11-1
CHAPTER 11
.
PLANT ASSET DISPOSALS,
NATURAL RESOURCES,
& INTANGIBLE ASSETS
Patent
11-2
Disposal of Plant Assets
Plant assets (except land) eventually
become inadequate or obsolete and
must be sold, retired (junked) or
exchanged for new assets.
11-3
Disposal of Plant Assets
General Procedure*
Record the asset depreciation up to
date of sale
Record the disposal by

Writing off asset cost (credit)

Writing off Accumulated Depreciation
(debit)

Record any cash, received (debit)

Record gain (credit) or loss (debit)
* No matter which way disposed
11-4
Steps in Sale of Plant Assets
Update depreciation to the date of sale
Determine the current book value (BV)
of the asset being sold
Remember: Book value equals
acquisition cost less
accumulated depreciation
11-5
Steps in Sale of Plant Assets
Determine if there is a gain or loss by
comparing cash received for the asset
with the asset’s book value
If Cash > BV, record a gain (credit)
If Cash < BV, record a loss (debit)
If Cash = BV, no gain or loss
11-6
Steps in Sale of Plant Assets
Prepare journal entry to record the sale
 Debit
Cash received
 Debit
Accumulated Depreciation
 Credit
Asset for original cost
 Record
gain (credit) or loss (debit)
(i.e., a PLUG)
11-7
Sale of Plant Assets
Example
On September 30, 1999, Evans
Company sold a machine that
originally cost $100,000 for $60,000
cash. Accumulated depreciation
taken on the machine was $46,000.
BV = cost - accumulated depreciation
BV = $100,000 - $46,000
BV = $54,000
11-8
Sale of Plant Assets
Example
On September 30, 1999, Evans
Company sold a machine that
originally cost $100,000 for $60,000
cash. Accumulated depreciation
taken on the machine was $46,000.
Gain = excess of cash received over
book value of asset sold
Gain = $60,000 - $54,000 = $6,000
11-9
Sale of Plant Assets
Example
Prepare the journal entry to record
Evans’ sale of the machine on
September 30, 1999 assuming that
depreciation has already been
recorded to that date.
11-10
Sale of Plant Assets
Example
GENERAL JOURNAL
Page:
Date
Description
9/30
Cash
Accumulated Depreciation
Gain on Sale
Machine
To record sale of machine
PR
Debit
1
Credit
60,000
46,000
6,000
100,000
11-11
Sale of Plant Assets
Example
GENERAL JOURNAL
Page:
Date
Description
9/30
Cash
Accumulated Depreciation
Gain on Sale
Machine
To record sale of machine
PR
Debit
1
Credit
60,000
46,000
Plug! 6,000
100,000
11-12
Plant Asset Retirement
(i.e., Junked)
No sale, so no cash received.
Use same procedure as for a sale
 Update depreciation to date of sale
 Determine current book value
 Determine loss, if any
 Prepare journal entry
11-13
Plant Asset Retirement
Example
Now assume the Evans Company retired
the machine on September 30, 1998.
All information is the same except the
asset is retired with no cash received.
11-14
Plant Asset Retirement
Example
Now assume the Evans Company retired
the machine on September 30, 1998.
All information is the same except the
asset is retired with no cash received.
Loss = Cash Received - Book Value
Loss =
0
- $54,000
Loss = $54,000
11-15
Plant Asset Retirement
Example
GENERAL JOURNAL
Page:
Date
Description
9/30
Accumulated Depreciation
Loss on Retirement
Machine
To record machine retirement
PR
Debit
1
Credit
46,000
54,000
100,000
11-16
Plant Asset Exchanges
Accounting depends on whether
assets are similar or dissimilar.
Airplane
for
Airplane
Truck
for
Airplane
11-17
Plant Asset Exchanges
Key to Recording These Exchanges
Compute gain or loss by comparing
book value of asset given
up with the
fair value of asset given up.
Fair value is frequently
determined by the trade-in
allowance received for
old asset.
11-18
Plant Asset Exchanges
General Procedure
Only situations where cash
is paid will be demonstrated
If loss
Always recognize losses
regardless of whether assets
are similar or dissimilar
If gain
Only recognize
if assets are
dissimilar
11-19
Plant Asset Exchanges
General Procedure
Update depreciation
Compute gain or loss by comparing
book value of asset given up with the
fair value of asset given up
Prepare journal entry to record the
transaction
11-20
Plant Asset Exchanges
Dissimilar Assets
First let’s look at exchanges of
dissimilar assets.
Gains and losses are always
recognized when the exchange
involves dissimilar assets.
DISSIMILAR
11-21
Dissimilar Assets
Example #1
On April 30, 1998, Essex Company
exchanged a used airplane and $25,000
for a new lift truck worth $31,000. The
airplane originally cost $50,000, had
up-to-date accumulated depreciation of
$40,000, and a fair value of $6,000.
DISSIMILAR
11-22
Dissimilar Assets
Question
The exchange resulted in a:
a.
b.
c.
d.
Loss of $10,000.
Loss of $6,000.
Loss of $4,000.
Loss of $2,000.
11-23
Dissimilar Assets
Question
The exchange resulted in a:
a.
b.
c.
d.
Loss of $10,000.
Loss of $6,000.
Loss of $4,000.
Loss of $2,000.
Cost
Accum. Depr.
$ 50,000
40,000
Book Value
Fair Value
Loss
$ 10,000
6,000
$ 4,000
Prepare the journal entry
to record the exchange.
11-24
Dissimilar Assets
Example #1
GENERAL JOURNAL
Page:
Date
Description
4/30
Lift Truck
