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Plant Assets, Natural Resources,

and Intangibles
Chapter 10
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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SUMMARY
ACQUISITIO
N
USE (Allocation of

EXCHANGE
Cost)

ADDITIONS

DISPOSAL
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C1

Plant Assets
Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

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C1

PLANT ASSETS
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C1

Cost Determination

Purchase All expenditures

price needed to
prepare the asset
Acquisition for its intended
Cost use

Acquisition cost excludes

financing charges and
cash discounts
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C1

Land
Title insurance premiums
Purchase Delinquent
price taxes

Real estate Surveying

commissions fees

Title search and transfer fees

Land is not depreciable.

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C1

Land Improvements

Parking lots, driveways, fences, walks, shrubs,

and lighting systems.

Depreciate
over useful life of
improvements.
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C1

Buildings
Cost of purchase or Title fees
construction

Brokerage Attorney fees

fees

Taxes
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C1

Machinery and Equipment

Purchase
price Taxes

Transportation
charges

Installing,
assembling, and Insurance while
testing in transit
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P1

Lump-Sum Purchase
The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.
CarMax paid $90,000 cash to acquire a group of
items consisting of land appraised at $30,000, land
improvements appraised at $10,000, and a building
appraised at $60,000. The $90,000 cost will be
allocated on the basis of appraised values as shown:
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P1

Depreciation

Depreciation is the process of allocating the cost of

a plant asset to expense in the accounting periods
benefiting from its use.

Balance Sheet Income Statement

Cost
Acquisition
Allocation Expense
Cost
(Unused) (Used)
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P1

Factors in Computing Depreciation

The calculation of depreciation requires

three amounts for each asset:
1. Cost
2. Salvage Value
3. Useful Life
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P1

Depreciation Methods
1. Straight-line
2. Units-of-production
3. Declining-balance
Asset we will depreciate in future screens
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P1

Straight-Line Method
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P1

Straight-Line Method

Balance Sheet Presentation

Machinery $ 10,000
Less: accumulated depreciation 3,600 $ 6,400
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P1 Straight-Line Depreciation
Schedule

Salvage
Value
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P1

Units-of-Production Method

Step 1:
Depreciation = Cost - Salvage Value
Per Unit Total Units of Production

Step 2:
Number of Units
Depreciation Depreciation × Produced
=
Expense Per Unit in the Period
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P1

Units-of-Production Method
Assume that 7,000 units were
inspected during 2013.
Depreciation would be
calculated as follows:

Step 1:
Depreciation = Cost - Salvage Value = $9,000 = $0.25/unit
Per Unit Total Units of Production 36,000

Step 2:
Number of Units
Depreciation Depreciation = $0.25 × 7,000 = $1,750
× Produced
Expense = Per Unit
in the Period
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P1 Units-of-Production
Depreciation Schedule

Units
Units produced
produced and
and sold
sold during
during the
the period.
period.
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P1

Double-Declining-Balance Method
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P1

Double-Declining-Balance Method
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P1

Comparing Depreciation Methods

Methods Used by Companies

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P1

Depreciation for Tax Reporting

Most corporations use the Modified

Accelerated Cost Recovery System (MACRS)
for tax purposes.
MACRS depreciation provides for rapid
write-off of an asset’s cost in order to
stimulate new investment.
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C2

Partial-Year Depreciation
When a plant asset is acquired during the year,
depreciation is calculated for the fraction of the year
the asset is owned.
Cost $ 10,000
Assume our machinery was purchased
Salvage value 1,000
on October 8, 2013. Let’s calculate
Depreciable cost $ 9,000
Useful life
depreciation expense for 2013,
Accounting periods 5 years assuming we use straight-line
Units inspected 36,000 units depreciation.
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C2 Changes in Estimates for

Depreciation
Predicted Predicted
salvage value useful life

Depreciation
is an estimate

Over the life of an asset, new information may

come to light that indicates the original
estimates were inaccurate.
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C2 Changes in Estimates for

Depreciation
Let’s look at our machinery from the previous examples and
assume that at the beginning of the asset’s third year, its book
value is $6,400 ($10,000 cost less $3,600 accumulated
depreciation using straight-line depreciation). At that time, it is
determined that the machinery will have a remaining useful life
of 4 years, and the estimated salvage value will be revised
downward from $1,000 to $400.
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C2
Reporting Depreciation

Dale Jarrett Racing Adventure

Office furniture and equipment $ 54,593
Shop and track equipment 202,973
Race vehicles and other 975,084
Property and equipment, gross 1,232,650

Less: accumulated depreciation 628,355

Property and equipment, net $ 604,295
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C3
Additional Expenditures
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes
Capital Balance sheet
Deferred Higher Higher
Expenditure account debited
Revenue Income statement Currently
Lower Lower
Expenditure account debited recognized

If the amounts involved are not material,

most companies expense the item.
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C3
Revenue and Capital
Expenditures
Type of Capital or
Expenditure Revenue Identifying Characteristics
1. Maintains normal operating condition.
Ordinary 2. Does not increase productivity.
Revenue
Repairs 3. Does not extend life beyond original
estimate.
Betterments 1. Major overhauls or partial
and replacements.
Extraordinary Capital
Repairs 2. Extends life beyond original estimate.
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P2
Disposals of Plant Assets
Update depreciation
to the date of disposal.

