ch10 Plant Assets, Natural Resources, and Intangible Assets

8/10/2019 ch10 Plant Assets, Natural Resources, and Intangible Assets

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Chapter10-1

Chapter

10Plant Assets, Natural

Resources, and

Intangible Assets

Accounting Principles, Ninth Edition


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Chapter10-2

1. Describe how the cost principle applies to plant assets.2. Explain the concept of depreciation.

3. Compute periodic depreciation using different methods.

4. Describe the procedure for revising periodic depreciation.

5. Distinguish between revenue and capital expenditures, andexplain the entries for each.

6. Explain how to account for the disposal of a plant asset.

7. Compute periodic depletion of natural resources.

8. Explain the basic issues related to accounting for intangibleassets.

9. Indicate how plant assets, natural resources, and intangibleassets are reported.

Study Objectives


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Chapter10-3

Plant Assets

Determining the

cost of plant

assets

Depreciation

Expendituresduring useful life

Plant asset

disposals

Natural

Resources

Intangible

Assets

Statement

Presentation and

Analysis

Presentation

Analysis

Accounting for

intangibles

Research and

development

costs

Plant Assets, Natural Resources, andIntangible Assets

Depletion


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Chapter10-4

Used in operations and not for resale.Long-term in nature and usually depreciated.

Possess physical substance.

Plant assetsinclude land, land improvements,buildings, and equipment (machinery, furniture, tools).

Major characteristics include:

Section 1Plant Assets

Referred to as property, plant, and equipment; plant andequipment; and fixed assets.


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Chapter10-7

Land

Required: Determine amount to be reported as the cost ofthe land.

Determining the Cost of Plant Assets

SO 1 Describe how the cost principle applies to plant assets.

Cash price of property of $100,000

Old warehouse razed at a cost of $6,000Attorney's fees of $1,000 1,000

6,000

$100,000

$115,000Cost of Land

Real estate brokers commission of $8,000 8,000


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Chapter10-8

Includes all expenditures necessary to make theimprovements ready for their intended use.

Land Improvements


Examples are driveways, parking lots, fences,landscaping, and underground sprinklers.

Limited useful lives.

Expense (depreciate) the cost of landimprovements over their useful lives.



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Chapter10-9

Includes all costs related directly to purchase orconstruction.

Buildings

Purchase costs:Purchase price, closing costs (attorneys fees, titleinsurance, etc.) and real estate brokers 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.




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Chapter10-10

Include all costs incurred in acquiring the equipmentand preparing it for use.

Costs typically include:

Equipment

purchase price,

sales taxes,

freight and handling charges,

insurance on the equipment while in transit,

assembling and installation costs, and

costs of conducting trial runs.




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Chapter10-11

Illustration: Assume Merten Company purchases factorymachinery at a cash price of $50,000. Related expendituresare for sales taxes $3,000, insurance during shipping $500,and installation and testing $1,000. Determine amount to be

reported as the cost of the machinery.



Machinery

Cash price

Sales taxes

Insurance during shipping 500

3,000

$50,000

$54,500Cost of Machinery

Installation and testing 1,000


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Chapter10-13

Process of cost allocation, not asset valuation.

Applies to land improvements, buildings, andequipment, not land.

Depreciable, because the revenue-producingability of asset will decline over the assetsuseful life.

Depreciationis the process of allocating the cost oftangible assets to expensein a systematic and rationalmanner to those periods expected to benefit from theuse of the asset.

Depreciation

SO 2 Explain the concept of depreciation.


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Chapter10-14

Factors in Computing Depreciation

Cost

Depreciation

SO 2 Explain the concept of depreciation.

Useful Life Salvage Value

Illustration 10-6


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Chapter10-15

Objective is to select the method that best measuresan assets contribution to revenue over its useful life.Examples include:

Depreciation Methods

(1) Straight-line method.

(2) Units-of-Activity method.

(3) Declining-balance method.

Depreciation

SO 3 Compute periodic depreciation using different methods.

Illustration 10-8Use of depreciationmethods in 600 largeU.S. companies


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Chapter10-16

Illustration: Barbs Florists purchased a small deliverytruck on January 1, 2010.

Required: Compute depreciation using the following.

(a) Straight-Line.

(b) Units-of-Activity.

(c) Declining Balance.

Depreciation


Illustration 10-7


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Chapter10-17

Straight-Line

Depreciation


Expense is same amount for each year.

