Chapter 10

Plant Assets, Natural Resources, and Intangibles

Review Questions
1. Property, plant, and equipment are long-lived, tangible assets used in the operation of a
business. Examples include land, buildings, equipment, furniture, and automobiles.

2. The historical cost of a plant asset includes the purchase price plus taxes, purchase
commissions, and all other amounts paid to ready the asset for its intended use.

3. Land improvements are depreciable improvements to land, such as fencing, sprinklers,

paving, signs, and lighting. Land is not depreciated.

4. Capitalize means that an asset account was debited (increased) because the company
acquired an asset. Capitalized assets, except for land, are depreciated over their useful lives.

5. A lump-sum purchase, also called a basket purchase, is the purchase of several assets as a
group. The total cost paid (100%) is divided among the assets according to their relative
market values.

6. A capital expenditure is debited to an asset account because it increases the asset’s capacity
or efficiency, or extends the asset’s useful life. Examples include extraordinary repairs, such
as replacing the engine in a delivery truck. Revenue expenditures are debited to an expense
account. Examples include routine repairs and maintenance, such as changing the oil or
replacing the tires on a delivery truck.

7. Depreciation is the allocation of a plant asset’s cost to expense over its useful life.
Depreciation matches the expense against the revenue generated from using the asset to
measure net income. Useful life is the length of the service period expected from an asset.
Residual value is the expected value of a depreciable asset at the end of its useful life.
Depreciable cost is the cost of a plant asset minus its estimated residual value.

8. The double-declining-balance method ignores residual value until the last year of
depreciation because the calculation is based on book value rather than depreciable cost. In
the last year of depreciation, depreciation is calculated as the amount needed to bring the
asset to its residual value.

9. A business should match an asset’s expense against the revenue that the asset produces when
deciding on a depreciation method. For an asset that generates revenue evenly over time, the
straight-line method follows the matching principle. The units-of-production method works
best for an asset that depreciates due to wear and tear rather than obsolescence. The
accelerated method, double-declining-balance, works best for assets that produce more
revenue in their early years.
10. Modified Accelerated Cost Recovery System (MACRS) is a method used for tax purposes.
Under MACRS, assets are divided into specific classes, such as 3-year, 5-year, 7-year, and
39-year property. Businesses do not get to choose the useful life of the asset. In addition, the
MACRS method ignores residual value.

11. When a company makes an accounting change in estimate, generally accepted accounting
principles require the business to recalculate the depreciation for the asset in the year of
change and in future periods. It does not require that businesses restate prior years’ financial
statements for this change in estimate. For a change in either estimated asset life or residual
value, the asset’s remaining depreciable book value is spread over the asset’s remaining life.

12. Property, plant and equipment are reported at book value on the balance sheet. Companies
may choose to report PP&E as a single amount, with a note to the financial statements that
provides detailed information, or companies may provide detailed information on the face of
the statement. The cost of the asset and the related accumulated depreciation should be
disclosed.

13. Discarding of plant assets involves disposing of the asset for no cash. Selling an asset
involves receiving cash in exchange for the asset.

14. Gain or loss is determined by comparing the cash received and the market value of any other
assets received with the book value of the plant asset disposed of. A gain occurs when the
cash received and the market value of any other assets received is greater than the book value
of the disposed plant asset. A loss occurs when the cash received and the market value of any
other assets received is less than the book value of the disposed plant asset.

15. Natural resources are assets that come from the earth that are extracted or cut down.
Examples include iron ore, oil, natural gas, diamonds, coal, and timber. Depletion is the
process by which businesses spread the allocation of a natural resource’s cost over its usage.

16. Intangible assets are assets that have no physical form. Instead, these assets convey special
rights from patents, copyrights, trademarks, and other creative works.

17. Amortization is the process by which businesses spread the allocation of an intangible asset’s
cost over its useful life.

18. Goodwill is the excess of the cost of an acquired company over the sum of the market values
of its net assets (assets minus liabilities). Goodwill is the value paid above the net worth of
the company’s assets and liabilities. Goodwill is not amortized. Instead, the acquiring
company measures the fair value of its goodwill each year. If the goodwill has increased in
value, there is nothing to record. But if goodwill’s value has decreased, then the company
records an impairment loss and writes the goodwill down.

