Plant Assets, Intangible
Assets, and Related
Expenses
Chapter 7
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Learning Objective 1
Determine the cost of a plant
asset.
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Types of Assets
Long-lived assets used in
operations
 Plant Assets
 Intangible Assets
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Plant Assets Terminology
Plant Assets - Depreciation
Natural Resources - Depletion
Intangibles - Amortization
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Determining the Cost of Land
A business signs a $300,000 note
payable to purchase land for a new
store site. It pays:
 $10,000
in back property tax
 $8,000 in transfer taxes
 $5,000 for removal of an old building
 $1,000 survey fee
 $260,000 to pave the parking lot.
What is the cost of the land?
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Determining the Cost of Land
Purchase price of land
$300,000
Add related costs:
Back property taxes $10,000
Transfer taxes
8,000
Removal of buildings 5,000
Survey fees
1,000
24,000
Total cost of land
$324,000
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Determining the Cost of
Buildings: Construction
 Architectural fees
 Building permits
 Contractor’s charges
 Materials
 Labor
 Overhead
 Cost of interest
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Determining the Cost of
Buildings: Purchase
Purchase price
Brokerage commissions
Sales and other taxes
Repairing or renovating building
for its intended purpose
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Determining the Cost of
Machinery and Equipment
 Purchase price less discounts
 Transportation charges
 Insurance in transit
 Sales and other taxes
 Purchase commission
 Installation costs
 Expenditures to test the asset
 Special platforms
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Determining the Cost of Land
and Leasehold Improvements
Land improvements
 Paving
 Fences
 Sprinkler
systems
 Lights in parking lot
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Determining the Cost of Land
and Leasehold Improvements
Leasehold Improvement: Cost
of improvements to leased
assets
Depreciate (amortize) over term
of the lease.
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Lump-Sum (or Basket)
Purchases of Assets
Xerox Corporation paid $2,800,000
for a combined purchase of land
and a building.
The land is appraised at $300,000
and the building at $2,700,000.
How much of the purchase price is
allocated to land and how much to
the building?
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Lump-Sum (or Basket)
Purchases of Assets
Total appraised value = $3,000,000
 Land: $300,000 ÷ $3,000,000 = 10%
$2,800,000 × 10% = $280,000
 Building: $2,700,000 ÷ $3,000,000 = 90%
$2,800,000 × 90% = $2,520,000
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Capital Expenditure versus
an Immediate Expense
Does expenditure
increase capacity or
efficiency or
extend useful life?
YES
Capital
Record an asset
NO
Expenses
Record an expense
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Learning Objective 2
Account for depreciation.
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Depreciation Methods
Straight-line (SL)
Units-of-production (UOP)
Double-declining balance
(DDB)
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Depreciation Methods
Data Items
Cost of truck
Estimated residual value
Depreciable cost
Estimated useful life
Units of production
Amount
$41,000
( 1,000)
$40,000
5 years
100,000 miles
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Straight-Line Method
(Cost – Residual value) ÷ Years of useful life
($41,000 – $1,000) ÷ 5 = $8,000
Year 1 depreciation:
Year 2 depreciation:
Year 3 depreciation:
Year 4 depreciation:
Year 5 depreciation:
Total depreciation:
$ 8,000
8,000
8,000
8,000
8,000
$40,000
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Units-of-Production Method
($41,000 – $1,000) ÷ 100,000 = $.40/mile
Year 1: 20,000 miles × $.40 = $ 8,000
Year 2: 30,000 miles × $.40 = 12,000
Year 3: 25,000 miles × $.40 = 10,000
Year 4: 15,000 miles × $.40 =
6,000
Year 5: 10,000 miles × $.40 =
4,000
$40,000
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Double-Declining-Balance
Method
Straight-line rate per year: 100% ÷ 5 = 20%
Double-declining balance:
2 times the straight-line rate = 40%
Book value of truck at the end of the first year:
$41,000 × 40% = $16,400
$41,000 – $16,400 = $24,600
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Comparing Depreciation
Methods
Amount of Depreciation per Year
Year
SL
UOP
DDB
1
$ 8,000 $ 8,000 $16,400
2
8,000 12,000
9,840
3
8,000 10,000
5,904
4
8,000
6,000
3,542
5
8,000
4,000
4,314
Total $40,000 $40,000 $40,000
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Depreciation Methods Used
by 600 Companies
5% Units-of-production
1% Other
10% Accelerated
84% Straight-line
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Learning Objective 3
Select the best depreciation
method.
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Relationship Between
Depreciation and Taxes
Cash revenues
Cash operating expenses
Cash provided by
operations before tax
Depreciation expense
Income before income tax
Income tax expense (30%)
Net income
Straight-line
Accelerated
$400,000
300,000
$400,000
300,000
$100,000
8,000
$ 92,000
27,600
$ 64,400
$100,000
16,400
$ 83,600
25,080
$ 58,520
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Relationship Between
Depreciation and Taxes
Straight-line
Accelerated
Cash-flow analysis
$100,000
Income tax expense
27,600
Cash provided by
operations before taxes $ 72,400
Extra cash available for
investment if DDB is used
($74,920 – $72,400)
$100,000
25,080
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$ 74,920
$ 2,520
Modified Accelerated Cost
Recovery System (MACRS)
Assets are grouped into one of
eight classes identified by asset
life.
