Plant Assets & Intangibles Plant Assets & Intangibles

Plant Assets & Intangibles
Chapter 10
Copyright © 2007 Prentice-Hall. All rights reserved 1

Long-lived Assets
Plant Natural Intangible

Assets Resources Assets
Depreciation Depletion Amortization

Objective 1
Measure the cost of a plant asset

Cost Principle
• Assets should be recorded at their
historical cost
• Cost of an asset – all costs necessary to
acquire the asset and get it ready for its
intended use

Land and Land Improvements
Land Land Improvements -
• Purchase price Improvements with
• Legal fees limited life
• Costs of grading and • Driveways and
parking lots
clearing
• Sidewalks
• Additional permanent
improvements • Fences
• Not depreciated • Depreciated

Buildings
• Purchase price
• Legal fees
• Repairs and renovations
• If self-constructed
– Architectural fees
– Building permits
– Material
– Labor
– Overhead
– Some interest costs
Machinery and Equipment
• Purchase price (less any discounts)
• Transportation charges
• Insurance while in transit
• Sales tax
• Installation costs
• Cost of testing before asset is used

Furniture and Fixtures
• Purchase price (less any discounts)
• Shipping charges
• Costs to assemble

E10-14
• Land • Building
Purchase price $380,000 Cost $500,000
Property tax 2,000
Title insurance 3,000 Land improvements
Remove and level 5,000 Fence $50,000
$390,000 Signage 10,000
Building and Land
Improvements are the
Lighting 6,000
assets to be depreciated
$66,000

Lump Sum Purchases
• Assign cost to individual assets based on
relative sales values

E10-15
Lot Appraised Percent of Cost Allocated
Cost Value Cost
1 $50,000 $50,000/$180,000
27.8% X $150,000 $41,700
2 60,000 $60,000/$180,000
33.3% X 150,000 49,950
3 70,000 $70,000/$180,000
38.9% X 150,000 58,350
$180,000 100% $150,000

Exercise 10-15
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Land, Lot 1 41,700

Land, Lot 2 49,950
Land, Lot 3 58,350
Cash 150,000

Capital Expenditures
Does the expenditure increase capacity

or efficiency or extend useful life?
YES NO
Capital Expenditure Expense

Debit asset Debit repairs and
account maintenance
expense
E10-16
Capital Expenditures Expenditure benefits
– Purchase price more than one period.
Debit
– Lubrication before machine an in
is placed asset
service
– Major overhaul
– Sales tax
– Transportation and insurance
Expenditure that
– Installation
maintains the asset in
– Training of personnel
its current working
Expenses: condition.
– Ordinary recurring repairs
Debit an expense
– Periodic lubrication
– Income tax
Objective 2
Account for depreciation

Depreciation
• Process of allocating the cost of a plant
asset to expense over its useful life in a
rational and systematic way
Matching Principle

Depreciation – Adjusting Entry
GENERAL JOURNAL
Depreciation Expense
Accumulated Depreciation
Partial balance sheet:

Building $120,000
Less Accumulated Depreciation (80,000)
$40,000
Book Value

Factors in Computing
Depreciation
1. Cost
2. Estimated Residual Value
• Depreciable cost = Cost – Residual Value
1. Estimated Useful Life
• Physical wear and tear
• Obsolescence

Depreciation Methods
• Straight-line
• Units-of-production
• Declining balance

Straight-Line Method
Depreciation Cost - Residual Value

=
Expense per Year Useful life in years
•Allocates an equal amount each year

•Depreciation is a function of time
•Appropriate for assets that generate revenues
evenly over time, like building

E10-19
Straight-line
$15,000 – $3,000 / 4 years = $3,000 per yr
Depr Exp for Total Year-End
Year Year Accum Depr Book Value
2006
$3,000 $3,000 $12,000
2007
3,000 6,000 9,000
2008 3,000 9,000 6,000
2009
3,000 12,000 3,000
Units-of-Production Method
1: Compute depreciation per unit:
Cost - Residual Value
Total Units of Production
2: Compute depreciation expense:

Depreciation Number
Depreciation is a function of use.of units produced
This is an × method for an asset that
appropriate
per unit in the period
depreciates due to wear and tear, like a vehicle