19. The asset turnover ratio measures how efficiently a business uses its average total assets to
generate sales. Net sales / Average total assets.
20A. An exchange has commercial substance if the future cash flows change as a result of the
transaction. In other words, if in the future cash flows (receipts of revenue or payment of
expenses) of the business will change because of the exchange. Exchanges that have
commercial substance require any gain or loss on the transaction to be recognized. The old
asset will be removed from the books and the new asset will be recorded at its market
value. Exchanges that lack commercial substance ignore any gain or loss on the transaction,
except in a few limited situations. The new asset is recorded at the old asset’s book value
plus cash paid minus cash received instead of at market value.

Short Exercises
S10-1

Purchase price of land $ 396,000

Add related costs:
Property taxes in arrears $ 1,100
Title insurance 600
Removal of building 4,600 6,300
Total cost of land $ 402,300

Date Accounts and Explanation Debit Credit

Land 402,300
Notes Payable 300,000
Cash 102,300
To record purchase of land with cash and
note payable.
 S10-2

× Total = Assigned
Market Purchase Cost of
Asset Value Percentage of Total Value Price Each Asset
Land $ 110,000 $110,000 / $220,000 = 50% × $210,000 = $ 105,000
Building 88,000 $88,000 / $220,000 = 40% × $210,000 = 84,000
Equipmen 22,000 $22,000 / $220,000 = 10% × $210,000 = 21,000
t
Total $ 220,000 100% $ 210,000

Date Accounts and Explanation Debit Credit

Land 105,000
Building 84,000
Equipment 21,000
Notes Payable 210,000
To record purchase of land, building, and
equipment in exchange for note payable.

S10-3
Requirement 1

a. Straight-line = (Cost − Residual value) / Useful life

= ($37,000,000 ̶ $5,000,000) / 5 years
= $6,400,000 per year

b. Depreciation per unit = (Cost – Residual value) / Useful life in units

= ($37,000,000 ̶ $5,000,000) / 4,000,000 miles
= $8 per mile

Units-of-production = Depreciation per unit × Current year usage

= $8 per mile × 1,400,000 miles
= $11,200,000 for year 1

c. Double-declining-balance = (Cost – Accumulated depreciation) × 2 × (1 / Useful life)

= ($37,000,000 ̶ $0) × 2 × (1/ 5 years)
= $14,800,000 for year 1
 S10-3, cont.
Requirement 2

Double-declining-
Straight-line Units-of-production balance
Cost $ 37,000,000 $ 37,000,000 $ 37,000,000
Less: Accumulated Depreciation 6,400,000 11,200,000 14,800,000
Book value $ 30,600,000 $ 25,800,000 $ 22,200,000

S10-4
Requirement 1

a. Straight-line = (Cost − Residual value) / Useful life

= ($60,500,000 ̶ $5,500,000) / 8 years
= $6,875,000 per year

b. Depreciation per unit = (Cost – Residual value) / Useful life in units

= ($60,500,000 ̶ $5,500,000) / 5,000,000 miles
= $11 per mile

Units-of-production = Depreciation per unit × Current year usage

= $11 per mile × 1,100,000 miles
= $12,100,000 in Year 1

= Depreciation per unit × Current year usage

= $11 per mile × 1,200,000 miles
= $13,200,000 in Year 2

c. Double-declining-balance = (Cost – Accumulated depreciation) × 2 × (1 / Useful life)

= ($60,500,000 ̶ $0) × 2 × (1/ 8 years)
= $15,125,000 in Year 1

= (Cost – Accumulated depreciation) × 2 × (1 / Useful life)

= ($60,500,000 ̶ $15,125,000) × 2 × (1/ 8 years)
= $11,343,750 in Year 2

Requirement 2

Units-of- Double-declining-
Straight-line production balance
Depreciation Expense – Year 1 $ 6,875,000 $ 12,100,000 $ 15,125,000
Depreciation Expense – Year 2 6,875,000 13,200,000 11,343,750
Total Accumulated Depreciation $ 13,750,000 $ 25,300,000 $ 26,468,750
 S10-5

Straight-line = (Cost − Residual value) / Useful life × (Number of Months / 12)

