Chapter
10-1
Chapter
10
Plant Assets, Natural
Resources, and
Intangible Assets
Chapter
10-2
Accounting Principles, Ninth Edition
Study Objectives
1.
Describe how the cost principle applies to plant assets.
2.
Explain the concept of depreciation.
3.
Compute periodic depreciation using different methods.
4.
Describe the procedure for revising periodic depreciation.
5.
Distinguish between revenue and capital expenditures, and
explain the entries for each.
6.
Explain how to account for the disposal of a plant asset.
7.
Compute periodic depletion of natural resources.
8.
Explain the basic issues related to accounting for intangible
assets.
9.
Indicate how plant assets, natural resources, and intangible
assets are reported.
Chapter
10-3
Plant Assets, Natural Resources, and
Intangible Assets
Plant Assets
Determining the
cost of plant
assets
Depreciation
Expenditures
during useful life
Plant asset
disposals
Chapter
10-4
Natural
Resources
Depletion
Intangible
Assets
Accounting for
intangibles
Research and
development
costs
Statement
Presentation and
Analysis
Presentation
Analysis
Section 1 – Plant Assets
Plant assets include land, land improvements,
buildings, and equipment (machinery, furniture, tools).
Major characteristics include:
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.
Referred to as property, plant, and equipment; plant and
equipment; and fixed assets.
Chapter
10-5
Determining the Cost of Plant Assets
Land
Includes all costs to acquire land and ready it for use.
Costs typically include:
(1) the purchase price;
(2) closing costs, such as title and attorney’s fees;
(3) real estate brokers’ commissions;
(4) costs of grading, filling, draining, and clearing;
(5) assumption of any liens, mortgages, or
encumbrances on the property.
Chapter
10-6
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Illustration: Assume that Hayes Manufacturing Company
acquires real estate at a cash cost of $100,000. The
property contains an old warehouse that is razed at a net
cost of $6,000 ($7,500 in costs less $1,500 proceeds from
salvaged materials). Additional expenditures are the
attorney’s fee, $1,000, and the real estate broker’s
commission, $8,000. The cost of the land is $115,000,
computed as follows.
Required: Determine amount to be reported as the cost of
the land.
Chapter
10-7
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Required: Determine amount to be reported as the cost of
the land.
Land
Cash price of property of $100,000
$100,000
Old warehouse razed at a cost of $6,000
6,000
Attorney's fees of $1,000
1,000
Real estate broker’s commission of $8,000
8,000
Cost of Land
Chapter
10-8
$115,000
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Land Improvements
Includes all expenditures necessary to make the
improvements ready for their intended use.
Examples are driveways, parking lots, fences,
landscaping, and underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land
improvements over their useful lives.
Chapter
10-9
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Buildings
Includes all costs related directly to purchase or
construction.
Purchase costs:
Purchase price, closing costs (attorney’s fees, title
insurance, etc.) and real estate broker’s commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees,
building permits, and excavation costs.
Chapter
10-10
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Equipment
Include all costs incurred in acquiring the equipment
and preparing it for use.
Costs typically include:
purchase price,
sales taxes,
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
Chapter
10-11
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Illustration: Assume Merten Company purchases factory
machinery at a cash price of $50,000. Related expenditures
are for sales taxes $3,000, insurance during shipping $500,
and installation and testing $1,000. Determine amount to be
reported as the cost of the machinery.
Machinery
Cash price
$50,000
Sales taxes
3,000
Insurance during shipping
500
Installation and testing
1,000
Cost of Machinery
Chapter
10-12
$54,500
SO 1 Describe how the cost principle applies to plant assets.
Chapter
10-13
Depreciation
Depreciation is the process of allocating the cost of
tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the
use of the asset.
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing
ability of asset will decline over the asset’s
useful life.
Chapter
10-14
SO 2 Explain the concept of depreciation.
Depreciation
Factors in Computing Depreciation
Cost
Chapter
10-15
Useful Life
Illustration 10-6
Salvage Value
SO 2 Explain the concept of depreciation.
Depreciation
Depreciation Methods
Objective is to select the method that best measures
an asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
Illustration 10-8
Use of depreciation
methods in 600 large
U.S. companies
Chapter
10-16
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: Barb’s Florists purchased a small delivery
truck on January 1, 2010.
Illustration 10-7
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
Chapter
10-17
SO 3 Compute periodic depreciation using different methods.
Depreciation
Straight-Line
Expense is same amount for each year.
Depreciable cost is cost of the asset less its
salvage value.
Illustration 10-9
Chapter
10-18
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Straight-Line Method)
Illustration 10-10
Year
Depreciable
Cost
2010
$ 12,000
2011
12,000
20
2,400
4,800
8,200
2012
12,000
20
2,400
7,200
5,800
2013
12,000
20
2,400
9,600
3,400
2014
12,000
20
2,400
12,000
1,000
2010
Journal
Entry
Chapter
10-19
x
Rate
=
20%
Annual
Expense
Accum.
