Plant Assets and Intangibles
Chapter 10
Plant Assets
Asset Account on
the Balance Sheet
Related Expense Account
on the Income Statement
Plant Assets
Land……………………………… none
Buildings, Machinery and
Equipment, Furniture
and Fixtures, and Land
Improvements………….… Depreciation
Natural Resources………..……
Depletion
Intangibles………………………. Amortization
Objective 1
Measure the cost
of a plant asset.
Cost Principle
An asset must be carried on the
balance sheet at the amount paid for it.
The cost of an asset equals the sum of
all of the costs incurred to bring the asset
to its intended purpose, net of discounts
Land and Land Improvements
Purchase price of land
Add related costs:
Back property taxes $40,000
Transfer taxes
8,000
Removal of buildings
5,000
Survey fees
1,000
Total cost of land
$500,000
54,000
$554,000
Land Improvements
• All improvements located on the land but
subject to decay:
Paving
Fences
Sprinkler systems
Lights in parking lot
Buildings – Construction
Architectural fees
Building permits
Contractor’s charges
Materials
Labor
Overhead
Buildings – Purchasing
Purchase price
Brokerage commissions
Sales and other taxes
Repairing or renovating building
for its intended purpose
Machinery and Equipment
Purchase price less discounts
Transportation charges
Insurance in transit
Sales and other taxes
Purchase commissions
Installation cost
Expenditures to test asset
before it is placed in service
Lump-Sum Purchases Example
• Andrea Ortiz paid $110,000 for a
combined purchase of land and a building.
• The land is appraised at $90,000 and the
building at $60,000.
• How much of the purchase price is
allocated to land and how much to the
building?
Lump-Sum Purchases Example
Land: $90,000 ÷ $150,000 = 60%
$110,000 × 60% = $66,000
Building: $60,000 ÷ $150,000 = 40%
$110,000 × 40% = $44,000
Distinction Between Capital and
Revenue Expenditures
Does the expenditure increase capacity
or efficiency or extend useful life?
YES
NO
Capital Expenditure
Debit Plant Assets
accounts
Revenue Expenditure
Debit Repairs and
Maintenance account
Measuring the Depreciation
of Plant Assets
Cost or basis
Estimated residual value
Estimated useful life
Objective 2
Account for depreciation.
Depreciation Methods
Straight-Line (SL)
Units-of-Production (UOP)
Double-Declining-Balance (DDB)
Depreciation Methods Example
• Donishia and Richard Catering, Inc.,
purchased a delivery van on January 1,
200x, for $22,000.
• The company expects the van to have a
trade-in value of $2,000 at the end of its
useful life.
• The van has an estimated service life of
100,000 miles or 4 years.
Straight-Line Method Example
(Cost – Residual value) ÷ years of useful life
($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000
Year 1 Depreciation:
Year 2 Depreciation:
Year 3 Depreciation:
Year 4 Depreciation:
Total Depreciation:
$ 5,000
5,000
5,000
5,000
$20,000
Units-of-Production
Method Example
($22,000 – 2,000) ÷ 100,000 = $.20/mile
Year 1:
30,000 miles = $ 6,000
Year 2:
27,000 miles =
5,400
Year 3:
23,000 miles =
4,600
Year 4:
20,000 miles =
4,000
Total:
100,000 miles = $20,000
(Actual mileage in year 4 was 22,000)
Double-Declining-Balance
Method Example
• Straight-line rate is 100% ÷ 4 = 25%
• Double-declining-balance = 2 times the
straight-line rate = 50%
• What is the book value of the van at the
end of the first year?
• $22,000 × 50% = $11,000
• $22,000 – $11,000 = $11,000
Double-Declining-Balance
Method Example
Dec. 31, 200x
Depreciation Expense
$11,000
Accumulated Depreciation
$11,000
To record depreciation expense for a one-year period
Depreciation Methods
Comparison
Year
1
2
3
4
Totals
SL
$ 5,000
$ 5,000
$ 5,000
$ 5,000
$20,000
UOP
$ 6,000
$ 5,400
$ 4,600
$ 4,000
$20,000
DDB
$11,000
$ 5,500
$ 2,750
$ 750
$20,000
Use of Depreciation Methods
3%
5%
2%
Straight-line
8%
Accelerated –
(not specified)
UOP
Decliningbalance
Other
82%
Objective 3
Select the best depreciation
method for tax purposes.
