CHAPTER 10
PLANT ASSETS,
NATURAL
RESOURCES, AND
INTANGIBLE ASSETS
Accounting Principles, Eighth Edition
Chapter
10-1
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
10-2
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
10-3
LO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets Land
Land
Cash price of property
Net removal cost of warehouse
Attorney’s fee
Real estate broker’s commission
Cost of land
Chapter
10-4
$ 100,000
6,000
1,000
8,000
$ 115,000
Determining the Cost of Plant Assets
E10-3 On March 1, 2008, Penner Company acquired real
estate on which it planned to construct a small office
building. The company paid $80,000 in cash. An old
warehouse on the property was razed at a cost of $8,600;
the salvaged materials were sold for $1,700. Additional
expenditures before construction began included $1,100
attorney’s fee for work concerning the land purchase, $5,000
real estate broker’s fee, $7,800 architect’s fee, and $14,000
to put in driveways and a parking lot.
Instructions
Determine amount to be reported as the cost of the land.
Chapter
10-5
LO 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.
Limited useful lives.
Expense (depreciate) the cost of
land improvements over their
useful lives.
Chapter
10-6
LO 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:
Construction costs:
Chapter
10-7
LO 1 Describe how the cost principle applies to plant assets.
E3
Chapter
10-8
Determining the Cost of Plant Assets
E10-3 Determine amount to be reported as the cost of the
land.
Land
Company paid $80,000 in cash.
$80,000
Old warehouse razed at a cost of $8,600
Salvaged materials were sold for $1,700.
8,600
- 1,700
Expenditures before construction began:
$1,100 attorney’s fee for work on land purchase.
$5,000 real estate broker’s fee.
$7,800 architect’s fee.
5,000
Building
Chapter
10-9
0
0
$14,000 for driveways and parking lot.
Land Improvements
1,100
Total
$93,000
LO 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
10-10
LO 1 Describe how the cost principle applies to plant assets.
Depreciation
Chapter
10-11
LO 2 Explain the concept of depreciation.
Depreciation – what is it?
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.
Applies to land improvements, buildings, and equipment,
not land.
Depreciable, because (theoretically) the revenueproducing ability of asset declines over the asset’s
useful life.
Chapter
10-12
LO 2 Explain the concept of depreciation.
QUIZ
What is the only plant asset that is NOT
depreciated?
Chapter
10-13
Depreciation - Factors in Computing
Depreciation
Chapter
10-14
LO 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
10-15
LO 3 Compute periodic depreciation using different methods.
PATTERNS OF DEPRECIATION
Chapter
10-16
Depreciation
Exercise (Depreciation Computations—Three Methods)
Parish Corp purchased a new machine for its assembly process
on January 2, 2008. The cost of this machine was $117,900.
The company estimated that the machine would have a salvage
value of $12,900 at the end of its service life. Its life is
estimated at 5 years and its working hours are estimated at
1,000 hours. Year-end is December 31.
Instructions: Compute the depreciation expense under the
following methods.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
Chapter
10-17
Depreciation – Straight Line
Straight-line method predominates in practice.
Expense is same amount for each year.
Depreciable cost is cost of the asset less its
salvage value.
Straight Line Depreciation Calculation
(Purchase Price of Asset - Approximate Salvage Value)
÷ Estimated Useful Life of Asset
Chapter
10-18
LO 3 Compute periodic depreciation using different methods.
FORMULA FOR STRAIGHT-LINE METHOD
The
The formula
formula for
for computing
computing annual
annual depreciation
depreciation expense
expense is:
is:
Depreciable
Depreciable Cost
Cost // Useful
Useful Life
Life (in
(in years)
years) == Depreciation
Depreciation Expense
Expense
Salvage
Value
Cost
$13,000
Depreciable
Cost
$12,000
Chapter
10-19
-
$1,000


Useful
Life (in Years)
÷
5
Depreciable
Cost
=
$12,000
Annual
Depreciation
Expense
=
$2,400
Depreciation – Straight Line
Parish Corp purchased a new machine for its assembly process
on January 2, 2008. The cost of this machine was $117,900.
The company estimated that the machine would have a salvage
value of $12,900 at the end of its service life. Its life is
estimated at 5 years and its working hours are estimated at
1,000 hours. Year-end is December 31.
Instructions: Compute the depreciation expense for the
first and second years under the Straight-Line method.
Chapter
10-20
LO 3 Compute periodic depreciation using different methods.
Depreciation
Exercise (Straight-Line Method)
Year
Depreciable
Cost
Annual
Expense
2008
$ 105,000
/
5
=
2009
105,000
/
5
2010
105,000
/
2011
105,000
2012
105,000
Years
$
Accum.
Deprec.