Deprec.
Book
Value
$ 2,400
$ 2,400
$ 10,600
Depreciation expense
Accumulated depreciation
2,400
2,400
SO 3 Compute periodic depreciation using different methods.
Depreciation
Units-of-Activity
Companies estimate total units of activity to calculate
depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is
cost less salvage
value.
Chapter
10-20
Illustration 10-11
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Units-of-Activity Method)
Illustration 10-12
Hours
Rate per
=
Book
Expense
Deprec.
Value
Used
2010
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
2011
30,000
0.12
3,600
5,400
7,600
2012
20,000
0.12
2,400
7,800
5,200
2013
25,000
0.12
3,000
10,800
2,200
2014
10,000
0.12
1,200
12,000
1,000
Chapter
10-21
Hour
Accum.
Year
2010
Journal
Entry
x
Annual
Depreciation expense
Accumulated depreciation
1,800
1,800
SO 3 Compute periodic depreciation using different methods.
Depreciation
Declining-Balance
Decreasing annual depreciation expense over the
asset’s useful life.
Declining-balance rate is double the straight-line
rate.
Rate applied to book value.
Illustration 10-13
Chapter
10-22
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Declining-Balance Method)
Declining
Balance
x Rate =
Illustration 10-14
Year
Beginning
Book value
2010
13,000
40%
2012
7,800
40
3,120
8,320
4,680
2013
4,680
40
1,872
10,192
2,808
2014
2,808
40
1,123
11,315
1,685
2015
1,685
40
12,000
1,000
2010
Journal
Entry
Chapter
10-23
Annual
Expense
Accum.
Deprec.
Book
Value
$ 5,200
$ 5,200
$ 7,800
685*
Depreciation expense
5,200
Accumulated depreciation
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
5,200
Depreciation
Comparison of Depreciation Methods
Illustration 10-15
Illustration 10-16
Chapter
10-24
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
The following five slides are included to
illustrate the calculation of partial-year
depreciation expense.
The amounts are consistent with the previous
slides illustrating the calculation of depreciation
expense.
Chapter
10-25
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: Barb’s Florists purchased a small delivery
truck on October 1, 2010.
Illustration 10-7
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
Chapter
10-26
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Straight-line Method)
Current
Year
Expense
Year
Depreciable
Cost
2010
$ 12,000
x
20% =
$ 2,400
2011
12,000
x
20% =
2,400
2,400
3,000
2012
12,000
x
20% =
2,400
2,400
5,400
2013
12,000
x
20% =
2,400
2,400
7,800
2014
12,000
x
20% =
2,400
2,400
10,200
2015
12,000
x
20% =
2,400
1,800
12,000
Rate
Annual
Expense
Partial
Year
x
x
3/12
9/12
=
=
$
600
Accum.
Deprec.
$
600
$ 12,000
Journal entry:
2010
Depreciation expense
Accumultated depreciation
Chapter
10-27
600
600
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Units-of-Activity Method)
Hours
Rate per
=
Accum.
Book
Expense
Deprec.
Value
Used
2010
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
2011
30,000
0.12
3,600
5,400
7,600
2012
20,000
0.12
2,400
7,800
5,200
2013
25,000
0.12
3,000
10,800
2,200
2014
10,000
0.12
1,200
12,000
1,000
Chapter
10-28
Hour
Annual
Year
2010
Journal
Entry
x
Illustration 10-12
Depreciation expense
Accumulated depreciation
1,800
1,800
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Declining-Balance Method)
Declining
Balance
Rate
Annual
Expense
Partial
Year
3/12
Year
Beginning
Book Value
2010
$ 13,000 x
40%
= $ 5,200 x
2011
11,700 x
40%
=
2012
7,020 x
40%
2013
4,212 x
2014
2015
Current
Year
Expense
1,300
$ 1,300
4,680
4,680
5,980
=
2,808
2,808
8,788
40%
=
1,685
1,685
10,473
2,527 x
40%
=
1,011
1,011
11,484
1,516 x
40%
=
607
516
12,000
Plug
= $
Accum.
Deprec.
$ 12,000
Journal entry:
2010
Depreciation expense
Accumultated depreciation
Chapter
10-29
1,300
1,300
SO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation and Income Taxes
IRS does not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.
IRS requires the straight-line method or a special
accelerated-depreciation method called the Modified
Accelerated Cost Recovery System (MACRS).
MACRS is NOT acceptable under GAAP.
Chapter
10-30
SO 3 Compute periodic depreciation using different methods.
Depreciation
Revising Periodic Depreciation
Accounted for in the period of change and
future periods (Change in Estimate).
Not handled retrospectively.
Not considered error.
