Plant Assets, Natural Resources, and Intangible Assets

Chapter 10

9-1
 Plant Assets

Plant assets are resources that have

 physical substance (a definite size and shape),
 are used in the operations of a business,
 are not intended for sale to customers,
 are expected to provide service to the company for a
number of years.

Referred to as property, plant, and equipment; plant and

equipment; and fixed assets.

9-2
 Determining the Cost of Plant Assets

In general, companies record plant assets at cost.

Cost consists of all expenditures necessary to

acquire an asset and make it ready for its
intended use.

9-3
 Determining the Cost of Plant Assets

Land
All necessary costs incurred in making land ready for its
intended use increase (debit) the Land account.

Costs typically include:

1) cash purchase price,
2) closing costs such as title and attorney’s fees,
3) real estate brokers’ commissions,
4) accrued property taxes and other liens assumed by the
purchaser, and
5) clearing, leveling, demo of existing structures.

9-4
 Determining the Cost of Plant Assets

Illustration: Lew Company acquires real estate at a cash cost

of HK$2,000,000. The property contains an old warehouse that
is razed at a net cost of HK$60,000 (HK$75,000 in costs less
HK$15,000 proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, HK$10,000, and the real
estate broker’s commission, HK$80,000.

Required: Determine the amount to be reported as the cost of

the land.

9-5
 Determining the Cost of Plant Assets

Required: Determine amount to be reported as the cost of the

land.
Land
Cash price of property (HK$2,000,000) HK$2,000,000
Net removal cost of warehouse (HK$60,000) 60,000
Attorney's fees (HK$10,000) 10,000
Real estate broker’s commission (HK$80,000) 80,000
Cost of Land HK$2,150,000

9-6
 Determining the Cost of Plant Assets

Land Improvements
Includes all expenditures necessary to make the
improvements ready for their intended use.
 Examples: driveways, parking lots, fences, landscaping,
and lighting.
 Limited useful lives.
 Expense (depreciate) the cost of land improvements over
their useful lives.

9-7
 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.

9-8
 Determining the Cost of Plant Assets

Equipment
Include all costs incurred in acquiring the equipment and
preparing it for use.
Costs typically include:
 Cash purchase price.
 Sales taxes.
 Freight charges.
 Insurance during transit paid by the purchaser.
 Expenditures required in assembling, installing, and testing
the unit.

9-9
 Determining the Cost of Plant Assets

Illustration: Zhang Company purchases factory machinery at

a cash price of HK$500,000. Related expenditures are for
sales taxes HK$30,000, insurance during shipping HK$5,000,
and installation and testing HK$10,000. Compute the cost of
the machinery.
Machinery
Cash price HK$500,000
Sales taxes 30,000
Insurance during shipping 5,000
Installation and testing 10,000
Cost of Machinery HK$545,000

9-10
 Determining the Cost of Plant Assets

Illustration: Zhang Company purchases factory machinery at

a cash price of HK$500,000. Related expenditures are for sales
taxes HK$30,000, insurance during shipping HK$5,000, and
installation and testing HK$10,000. Prepare the journal entry to
record these costs.

Equipment 545,000
Cash 545,000

9-11
 Determining the Cost of Plant Assets

Illustration: Huang Company purchases a delivery truck at a

cash price of HK$420,000. Related expenditures are sales
taxes HK$13,200, painting and lettering HK$5,000, motor vehicle
license HK$800, and a three-year accident insurance policy
HK$16,000. Compute the cost of the delivery truck.
Truck
Cash price HK$420,000
Sales taxes 13,200
Painting and lettering 5,000

Cost of Delivery Truck HK$438,200

9-12
 Determining the Cost of Plant Assets

Illustration: Huang Company purchases a delivery truck at a

cash price of HK$420,000. Related expenditures are sales
taxes HK$13,200, painting and lettering HK$5,000, motor vehicle
license HK$800, and a three-year accident insurance policy
HK$16,000. Prepare the journal entry to record these costs.

Equipment 438,200
License expense 800
Prepaid insurance 16,000
Cash 455,000

9-13
 Depreciation

Depreciation
Process of allocating to expense the cost of a plant asset
over its useful (service) life in a rational and systematic
manner.
 Process of cost allocation, not asset valuation.
 Applies to land improvements, buildings, and equipment,
not land.
 Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.

9-14
 Depreciation

Factors in Computing Depreciation

Illustration 9-6

Cost Useful Life Residual Value

9-15
 Depreciation

Depreciation Methods
Management selects the method it believes 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

9-16
 Depreciation

Illustration: Barb’s Florists purchased a small delivery truck on

January 1, 2014.
Illustration 9-7

Required: Compute depreciation using the following.

(a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance.

