Chapter 9

Plant Assets,
Natural Resources, and
Intangible Assets
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
9-1
 Study
Study Objectives
Objectives
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 extractable 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.
Slide
9-2
 Plant
Plant Assets,
Assets, Natural
Natural Resources,
Resources, and
and Intangible
Intangible
Assets
Assets

Statement
Natural Intangible
Plant Assets Presentation and
Resources Assets
Analysis

Determining the Accounting for Accounting for Presentation

cost of plant extractable intangibles
Analysis
assets natural resources Types of
Depreciation Financial intangibles
Revaluation of statement Research and
presentation development costs
plant assets
Expenditures
during useful life
Plant asset
disposals
Slide
9-3
 Section 11 –– Plant
Section Plant Assets
Assets

Plant assets include land, land improvements, buildings,

and equipment (machinery, furniture, tools).
Major characteristics include:

“Used in operations” and not for resale.

Long-term in nature and usually depreciated.
Possess physical substance.

Referred to as property, plant, and equipment; plant and

equipment; and fixed assets.

Slide
9-4
 Section 11 –– Plant
Section Plant Assets
Assets
Illustration 9-1
Percentages of plant assets
in relation to total assets

Slide
9-5
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Land
Includes all costs to acquire land and ready it for use.
Costs typically include:
(1) 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.

Slide
9-6
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

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’s commission, $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.

Slide
9-7
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Required: Determine amount to be reported as the cost of the
land.
Land

Cash price of property of $100,000 $100,000

Net removal cost of warehouse of $6,000 6,000
Attorney's fees of $1,000 1,000
Real estate broker’s commission of $8,000 8,000
Cost of Land $115,000
Journal Entry
Land 115,000
Cash 115,000
Slide
9-8
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Land Improvements
All expenditures necessary to make the improvements
ready for their intended use.

Driveways, parking lots, fences, landscaping, and

underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements
over their useful lives.

Slide
9-9
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Buildings
All costs related directly to purchase or construction.
Purchase costs:
Purchase price, closing costs 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.

Slide
9-10
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Equipment
All costs incurred in acquiring the equipment and
preparing it for use.
Costs typically include:
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.
Slide
9-11
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

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. Machinery

Cash price $50,000

Sales taxes 3,000
Insurance during shipping 500
Installation and testing 1,000
Cost of Machinery $54,500

Slide
9-12
SO 1 Describe how the cost principle applies to plant assets.
Slide Answer on notes page
9-13
 Depreciation
Depreciation

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.

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.

Slide
9-14
SO 2 Explain the concept of depreciation.
 Depreciation
Depreciation

Factors in Computing Depreciation

Illustration 9-6

Cost Useful Life Residual Value

Slide
9-15
SO 2 Explain the concept of depreciation.
 Depreciation
Depreciation

Depreciation Methods
Objective is to select the method that best measures an
asset’s contribution to revenue over its useful life.

Examples include:
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.

Slide
9-16
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation

Illustration: Barb’s Florists purchased a small delivery truck on

January 1, 2011.
Illustration 9-7

Required: Compute depreciation using the following.

(a) Straight-Line (b) Units-of-Activity (c) Declining Balance.

Slide
9-17
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation

Straight-Line
Expense is same amount for each year.
Depreciable cost - cost of the asset less its residual
value. Illustration 9-8

Slide
9-18
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation
Illustration: (Straight-Line Method)
Illustration 9-9

Depreciable Annual Accum. Book

Year Cost x Rate = Expense Deprec. Value
2011 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600
2012 12,000 20 2,400 4,800 8,200
2013 12,000 20 2,400 7,200 5,800
2014 12,000 20 2,400 9,600 3,400
2015 12,000 20 2,400 12,000 1,000

2011 Depreciation expense 2,400

Journal
Entry Accumulated depreciation 2,400
Slide
9-19
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation

Units-of-Activity
Companies estimate total units of activity to calculate
depreciation cost per unit.
Expense varies based on units of activity.
Illustration 9-10
Depreciable cost is
cost less residual
value.

Slide
9-20
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation
Illustration: (Units-of-Activity Method)
Units Annual Illustration 9-11

of Cost / Depreciation Accumulated Book

Year Activity x Unit = Expense Depreciation Value

2011 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200

2012 30,000 0.12 3,600 5,400 7,600
2013 20,000 0.12 2,400 7,800 5,200
2014 25,000 0.12 3,000 10,800 2,200
2015 10,000 0.12 1,200 12,000 1,000

2011 Depreciation expense 1,800

Journal
Entry Accumulated depreciation 1,800
Slide
9-21
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation

Declining-Balance
Decreasing annual depreciation expense over the asset’s
useful life.
Declining-balance rate is double the straight-line rate.
Rate applied to book value.
Illustration 9-12

Slide
9-22
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation
Illustration: (Declining-Balance Method)
Declining Annual Illustration 9-13

Beginning Balance Deprec. Accum. Book

Year Book value x Rate = Expense Deprec. Value

2011 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

2011 Depreciation expense 5,200

Journal
Entry Accumulated depreciation 5,200

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

9-23
 Depreciation
Depreciation

Comparison of Methods
Illustration 9-14

Illustration 9-15

Slide
9-24
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation

Review Question
Depreciation is a process of:
a. valuation.
b. cost allocation.
c. cash accumulation.
d. appraisal.