= ($53,400 ̶ $3,000) / 6 years × (10/12)
= $7,000

S10-6
Requirement 1

Straight-line = (Cost − Residual value) / Useful life

= ($45,000 ̶ $0) / 15 years
= $3,000 per year

Accumulated depreciation after 6 years = $3,000 per year × 6 years

= $18,000

Book value after 6 years = (Cost – Accumulated Depreciation)

= $45,000 ̶ $18,000
= $27,000

Revised depreciation = (Book value − Revised residual value) / Revised useful life remaining
= ($27,000 ̶ $0) / 5 years
= $5,400 per year

Date Accounts and Explanation Debit Credit

End of Depreciation Expense—Equipment 5,400
Year 7 Accumulated Depreciation—Equip. 5,400
To record depreciation on equipment.

Requirement 2

Straight-line
Depreciation Expense – Years 1– 6 $ 18,000
Depreciation Expense – Year 7 5,400
Total Accumulated Depreciation $ 23,400
S10-7

Date Accounts and Explanation Debit Credit

June 15 Accumulated Depreciation—Equipment 27,000
Equipment 27,000
Discarded fully depreciated equipment.

S10-8

Partial year depreciation = $1,920 × 10/12 = $1,600

Market value of assets received $ 0

Less: Book value of asset disposed of
Cost $ 26,920
Less: Accumulated Depreciation ($25,000 + $1,600) (26,600) 320
Gain or (Loss) $ (320)

Date Accounts and Explanation Debit Credit

Oct. 31 Depreciation Expense—Equipment 1,600
Accumulated Depreciation—Equipment 1,600
To record depreciation on equipment.

31 Accumulated Depreciation—Equipment 26,600

Loss on Disposal 320
Equipment 26,920
Discarded equipment with a book value of $320.
S10-9

Market value of assets received $ 20,000

Less: Book value of asset disposed of
Cost $ 27,500
Less: Accumulated Depreciation (10,000) 17,500
Gain or (Loss) $ 2,500

Date Accounts and Explanation Debit Credit

Dec. 31 Cash 20,000
Accumulated Depreciation—Equipment 10,000
Equipment 27,500
Gain on Disposal 2,500
Sold equipment for cash.

S10-10

Market value of assets received $ 4,000

Less: Book value of asset disposed of
Cost $ 28,000
Less: Accumulated Depreciation (11,000) 17,000
Gain or (Loss) $ (13,000)

Date Accounts and Explanation Debit Credit

Dec. 31 Cash 4,000
Accumulated Depreciation—Equipment 11,000
Loss on Disposal 13,000
Equipment 28,000
Sold equipment for cash.
S10-11
Requirement 1
Units-of-production is the method used to compute depletion.

Requirement 2

Depletion per unit = (Cost – Residual value) / Estimated total units

= ($27,000,000 ̶ $0) / 3,000,000 barrels
= $9 per barrel

Depletion expense = Depletion per unit × Number of units extracted

= $9 per barrel × 500,000 barrels
= $4,500,000

Date Accounts and Explanation Debit Credit

Dec. 31 Depletion Expense—Oil Reserves 4,500,000
Accumulated Depletion—Oil Reserves 4,500,000
To record depletion.

S10-12
Requirement 1

Date Accounts and Explanation Debit Credit

Oct. 1 Patent 153,600
Cash 153,600
To record purchase of patent.

Requirement 2

Amortization expense = (Cost – Residual value) / Useful life

= ($153,600 ̶ $0) / 8 years × 3/12
= 4,800

Date Accounts and Explanation Debit Credit

Dec. 31 Amortization Expense—Patent 4,800
Patent 4,800
To record amortization of patent.
S10-13
Requirement 1

Purchase price to acquire Thrifty Nickel $ 230,000

Market value of Thrifty Nickel’s assets $ 100,000
Less: Thrifty Nickel’s liabilities (70,000)
Market value of Thrifty Nickel’s net assets 30,000
Goodwill $ 200,000

Requirement 2

Date Accounts and Explanation Debit Credit

Assets 100,000
Goodwill 200,000
Liabilities 70,000
Cash 230,000
To record purchase of Thrifty Nickel.

