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Chapter 10-1
Chapter 10-2
Chapter 10
Plant Assets, NaturalResources, and
Intangible Assets
Accounting Principles, Ninth Edition
Chapter 10-3
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, and explain 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 intangible assets.
9. Indicate how plant assets, natural resources, and intangible assets are reported.
Study ObjectivesStudy Objectives
Chapter 10-4
Plant AssetsPlant Assets
Determining the cost of plant assets
Depreciation
Expenditures during useful life
Plant asset disposals
Natural Resources
Natural Resources
Intangible Assets
Intangible Assets
Statement Presentation and
Analysis
Statement Presentation and
Analysis
Presentation
Analysis
Accounting for intangibles
Research and development costs
Plant Assets, Natural Resources, and Intangible Assets
Plant Assets, Natural Resources, and Intangible Assets
Depletion
Chapter 10-5
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.
Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools).
Major characteristics include:
Section 1 – Plant AssetsSection 1 – Plant Assets
Referred to as property, plant, and equipment; plant and equipment; and fixed assets.
Chapter 10-6
Includes all costs to acquire land and ready it for use.
Costs typically include:
Land
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
(1) the purchase price;
(2) closing costs, such as title and attorney’s fees;
(3) real estate brokers’ commissions;
(4) costs of grading, filling, draining, and clearing;
(5) assumption of any liens, mortgages, or encumbrances on the property.SO 1 Describe how the cost principle applies to plant assets.
Chapter 10-7
Illustration: Assume that Hayes Manufacturing Company acquires real estate at a cash cost of $100,000. The property contains an old warehouse that is razed at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, $1,000, and the real estate broker’scommission, $8,000. The cost of the land is $115,000, computed as follows.
Required: Determine amount to be reported as the cost of the land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.
Chapter 10-8
Land
Required: Determine amount to be reported as the cost of the land.
Determining the Cost of Plant AssetsDetermining 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 $6,000
Attorney's fees of $1,000 1,000
6,000
$100,000
$115,000
Cost of Land
Real estate broker’s commission of $8,000 8,000
Chapter 10-9
Includes all expenditures necessary to make the improvements ready for their intended use.
Land Improvements
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
Examples are driveways, parking lots, fences, landscaping, and underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements over their useful lives.
SO 1 Describe how the cost principle applies to plant assets.
Chapter 10-10
Includes all costs related directly to purchase or construction.
Buildings
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.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.
Chapter 10-11
Include all costs incurred in acquiring the equipment and 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.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.
Chapter 10-12
Illustration: Assume Merten Company purchases factory machinery at a cash price of $50,000. Related expenditures are 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.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.
MachineryCash price
Sales taxes
Insurance during shipping 500
3,000
$50,000
$54,500Cost of Machinery
Installation and testing 1,000
Chapter 10-13
Chapter 10-14
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.
Depreciation is the process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
DepreciationDepreciation
SO 2 Explain the concept of depreciation.
Chapter 10-15
Factors in Computing Depreciation
Cost
DepreciationDepreciation
SO 2 Explain the concept of depreciation.
Useful Life Salvage Value
Illustration 10-6
Chapter 10-16
Objective is to select the method that best measures an asset’s contribution to revenue over its useful life. Examples include:
Depreciation Methods
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.
Illustration 10-8 Use of depreciation methods in 600 large U.S. companies
Chapter 10-17
Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2010.
Required: Compute depreciation using the following. (a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.
Illustration 10-7
Chapter 10-18
Straight-Line
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.
Expense is same amount for each year.
Depreciable cost is cost of the asset less its salvage value.
Illustration 10-9
Chapter 10-19
Depreciable Annual Accum. BookYear Cost x Rate = Expense Deprec. Value
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.
Illustration: (Straight-Line Method)
2010 $ 12,000 20% $ 2,400 $ 2,400 $ 10,6002011 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
2010 Journal Entry
Depreciation expense 2,400
Accumulated depreciation 2,400
Illustration 10-10
Chapter 10-20
Companies estimate total units of activity to calculate depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is cost less salvage value.
Units-of-Activity
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.