Chapter
10-31
SO 4 Describe the procedure for revising periodic depreciation.
Depreciation
Illustration: Assume that Barb’s Florists decides on
January 1, 2013, to extend the useful life of the truck one
year because of its excellent condition. The company has
used the straight-line method to depreciate the asset to
date, and book value is $5,800 ($13,000 - $7,200).
Questions:
1. What is the journal entry to correct
the prior years’ depreciation?
No Entry
Required
2. Calculate the depreciation expense
for 2013.
Chapter
10-32
SO 4 Describe the procedure for revising periodic depreciation.
Depreciation
Book value, 1/1/13
Salvage value
Depreciable cost
Useful life (revised)
Annual depreciation
First,
establish
Book Value
at the date
of change in
estimate.
$5,800
- 1,000
4,800
/ 3 years
$ 1,600
Illustration 10-17
Journal entry for 2013
Depreciation expense
Accumulated depreciation
Chapter
10-33
1,600
1,600
SO 4 Describe the procedure for revising periodic depreciation.
Expenditures During Useful Life
Ordinary Repairs - expenditures to maintain the
operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Additions and Improvements - costs incurred to
increase the operating efficiency, productive capacity, or
useful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
Chapter
10-34
SO 5 Distinguish between revenue and capital expenditures,
and explain the entries for each.
Plant Asset Disposals
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Illustration 10-18
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Chapter
10-35
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Retirement
Illustration: Assume that Hobart Enterprises retires
its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry
to record this retirement is?
Accumulated depreciation
Printing equipment
32,000
32,000
Question: What happens if a fully depreciated plant asset is still
useful to the company?
Chapter
10-36
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Retirement
Illustration: Assume that Sunset Company discards delivery
equipment that cost $18,000 and has accumulated
depreciation of $14,000. The journal entry is?
Accumulated depreciation
Loss on disposal
Delivery equipment
14,000
4,000
18,000
Companies report a loss on disposal in the “Other expenses and
losses” section of the income statement.
Chapter
10-37
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals
Sale of Plant Assets
Compare the book value of the asset with the
proceeds received from the sale.
If proceeds exceed the book value, a gain on
disposal occurs.
If proceeds are less than the book value, a loss
on disposal occurs.
Chapter
10-38
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Illustration: Assume that on July 1, 2010, Wright Company
sells office furniture for $16,000 cash. The office furniture
originally cost $60,000. As of January 1, 2010, it had
accumulated depreciation of $41,000. Depreciation for the
first six months of 2010 is $8,000. Prepare the journal entry
to record depreciation expense up to the date of sale.
Depreciation expense
Accumulated depreciation
Chapter
10-39
8,000
8,000
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Illustration 10-19
Computation of gain on
disposal
Illustration: Wright records the sale as follows.
July 1
Cash
16,000
Accumulated depreciation
49,000
Office equipment
Gain on disposal
Chapter
10-40
60,000
5,000
SO 6 Explain how to account for the disposal of a plant asset.
Section 2 – Natural Resources
Natural resources consist of standing timber and
underground deposits of oil, gas, and minerals.
Distinguishing characteristics:
Physically extracted in operations.
Replaceable only by an act of nature.
Chapter
10-41
Section 2 – Natural Resources
Cost - price needed to acquire the resource and
prepare it for its intended use.
Depletion - allocation of the cost to expense in a rational
and systematic manner over the resource’s useful life.
Depletion is to natural resources as depreciation
is to plant assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units
extracted.
Chapter
10-42
SO 7 Compute periodic depletion of natural resources.
Section 2 – Natural Resources
Illustration: Assume that Lane Coal Company invests $5
million in a mine estimated to have 10 million tons of coal and
no salvage value. In the first year, Lane extracts and sells
800,000 tons of coal. Lane computes the depletion expense
as follows:
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 x 800,000 = $400,000 depletion expense
Journal entry:
Depletion expense
Accumulated depreciation
Chapter
10-43
400,000
400,000
SO 7 Compute periodic depletion of natural resources.
Section 2 – Natural Resources
Illustration 10-22
Statement presentation of accumulated depletion
Extracted resources that have not been sold are reported
as inventory in the current assets section.
Chapter
10-44
SO 7 Compute periodic depletion of natural resources.
Section 3 – Intangible Assets
Intangible assets are rights, privileges, and
competitive advantages that do not possess physical
substance.
Intangible assets are categorized as having either a
limited life or an indefinite life.
Common types of intangibles:
Patents
Trademarks or trade names
Copyrights
Goodwill
Franchises or licenses
Chapter
10-45
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible
asset ready for its intended use.
Internally Created Intangibles:
Generally expensed.
Only capitalize direct costs incurred in perfecting title
to the intangible, such as legal costs.
Chapter
10-46
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Chapter
10-47
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Patents
Exclusive right to manufacture, sell, or otherwise
control an invention for a period of 20 years from the
date of the grant.
