Accounting 2
ACCT 1110
Chapter 9 -- Plant Assets, Intangible Assets,
Natural Resources & Related Expenses
Plant Assets:
Characteristics:
Tangible
Used Over and Over
Wear out gradually (except land which does not wear out)
Examples:
Buildings, Equipment, Vehicles, Land
Accounting Issues:
What to Include in Cost of Plant Assets
General Rule: Everything necessary to get the Assets into condition and position to use.
Include interest on borrowed money during the construction period.
Subsequent costs that increase life or productivity of an Asset are added to the
Asset Cost this is called capitalizing the costs. (Capitalizing means the cost is initially
treated as an asset)
Subsequent costs that only maintain or restore an asset to its original life are
Recorded as expenses - these costs are called revenue expenditures. (Revenue
expenditure means the cost is identified immediately as an expense). The most common
expense categories for revenue expenditures are repairs and maintenance.
Interest during Construction: When an asset is constructed over a period of several months or
years, the cost of the self-constructed asset includes interest the company could have avoided if it
had not undergone the construction of the asset. (This information is not in the text)
Lump Sum Purchases (Paying a Single Amount for a Group of Assets)
1.
2.
Identify the estimated value of each item.
Allocate the Cost based on the relative Value of the Assets acquired
Example: A Company pays $180,000 for Land Building and Equipment. It is estimated
by an appraiser that the Land is worth $16,000, The building is worth $150,000, and the
Equipment is worth $34,000. How much cost should be allocated to each Asset?
-2Allocation of Lump Sum Purchase
General Journal
Date
Page 1
Account Title
Ref
Debit
Credit
Equipment
Building
Land
Cash
How to Compute and Record Depreciation
Important Terms:
Life Residual value
Book Value
How long will the asset be useful to the present owner
(also called salvage value)(also called scrap value) Estimated value of
Fixed Asset at end of the life.
Cost - Accumulated Depreciation
Sample Journal Entry for Recording Depreciation Expense (Covered in ACC 1100)
General Journal
Date
Account Title
Depreciation Expense - Equipment
Accumulated Depreciation - Equipment
Methods Of Calculating Depreciation:
1.
Straight Line Depreciation Expense is
= (SL Rate) x (Cost - Salvage Value)
Or
=(Cost - Residual Value) divided by life
Page
Ref
Debit
2
Credit
$x,xxx
$x,xxx
-32.
Double Declining Balance Depreciation Expense is
= 2 x (Straight Line Rate) x (Beginning of year Book Value)
3.
Units of Production or Output Depreciation Expense is
= Usage Rate x Usage
Usage Rate = (Cost - Salvage) / (Total Units of Output during the assets life)
4.
MACRS (used only for income taxes)
= legislated rate x Cost
5.
Other Depreciation Issues:
A)
B)
C)
Prorating for years of partial ownership
Changes in life or salvage value
Tax advantages of accelerated methods
Disposal of Plant Assets:
General Rule: The fair value of an asset received in an exchange is considered to be its cost.
Gain or loss on the exchange is recognized.
Exception: When the fair value of the asset being acquired is not know, The cost of an asset
received in an exchange is considered to be the book value of the asset traded in plus the
additional cash paid (boot). This means no gain or loss is recognized.
Sample Journal Entry for Recording sale of equipment for cash
General Journal
Date
Account Title
Page 3
Ref
Debit
Cash (Received)
$x,xxx
Accumulated Depreciation (on Equipment Sold)
$x,xxx
Credit
Equipment (Cost of Equipment Sold)
$x,xxx
Cash or Notes Payable (If Applicable)
$x,xxx
Gain On Disposition (OR Loss which
would be a debit)
$x,xxx
-4Sample Journal Entry for Recording Exchange of equipment
General Journal
Date
Account Title
Equipment (Book Value of old equipment plus
the additional cash paid)
Page 4
Ref
Debit
Credit
$x,xxx
Accumulated Depreciation (on Equipment Sold)
$x,xxx
Equipment (Cost of Equipment traded in)
$x,xxx
Cash or Notes Payable (If Applicable)
$x,xxx
Sample Journal Entry for Recording Exchange of equipment with Loss
General Journal
Date
Account Title
Page 4
Ref
Debit
Loss on Exchange of Equipment
$x,xxx
Equipment (Market Value of new equipment)
$x,xxx
Accumulated Depreciation (on Equipment Sold)
$x,xxx
Credit
Equipment (Cost of Equipment Sold)
$x,xxx
Cash or Notes Payable (If Applicable)
$x,xxx
-5Intangible Assets:
Characteristics:
1.
Goodwill and Legal Rights are called intangible assets.
2.
Intangible Assets with a limited life are amortized (written off) to expense.
3.
The useful life of an intangible asset is frequently shorter than the legal life.
4.
Goodwill and other intangible assets with an indefinite life are not amortized.
5.
Amortization is calculated in the same way as straight line depreciation.
Sample Journal Entry for Recording Amortization Expense
General Journal
Page 4
Journal Entries (Either is acceptable)
Date
Account Title
Ref
Amortization Expense - Patents
Debit
Credit
$x,xxx
Patents
$x,xxx
OR
Amortization Expense - Patents
$x,xxx
Accumulated Amortization - Patents
$x,xxx
Natural Resource Assets
Characteristics:
1.
Land with Natural Resources on it (Oil, Gold, Silver, Forests, Gypsum)
2.
Removing natural resources from the land creates an expense.
3.
When Natural Resources Assets are allocated to expense it is called depletion.
4.
Depletion is calculated in the same way as units of output depreciation.
Sample Journal Entry for Recording Depletion Expense
General Journal
Page 4
Journal Entries (Either is acceptable)
Date
Account Title
Ref
Depletion Expense - Oil Property
Debit
Credit
$x,xxx
Oil Property
$x,xxx
OR
Depletion Expense - Oil Property
Accumulated Depletion - Oil Property
$x,xxx
$x,xxx