Illustration 10-11
Chapter 10-21
Hours Rate per Annual Accum. Book
Year Used x Hour = Expense Deprec. Value
DepreciationDepreciation
Illustration: (Units-of-Activity Method)
2010 15,000
$ 0.12 $ 1,800 $ 1,800 $ 11,2002011 30,00
00.12 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
Depreciation expense 1,800
Accumulated depreciation 1,800
2010 Journal Entry
Illustration 10-12
SO 3 Compute periodic depreciation using different methods.
Chapter 10-22
Decreasing annual depreciation expense over the asset’s useful life.
Declining-balance rate is double the straight-line rate.
Rate applied to book value.
Declining-Balance
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.
Illustration 10-13
Chapter 10-23
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value
DepreciationDepreciation
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 $685.
Depreciation expense 5,200
Accumulated depreciation 5,200
2010 Journal Entry
Illustration 10-14
Chapter 10-24 SO 3 Compute periodic depreciation using different methods.
Comparison of Depreciation Methods
DepreciationDepreciation
Illustration 10-15
Illustration 10-16
Chapter 10-25
The following five slides are included to illustrate the calculation of partial-year depreciation expense.
The amounts are consistent with the previous slides illustrating the calculation of depreciation expense.
Depreciation for Partial YearDepreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.
Chapter 10-26
Illustration: Barb’s Florists purchased a small delivery truck on October 1, 2010.
Required: Compute depreciation using the following. (a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
SO 3 Compute periodic depreciation using different methods.
Illustration 10-7
Depreciation for Partial YearDepreciation for Partial Year
Chapter 10-27
CurrentDepreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2010 12,000$ 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 5,400
2013 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$
J ournal entry:
2010 Depreciation expense 600
Accumultated depreciation 600
Depreciation for Partial YearDepreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.
Illustration: (Straight-line Method)
Chapter 10-28
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 $ 11,2002011 30,00
00.12 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
Depreciation expense 1,800
Accumulated depreciation 1,800
2010 Journal Entry
Illustration 10-12
Depreciation for Partial YearDepreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.
Chapter 10-29
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$
J ournal entry:
2010 Depreciation expense 1,300
Accumultated depreciation 1,300
Depreciation for Partial YearDepreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.
Chapter 10-30
IRS does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
IRS requires the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS). MACRS is NOT acceptable under GAAP.
Depreciation and Income Taxes
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.
Chapter 10-31
DepreciationDepreciation
Depreciation expense 1,600
Accumulated depreciation 1,600
Journal entry for 2013
SO 4 Describe the procedure for revising periodic depreciation.
Book value, 1/1/13 $5,800Salvage valueDepreciable costUseful life (revised) /Annual depreciation
First, establish
Book Value at the date of change
in estimate.
First, establish
Book Value at the date of change
in estimate.
- 1,000
4,8003 years
$ 1,600
Illustration 10-17
Chapter 10-32
Ordinary Repairs - expenditures to maintain the operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Expenditures During Useful LifeExpenditures During Useful Life
SO 5 Distinguish between revenue and capital expenditures, and explain the entries for each.
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.
Chapter 10-33
Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).
Plant Asset DisposalsPlant 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.
Chapter 10-34
Illustration: Assume that Hobart Enterprises retiresits computer printers, which cost $32,000. The accumulated depreciation on these printers is $32,000. The journal entry to record this retirement is?
Plant Asset Disposals - RetirementPlant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 32,000
Printing equipment32,000
Question: What happens if a fully depreciated plant asset is still useful to the company?
Chapter 10-35
Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulateddepreciation of $14,000. The journal entry is?
Plant Asset Disposals - RetirementPlant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 14,000
Loss on disposal 4,000
Companies report a loss on disposal in the “Other expenses and losses” section of the income statement.
Delivery equipment18,000
Chapter 10-36
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.
Plant Asset DisposalsPlant Asset Disposals
SO 6 Explain how to account for the disposal of a plant asset.
Chapter 10-37
Illustration: Assume that on July 1, 2010, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As of January 1, 2010, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2010 is $8,000. Prepare the journal entry to record depreciation expense up to the date of sale.
