Chapter 10-1 Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Accounting...

Chapter 10-1

Chapter 10

Plant Assets, NaturalResources, and

Intangible Assets

Accounting Principles, Ninth Edition

Chapter 10-2

Plant AssetsPlant AssetsPlant AssetsPlant Assets

Determining the Determining the cost of plant cost of plant assetsassets

DepreciationDepreciation

Expenditures Expenditures during useful lifeduring useful life

Plant asset Plant asset disposalsdisposals

Natural Natural

ResourcesResources

Natural Natural

ResourcesResourcesIntangible Intangible

AssetsAssets

Intangible Intangible

AssetsAssets

Statement Statement

Presentation and Presentation and

AnalysisAnalysis

Statement Statement

Presentation and Presentation and

AnalysisAnalysis

PresentationPresentation

AnalysisAnalysis

Accounting for Accounting for intangiblesintangibles

Research and Research and development development costscosts

Plant Assets, Natural Resources, and Plant Assets, Natural Resources, and Intangible AssetsIntangible Assets

Plant Assets, Natural Resources, and Plant Assets, Natural Resources, and Intangible AssetsIntangible Assets

DepletionDepletion

Chapter 10-3

“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 1Section 1 – Plant Assets – Plant AssetsSection 1Section 1 – Plant Assets – Plant Assets

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

Chapter 10-4

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

Chapter 10-5

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


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

Chapter 10-6

LandLand

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



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 10-7

Includes all expenditures necessary to make the improvements 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 land improvements over their useful lives.


Chapter 10-8

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.



Chapter 10-9

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.



Chapter 10-10

Illustration: 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.



MachineMachineryryCash price

Sales taxes

Insurance during shipping 500

3,000

$50,000

$54,500Cost of Machinery

Installation and testing 1,000

Chapter 10-11

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.

DepreciationDepreciationDepreciationDepreciation

SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.

Chapter 10-12

Factors in Computing Depreciation

Cost


SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.

Useful Life Salvage Value

Illustration 10-6

Chapter 10-13

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.


SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.

Illustration 10-8 Use of depreciation methods in 600 large U.S. companies

Chapter 10-14

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.



Illustration 10-7

Chapter 10-15

Straight-Line



Expense is same amount for each year.

Depreciable cost is cost of the asset less its salvage value.

Illustration 10-9

Chapter 10-16

Depreciable Annual Accum. BookYear Cost x Rate = Expense Deprec. Value



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 depreciation2,400

Illustration 10-10

Chapter 10-17

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



Illustration 10-11

Chapter 10-18

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


Accumulated depreciation 1,800

2010 Journal Entry

Illustration 10-12


Chapter 10-19

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



Illustration 10-13

Chapter 10-20

Declining

Beginning Balance Annual Accum. Book

Year Book value x Rate = Expense Deprec. Value


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.


Accumulated depreciation5,200

2010 Journal Entry

Illustration 10-14

Chapter 10-21 SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.

Comparison of Depreciation Methods


Illustration 10-15

Illustration 10-16

Chapter 10-22

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 YearDepreciation for Partial YearDepreciation for Partial Year


Chapter 10-23

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.


Illustration 10-7


Chapter 10-24

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



Illustration: (Straight-line Method)

Chapter 10-25

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



2010 Journal Entry

Illustration 10-12



Chapter 10-26

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



Chapter 10-27

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



Chapter 10-28

Revising Periodic Depreciation

Accounted for in the period of change and future periods (Change in Estimate).

Not handled retrospectively.

Not considered error.


SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.

Chapter 10-29

Illustration: Assume that Barb’s Florists decides on January 1, 2013, to extend the useful life of the truck one year 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:Questions:

1.1. What is the journal entry to correct What is the journal entry to correct the prior years’ depreciation? the prior years’ depreciation?

2.2. Calculate the depreciation expense Calculate the depreciation expense for 2013. for 2013.

No Entry No Entry RequiredRequired



Chapter 10-30




Journal entry for 2013


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

Salvage valueSalvage value

Depreciable costDepreciable cost

Useful life (revised) /Useful life (revised) /

Annual depreciationAnnual depreciation

First, First, establish establish

Book Value Book Value at the date at the date of change of change

in estimate.in estimate.

