Chapter 10
Plant Assets, Natural Resources, and Intangibles
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Chapter 10 Overview
Plant Assets
• Equipment
• Machines
• Vehicles,
Trucks and
Vans
• Lands
• Buildings
Natural
Resources
• Oil and Gas
Fields
• Minerals
Intangible Assets
• Patents
• Copyrights
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Chapter 10 Overview
Plant Assets
•Cost Determination
•Depreciation
•Partial years depreciation
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Learning Objective
Explain the cost principle for
computing the cost of plant
assets.
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Definition of Plant Assets
Tangible in Nature
Actively Used in Operations
Expected to Benefit Future Periods
Called Property, Plant, & Equipment
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Types of Plant Assets
Machines and Equipment
Buildings
Lands
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1. Cost Determination
Purchase
price
Acquisition
Cost
All expenditures
needed to
prepare the asset
for its intended
use
Acquisition cost includes all
normal and reasonable
expenditures necessary to get the
asset in place and ready for
intended use
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Machinery and Equipment
Purchase
price
Taxes
Transportation
charges
Installing and
assembling costs
Insurance while
in transit
Plant Assets
Depreciation
Depreciation
Depreciation is the process of allocating the
cost of a plant asset to expense in the
accounting periods benefiting from its use.
Financial Position Statement
Acquisition
Cost
(Unused)
Income Statement
Cost
Allocation
Expense
(Used)
Depreciation is the decline in the book value of the asset.
Machine (Asset) at original cost
Less: Accumulated Depreciation
Machine ,NBV/ NRV/ Net Worth now
Accumulated Depreciation is the summation of all previous years Depreciation
Expenses until the current time
It is a contra asset account , as it reduces the value of the plant asset and that’s why
it is normally written in the CREDIT side of the journal
Accumulated Depreciation is used to:
• Determine the net realizable value (NRV) OR the Net book value (NBV) of a plant
asset at a specific point of time. i.e. it’s current worth
• Help in determining and asking for a reasonable price in case of selling the asset.
All Plant (Fixed)assets depreciate
Land is not depreciable.
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Depreciation Methods
1. Straight-line
2. Units-of-production
Exercise “1”
Original Cost of the Asset - Salvage Value =
$734,500 - $100,000
Estimated useful Life
= $158,625/ year
4 years
This method assumes that every year, the asset is depreciated i.e. equally
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Straight-Line Method
Date
Annual
Period
Depreciation
Expense
Accumulated
Depreciation
Net Book Value
[Original cost –
accumulated depreciation
till today]
Today
1/1/2015
1/1/2016
0
0
0
$734,500
1
158,625
158,625
575,875
1/1/2017
2
158,625
317,250
417,250
3
158,625
475,875
258,625
4
158,625
634,500
100,000
1/1/2018
1/1/2019
Book value
declines
until it
reaches
salvage
value
Total depreciable cost
Accumulated Depreciation is the summation of all previous years Depreciation
Expenses until the current time
Salvage value
Straight-Line Method
(On Financial position statement)
For year ended December 31
Financial Balance
position statement
Sheet Presentation
Machinery
Less: accumulated depreciation
As of December 31
for Year ended Dec. 31st, 2018
$ 734,500
(634,500)
$ 100,000
Partial-Year Depreciation
When a plant asset is purchased (or sold) during the
year, depreciation is calculated for the fraction of the
year the asset is owned.
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Units-of-Production (Activity) Method
Step 1:
Depreciation
Per Unit
=
Cost - Salvage Value
Total Units of Production
Step 2:
Depreciation
Expense
=
Depreciation
Per Unit
×
Number of Units
Produced
in the Period
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Step 1:
Depreciation
Per Unit
=
Cost - Salvage Value
Total Units of Production
=
$734,500 - $100,000
6,345 units
= $100 /unit
Step 2:
Number of Units
Depreciation
Depreciation
= $100 × Number of Units
Produced
×
Expense = Per Unit
Produced/ year
in the Period
Units-of-Production Method
Date
Annual
Period
Number of Depreciation
units
per unit
Depreciation
Expense
Accumulated
Depreciation
Net Book
Value
[Original cost
–
accumulated
depreciation
till today]
Today
1/1/2015
1/1/2016
Year 0
0
0
0
0
734,500
Year 1
3000
$ 100
/unit
300,000
300,000
100
200,000
500,000
100,000
600,000
1/1/2017
Year 2
2000
1/1/2018
Year 3
1000
100
1/1/2019
Year 4
345
100
34,500
634,500
434,500
234,500
134,500
100,000
Comparing Depreciation Methods
Deciding which method is best depends on the asset.
Method
Straight-Line
Units-of-production
Effect on Depreciation Expense
Equal amount each period
More usage causes larger depreciation expense
Used for calculating depreciation for vehicles (miles) & machinery (machine hours)
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Remember that:
Some Important notes
• There are three factors used in calculating depreciation which are: cost, salvage value, useful life time. Cost is the
only actual figure. Useful life time and salvage value are estimates based on managers’ estimations and
expectations.
• Salvage value is also called residual value.
• Total depreciable cost is the same across all the depreciation methods; what differs is the calculation of
depreciation expense every year.
• Depreciation expense is a function of time under the straight-line method, however, is a function of usage under
units of activity method.
• Depreciation expense is the same (fixed or constant) every year under the straight line method, however is
variable under the units of activity method; it varies based on production or usage.
• The book value of the plant asset continues to decline until it reaches the salvage value at the end of its useful
life.
• Depreciation expense appears in the income statement, however, accumulated depreciation is a contra-asset
that appears in the balance sheet.
• Depreciation is calculated for all the plant assets except for Land.
• Depreciation is the decline in the book value of the asset not the market value.
• Assets are classified as either current (short-term) such as cash, accounts receivable, supplies, prepaid insurance.
Or non-current (long-term) such as equipment, machine, vehicles, land, buildings which are the plant (fixed)
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assets ; the property, plant & Equipment.
Also, remember that….
• Liabilities are classified as current (short-term debts); debts that I am obliged to pay within one year such as
accounts payable, salaries payable, anything that is payable, unearned revenue or part of notes payable that is
due within one year or non-current (long-term debts); debts that I am obliged to pay over more the one year
such as notes payable; bank loans that are due within 2 or 3 years.
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Done with Lecture (10) 
Covered today :
• Types of Plant Assets, Natural Resources and
Intangibles
• Calculating and Recording acquisition of Plant Assets
• Calculating Depreciation of Plant Assets using:
– Straight Line method.
– Units of Production (Activity) method.
• Comparison Between the depreciation methods.
END OF CHAPTER 10
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