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9-1

Chapter
PLANT AND INTANGIBLE
9 ASSETS

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Plant Assets
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
Date Description Debit Credit

As years pass, and the

The cost of plant assets services are used, the
is the advance purchase cost is transferred to
of services. depreciation expense.
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Major Categories of Plant Assets

Tangible Plant Intangible Natural

Assets Assets Resources

Long-term Noncurrent assets Sites acquired for

assets having with no physical extracting valuable
physical substance. substance. resources.

Land, buildings, Patents, copyrights, Oil reserves,

equipment, trademarks, timber, other
furniture, fixtures. franchises, goodwill. minerals.

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Acquisition of Plant Assets

Asset
price

Cost +
Reasonable and
necessary costs . . .

. . . for getting . . . for getting

the asset to the the asset ready
desired location. for use.

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Determining Cost
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.

Compute the cost of Heat Co.’s new machine.

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Determining Cost
List price $ 52,000
Sales tax @ 8% 4,160
Transportation cost 500
Set-up 1,300
Testing 4,000
Total cost to Heat Co. $ 61,960

Date Description Debit Credit

May 4 New Machine 61,960
Cash 61,960
Prepare the journal entry.

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Special Considerations

Cost includes real estate

commissions, legal fees,
Land clearing and grading the
property.

Improvements to land
Land such as driveways,
Improvements fences, and landscaping
are recorded separately.

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Special Considerations
Repairs made prior to the
building being put in use
Buildings are considered part of the
building’s cost.

Related interest,
insurance, and property
Equipment taxes are treated as
expenses of the current
period.
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Capital Expenditures and Revenue
Expenditures
Capital Revenue
Expenditure Expenditure

Any expenditure for purchase Expenditure for

of plant asset lasting ordinary repairs
for several accounting periods and maintenance.

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Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.

Balance Sheet
Cost of Assets:
plant Plant and
assets equipment

as the services
Income Statement
are received
Revenues:
Expenses:
Depreciation
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Depreciation

Book Value
• Cost – Accumulated Depreciation
Accumulated Depreciation
– Contra-asset
– Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
– Physical deterioration
– Obsolescence

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1. Straight-Line Depreciation

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life

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Straight-Line Depreciation
On January 2, , S&G bought a new delivery Truck. Bass
Co. pays $17,000 for the boat. The truck has an
estimated residual value of $2,000 and an estimated
useful life of 5 years.
Compute depreciation using the straight-line
method.

Cost – Residual Value $ 17,000 – $ 2,000

=
Years of Useful Life 5
= $ 3,000 per year
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Depreciation for Fractional Periods

When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.

Half-Year Convention
In the year of
acquisition, record six
months of depreciation. ½
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2. Declining-Balance Method
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.

Accelerated
Depreciation Remaining
= × Depreciation
Expense Book Value
Rate

The double-declining balance depreciation

rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
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The Units-of-Output Method

Cost per Unit Cost - Residual Value

=
of Output Estimated Units of Output

Depreciation Cost per Unit Number of

Expense
=
of Output
× Units Produced

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MACRS: The “Tax Method”

MACRS = Modified Accelerated Cost Recovery System

Based on The only accelerated method

Declining- allowed by the IRS when
Balance computing depreciation for tax
Methods return purposes.

Asset Cost × MACRS rate

Rates are available from tables
provided by the IRS.
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Revising Depreciation Rates

On January 1, 2003, equipment was
purchased that cost $30,000, has a useful
life of 10 years and no salvage value.
During 2006, the useful life was revised to 8
years total (5 years remaining).

Calculate depreciation expense for the year

ended December 31, 2006, using the
straight-line method.

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Revising Depreciation Rates

When our estimates change,
depreciation is:

Book value at Salvage value at

date of change – date of change

Remaining useful life at date of change

Asset cost $ 30,000

Accumulated depreciation, 12/31/2005
($3,000 per year × 3 years) 9,000
Remaining book value $ 21,000
Divide by remaining life ÷5
Revised annual depreciation $ 4,200
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Disposal of Plant and Equipment

If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.

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Trading in Used Assets
for New Ones – Similar Assets
On May 30, 2003, Essex Company
exchanged a used airplane and $35,000
cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and
a fair value of $4,000.

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Trading in Used Assets
for New Ones – Similar Assets
Prepare the journal entry to record
the trade.

Date Description Debit Credit

May 30 Airplane (new) 39,000
Accumulated Depreciation 30,000
Loss on Exchange 6,000
Airplane (old) 40,000
Cash 35,000

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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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Depletion of Natural Resources

Depletion is calculated using the
units-of-production method.

Unit depletion rate is calculated as follows:

Cost – Salvage Value

Total Units of Capacity

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Depletion of Natural Resources

Total depletion cost for a period is:

Unit Depletion Number of Units

Rate × Extracted in Period

Cost of
Total goods sold
Inventory
depletion
for sale
cost Unsold
Inventory

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Depletion of Natural Resources

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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Intangible Assets
Record at
current cash • Patents
equivalent cost,
including • Copyrights
purchase price, • Goodwill
legal fees, and • Trademarks and
filing fees. Trade Names

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Intangible Assets
• Amortize over shorter of economic
life or legal life, subject to a maximum
of 40 years.
• Use straight-line method.
• Research and development costs are
normally expensed as incurred.

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Intangible Assets – Goodwill

Goodwill

The amount by which the

purchase price exceeds the fair
market value of net identifiable assets acquired.

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Intangible Assets – Goodwill

Eddy Company paid $1,000,000 to

purchase all of James Company’s assets
and assumed liabilities of $200,000. The
acquired assets were appraised at a fair
value of $900,000.

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Intangible Assets – Patents

Exclusive right granted

by federal government to sell or
manufacture an invention.

Cost is purchase Amortize cost

price plus legal over the shorter of
cost to defend. useful life or 17 years.

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Intangible Assets –
Trademarks and Trade Names
A symbol, design, or logo
associated with a business.

Purchased
Internally trademarks
developed are recorded
trademarks at cost, and
have no amortized over
recorded shorter of legal
asset cost. or economic life,
or 40 years.
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Intangible Assets – Franchises

Legally protected right to sell products
or provide services purchased by
franchisee from franchisor.

Purchase price is intangible asset

which is amortized over the shorter of
the protected right or 40 years.
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Intangible Assets – Copyrights

Exclusive right granted by the

federal government to protect
artistic or intellectual properties.

Legal life is Amortize cost

life of creator over a period not
plus 50 years. to exceed 40 years.

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End of Chapter 9

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002