E10-19
Units of Production
($15,000 - $3,000) / 3,000 jobs = $4.00 per job
2006 $4 x 300=
$1,200
$1,200 $1,200 $13,800
2007 $4 x 900=
3,600 4,800 9,000
2008
4,800 9,600 5,400
2009
2,400 12,000 3,000
Double-Declining Balance Method
• Accelerated method – writes off a greater
amount of the cost of an asset in earlier
years of asset’s useful life.
• Amount of depreciation expense
recognized declines each year
Depreciation is a function of time.
This method is appropriate for assets that
produce more revenues in their early years
(match higher depreciation expense with higher
revenues)

Double-Declining-Balance
Method
1: Compute straight-line rate and multiply it by 2
1 X2
Useful life in years
2: Multiply beginning book value by rate

Depreciation Double-declining- Beginning period
= ×
expense balance rate book value
Ignores residual
value
Switchover to Straight Line
• A method employed by some companies
• Change from double-declining balance to
straight-line during the next-to-last year of
asset’s life
• Eliminates the need to use a plug figure
for depreciation expense in last year

E10-19
Switch to Straight line.
Double declining Balance
$3,750 – 3,000 / 2 years
Rate = 2/4 or 50%
2006
$15,000 x 50%
$7,500 $7,500 $7,500
2007 $7,500 x 50%
3,750 11,250 3,750
2008
($3,750 –375
3,000)/2 11,625 3,375
2009
375 12,000 3,000
E10-19
• The units-of-production method tracks the
wear and tear on the equipment most
closely

Use of Depreciation Methods
10%
84% 5%
1%
Straight-line Accelerated UOP Other

Objective 3
Select the best depreciation

method for tax purposes

Depreciation for Tax Reporting
• Modified Accelerated Cost Recovery
System (MACRS)
• Assets are classified into categories by
asset life
• Depreciation method is specified
according to category

E10-20
Double-declining balance
Year 1:($140,000 x 2/10) $28,000
Year 2:($140,000–28,000) x 2/10 22,400
$50,400
Straight-line
Year 1: ($140,000 – 40,000)/10 $10,000
Year 2: 10,000
20,000
$30,400

Partial Year Depreciation
• When plant asset is acquired during the
year, compute full year’s depreciation and
multiply that by the fraction of the year the
asset is owned

Revising Depreciation
• Depreciation is an estimate
– Estimated residual value
– Estimated useful life
Book value – New residual value
Remaining life in years

E10-21
Cost $500,000
Residual value 100,000
Depreciable base $400,000
/40 years
Depreciation expense per year $10,000

E10-21
Depreciation expense per year $10,000
X 15 years
Accumulated depreciation
after 15 years $150,000

Exercise 10-8
Book value after 15 years
Cost $500,000
Accumulated depreciation (150,000)
Cost left to depreciate $350,000
Residual value (100,000)
New depreciable base $250,000
Life (25 years – 15 years taken) /10 year
New depreciation per year $25,000

Exercise 10-8
GENERAL JOURNAL
Yr 15 Depreciation Expense 10,000

Accumulated Depreciation 10,000
Yr 16 Depreciation Expense 25,000


Fully Depreciated Assets
• If still useful, a company will continue to
use it
• Report book value on balance sheet
• Record no more depreciation

Objective 4
Account for the disposal of a plant

asset

Disposing of a Plant Asset
• Sell
• Exchange
• Discard

Disposing of a Plant Asset
• Bring depreciation up to date
• Compare assets received with book value
of asset being disposed of to determine if
there is a gain or loss
– Gain increases net income – credit balance
– Loss decreases net income – debit balance
• Record entry to remove asset from books

E10-22
Depreciation for 2006:
10,000 x 2/5 = $4,000
Depreciation for 2007 (through Sept 30)
(10,000 – 4,000) x 2/5 x 9/12 = $1,800
Accumulated Depreciation
4,000
1,800
5,800 balance

E10-22
Cash Received $6,200
Book Value of Fixtures:
Cost $10,000
Accumulated Depreciation 5,800 4,200
Gain on Sale $2,000
A gain is similar to a revenue and

appears on the income statement as
an “Other revenues and expenses”
E10-22
GENERAL JOURNAL
Sep 30 Depreciation Expense 1,800

30 Cash 6,200
Fixtures 10,000
Gain on Sale of Assets 2,000

Exchanging Plant Assets
Book value of
Market value
of new asset > old asset +
cash given
“Cost” of the new asset =

Exchanging Plant Assets
Book value of
Market value
of new asset < old asset +
cash given
“Cost” of the new asset =
Recognize a loss for the difference

E10-23
Old fixtures:
Cost $90,000
Book value $15,000
Cash paid 100,000
Cost of new fixtures $115,000