21,000
$ 21,000
=
21,000
42,000
5
=
21,000
63,000
/
5
=
21,000
84,000
/
5
=
21,000
105,000
$ 105,000
2008 Journal
Entry
Chapter
10-21
Depreciation expense
Accumulated depreciation
21,000
21,000
LO 3 Compute periodic depreciation using different methods.
Depreciation – Units of Activity
Expense varies based on units of activity. Best matching of
expenses with revenues.
Depreciable cost is cost less salvage value.
Companies estimate total units of activity to calculate
depreciation cost per unit.
Depreciable Cost ÷ Total Units of Activity
= Depreciation Cost per Unit
Depreciation Cost per Unit X Units of Activity During the Year
= Annual Depreciation Expense
Chapter
10-22
LO 3 Compute periodic depreciation using different methods.
FORMULA FOR UNITS-OF-ACTIVITY METHOD
To use the units-of-activity method, 1) the total units of activity for the
entire useful life are estimated, 2) the amount is divided into depreciable
cost to determine the depreciation cost per unit, and 3) the depreciation
cost per unit is then applied to the units of activity during the year to
determine the annual depreciation.


Depreciable
Cost
$12,000
Chapter
10-23
Depreciable
Cost per Unit
÷ 100,000 miles = $0.12
Units of
Activity during
the Year
Depreciable
Cost per Unit
$0.12
Total Units of
Activity
x
Annual
Depreciation
Expense
15,000 miles = $1,800
Depreciation – Units of Activity
Parish Corp purchased a new machine for its assembly process
on January 2, 2008. The cost of this machine was $117,900.
The company estimated that the machine would have a salvage
value of $12,900 at the end of its service life. Its life is
estimated at 5 years and its working hours are estimated at
1,000 hours. 1st and 2nd year usage was 200 and 150 hours,
respectively. Year-end is December 31.
Instructions: Compute the depreciation expense for the
first 2 years using Units-of-Activity.
Chapter
10-24
LO 3 Compute periodic depreciation using different methods.
Depreciation
Exercise (Units-of-Activity Method)
($105,000 / 1,000 hours = $105 per hour)
Year
Hours
Used
Rate per
Hour
2008
200
x
$105
=
2009
150
x
105
=
15,750
36,750
2010
250
x
105
=
26,250
63,000
2011
300
x
105
=
31,500
94,500
2012
100
x
105
=
10,500
105,000
1,000
2008 Journal
Entry
Chapter
10-25
Annual
Expense
$
21,000
Accum.
Deprec.
$
21,000
$ 105,000
Depreciation expense
21,000
Accumulated depreciation
21,000
Depreciation – Declining balance method
Decreasing annual depreciation expense over the
asset’s useful life.
Declining-balance rate is double the straight-line rate.
Rate applied to book value (cost less accumulated
depreciation.
Chapter
10-26
LO 3 Compute periodic depreciation using different methods.
Depreciation – Declining balance method



Chapter
10-27
FOR THE FIRST YEAR: Book value is the cost of the
asset. (Salvage value is ignored in the DB method.)
IN SUBSEQUENT YEARS: Book value is the
difference between cost and accumulated
depreciation at the beginning of that year.
Note:
 Depreciation rate remains constant from year to
year
 book value declines each year
FORMULA FOR DECLINING-BALANCE
METHOD
Unlike the other depreciation methods, salvage value is
ignored in determining the amount to which the declining
balance rate is applied.
A common application of the declining-balance method is
the double-declining-balance method, in which the
declining-balance rate is double the straight-line rate.
If Barb’s Florists uses the double-declining-balance
method, the depreciation is 40% (2 X the straight-line rate of
20%).
Chapter
10-28
Depreciable
Cost per Unit
Units of
Activity during
the Year
=
Annual
Depreciation
Expense
$13,000 x
40%
=
$5,200
Depreciation
Exercise (Declining-Balance Method)
Declining
Balance
Rate
Year
Beginning
Book value
Annual
Expense
2008
$ 117,900
x
40%
=
2009
70,740
x
40%
2010
42,444
x
2011
25,466
2012
15,280
$
47,160
$ 47,160
=
28,296
75,456
40%
=
16,978
92,434
x
40%
=
10,186
102,620
x
40%
=
2,380
105,000
$ 105,000
2008 Journal
Entry
Chapter
10-29
Accum.
Deprec.
Depreciation expense
Accumulated depreciation
Plug
47,160
47,160
LO 3 Compute periodic depreciation using different methods.
Depreciation
Comparison of Depreciation Methods
Year
2008
SL
21,000
DB
47,160
Comparison
of Depreciation
2009
21,000
28,296
Chapter
10-30
Activity
21,000
15,750
Methods
2010
21,000
16,978
26,250
2011
21,000
10,186
31,500
2012
21,000
2,380
10,500
105,000
105,000
105,000
LO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Question: If a depreciable asset is
purchased on October 1st… what is the
depreciation for the year?