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - Sale
Depreciation expense 8,000
Accumulated depreciation 8,000
Chapter 10-38
Illustration: Wright records the sale as follows.
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - Sale
Cash 16,000
Accumulated depreciation 49,000
Illustration 10-19Computation of gain ondisposal
Office equipment 60,000
Gain on disposal 5,000
July 1
Chapter 10-39
Physically extracted in operations.
Replaceable only by an act of nature.
Natural resources consist of standing timber and underground deposits of oil, gas, and minerals.
Distinguishing characteristics:
Section 2 – Natural ResourcesSection 2 – Natural Resources
Chapter 10-40
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.
Cost - 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.
Section 2 – Natural ResourcesSection 2 – Natural Resources
SO 7 Compute periodic depletion of natural resources.
Chapter 10-41
Illustration: Assume that Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, Lane extracts and sells 800,000 tons of coal. Lane computes the depletion expense as follows:
Section 2 – Natural ResourcesSection 2 – Natural Resources
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
Accumulated depreciation 400,000
Journal entry:
Chapter 10-42
Section 2 – Natural ResourcesSection 2 – Natural Resources
SO 7 Compute periodic depletion of natural resources.
Illustration 10-22Statement presentation of accumulated depletion
Extracted resources that have not been sold are reported as inventory in the current assets section.
Chapter 10-43
Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance.
Section 3 – Intangible AssetsSection 3 – Intangible Assets
Patents
Copyrights
Franchises or licenses
Trademarks or trade names
Goodwill
Intangible assets are categorized as having either a limited life or an indefinite life.
Common types of intangibles:
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-44
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible asset ready for its intended use.
Valuation
Internally Created Intangibles:
Generally expensed.
Only capitalize direct costs incurred in perfecting title to the intangible, such as legal costs.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-45
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to provide cash flows.
No amortization.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-46
Patents
Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.
Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent are capitalized to Patent account.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-47
Illustration: Assume that National Labs purchases a patent at a cost of $60,000. National estimates the useful life of the patent to be eight years. National records the annualamortization as follows.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
Amortization expense 7,500
Patent 7,500
Chapter 10-48
Copyrights
Give the owner the exclusive right to reproduce and sell an artistic or published work.
plays, literary works, musical works, pictures, photographs, and video and audiovisual material.
Copyright is granted for the life of the creator plus 70 years.
Capitalize acquisition costs.
Amortized to expense over useful life.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-49
Trademarks and Trade Names
Word, phrase, jingle, or symbol that identifies a particular enterprise or product.
Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca-Cola, and Jeep.
Trademark or trade name has legal protection for indefinite number of 20 year renewal periods.
Capitalize acquisition costs.
No amortization.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-50
Franchises and Licenses
Contractual arrangement between a franchisor and a franchisee.
Shell, Taco Bell, or Rent-A-Wreck are franchises.
Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at cost and not amortized.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-51
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 ...purchase price over the FMV of the identifiable net assets acquired.
Internally created goodwill should not be capitalized.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-52
Chapter 10-53
Research and Development CostsResearch and Development Costs
Frequently results in something that a company patents or copyrights such as:
new product, process, idea,
formula, composition, orliterary work.
All R & D costs are expensed when incurred.
SO 8 Explain the basic issues related to accounting for intangible assets.
Chapter 10-54
Presentation
Companies usually include natural resources under “Property, plant, and equipment” and show intangibles separately.
Statement Presentation and AnalysisStatement Presentation and Analysis
SO 9 Indicate how plant assets, natural resources, and intangible assets are reported.
Illustration 10-24
Chapter 10-55
Assignments
BE 10-1,2,3,11, 12 E-10-2 E-10-6 E-10-7 E-10-11 P10-2A
Chapter 10-56
Terms
Depletion
Chapter 10-57
Analysis
Each dollar invested in assets produced $0.56 in sales. If a company is using its assets efficiently, each dollar of assets will create a high amount of sales.
Statement Presentation and AnalysisStatement Presentation and Analysis
SO 9 Indicate how plant assets, natural resources, and intangible assets are reported.
Illustration 10-25