9-17
 Depreciation

Straight-Line
 Expense is same amount for each year.
 Depreciable cost = Cost less residual value.
Illustration 9-8

9-18
 Depreciation

Illustration: (Straight-Line Method)

Illustration 9-10

Depreciable Annual Accum. Book

Year Cost x Rate = Expense Deprec. Value

2014 € 12,000 20% € 2,400 € 2,400 € 10,600

2015 12,000 20 2,400 4,800 8,200
2016 12,000 20 2,400 7,200 5,800
2017 12,000 20 2,400 9,600 3,400
2018 12,000 20 2,400 12,000 1,000

2014 Depreciation expense 2,400

Journal
Accumulated depreciation 2,400
Entry

9-19
 Depreciation Partial
Year
Illustration: (Straight-Line Method)

Assume the delivery truck was purchased on April 1, 2014.

Current
Depreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2014 € 12,000 x 20% = € 2,400 x 9/12 = € 1,800 € 1,800
2015 12,000 x 20% = 2,400 2,400 4,200
2016 12,000 x 20% = 2,400 2,400 6,600
2017 12,000 x 20% = 2,400 2,400 9,000
2018 12,000 x 20% = 2,400 2,400 11,400
2019 12,000 x 20% = 2,400 x 3/12 = 600 12,000
€ 12,000
Journal entry:
2014 Depreciation expense 1,800
Accumulated depreciation 1,800
9-20
 Depreciation

Units-of-Activity
 Companies estimate total units of activity to calculate
depreciation cost per unit.
 Expense varies based
Illustration 9-10
on units of activity.
 Depreciable cost is
cost less residual
value.

9-21
 Depreciation

Illustration: (Units-of-Activity Method)

Illustration 9-11

Units of Cost per Annual Accum. Book

Year Activity x Unit = Expense Deprec. Value
2014 15,000 € 0.12 € 1,800 € 1,800 € 11,200
2015 30,000 0.12 3,600 5,400 7,600
2016 20,000 0.12 2,400 7,800 5,200
2017 25,000 0.12 3,000 10,800 2,200
2018 10,000 0.12 1,200 12,000 1,000

2014 Depreciation expense 1,800

Journal
Accumulated depreciation 1,800
Entry

9-22
 Depreciation

Declining-Balance
 Accelerated method.
 Decreasing annual depreciation expense over the asset’s
useful life.
 Twice the straight-line rate with Double-Declining-Balance.
 Rate applied to book value.
Illustration 9-12

9-23
 Depreciation
Illustration: (Declining-Balance Method)
Illustration 9-13
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value

2014 € 13,000 40% € 5,200 € 5,200 € 7,800

2015 7,800 40 3,120 8,320 4,680
2016 4,680 40 1,872 10,192 2,808
2017 2,808 40 1,123 11,315 1,685
2018 1,685 40 685* 12,000 1,000

2014 Depreciation expense 5,200

Journal
Accumulated depreciation 5,200
Entry

9-24
 Depreciation Partial
Year
Illustration: (Declining-Balance Method)
Declining Current
Beginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2014 € 13,000 x 40% = € 5,200 x 9/12 = € 3,900 € 3,900
2015 9,100 x 40% = 3,640 3,640 7,540
2016 5,460 x 40% = 2,184 2,184 9,724
2017 3,276 x 40% = 1,310 1,310 11,034
2018 1,966 x 40% = 786 786 11,821
2019 1,179 x 40% = 472 Plug 179 12,000
€ 12,000
Journal entry:

2014 Depreciation expense 3,900

Accumulated depreciation 3,900

9-25
 Depreciation
Illustration: Lexure Construction builds an office building for HK$4,000,000.
The building is estimated to have a 40-year useful life, however HK$320,000
of the cost of the building relates to personal property and HK$600,000 relates
to land improvements. Because the personal property has a depreciable life of
5 years and the land improvements have a depreciable life of 10 years, Lexure
must use component depreciation. Assuming that Lexure uses straight-line
depreciation and no residual value, component depreciation for the first year of
the office building is computed as follows.
Illustration 9-16

9-26
 Expenditures During Useful Life

Ordinary Repairs - expenditures to maintain the operating

efficiency and productive life of the unit.
 Debit – Maintenance and Repairs 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.

9-27
 Plant Asset Disposals

Companies dispose of plant assets in three ways—Sale,

Retirement, or Exchange (appendix).
Illustration 9-19

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.

9-28
 Plant Asset Disposals

Retirement of Plant Assets

 No cash is received.
 Decrease (debit) Accumulated Depreciation for
the full amount of depreciation taken over the life of
the asset.
 Decrease (credit) the asset account for the
original cost of the asset.
 Record any difference as gain or loss on disposal.

9-29
 Plant Asset Disposals

Illustration: Hobart Enterprises retires its computer printers,

which cost €32,000. The accumulated depreciation on these
printers is €32,000. Prepare the entry to record this retirement.

Accumulated depreciation 32,000

Equipment
32,000

Question: What happens if a fully depreciated plant asset is still

useful to the company?

9-30
 Plant Asset Disposals

Illustration: Sunset Company discards delivery equipment

that cost €18,000 and has accumulated depreciation of
€14,000. The journal entry is?

Accumulated depreciation 14,000

Loss on disposal of plant assets 4,000
Equipment
18,000

Companies report a loss on disposal in the “Other income and

expense” section of the income statement.