Depreciable cost is cost of the asset less its

salvage value. Illustration 10-9


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Chapter10-18

Depreciable Annual Accum. Book

Year Cost x Rate = Expense Deprec. Value

Depreciation


Illustration: (Straight-Line Method)

2010 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600

2011 12,000 20 2,400 4,800 8,200

2012 12,000 20 2,400 7,200 5,800

2013 12,000 20 2,400 9,600 3,400

2014 12,000 20 2,400 12,000 1,000

2010JournalEntry

Depreciation expense 2,400

Accumulated depreciation 2,400

Illustration 10-10


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Chapter10-19

Companies estimate total units of activity to calculatedepreciation cost per unit.

Expense varies based on units of activity.Depreciable cost iscost less salvagevalue.

Units-of-Activity

Depreciation


Illustration 10-11


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Chapter10-20

Hours Rate per Annual Accum. Book

Year Used x Hour = Expense Deprec. Value

Depreciation

Illustration: (Units-of-Activity Method)

2010 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200

2011 30,000 0.12 3,600 5,400 7,600

2012 20,000 0.12 2,400 7,800 5,200

2013 25,000 0.12 3,000 10,800 2,200

2014 10,000 0.12 1,200 12,000 1,000



2010JournalEntry

Illustration 10-12



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Chapter10-21

Decreasing annual depreciation expense over theassets useful life.

Declining-balance rate is double the straight-linerate.

Rate applied to book value.

Declining-Balance

Depreciation


Illustration 10-13


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Chapter10-22

Declining

Beginning Balance Annual Accum. Book

Year Book value x Rate = Expense Deprec. Value

Depreciation

Illustration: (Declining-Balance Method)

2010 13,000 40% $ 5,200 $ 5,200 $ 7,800

2012 7,800 40 3,120 8,320 4,680

2013 4,680 40 1,872 10,192 2,808

2014 2,808 40 1,123 11,315 1,685

2015 1,685 40 685* 12,000 1,000

* Computation of $674 ($1,685 x 40%) is adjusted to $685.



2010JournalEntry

Illustration 10-14


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Chapter10-23 SO 3 Compute periodic depreciation using different methods.

Comparison of Depreciation Methods

Depreciation

Illustration 10-15

Illustration 10-16


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Chapter10-24

The following five slides are included toillustrate the calculation of partial-yeardepreciation expense.

The amounts are consistent with the previousslides illustrating the calculation of depreciationexpense.

Depreciation for Partial Year



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Chapter10-25

Illustration: Barbs Florists purchased a small deliverytruck on October 1, 2010.

Required: Compute depreciation using the following.

(a) Straight-Line.

(b) Units-of-Activity.

(c) Declining Balance.


Illustration 10-7



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Chapter10-26

CurrentDepreciable Annual Partial Year Accum.

Year Cost Rate Expense Year Expense Deprec.

2010 12,000$ x 20% = 2,400$ x 3/12 = 600$ 600$

2011 12,000 x 20% = 2,400 2,400 3,000

2012 12,000 x 20% = 2,400 2,400 5,4002013 12,000 x 20% = 2,400 2,400 7,800

2014 12,000 x 20% = 2,400 2,400 10,200

2015 12,000 x 20% = 2,400 x 9/12 = 1,800 12,000

12,000$

Journal entry:

2010 Depreciation expense 600

Accumultated depreciation 600



Illustration: (Straight-line Method)


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Chapter10-27

Hours Rate per Annual Accum. Book

Year Used x Hour = Expense Deprec. Value

Illustration: (Units-of-Activity Method)

2010 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200

2011 30,000 0.12 3,600 5,400 7,600

2012 20,000 0.12 2,400 7,800 5,200

2013 25,000 0.12 3,000 10,800 2,200

2014 10,000 0.12 1,200 12,000 1,000



2010JournalEntry

Illustration 10-12




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Chapter10-28

Illustration: (Declining-Balance Method)Declining Current

Beginning Balance Annual Partial Year Accum.Year Book Value Rate Expense Year Expense Deprec.

2010 13,000$ x 40% = 5,200$ x 3/12 = 1,300$ 1,300$

2011 11,700 x 40% = 4,680 4,680 5,980

2012 7,020 x 40% = 2,808 2,808 8,788

2013 4,212 x 40% = 1,685 1,685 10,473

2014 2,527 x 40% = 1,011 1,011 11,484

2015 1,516 x 40% = 607 Plug 516 12,000

12,000$

Journal entry:

2010 Depreciation expense 1,300

Accumultated depreciation 1,300




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Chapter

10-29

IRS does not require taxpayer to use the samedepreciation method on the tax return that is used inpreparing financial statements.

IRS requires the straight-linemethod or a specialaccelerated-depreciation method called the ModifiedAccelerated Cost Recovery System(MACRS).