First, First, establish establish

Book Value Book Value at the date at the date of change of change

in estimate.in estimate.

- 1,000- 1,000

4,8004,8003 years3 years

$ 1,600$ 1,600

Illustration 10-17

Chapter 10-31

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 LifeExpenditures During Useful LifeExpenditures During Useful Life

SO 5 Distinguish between revenue and capital SO 5 Distinguish between revenue and capital expenditures, and explain the entries for each.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 10-32

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

Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals

SO 6 Explain how to account for the disposal of a plant SO 6 Explain how to account for the disposal of a plant asset.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 10-33

Illustration: 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 - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - Retirement



Printing equipment32,000

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

Chapter 10-34

Illustration: 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 - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - Retirement



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 10-35

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 DisposalsPlant Asset DisposalsPlant Asset Disposals


Chapter 10-36

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.


Plant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - Sale



Chapter 10-37

Illustration: Wright records the sale as follows.


Plant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - Sale

Cash 16,000


Illustration 10-19Computation of gain ondisposal

Office equipment60,000Gain on disposal

5,000

July 1

Chapter 10-38

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 2Section 2 – Natural Resources – Natural ResourcesSection 2Section 2 – Natural Resources – Natural Resources

Chapter 10-39

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.


SO 7 Compute periodic depletion of natural resources.SO 7 Compute periodic depletion of natural resources.

Chapter 10-40

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:



$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:

Chapter 10-41



Illustration 10-22Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported as inventory in the current assets section.

Chapter 10-42

Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance.

Section 3Section 3 – Intangible Assets – Intangible AssetsSection 3Section 3 – Intangible Assets – 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 SO 8 Explain the basic issues related to accounting for intangible assets.intangible assets.

Chapter 10-43

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 AssetsAccounting for Intangible AssetsAccounting for Intangible Assets


Chapter 10-44

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.



Chapter 10-45

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.



Chapter 10-46

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.



Amortization expense 7,500

Patent 7,500

Chapter 10-47

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.



Chapter 10-48

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.



Chapter 10-49

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.



Chapter 10-50

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 overover the FMV of the identifiable net assets acquired.

Internally created goodwill should not be capitalized.



Chapter 10-51

Research and Development CostsResearch and Development CostsResearch and Development CostsResearch and Development Costs

Frequently results in something that a company patents or copyrights such as:

new product,

process,

idea,

formula,

composition, or

literary work.

All R & D costs are expensed when incurred.


Chapter 10-52

Presentation

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

Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis

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

Illustration 10-24

Chapter 10-53

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 AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis

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

Illustration 10-25

Chapter 10-54

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

The rationale for recognizing a gain or loss is that most exchanges have commercial substance.

An exchange has commercial substance if the future cash flows change as a result of the exchange.

Exchange of Plant AssetsExchange of Plant AssetsExchange of Plant AssetsExchange of Plant Assets

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

Chapter 10-55

Cost of old trucks $64,000Less: Accumulated depreciation 22,000Book value 42,000Fair market value of old trucks 26,000Loss on disposal $16,000

Fair market value of old trucks $26,000Cash paid 17,000Cost of new semi-truck $43,000

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



Illustration 10A-1 & 10A-2

Chapter 10-56

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

Prepare the entry to record the exchange of assets by Roland Co.



Semi-truck 43,000


Loss on disposal 16,000

Used trucks64,000Cash 17,000

Chapter 10-57

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



Cost of old equipment $40,000Less: Accumulated depreciation 28,000Book value 12,000Fair market value of old equipment 19,000Gain on disposal $ 7,000

Fair market value of old equipment $19,000Cash paid 3,000Cost of new equipment $22,000

Illustration 10A-3 & 10A-4

Chapter 10-58

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

Prepare the entry to record the exchange of assets by Mark Express.



Delivery equipment (new) 22,000


Delivery equipment (used)

40,000Gain on disposal

7,000Cash 3,000

Chapter 10-59

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Chapter 10-1 Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Accounting...

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