E10-23
GENERAL JOURNAL
1. Fixtures (new) 115,000

Accumulated Depreciation,
Fixtures 75,000
Fixtures (old) 90,000
Cash 100,000

E10-23
Old fixtures:
Cost $90,000
Book value $15,000
Cash paid 100,000
Cost of assets given up $115,000
Market value of new fixtures 110,000
Loss $5,000

E10-23
GENERAL JOURNAL
1. Fixtures (new) 110,000

Accumulated Depreciation,
Fixtures 75,000
Loss on Exchange of Assets 5,000
Fixtures (old) 90,000
Cash 100,000

Objective 5
Account for natural resources

Natural Resources
• Plant assets extracted from the natural
environment
• Expensed through depletion using the
units of production method
• Reported on balance sheet at cost less
accumulated depletion

Depletion
• Compute depletion rate per unit:
Cost – Residual Value

Estimated total units of natural resource
• Compute depletion expense:
Depletion Number of units

× extracted this
rate per unit
period

E10-25
Mine: $428,500
Filing fee 500
License 1,000
Survey 70,000
Total cost $500,000
Divided by200,000 tons = $2.50 per ton
Depletion: 30,000 tons @ $2.50/ton = $75,000

E10-25
GENERAL JOURNAL
a) Mineral Asset 428,000

Cash 428,000
b) Mineral Asset 1,500

Cash 1,500
To record filing and license
fees

E10-25
GENERAL JOURNAL
b) Mineral Asset 70,000

Cash 70,000
Paid for geological survey
c) Depletion Expense, Mineral

Asset 75,000
Accumulated Depletion,
Mineral Asset 75,000

Objective 6
Account for intangible assets

Intangible Assets
• Noncurrent assets with no physical form
• Provide exclusive rights or privileges
• Acquired to help generate revenues
• Expensed through amortization using the
straight-line method
• Written off the asset directly

Patents
• Exclusive 20-year right to produce and sell
an invention
• Granted by federal government

Copyrights
• Exclusive right to reproduce and sell
artistic works or intellectual property
• Issued by federal government
• Legal life – 70 years beyond life of the
creator

Trademarks, Brand Names
• Represent distinctive identifications of a
product or service

Franchises, Licenses
• Franchises - privileges granted by private
business or government to sell goods or
services
• Acquisition cost is capitalized and
amortized

E10-26
GENERAL JOURNAL
a) Patent 600,000
Cash 600,000
b) Amortization Expense,
Patent 75,000
Patent 75,000
($600,000 / 8 years)

E10-26
Cost $600,000
Less amortization for 4 years
(75,000 x 4) 300,000
Carrying value of patent $300,000
GENERAL JOURNAL
Yr 5 Amortization Expense,
Patent 150,000
Patent 150,000
($300,000 / 2 years)
Goodwill
• Goodwill - excess of purchase price of a
company over the market value of the net
assets acquired
• Goodwill can only be recorded in the
purchase of another company
• Goodwill is not amortized
• Measure value of goodwill each year
– If value has increased – record nothing
– If value has decreased – recognize loss and
decrease carrying value of goodwill

E10-27
Goodwill
Purchase price $8,000,000
Market value of net assets:
Assets $12,000,000
Liabilities (10,000,000) 2,000,000
Cost of goodwill purchased $6,000,000

E10-27
GENERAL JOURNAL
(in millions)
Other Assets 12
Goodwill 6
Liabilities 10
Cash 8

Research & Development
Costs
• Expense them as they are incurred

End of Chapter 10

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Plant Assets & Intangibles

Copyright © 2007 Prentice-Hall. All rights reserved 1

Plant Natural Intangible

Depreciation Depletion Amortization

Copyright © 2007 Prentice-Hall. All rights reserved 2

Measure the cost of a plant asset

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Land, Lot 1 41,700

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Does the expenditure increase capacity

Capital Expenditure Expense

Account for depreciation

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Partial balance sheet:

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Depreciation Cost - Residual Value

•Allocates an equal amount each year

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2: Compute depreciation expense:

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2: Multiply beginning book value by rate

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Straight-line Accelerated UOP Other

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Select the best depreciation

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Book value – New residual value

Remaining life in years

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Yr 15 Depreciation Expense 10,000

Yr 16 Depreciation Expense 25,000

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Account for the disposal of a plant

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A gain is similar to a revenue and

Sep 30 Depreciation Expense 1,800

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“Cost” of the new asset =

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“Cost” of the new asset =

Recognize a loss for the difference