CHAPTER 10
PLANT ASSETS,
NATURAL
RESOURCES, AND
INTANGIBLE
ASSETS
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
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
10-4
LO 1 Describe how the cost principle applies to plant assets.
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.
Chapter
10-5
LO 2 Explain the concept of depreciation.
Depreciation
Factors in Computing Depreciation
Cost
Chapter
10-6
Useful Life
Illustration 10-6
Salvage Value
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
10-7
LO 3 Compute periodic depreciation using different methods.
Depreciation
Exercise (Depreciation Computations—Three Methods)
Parish Corporation purchased a new machine for its assembly
process on January 2, 2007. 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) Double-Declining Balance.
Chapter
10-8
LO 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.
Straight-line method
predominates in
practice.
Chapter
10-9
LO 3 Compute periodic depreciation using different methods.
Depreciation
Exercise (Straight-Line Method)
Year
Depreciable
Base
2007
$ 105,000
/
5
=
$ 21,000
$ 21,000
2008
105,000
/
5
=
21,000
42,000
2009
105,000
/
5
=
21,000
63,000
2010
105,000
/
5
=
21,000
84,000
2011
105,000
/
5
=
21,000
105,000
Years
Annual
Expense
Accum.
Deprec.
$ 105,000
Journal entry 2007
Depreciation expense
Accumulated depreciation
Chapter
10-10
21,000
21,000
LO 3 Compute periodic depreciation using different methods.
Depreciation
Units-of-Activity
Expense varies based on units of activity.
Depreciable cost is cost
less salvage value.
Companies estimate
total units of activity to
calculate depreciation
cost per unit.
Chapter
10-11
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
2007
200
x
$105
=
$ 21,000
$ 21,000
2008
150
x
105
=
15,750
36,750
2009
250
x
105
=
26,250
63,000
2010
300
x
105
=
31,500
94,500
2011
100
x
105
=
10,500
105,000
1,000
Chapter
10-12
Rate per
Hour
Annual
Expense
Accum.
Deprec.
$ 105,000
LO 3 Compute periodic depreciation using different methods.
Depreciation
Declining-Balance Method
Decreasing annual depreciation expense over the
asset’s useful life.
Rate applied to book
value (cost less
accumulated
depreciation).
Chapter
10-13
LO 3 Compute periodic depreciation using different methods.
Depreciation
Exercise (Declining Balance Method)
Year
Net
Bookvalue
Rate per
Year
Annual
Expense
Accum.
Deprec.
2007
$ 117,900
x
40%
=
$ 47,160
$ 47,160
2008
70,740
x
40%
=
28,296
75,456
2009
42,444
x
40%
=
16,978
92,434
2010
25,466
x
40%
=
10,186
102,620
2011
15,280
x
40%
=
2,380
105,000
$105,000
Chapter
10-14
LO 3 Compute periodic depreciation using different methods.
Illustration 10-16
Depreciation
Comparison of
Depreciation Methods
Annual Expense
Year
Chapter
10-15
SL
DB
Activity
2003
21,000
47,160
21,000
2004
21,000
28,296
15,750
2005
21,000
16,978
26,250
2006
21,000
10,186
31,500
2007
21,000
2,380
10,500
105,000
105,000
105,000
LO 3 Compute periodic depreciation using different methods.
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
10-16
LO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Retirement
BE10-9 Prepare journal entries to record the following.
(a) Gomez Company retires its delivery equipment, which cost
$41,000. Accumulated depreciation is also $41,000 on this
delivery equipment. No salvage value is received.
(b) Assume the same information as (a), except that
accumulated depreciation for Gomez Company is $39,000,
instead of $41,000.
(a)
Chapter
10-17
Accumulated depreciation
Equipment
41,000
41,000
LO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Retirement
BE10-9 Prepare journal entries to record the following.
(a) Gomez Company retires its delivery equipment, which cost
$41,000. Accumulated depreciation is also $41,000 on this
delivery equipment. No salvage value is received.
(b) Assume the same information as (a), except that
accumulated depreciation for Gomez Company is $39,000,
instead of $41,000.
(b)
Accumulated depreciation
Equipment
Loss on disposal
Chapter
10-18
39,000
41,000
2,000
LO 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
10-19
LO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
BE10-10 Chan Company sells office equipment on
September 30, 2008, for $20,000 cash. The office
equipment originally cost $72,000 and as of January 1,
2008, had accumulated depreciation of $42,000.
Prepare the journal entries to (a) record the sale of the
equipment.
Chapter
10-20
LO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
BE10-10 Prepare the journal entries to (a) record the
sale of the equipment.
(a)
Cash
20,000
Accumulated depreciation
42,000
Office equipment
Loss on disposal
Chapter
10-21
72,000
10,000
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.
Chapter
10-22
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.
Normally classified as long-term asset.
Common types of intangibles:
Patents
Trademarks or trade names
Copyrights
Goodwill
Franchises or licenses
Chapter
10-23
Depreciation for Intangible Assets






Chapter
10-24
Depreciation is referred as amortization
Amortization is only applicable for intangible assets
with limited life not for those with unlimited life
Amortization method is similar to depreciation
Intangible assets are typically amortized on SL
method
To record amortization of an intangible asset,
company debits amortization expense and credits
the intangible asset (Unlike depreciation, no use of
contra-asset account)
These assets are recorded at their purchasing price
(unlike plant assets which also include designing,
remodeling, construction cost if there is any)