MACRS is NOT acceptable under GAAP.

Depreciation and Income Taxes

Depreciation



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Chapter

10-30

Revising Periodic DepreciationAccounted for in the period of change andfuture periods (Change in Estimate).

Not handled retrospectively.Not considered error.

Depreciation

SO 4 Describe the procedure for revising periodic depreciation.


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Chapter

10-31

Illustration: Assume that Barbs Florists decides onJanuary 1, 2013, to extend the useful life of the truck oneyear because of its excellent condition. The company has

used the straight-line method to depreciate the asset to

date, and book value is $5,800 ($13,000 - $7,200).

Questions:

1. What is the journal entry to correctthe prior years depreciation?

2. Calculate the depreciation expensefor 2013.

No EntryRequired

Depreciation



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Chapter

10-32

Depreciation

Depreciation expense 1,600Accumulated depreciation 1,600

Journal entry for 2013


Book value, 1/1/13 $5,800Salvage value

Depreciable cost

Useful life (revised) /

Annual depreciation

First,establish

Book Valueat the dateof change in

estimate.

- 1,000

4,8003 years

$ 1,600

Illustration 10-17


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Chapter

10-33

Ordinary Repairs- expenditures to maintain theoperating efficiency and productive life of the unit.

Debit - Repair (or Maintenance) Expense.

Referred to as revenue expenditures.

Expenditures During Useful Life

SO 5 Distinguish between revenue and capital expenditures,and explain the entries for each.

Additions and Improvements- costs incurred toincrease the operating efficiency, productive capacity, oruseful life of a plant asset.

Debit - the plant asset affected.

Referred to as capital expenditures.


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Chapter

10-34

Companies dispose of plant assets in three ways Retirement, Sale, or Exchange (appendix).

Plant Asset Disposals

SO 6 Explain how to account for the disposal of a plant asset.

Illustration 10-18

Record depreciation up to the date of disposal.

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


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Chapter

10-35

Illustration: Assume that Hobart Enterprises retiresits computer printers, which cost $32,000. The accumulateddepreciation on these printers is $32,000. The journal entryto record this retirement is?

Plant Asset Disposals - Retirement



Printing equipment 32,000

Question: What happens if a fully depreciated plant asset is stilluseful to the company?


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Chapter

10-36

Illustration: Assume that Sunset Company discards deliveryequipment that cost $18,000 and has accumulateddepreciation of $14,000. The journal entry is?

Plant Asset Disposals - Retirement


Accumulated depreciation 14,000Loss on disposal 4,000

Companies report a loss on disposal in the Other expenses andlosses section of the income statement.

Delivery equipment 18,000


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Chapter

10-38

Illustration: Assume that on July 1, 2010, Wright Companysells office furniture for $16,000 cash. The office furnitureoriginally cost $60,000. As of January 1, 2010, it hadaccumulated depreciation of $41,000. Depreciation for thefirst six months of 2010 is $8,000. Prepare the journal entryto record depreciation expense up to the date of sale.


Plant Asset Disposals - Sale




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Chapter

10-39

Illustration: Wright records the sale as follows.


Plant Asset Disposals - Sale

Cash 16,000


Illustration 10-19Computation of gain on

disposal

Office equipment 60,000

Gain on disposal 5,000

July 1


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Chapter

10-40

Physically extracted in operations.

Replaceable only by an act of nature.

Natural resourcesconsist of standing timber andunderground deposits of oil, gas, and minerals.

Distinguishing characteristics:

Section 2Natural Resources


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Chapter

10-41

Depletionis to natural resources as depreciationis to plant assets.

Companies generally use units-of-activity method.

Depletion generally is a function of the unitsextracted.

Cost - price needed to acquire the resource andprepare it for its intended use.

Depletion- allocation of the cost to expense in a rationaland systematic manner over the resources useful life.


SO 7 Compute periodic depletion of natural resources.


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Chapter

10-42

Illustration: Assume that Lane Coal Company invests $5million in a mine estimated to have 10 million tons of coal andno salvage value. In the first year, Lane extracts and sells800,000 tons of coal. Lane computes the depletion expenseas follows:


SO 7 Compute periodic depletion of natural resources.

$5,000,000 10,000,000 = $.50 depletion cost per ton

$.50 x 800,000 = $400,000 depletion expense

Depletion expense 400,000


Journal entry:


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Chapter

10-44

Intangible assetsare rights, privileges, andcompetitive advantages that do not possess physicalsubstance.

Section 3Intangible Assets

PatentsCopyrights

Franchises or licenses

Trademarks or trade namesGoodwill

Intangible assets are categorized as having either alimited life or an indefinite life.