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Depreciation for Partial Years
 Suppose a calendar-year business
purchases a building on April 1 for
$500,000 with an estimated life of
20 years and an estimated residual
value of $80,000.
 What is the current year’s
depreciation using the straight-line
method?
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Depreciation for Partial Years
Full-year depreciation:
($500,000 – $80,000) ÷ 20 = $21,000
Partial-year depreciation:
$21,000 × 9/12 = $15,750
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Changing the Useful Life
of a Depreciable Asset
 Assume an asset cost of $50,000,
an ten-year useful life with no
residual value, and the straight-line
method.
$50,000 ÷ 10 = $5,000 depreciation per year
What is the book value after four years?
$50,000 – $20,000 = $30,000
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Changing the Useful Life
of a Depreciable Asset
 Management determines that the
asset will be useful for an additional
ten years. How much depreciation
expense would be recognized each
year starting in year five?
$30,000 / 10 years = $3,000
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Learning Objective 4
Analyze the effect of a plant
asset disposal.
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Accounting for Disposal
of Plant Assets: Example
Fixtures cost:
Accumulated depreciation:
Book value
Date
General Journal
Accounts and Explanations
PR
Accumulated Depreciation
Loss of Disposal of Asset
Store Fixtures
To dispose of store fixtures
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$4,000
$3,000
$1,000
Debit
Credit
3,000
1,000
4,000
Selling a Plant Asset: Example
Equipment which cost $10,000
on 1/1/2002 is sold on
9/30/2005 for $5,000. It has
been depreciated on a straightline basis over its 10 years’
estimated useful life. There is
no residual value.
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Selling a Plant Asset: Example
What is the accumulated
depreciation on September 30,
2005?
$10,000 ÷ 10 = $1,000/year
$1,000 × 3 years =
$3,000
$1,000 × 9/12 =
$750
$3,000 + $750 =
$3,750
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Selling a Plant Asset: Example
General Journal
Date
Accounts and Explanations
PR
Sep 30 Cash
Accumulated Depreciation
Loss of Sale of Equipment
Equipment
To record sale of equipment.
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Debit
Credit
5,000
3,750
1,250
10,000
Exchanging Plant Assets
Assume than an old delivery car
with a cost of $9,000 and a
book value of $1,000 is
exchanged for a new car. Cash
payment is $10,000. What is
the cost of the new car?
$10,000 + $1,000 = $11,000
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Exchanging Plant Assets
General Journal
Date
Accounts and Explanations
PR
Delivery Auto (new)
Accumulated Depreciation (old)
Delivery Auto (old)
Cash
To record exchange of auto.
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Debit
Credit
11,000
8,000
9,000
10,000
Learning Objective 5
Account for natural resources
and depletion.
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Accounting for Natural
Resources and Depletion
Natural gas and oil
Precious metals and gems
Timber, coal, and iron ore
(Cost – Residual value)
÷
Estimated units of natural resource
=
Depletion per unit
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Accounting for Natural
Resources and Depletion
Assume an oil lease cost $100,000 and
contains an estimated 10,000 barrels of
oil.
Depletion rate:
$100,000 ÷ 10,000 = $10 per barrel.
If 3,000 barrels are extracted during the
year,depletion expense is $30,000.
Accumulated Depletion is a contra account
similar to Accumulated Depreciation
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Learning Objective 6
Account for intangible assets and
amortization
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Intangible Assets
Have no physical form
 Patents
 Copyrights
 Trademarks
 Franchises
 Leaseholds
 Goodwill
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Intangible Assets
Amortization expense - can be
written off directly against asset
account
Assets with an indefinite useful
life are not amortized.
All intangible assets are subject
to impairment
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Intangible Assets: Patents
 Federal government grants giving
holder the right to produce and sell
an invention.
 Suppose a company pays
$170,000 to acquire a patent on
January 1. The company believes
that its expected useful life is 5
years.
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Intangible Assets: Patets
Date
Jan 1
General Journal
Accounts and Explanations
PR
Patents
Cash
To record acquisition of patent.
Dec 31 Amortization Expense
Patents
To amortize cost of patent
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Debit
Credit
170,000
170,000
34,000
34,000
Intangible Assets: Copyrights
 Literary compositions (novels)
 Musical compositions
 Films (movies)
 Software
 Other works of art
 Extend 50 years beyond author’s
life.
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Intangible Assets: Trademarks
Trademarks, Trade Names, or
Brand Names - assets that
represent distinctive
identifications of a product or
service
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Intangible Assets: Franchises
Privileges granted by private
business or government to sell
a product or service
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Intangible Assets: Goodwill
Purchase price paid for
Mexana Company
$10 million
Assets at market value $9 million
Less: Mexana’s liabilities $1 million
Market value of Mexana’s
net assets
8 million
Goodwill
$ 2 million
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Research and Development
Expensed as it is incurred
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Learning Objective 7
Report plant asset transactions
on the statement of cash flows.
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Reporting Plant Asset Transactions:
Statement of Cash Flows
Acquisitions (an investing
activity)
Sales
Depreciation (including
amortization and depletion)
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End of Chapter 7
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