S10-14

Asset turnover ratio = Net sales / Average total assets

= $55,600,000 / [($52,800,000 + $98,500,000) / 2]
= $55,600,000 / $75,650,000
= 0.73 times (rounded)

S10A-15

Market value of assets received $ 3,900

Less:
Book value of asset exchanged
Cost $ 2,500
Less: Accumulated depreciation (1,600) $ 900
Cash paid 2,100 3,000
Gain or (Loss) $ 900
S10A-15, cont.

Date Accounts and Explanation Debit Credit

Jan. 1 Computer Equipment (new) 3,900
Accumulated Depreciation—Computer Equipment 1,600
Computer Equipment (old) 2,500
Cash 2,100
Gain on Disposal 900
Exchanged old computer equipment and cash for
new computer equipment.

S10A-16

Market value of assets received $ 25,100

Less:
Book value of asset exchanged
Cost $ 22,000
Less: Accumulated depreciation (19,000) $ 3,000
Cash paid 23,200 26,200
Gain or (Loss) $ (1,100)

Date Accounts and Explanation Debit Credit

Jan. 1 Equipment (new) 25,100
Accumulated Depreciation—Equipment 19,000
Loss on Disposal 1,100
Equipment (old) 22,000
Cash 23,200
Exchanged old equipment and cash for new
equipment.
Exercises

E10-17
Requirement 1

Land
Land Improvements Building
Purchase price $ 65,000
Note payable 250,000
Property tax 5,000
Title insurance 4,000
Remove building 9,000
Construct building $ 400,000
Fence $ 54,000
Sign 12,000
Lighting 8,000
Totals $ 333,000 $ 74,000 $ 400,000

Requirement 2

Lawson will depreciate Land Improvements and Building.

E10-18

× Total = Assigned
Market Purchase Cost of
Asset Value Percentage of Total Value Price Each Asset
Lot 1 $ 144,000 $144,000 / $480,000 = 30% × $355,000 = $ 106,500
Lot 2 96,000 $96,000 / $480,000 = 20% × $355,000 = 71,000
Lot 3 240,000 $240,000 / $480,000 = 50% × $355,000 = 177,500
Total $ 480,000 100% $ 355,000

Date Accounts and Explanation Debit Credit

Land—Lot 1 106,500
Land—Lot 2 71,000
Land—Lot 3 177,500
Cash 355,000
To record purchase of lots for cash.
E10-19

a. Capital expenditure
b. Revenue expenditure
c. Capital expenditure
d. Revenue expenditure
e. Capital expenditure
f. Capital expenditure
g. Capital expenditure
h. Capital expenditure
i. Capital expenditure

E10-20
Requirement 1

Depreciable cost = Cost − Residual value = $33,000 − $6,000 = $27,000

Straight-Line Depreciation Schedule

Depreciation for the Year
Depreciabl Depreciatio Depreciatio Accumulate
Asset e n n d Book
Date Cost Cost Rate Expense Depreciation Value
1/02/18 $33,000 $ 33,000
12/31/18 $ 27,000 1/4 $ 6,750 $ 6,750 26,250
12/31/19 27,000 1/4 6,750 13,500 19,500
12/31/20 27,000 1/4 6,750 20,250 12,750
12/31/21 27,000 1/4 6,750 27,000 6,000

Depreciation per unit = (Cost – Residual value) / Useful life in units

= ($33,000 ̶ $6,000) / 6,750 hours
= $4 per hour

Units-of-Production Depreciation Schedule

Depreciation for the Year
Depreciatio Depreciatio Accumulate
Asset n Number n d Book
Date Cost per Unit of Units Expense Depreciation Value
1/02/18 $ 33,000 $ 33,000
12/31/18 $4 675 $ 2,700 $ 2,700 30,300
12/31/19 4 2,025 8,100 10,800 22,200
12/31/20 4 2,700 10,800 21,600 11,400
12/31/21 4 1,350 5,400 27,000 6,000
 E10-20, cont.
Requirement 1, cont.

Double-Declining-Balance Depreciation Schedule

Depreciation for the Year
Depreciatio
Asset Book DDB n Accumulated Book
Date Cost Value Rate Expense Depreciation Value
1/02/18 $ 33,000 $ 33,000
12/31/18 $ 33,000 2 × (1 / 4) $ 16,500 $ 16,500 16,500
12/31/19 16,500 2 × (1 / 4) 8,250 24,750 8,250
12/31/20 8,250 2,250* 27,000 6,000
12/31/21 0 27,000 6,000

*3rd year depreciation is the “plug figure” needed to reduce book value to residual value ($8,250 - $6,000)

Requirement 2

The units-of-production method tracks the wear and tear on the equipment most closely.