Relationship Between
Depreciation and Taxes
• MACRS was created by the Tax Reform
Act of 1986.
• It is an accelerated method used for
depreciating equipment.
Depreciation for Partial Years
• Assume that Donishia and Richard
Catering, Inc., owned the van for 3 months.
• How much is the van’s depreciation?
Straight-line method:
$5,000 × 3/12 = $1,250
Double-declining-balance method:
$11,000 × 3/12 = $2,750
Revising Depreciation Rates
Revised SL depreciation
=
Cost – Accumulated depreciation
–
New residual value
÷
Remaining useful life
Objective 4
Account for the disposal
of a plant asset.
Disposing of Plant Assets
–
–
–
•
selling
exchanging
discarding (scrapping it)
Gain/loss is reported on the income
statement...
– and closed to Income Summary.
Disposing by Discarding
Example
• On September 1, Joe, manager of Joe’s
Landscaping, is contemplating the disposal
of an old piece of equipment:
• Equipment cost:
$36,000
• Residual value:
$ 6,000
• Accumulated depreciation: $20,000
• Estimated useful life at acquisition: 10
years
Disposing by Discarding
Example
• Assume the equipment is discarded on
November 30.
• What is the accumulated depreciation on
November 30?
($36,000 – $6,000) ÷ 10 = $3,000
$3,000 ÷ 12 = $250
$250 × 3 = $750
$20,000 + $750 = $20,750
Disposing by Discarding
Example
November 30, 20xx
Accumulated Depreciation 20,750
Loss on disposal
15,250
Equipment
36,000
To record discarding of equipment
Selling a Plant Asset Example
• Assume the equipment is sold for $10,000.
• What is the gain or loss on disposal?
Cash
10,000
Accumulated Depreciation 20,750
Loss on Sale of Equipment 5,250
Equipment
36,000
To record sale of equipment for $10,000
Selling a Plant Asset Example
• Equipment is sold for $20,000.
• What is the gain or loss on disposal?
Cash
20,000
Accumulated Depreciation 20,750
Gain on Sale of Equipment
4,750
Equipment
36,000
To record sale of equipment for $20,000
Exchanging Plant Assets
• Assume equipment with a cost of $36,000
and a book value of $15,250 is exchanged
for new, similar equipment having a cost of
$42,000 with a trade-in of $18,000
allowed.
• Cash payment is $24,000.
• What is the cost of the new asset?
• $24,000 + $15,250 = $39,250
Exchanging Plant Assets
Equipment (new)
$39,250
Accumulated Depreciation (old) $20,750
Equipment (old)
Cash
$36,000
$24,000
Objective 5
Account for natural resources
Accounting for Natural
Resources
Natural gas and oil
Precious metals and gems
Timber, coal, and iron ore
Cost – Residual value) ÷ Estimated units
of natural resources = Depletion per unit
Objective 6
Account for intangible assets
Intangible Assets
Not physical in nature
Patents
Copyrights
Trademarks
Franchises
Leaseholds
Goodwill
Intangible Assets: Patents
• Patents are federal government grants.
• They give the 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.
• What are the entries?
Intangible Assets: Patents
Jan. 1
Patents
Cash
To acquire a patent
170,000
Dec. 31
Amortization Expense
34,000
Patents
To amortize the cost of a patent
170,000
34,000
Intangible Assets: Copyrights
Literary compositions (novels)
Musical compositions
Films (movies)
Software
Other works of art
Intangible Assets: Trademarks
Trademarks, Trade Names,
or Brand Names are assets that represent
distinctive identifications of a product or
service.
Intangible Assets: Franchises
• Franchises are privileges granted by
private business or government to sell a
product or service.
Intangible Assets: Goodwill
• Goodwill is defined as the excess of
purchase price over the fair value of the net
assets acquired.
• Goodwill can only be recorded in the
purchase of another company.
• Goodwill is no longer amortized
• Goodwill is now subject to an
“impairment” test.
Intangible Assets: Goodwill
Goodwill Example
Purchase price paid for
Mexana Company
Assets at market value
Less Mexana’s liabilities
Market value of
Mexana’s net assets
Goodwill
$10 million
9 million
1 million
8 million
$ 2 million
Special Issues
International accounting for goodwill
Research and development
Capitalize or expense a cost
End of Chapter 10