Accumulated Depreciation
Loss on Exchange
Airplane
Cash
PR
Debit
1
Credit
Plug 31,000
40,000
4,000
To record
airplane
Noteexchange
that the of
debit
to the new asset, lift truck,
for lift truck
for $31,000 was a plug figure in the entry.
50,000
25,000
11-25
Dissimilar Assets
Let’s look at an
exchange of
dissimilar assets that
results in a gain.
11-26
Dissimilar Assets
Example #2
On June 1, 1998, Rogers Company
exchanged equipment and $30,000 for
land worth $130,000. The equipment
originally cost $200,000, had up-to-date
accumulated depreciation of $120,000,
and a fair value of $100,000.
DISSIMILAR
11-27
Dissimilar Assets
Question
The exchange resulted in a gain of:
a.
b.
c.
d.
$10,000.
$20,000.
$30,000.
$40,000.
11-28
Dissimilar Assets
Question
The exchange resulted in a gain of:
a.
b.
c.
d.
$10,000.
$20,000.
$30,000.
$40,000.
Cost
Accum. Depr.
$ 200,000
120,000
Book Value
Fair Value
Gain
80,000
100,000
$ 20,000
Prepare a journal entry
to record the exchange.
11-29
Dissimilar Assets
Example #2
GENERAL JOURNAL
Page:
Date
Description
6/1
Land
Accumulated Depreciation
Gain on Exchange
Equipment
Cash
To record exchange of equipment
for land.
PR
Debit
1
Credit
Plug 130,000
120,000
20,000
200,000
30,000
11-30
Plant Asset Exchanges
Similar Assets
Now let’s look at exchanges of similar
assets.
Remember that when the exchange
involves similar assets, losses are
always recognized, but gains are never
recognized.
SIMILAR
11-31
Similar Assets
Example #1
On May 30, 1998, Huge Company
exchanged a used airplane and $35,000
cash for a new airplane worth $39,000.
The old airplane originally cost $40,000,
had up-to-date accumulated depreciation
of $30,000, and a fair value of $4,000.
SIMILAR
11-32
Similar Assets
Question
The exchange resulted in a:
a.
b.
c.
d.
Loss of $10,000.
Loss of $6,000.
Loss of $4,000.
Loss of $2,000.
11-33
Similar Assets
Question
The exchange resulted in a:
a.
b.
c.
d.
Loss of $10,000.
Loss of $6,000.
Loss of $4,000.
Loss of $2,000.
Prepare a journal entry
to record the exchange.
Cost
Accum. Depr.
$ 40,000
30,000
Book Value
Fair Value
Loss
$ 10,000
4,000
$ 6,000
11-34
Similar Assets
Example #1
GENERAL JOURNAL
Page:
Date
Description
5/30
New Airplane
Accumulated Depreciation
Loss on Exchange
Old Airplane
Cash
To record exchange of airplanes
PR
Debit
1
Credit
39,000
30,000
6,000
The “Rule”: The new airplane is recorded
at the fair value of the old airplane plus the
cash paid, just like an exchange of
dissimilar assets.
40,000
35,000
11-35
Similar Assets
Example #1
GENERAL JOURNAL
Page:
Date
Description
5/30
New Airplane
Accumulated Depreciation
Loss on Exchange
Old Airplane
Cash
To record exchange of airplanes
PR
Debit
1
Credit
Plug 39,000
30,000
6,000
The “Rule”: The new airplane is recorded
at the fair value of the old airplane plus the
cash paid, just like an exchange of
dissimilar assets.
Rice says: “Forget the rule and plug it!”
40,000
35,000
11-36
Similar Assets
Example
Let’s change the example so that a gain
is indicated. The assets are still similar.
SIMILAR
11-37
Similar Assets
Example #2
On July 31, 1998, SimCo exchanged a
used airplane and $100,000 cash for a
new airplane . The old airplane originally
cost $4,000,000, had up-to-date
accumulated depreciation of $3,000,000,
and a fair value of $1,400,000.
SIMILAR
11-38
Similar Assets
Question
The exchange indicates a gain of:
a.
b.
c.
d.
$ 400,000.
$1,400,000.
$1,000,000.
$2,600,000.
11-39
Similar Assets
Question
The exchange indicates a gain of:
a.
b.
c.
d.
$ 400,000.
$1,400,000.
$1,000,000.
$2,600,000.
Cost
Accum. Depr.
$ 4,000,000
3,000,000
Book Value
Fair Value
Indicated Gain
1,000,000
1,400,000
$ 400,000
Prepare a journal entry
to record the exchange.
11-40
Similar Assets
Example #2
The “Rule”
Book value
of oldJOURNAL
asset + cash paid
GENERAL
$1,000,000 + $100,000 = $1,100,000
Page:
Date
Description
7/31
New Airplane
Accumulated Depreciation
Old Airplane
Cash
To record exchange of airplanes
PR
Debit
1
Credit
1,100,000
3,000,000
4,000,000
100,000
11-41
Similar Assets
Example #2
PLUG IT!
GENERAL JOURNAL
Page:
Date
Description
7/31
New Airplane
Accumulated Depreciation
Old Airplane
Cash
PR
Debit
1
Credit
1,100,000
3,000,000
4,000,000
100,000
To record exchange
of airplanes
Remember,
gains
are not recognized when
similar assets are exchanged.
11-42
Plant Asset Exchanges
Summary
Dissimilar Assets Similar Assets
Recognize
Gains?
Recognize
Losses
Yes
No
Yes
Yes
11-43
Let’s change the subject!
11-44
Natural Resources
Extracted from
the natural
environment
A noncurrent
asset presented
at cost less
accumulated
depletion
Examples: oil, coal, gold
11-45
Natural Resources
Total cost of
asset is the cost
of acquisition,
exploration,
and development
Total cost is
allocated over
periods benefited
by means of
depletion
Depletion is like depreciation
11-46
Let’s change the subject again!
11-47
Intangible Assets
Often provide
exclusive rights
or privileges to
use the asset
Non-current assets
without physical
substance
Intangible
Assets
Useful life is
often difficult
to determine
11-48
Intangible Assets
Examples