E10-21

Straight-line depreciation = (Cost − Residual value) / Useful life

= ($540,000 ̶ $100,000) / 40 years
= $11,000 per year

Accumulated depreciation after 15 years = $11,000 per year × 15 years

= $165,000

Book value after 15 years = (Cost – Accumulated Depreciation)

= $540,000 ̶ $165,000
= $375,000

Revised depreciation = (Book value − Revised residual value) / Revised useful life remaining
= ($375,000 − $88,000) / (35 total years – 15 previous years)
= $14,350 per year

Date Accounts and Explanation Debit Credit

Year 15 Depreciation Expense—Building 11,000
Accumulated Depreciation—Building 11,000
To record depreciation on building.

Year 16 Depreciation Expense—Building 14,350

Accumulated Depreciation—Building 14,350
To record depreciation on building.
E10-22

Double-declining-balance = (Cost – Accumulated depreciation) × 2 × (1 / Useful life)

= ($17,000 ̶ $0) × 2 × (1/5 years)
= $6,800 in year 1

= (Cost – Accumulated depreciation) × 2 × (1 / Useful life)

= ($17,000 ̶ $6,800) × 2 × (1/ 5 years) × 10/12
= $3,400 in year 2

Market value of assets received $ 7,600

Less: Book value of asset disposed of
Cost $ 17,000
Less: Accumulated Depreciation ($6,800 + $3,400) (10,200) 6,800
Gain or (Loss) $ 800

Date Accounts and Explanation Debit Credit

Oct. 31 Depreciation Expense—Fixtures 3,400
Accumulated Depreciation—Fixtures 3,400
To record depreciation on fixtures.

31 Cash 7,600
Accumulated Depreciation—Fixtures 10,200
Fixtures 17,000
Gain on Disposal 800
Sold fixtures for cash.
E10-23

Straight-line depreciation = (Cost − Residual value) / Useful life

= ($37,800 ̶ $9,000) / 6 years
= $4,800 per year (2016 and 2017)

= (Cost − Residual value) / Useful life

= ($37,800 ̶ $9,000) / 6 years × 5/12
= $2,000 per partial year (2018)

Market value of assets received $ 24,200

Less: Book value of asset disposed of
Cost $ 37,800
Less: Accumulated Depreciation ($4,800 + $4,800 + $2,000) (11,600) 26,200
Gain or (Loss) $ (2,000)

Date Accounts and Explanation Debit Credit

May 31 Depreciation Expense—Fixtures 2,000
Accumulated Depreciation—Fixtures 2,000
To record depreciation on fixtures.

31 Cash 24,200
Accumulated Depreciation—Fixtures 11,600
Loss on Disposal 2,000
Fixtures 37,800
Sold fixtures for cash.
E10-24

Purchase price of minerals $ 462,300

Add related costs:
Filing fee $ 900
License 1,800
Geological survey 55,000 57,700
Total cost of minerals $ 520,000

Depletion per unit = (Cost – Residual value) / Estimated total units

= ($520,000 ̶ $0) / 400,000 tons
= $1.30 per ton

Depletion expense = Depletion per unit × Number of units extracted

= $1.30 per ton × 50,000 tons
= $65,000

Date Accounts and Explanation Debit Credit

a. Minerals 462,300
Cash 462,300
To record purchase of mineral rights.

b. Minerals 57,700
Cash 57,700
To record payment of costs associated with
purchase of minerals.

c. Depletion Expense—Minerals 65,000

Accumulated Depletion—Minerals 65,000
To record depletion.
 E10-25
Requirement 1

Amortization expense = (Cost – Residual value) / Useful life

= ($200,000 ̶ $0) / 8 years
= $25,000

Date Accounts and Explanation Debit Credit

Patent 200,000
Cash 200,000
To record purchase of patent.

Amortization Expense—Patent 25,000

Patent 25,000
To record amortization.