Journalize disposal by:

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
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P2
Discarding Plant Assets
Update depreciation
If Cash > BV, record a gain (credit).
to the date of disposal.
If Cash < BV, record a loss (debit).
If CashJournalize
= BV, nodisposal
gain orby:
loss.

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
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P2
Discarding Plant Assets
A machine costing $9,000, with accumulated depreciation of
$9,000 on December 31st of the previous year was discarded on
June 5th of the current year. The company is depreciating the
equipment using the straight-line method over eight years with
zero salvage value.
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P2
Discarding Plant Assets
Equipment costing $8,000, with accumulated depreciation of
$6,000 on December 31st of the previous year was discarded on
July 1st of the current year. The company is depreciating the
equipment using the straight-line method over eight years with
zero salvage value.
Step 1: Bring the depreciation up-to-date.

Step 2: Record discarding of asset.

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P2
Selling Plant Assets
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $3,000 cash.
Step 1: Update depreciation to March 31st.

Step 2: Record sale of asset at book value ($16,000 - $13,000 = $3,000).

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P2
Selling Plant Assets
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $2,500 cash.
Step 1: Update depreciation to March 31st.

Step 2: Record sale of asset at a loss (Book value $3,000 - $2,500 cash received).
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P3
Natural Resources

Total cost,
Extracted from
including
the natural
exploration and
environment
development,
and reported
is charged to
at cost less
depletion expense
accumulated
over periods
depletion.
benefited.

Examples: oil, coal, gold

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P3
Cost Determination
and Depletion
Let’s consider a mineral deposit with an estimated 250,000
tons of available ore. It is purchased for $500,000, and we
expect zero salvage value.
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P3
Depletion of Natural Resources
Depletion expense in the first year would be:

Balance Sheet presentation of natural resources:

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P3
Plant Assets Used in Extracting

 Specialized plant assets may be required

to extract the natural resource.
 These assets are recorded in a separate
account and depreciated.
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P4
Intangible Assets
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.

Intangible
Assets

Useful life is Usually acquired

often difficult for operational
to determine. use.
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P4 Cost Determination and

Amortization
Record at current
o Patents
cash equivalent
cost, including o Copyrights
purchase price, o Leaseholds
legal fees, and o Leasehold Improvements
filing fees. o Franchises and Licenses
o Goodwill
o Trademarks and Trade Names
o Other Intangibles
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Global View
There is one area where notable differences exist, and that is in
accounting for changes in the value of plant assets (between the
time they are acquired and disposed of). Namely, how does IFRS
and U.S. GAAP treat decreases and increases in the value of plant
assets subsequent to acquisition?

Decreases
Decreases in
in the
the Value
Value of
of Plant
Plant Assets
Assets
Both
Both U.S.
U.S. GAAP
GAAP andand IFRS
IFRS require
require that
that an
an
impairment
impairment in in value
value be
be recognized.
recognized.

Increases
Increases in
in the
the Value
Value of
of Plant
Plant Assets
Assets
U.S.
U.S. GAAP
GAAP prohibits
prohibits recording
recording increase
increase in
in value
value
of
of plant
plant assets.
assets. IFRS
IFRS permits
permits upward
upward asset
asset
revaluation.
revaluation.
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A1
Total Asset Turnover
Total Asset Net Sales
Turnover = Average Total Assets

Provides information about a company’s

efficiency in using its assets.
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P5A

10A – Exchanging Plant Assets

Many plant assets such as machinery, automobiles, and office
equipment are disposed of by exchanging them for newer
assets. In a typical exchange of plant assets, a trade-in
allowance is received on the old asset and the balance is paid
in cash. Accounting for the exchange of assets depends on
whether the transaction has commercial substance.

Commercial substance implies the

company’s future cash flows will be altered.
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P5A Exchange with Commercial

Substance: A Loss
A company acquires $42,000 in new equipment. In exchange, the company pays
$33,000 cash and trades in old equipment. The old equipment originally cost
$36,000 and has accumulated depreciation of $20,000 (book value is $16,000).
This exchange has commercial substance. The old equipment has a trade-in
allowance of $9,000.
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P5A Exchange with Commercial

Substance: A Loss
A company acquires $42,000 in new equipment. In exchange, the company pays
$33,000 cash and trades in old equipment. The old equipment originally cost
$36,000 and has accumulated depreciation of $20,000 (book value is $16,000).
This exchange has commercial substance. The old equipment has a trade-in
allowance of $9,000.
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P5A
Exchanges Without Commercial Substance
Let’s assume the same facts as on the previous screen except that
the market value of the new equipment received is $52,000 and the
transaction lacks commercial substance.
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P5A
Exchanges Without Commercial Substance
Let’s assume the same facts as on the previous screen except that
the market value of the new equipment received is $52,000 and the
transaction lacks commercial substance.
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End of Chapter 10