9-31
 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.

9-32
 Plant Asset Disposals

Gain on Sale
Illustration: On July 1, 2014, Wright Company sells office
furniture for €16,000 cash. The office furniture originally cost
€60,000. As of January 1, 2014, it had accumulated
depreciation of €41,000. Depreciation for the first six months of
2014 is €8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.

July 1 Depreciation expense 8,000

Accumulated depreciation
8,000

9-33
 Plant Asset Disposals
Illustration 9-20
Computation of gain
on disposal

Illustration: Wright records the sale as follows.

July 1 Cash 16,000

Accumulated depreciation 49,000
Equipment 60,000
Gain on disposal of plant assets
5,000
9-34
 Plant Asset Disposals

Illustration: Assume that instead of selling the office furniture

for €16,000, Wright sells it for €9,000.
Illustration 9-21
Computation of loss
on disposal

July 1 Cash 9,000

Accumulated depreciation 49,000
Loss on disposal of plant asset 2,000
Equipment 60,000
9-35
 Extractable Natural Resources

Natural resources consist of standing timber and resources

extracted from the ground, such as oil, gas, and minerals.

IFRS defines extractive industries as those businesses

involved in finding and removing natural resources located in
or near the earth’s crust.
Standing timber is considered a biological asset under IFRS. In
the years before they are harvested, the recorded value of
biological assets is adjusted to fair value each period.

9-36
 Extractable Natural Resources

Acquisition cost of an extractable natural resource is the

 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.

9-37
 Extractable Natural Resources

Illustration: Lane Coal Company invests HK$50 million in a

mine estimated to have 10 million tons of coal and no residual
value. In the first year, Lane extracts and sells 800,000 tons of
coal. Lane computes the depletion expense as follows:

HK$50,000,000 ÷ 10,000,000 = HK$5 depletion cost per ton

HK$5 x 800,000 = HK$4,000,000 annual depletion expense

Journal entry:
Depletion expense 4,000,000
Accumulated depletion
4,000,000
9-38
 Extractable Natural Resources

Illustration 9-23
Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported as

inventory in the current assets section.

9-39
 Intangible Assets

Intangible assets are rights, privileges, and competitive

advantages that result from ownership of long-lived assets that
do not possess physical substance.

Limited life or indefinite life.

Common types of intangibles:

 Patents  Trademarks and Trade Names

 Copyrights  Franchises or licenses
 Goodwill

9-40
 Accounting for Intangible Assets

Limited-Life Intangibles:
Companies
Companiesclassify
classify
 Amortize to expense. Amortization
Amortization
 Credit asset account. Expense
Expenseas asan
an
operating
operatingexpense
expense
Indefinite-Life Intangibles: in
inthe
theincome
income
statement.
statement.
 No amortization.

Similar
Similarto
toproperty,
property,plant,
plant,and
andequipment,
equipment,IFRS
IFRS
permits
permitsrevaluation
revaluationofofintangible
intangibleassets
assetsto
tofair
fairvalue,
value,
except
exceptforforgoodwill.
goodwill.

9-41
 Accounting for Intangible Assets

Patents
 Exclusive right to manufacture, sell, or otherwise control an
invention for a specified number of years from the date of
the grant.
 Capitalize costs of purchasing a patent and amortize
over its legal life or its useful life, whichever is shorter.
 Expense any Research and Development costs in
developing a patent.
 Legal fees incurred successfully defending a patent are
capitalized to Patent account.

9-42
 Accounting for Intangible Assets

Illustration: National Labs purchases a patent at a cost of

NT$720,000. National estimates the useful life of the patent to
be eight years. National records the annual amortization for the
ended December 31 as follows.

Cost NT$720,000
Useful life ÷ 8 years
Annual expense NT$ 90,000

Dec. 31
Amortization expense 90,000
Patent
90,000
9-43
 Accounting for Intangible Assets

Copyrights
 Give the owner the exclusive right to reproduce and sell
an artistic or published work.
 Granted for the life of the creator plus a specified
number of years, commonly 70 years.
 Capitalize costs of acquiring and defending it.
 Amortized to expense over useful life.

9-44
 Accounting for Intangible Assets

Trademarks and Trade Names

 Word, phrase, jingle, or symbol that identifies a particular
enterprise or product.
► Wheaties, Monopoly, Kleenex, Coca-Cola, Big Mac, and
Jetta.

 Legal protection for specified number of years, commonly

20 years. Protection may be renewal indefinitely.
 Capitalize cost of acquisition.
 No amortization.

9-45
 Accounting for Intangible Assets

Franchises and Licenses

 Contractual arrangement between a franchisor and a
franchisee.
► BP (GBR), Subway (USA), and Europcar are
franchises.

 Franchise (or license) with a limited-life should be

amortized to expense over its useful life.
 Franchise (or license) with an indefinite life is not
amortized.

9-46
 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 cost over the fair
value of the net assets acquired.
 Internally created goodwill should not be capitalized.
 Not amortized.

9-47