Capitalize costs of purchasing a patent and amortize
over its 20-year life or its useful life, whichever is
shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent
are capitalized to Patent account.
Chapter
10-48
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Illustration: Assume that National Labs purchases a patent
at a cost of $60,000. National estimates the useful life of
the patent to be eight years. National records the annual
amortization as follows.
Amortization expense
Patent
Chapter
10-49
7,500
7,500
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Copyrights
Give the owner the exclusive right to reproduce and
sell an artistic or published work.
 plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
Copyright is granted for the life of the creator plus
70 years.
Capitalize acquisition costs.
Amortized to expense over useful life.
Chapter
10-50
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Trademarks and Trade Names
Word, phrase, jingle, or symbol that identifies a
particular enterprise or product.
 Wheaties, Game Boy, Frappuccino, Kleenex,
Windows, Coca-Cola, and Jeep.
Trademark or trade name has legal protection for
indefinite number of 20 year renewal periods.
Capitalize acquisition costs.
No amortization.
Chapter
10-51
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Franchises and Licenses
Contractual arrangement between a franchisor and a
franchisee.
 Shell, Taco Bell, or Rent-A-Wreck are franchises.
Franchise (or license) with a limited life should be
amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at
cost and not amortized.
Chapter
10-52
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Goodwill
Includes exceptional management, desirable location,
good customer relations, skilled employees, high-quality
products, etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of ...
purchase price over the FMV of the identifiable net
assets acquired.
Internally created goodwill should not be capitalized.
Chapter
10-53
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter
10-54
Research and Development Costs
Frequently results in something that a company
patents or copyrights such as:
new product,
process,
idea,
formula,
composition, or
literary work.
All R & D costs are expensed when incurred.
Chapter
10-55
SO 8 Explain the basic issues related to accounting for intangible assets.
Statement Presentation and Analysis
Presentation
Illustration 10-24
Companies usually include natural resources under “Property, plant,
and equipment” and show intangibles separately.
Chapter
10-56
SO 9 Indicate how plant assets, natural resources,
and intangible assets are reported.
Statement Presentation and Analysis
Analysis
Illustration 10-25
Each dollar invested in assets produced $0.56 in sales.
If a company is using its assets efficiently, each dollar
of assets will create a high amount of sales.
Chapter
10-57
SO 9 Indicate how plant assets, natural resources,
and intangible assets are reported.
Exchange of Plant Assets
Ordinarily, companies record a gain or loss on
the exchange of plant assets.
The rationale for recognizing a gain or loss is
that most exchanges have commercial
substance.
An exchange has commercial substance if the
future cash flows change as a result of the
exchange.
Chapter
10-58
SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets
Illustration: Roland Co. exchanged old trucks (cost $64,000
less $22,000 accumulated depreciation) plus cash of
$17,000 for a new semi-truck. The old trucks had a fair
market value of $26,000.
Chapter
10-59
Cost of old trucks
Less: Accumulated depreciation
Book value
Fair market value of old trucks
Loss on disposal
$64,000
22,000
42,000
26,000
$16,000
Fair market value of old trucks
Cash paid
Cost of new semi-truck
$26,000
17,000
$43,000
Illustration
10A-1 & 10A-2
SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets
Illustration: Roland Co. exchanged old trucks (cost $64,000
less $22,000 accumulated depreciation) plus cash of
$17,000 for a new semi-truck. The old trucks had a fair
market value of $26,000.
Prepare the entry to record the exchange of assets by
Roland Co.
Chapter
10-60
Semi-truck
43,000
Accumulated depreciation
22,000
Loss on disposal
16,000
Used trucks
64,000
Cash
17,000
SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets
Illustration: Mark Express Delivery trades its old delivery
equipment (cost $40,000 less $28,000 accumulated
depreciation) for new delivery equipment. The old equipment
had a fair market value of $19,000. Mark also paid $3,000.
Chapter
10-61
Cost of old equipment
Less: Accumulated depreciation
Book value
Fair market value of old equipment
Gain on disposal
$40,000
28,000
12,000
19,000
$ 7,000
Fair market value of old equipment
Cash paid
Cost of new equipment
$19,000
3,000
$22,000
Illustration
10A-3 & 10A-4
SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets
Illustration: Mark Express Delivery trades its old delivery
equipment (cost $40,000 less $28,000 accumulated
depreciation) for new delivery equipment. The old equipment
had a fair market value of $19,000. Mark also paid $3,000.
Prepare the entry to record the exchange of assets by Mark
Express.
Delivery equipment (new)
22,000
Accumulated depreciation
28,000
Delivery equipment (used)
Chapter
10-62
40,000
Gain on disposal
7,000
Cash
3,000
SO 10 Explain how to account for the exchange of plant assets.
Copyright
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Chapter
10-63