Patents
Copyrights
Franchises
Trademarks
Leaseholds
Leasehold
improvements
Goodwill
11-49
Intangible Assets
Accounting Procedures

Record cost at
current cash
equivalent,
including
purchase price,
legal fees, and
filing fees.


Cost is allocated over
the period the asset is
expected to produce
revenue using a process
called “amortization”
Amortize cost over
 economic life
 legal life or
 40 years...
whichever is shorter
Why?
Because FASB said so!
Use straight-line method
11-50
Intangible Assets
Patents
Exclusive right granted
by federal government to
sell or manufacture invention
Cost is purchase
price plus any legal
cost to defend
Legal life is 17 years
Research and Development
costs to develop a patent are
expensed as cost is incurred.
11-51
Intangible Assets
Copyrights
Exclusive right granted by the
federal government to protect
artistic or intellectual properties
Legal life is
life of creator
plus 50 years
11-52
Intangible Assets
Franchises
Right to sell products or provide
services purchased by franchisee
from franchisor
Purchase price is intangible asset
which is amortized over shorter of
legal life, economic life, or 40 years
11-53
Intangible Assets
Trademarks
A symbol, design, or logo
associated with a business
If
internally
developed,
trademarks
have no
recorded
asset cost
If
purchased,
trademarks
are recorded
at cost, and
amortized over
shorter of legal or
economic life, or
40 years
11-54
Intangible Assets
Leases

A contract to rent property. Right to
use is granted by lessor to lessee.

Two types of leases

Capital leases

Operating leases
11-55
Intangible Assets
Capital Leases

A means of financing acquisition of
property


Lessor transfers ownership to lessee at
end of lease
However, lessee records leased
property from the beginning as if it
were purchased, ignoring the legal
reality.
11-56
Intangible Assets
Operating Leases

If a lease does not qualify as capital
lease, it is an operating lease.

Common rental agreements are
normally operating leases.

Rent expense is normally recorded
as incurred.

However, if there is a prepayment at the
start of the lease, it is accounted for as
long-term prepaid rent in an intangible
asset account called “leasehold”.
11-57
Intangible Assets
Leasehold Improvements
Long-lived alterations made by
lessee to leased property
Leasehold improvements are amortized
over the shorter of the life of the
improvement or the life of the lease.
11-58
Intangible Assets
Goodwill
Occurs when one company buys the assets
and assumes the liabilities of another company
Only purchased goodwill is recorded as an asset
Goodwill is the amount by which cost exceeds
the fair market value of net assets acquired
•Goodwill = Cost - (FMV of net assets acquired)
•Net assets = assets - liabilities
•Synergism
11-59
Intangible Assets
Goodwill Example
Eddy Company paid $1,000,000 to
purchase all of James Company’s
assets and assumed James Company
liabilities of $200,000. James
Company’s assets were appraised at a
fair value of $900,000.
11-60
Goodwill
Question
What amount of goodwill should be
recorded on Eddy Company books?
a.
b.
c.
d.
$100,000
$200,000
$300,000
$400,000
11-61
Goodwill
Question
What amount of goodwill should be
recorded on Eddy Company books?
a.
b.
c.
d.
$100,000
$200,000
$300,000
$400,000
FMV of Assets
Debt Assumed
$
FMV of Net Assets
Purchase Price
Goodwill
$
900,000
200,000
700,000
1,000,000
$ 300,000
11-62
THE END
THIS CHAPTER HAS
BEEN A MOUNTAIN-TOP
EXPERIENCE, BUT I’M
GLAD IT’S FINISHED!