Common types of intangibles:

SO 8 Explain the basic issues related to accounting for intangible assets.


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Chapter

10-45

Purchased Intangibles:

Recorded at cost.

Includes all costs necessary to make the intangibleasset ready for its intended use.

Valuation

Internally CreatedIntangibles:

Generally expensed.Only capitalize direct costs incurred in perfecting titleto the intangible, such as legal costs.

Accounting for Intangible Assets



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Chapter

10-47

PatentsExclusive right to manufacture, sell, or otherwisecontrol an invention for a period of 20 years from thedate of the grant.

Capitalize costs of purchasing a patent and amortizeover its 20-year life or its useful life, whichever isshorter.

Expense any R&D costs in developing a patent.Legal fees incurred successfully defending a patentare capitalized to Patent account.




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Chapter

10-49

CopyrightsGive the owner the exclusive right to reproduce andsell an artistic or published work.

plays, literary works, musical works, pictures,photographs, and video and audiovisual material.

Copyrightis granted for the life of the creator plus70 years.

Capitalize acquisition costs.

Amortized to expense over useful life.




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Chapter

10-51

Franchises and LicensesContractual arrangement between a franchisor and afranchisee.

Shell, Taco Bell, or Rent-A-Wreck are franchises.

Franchise(or license) with a limited life should beamortized to expense over the life of the franchise.

Franchise with an indefinite life should be carried at

cost and not amortized.




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Chapter

10-53


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Chapter

10-54

Research and Development Costs

Frequently results in something that a companypatents or copyrights such as:

new product,

process,idea,

formula,

composition, orliterary work.

All R & D costs are expensed when incurred.



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Chapter

10-55

Presentation

Companies usually include natural resources under Property, plant,and equipment and show intangibles separately.

Statement Presentation and Analysis

SO 9 Indicate how plant assets, natural resources,and intangible assets are reported.

Illustration 10-24


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Chapter

10-56

Analysis

Each dollar invested in assets produced $0.56 in sales.

If a company is using its assets efficiently, each dollarof assets will create a high amount of sales.

Statement Presentation and Analysis

SO 9 Indicate how plant assets, natural resources,and intangible assets are reported.

Illustration 10-25


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Chapter

10-57

Ordinarily, companies record a gain or loss onthe exchange of plant assets.

The rationale for recognizing a gain or loss is

that most exchanges have commercialsubstance.

An exchange has commercial substanceif thefuture cash flows change as a result of the

exchange.

Exchange of Plant Assets

SO 10 Explain how to account for the exchange of plant assets.


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Chapter

10-58

Cost of old trucks $64,000Less: Accumulated depreciation 22,000

Book value 42,000

Fair market value of old trucks 26,000

Loss on disposal $16,000Fair market value of old trucks $26,000

Cash paid 17,000

Cost of new semi-truck $43,000

Illustration: Roland Co. exchanged old trucks (cost $64,000less $22,000 accumulated depreciation) plus cash of$17,000 for a new semi-truck. The old trucks had a fairmarket value of $26,000.



Illustration

10A-1 & 10A-2


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Chapter

10-59

Illustration: Roland Co. exchanged old trucks (cost $64,000less $22,000 accumulated depreciation) plus cash of$17,000 for a new semi-truck. The old trucks had a fairmarket value of $26,000.

Prepare the entry to record the exchange of assets byRoland Co.



Semi-truck 43,000


Loss on disposal 16,000

Used trucks 64,000

Cash 17,000


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Chapter

10-60

Illustration: Mark Express Delivery trades its old deliveryequipment (cost $40,000 less $28,000 accumulateddepreciation) for new delivery equipment. The old equipmenthad a fair market value of $19,000. Mark also paid $3,000.



Cost of old equipment $40,000Less: Accumulated depreciation 28,000

Book value 12,000

Fair market value of old equipment 19,000

Gain on disposal $

7,000Fair market value of old equipment $19,000

Cash paid 3,000

Cost of new equipment $22,000

Illustration10A-3 & 10A-4


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Chapter

10-61

Illustration: Mark Express Delivery trades its old deliveryequipment (cost $40,000 less $28,000 accumulateddepreciation) for new delivery equipment. The old equipmenthad a fair market value of $19,000. Mark also paid $3,000.

Prepare the entry to record the exchange of assets by MarkExpress.



Delivery equipment (new) 22,000


Delivery equipment (used) 40,000

Gain on disposal 7,000

Cash 3,000


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ch10 Plant Assets, Natural Resources, and Intangible Assets