Requirement 2

Accumulated amortization after 4 years = $25,000 per year × 4 years

= $100,000

Book value after 4 years = (Cost – Accumulated Amortization)

= $200,000 ̶ $100,000
= $100,000

Revised amortization = (Book value − Revised residual value) / Revised useful life remaining
= ($100,000 ̶ $0) / 2 years
= $50,000 per year

Date Accounts and Explanation Debit Credit

Amortization Expense—Patent 50,000
Patent 50,000
To record amortization.
E10-26
Requirement 1

Purchase price to acquire Kelleher $ 9,000,000

Market value of Kelleher’s assets $ 20,000,000
Less: Kelleher’s liabilities (12,000,000)
Market value of Kelleher’s net assets 8,000,000
Goodwill $ 1,000,000

Requirement 2

Date Accounts and Explanation Debit Credit

Assets 20,000,000
Goodwill 1,000,000
Liabilities 12,000,000
Cash 9,000,000
To record purchase of Kelleher.

E10-27

Dec. 31, 2018 Dec. 31, 2017

Cash $ 31,000 $ 30,000
Accounts Receivable 68,000 65,000
Merchandise Inventory 80,000 79,000
Prepaid Expenses 16,000 5,000
Property, plant, and equipment, net 175,000 18,000
Total Assets $ 370,000 $ 197,000

Asset turnover ratio = Net sales / Average total assets

= $441,000 / [($370,000 + $197,000) / 2]
= $441,000 / $283,500
= 1.56 times (rounded)
E10A-28
Requirement 1

Market value of assets received $133,000

Less:
Book value of asset exchanged
Cost $ 91,000
Less: Accumulated depreciation (68,000) $ 23,000
Cash paid 110,000 (133,000)
Gain or (Loss) $ 0

Date Accounts and Explanation Debit Credit

Fixtures (new) 133,000
Accumulated Depreciation—Fixtures 68,000
Fixtures (old) 91,000
Cash 110,000
Exchanged old fixtures and cash for new
fixtures.

Requirement 2

Market value of assets received $ 126,000

Less:
Book value of asset exchanged
Cost $ 91,000
Less: Accumulated depreciation (68,000) $ 23,000
Cash paid 110,000 (133,000)
Gain or (Loss) $ (7,000)

Date Accounts and Explanation Debit Credit

Fixtures (new) 126,000
Accumulated Depreciation—Fixtures 68,000
Loss on Disposal 7,000
Fixtures (old) 91,000
Cash 110,000
Exchanged old fixtures and cash for new
fixtures.
E10A-29
Requirement 1

Depreciation per unit = (Cost – Residual value) / Useful life in units

= ($360,000 ̶ $90,000) / 1,000,000 miles
= $0.27 per mile

Units-of-production = Depreciation per unit × Current year usage

= $0.27 per mile × 80,000 miles
= $21,600 in 2015

= Depreciation per unit × Current year usage

= $0.27 per mile × 120,000 miles
= $32,400 in 2016

= Depreciation per unit × Current year usage

= $0.27 per mile × 160,000 miles
= $43,200 in 2017

= Depreciation per unit × Current year usage

= $0.27 per mile × 44,000 miles
= $11,880 in 2018

Total accumulated depreciation = $21,600 + $32,400 + $43,200 + $11,880

= $109,080

Date Accounts and Explanation Debit Credit

Mar. 15 Depreciation Expense—Truck 11,880
Accumulated Depreciation—Truck 11,880
To record depreciation on truck.
E10A-29, cont.
Requirement 2

Market value of assets received $270,920

Less:
Book value of asset exchanged
Cost $ 360,000
Less: Accumulated depreciation (109,080)* $ 250,920
Cash paid 20,000 270,920
Gain or (Loss) $ 0

*from Requirement 1

If the fair market value of the old truck is equal to its net book value, then the “trade-in” value of
the old truck is equal to the book value and there is no gain or loss on the exchange. Therefore,
the cost of the new truck is $270,920—the book value of the old truck plus the cash paid.

Requirement 3

Date Accounts and Explanation Debit Credit

Mar. 15 Truck (new) 270,920
Accumulated Depreciation—Truck 109,080
Truck (old) 360,000
Cash 20,000
Exchanged old truck and cash for new truck.