Hint: What adjustment to our calculation
would we make?
Chapter
10-31
LO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Exercise (Depreciation Computations—Three Methods)
Parish Corporation purchased a new machine for its assembly
process on October 1, 2008. The cost of this machine was
$117,900. The company estimated that the machine would
have a salvage value of $12,900 at the end of its service life.
Its life is estimated at 5 years and its working hours are
estimated at 1,000 hours. During 2008, the machine was used
30 hours. Year-end is December 31.
Instructions: Compute the depreciation expense for the
first two years under the following methods.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining-Balance.
Chapter
10-32
LO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Exercise (Straight-line Method)
Year
Depreciable
Base
Annual
Expense
2008
$ 105,000
/
5
=
$ 21,000
2009
105,000
/
5
=
2010
105,000
/
5
2011
105,000
/
2012
105,000
2013
105,000
Years
Current
Year
Expense
Partial
Year
x
5,250
$ 5,250
21,000
21,000
26,250
=
21,000
21,000
47,250
5
=
21,000
21,000
68,250
/
5
=
21,000
21,000
89,250
/
5
=
21,000
15,750
105,000
x
3/12
9/12
=
=
$
Accum.
Deprec.
$ 105,000
Journal entry:
2008
Depreciation expense
Accumultated depreciation
Chapter
10-33
5,250
5,250
LO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Exercise (Units-of-Activity Method)
($105,000 / 1,000 hours = $105 per hour)
Year
(Given)
Hours
Used
2008
30
2009
Rate per
Hours
Annual
Expense
x $105
=
$ 3,150
150
x
105
=
2010
250
x
105
2011
300
x
2012
100
2013
170
Current
Year
Expense
3,150
$ 3,150
15,750
15,750
18,900
=
26,250
26,250
45,150
105
=
31,500
31,500
76,650
x
105
=
10,500
10,500
87,150
x
105
=
17,850
$ 17,850
105,000
$105,000
$ 105,000
1,000
$
Journal entry:
2008
Chapter
10-34
Accum.
Deprec.
Depreciation expense
3,150
Accumultated depreciation
3,150
Depreciation for Partial Year
Exercise (Declining-Balance Method)
Declining
Balance
Rate
Year
Depreciable
Base
Annual
Expense
2008
$ 117,900
x
40%
=
2009
106,110
x
40%
=
2010
63,666
x
40%
2011
38,200
x
2012
22,920
2013
13,752
$ 47,160 x
Partial
Year
3/12
Current
Year
Expense
Accum.
Deprec.
= $ 11,790
$ 11,790
42,444
42,444
54,234
=
25,466
25,466
79,700
40%
=
15,280
15,280
94,980
x
40%
=
9,168
9,168
104,148
x
40%
=
852
852
105,000
Plug
$ 105,000
Journal entry:
2008
Depreciation expense
Accumultated depreciation
Chapter
10-35
11,790
11,790
LO 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 Modified Accelerated Cost
Recovery System, which is NOT acceptable under
GAAP.
Chapter
10-36
LO 3 Compute periodic depreciation using different methods.
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
10-37
LO 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
10-38
LO 6 Explain how to account for the disposal of a plant asset.
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
10-39
LO 7 Compute periodic depletion of natural resources.
Section 2 – Natural Resources
BE10-11 Olpe Mining Co. purchased for $7 million a
mine that is estimated to have 35 million tons of ore and
no salvage value. In the first year, 6 million tons of ore
are extracted and sold. (a) Prepare the journal entry
to record depletion expense for the first year. (b)
Show how this mine is reported on the balance sheet at
the end of the first year.
Depletion cost per unit = $7,000,000 ÷ 35,000,000 =
$.20 depletion cost per ton
$.20 X 6,000,000 = $1,200,000
Chapter
10-40
LO 7 Compute periodic depletion of natural resources.
Section 2 – Natural Resources
BE10-11 (a) Prepare the journal entry to record
depletion expense for the first year. (b) Show how this
mine is reported on the balance sheet at the end of the
first year.
(a)
(b)
Chapter
10-41
LO 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
10-42
LO 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
10-43
LO 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
10-44
LO 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
10-45
LO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
BE10-11 Galena Company purchases a patent for
$120,000 on January 2, 2008. Its estimated useful life is
10 years. (a) Prepare the journal entry to record patent
expense for the first year. (b) Show how this patent is
reported on the balance sheet at the end of the first
year.
Chapter
10-46
LO 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
10-47
LO 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 10 year renewal periods.
Capitalize acquisition costs.
No amortization.
Chapter
10-48
LO 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
10-49
LO 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
10-50
LO 8 Explain the basic issues related to accounting for intangible assets.
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
10-51
LO 8 Explain the basic issues related to accounting for intangible assets.