Slide
9-25
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation for
for Partial
Partial Year
Year

The following four 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.

Slide
9-26
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation for
for Partial
Partial Year
Year

Illustration: Barb’s Florists purchased a small delivery truck on

October 1, 2011.
Illustration 9-7

Required: Compute depreciation using the following.

(a) Straight-Line (b) Units-of-Activity (c) Declining Balance.

Slide
9-27
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation for
for Partial
Partial Year
Year
Illustration: (Straight-line Method)
Current
Depreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2011 $ 12,000 x 20% = $ 2,400 x 3/12 = $ 600 $ 600
2012 12,000 x 20% = 2,400 2,400 3,000
2013 12,000 x 20% = 2,400 2,400 5,400
2014 12,000 x 20% = 2,400 2,400 7,800
2015 12,000 x 20% = 2,400 2,400 10,200
2016 12,000 x 20% = 2,400 x 9/12 = 1,800 12,000
$ 12,000
Journal entry:

2011 Depreciation expense 600

Accumultated depreciation 600

Slide
9-28
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation for
for Partial
Partial Year
Year

Illustration: (Units-of-Activity Method) Illustration 9-12

Hours Cost / Annual Accum. Book

Year Used x Unit = Expense Deprec. Value
2011 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2012 30,000 0.12 3,600 5,400 7,600
2013 20,000 0.12 2,400 7,800 5,200
2014 25,000 0.12 3,000 10,800 2,200
2015 10,000 0.12 1,200 12,000 1,000

2011 Depreciation expense 1,800

Journal
Entry Accumulated depreciation 1,800

Slide
9-29
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation for
for Partial
Partial Year
Year
Illustration: (Declining-Balance Method)
Declining Current
Beginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2011 $ 13,000 x 40% = $ 5,200 x 3/12 = $ 1,300 $ 1,300
2012 11,700 x 40% = 4,680 4,680 5,980
2013 7,020 x 40% = 2,808 2,808 8,788
2014 4,212 x 40% = 1,685 1,685 10,473
2015 2,527 x 40% = 1,011 1,011 11,484
2016 1,516 x 40% = 607 Plug 516 12,000
$ 12,000
Journal entry:

2011 Depreciation expense 1,300

Accumultated depreciation 1,300

Slide
9-30
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation

Depreciation and Income Taxes

Tax laws often do not require the taxpayer to use the

same depreciation method on the tax return that is used
in preparing financial statements.
Many corporations use straight-line in their financial
statements to maximize net income. At the same time,
they use an accelerated-depreciation method on their
tax returns to minimize their income taxes.

Slide
9-31
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation

Revising Periodic Depreciation

Accounted for in the period of change and future

periods (Change in Estimate).

Not handled retrospectively.

Not considered error.

Slide
9-32
SO 4 Describe the procedure for revising periodic depreciation.
 Depreciation
Depreciation

Illustration: Assume that Barb’s Florists decides on January 1,

2014, 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:
1. What is the journal entry to correct No Entry
the prior years’ depreciation? Required
2. Calculate the depreciation expense
for 2014.

Slide
9-33
SO 4 Describe the procedure for revising periodic depreciation.
 Depreciation
Depreciation

Book value, 1/1/14 $5,800 First,

First,
Residual value - 1,000 establish
establish
Book
BookValue
Value
Depreciable cost 4,800
at
atthe
thedate
dateof of
Useful life (revised) / 3 years change
changein in
Annual depreciation $ 1,600 estimate.
estimate.

Illustration 9-17

Journal entry for 2014

Depreciation expense 1,600

Accumulated depreciation 1,600

Slide
9-34
SO 4 Describe the procedure for revising periodic depreciation.
 Depreciation
Depreciation

Review Question
When there is a change in estimated depreciation:
a. previous depreciation should be corrected.
b. current and future years’ depreciation should be
revised.
c. only future years’ depreciation should be revised.
d. None of the above.

Slide
9-35
SO 4 Describe the procedure for revising periodic depreciation.
 Revaluation
Revaluation of
of Plant
Plant Assets
Assets

IFRS allows revaluation of plant assets to fair value

If revaluation is used, it must be applied to all assets in

a class of assets.

Assets that are experiencing rapid price changes must

be revalued on an annual basis, otherwise less
frequent revaluation is acceptable.

Slide
9-36
SO 4 Describe the procedure for revising periodic depreciation.
 Revaluation
Revaluation of
of Plant
Plant Assets
Assets
Illustration: Pernice Company applies revaluation to plant
assets with a carrying value of $1,000,000, a useful life of 5
years, and no residual value. Pernice makes the following
journal entries in year 1, assuming straight-line depreciation.

Depreciation expense 200,000

Accumulated depreciation 200,000

After this entry, Pernice’s plant assets have a carrying amount

of $800,000 ($1,000,000 - $200,000).

Slide
9-37
SO 4 Describe the procedure for revising periodic depreciation.
 Revaluation
Revaluation of
of Plant
Plant Assets
Assets
Illustration: At the end of year 1, independent appraisers
determine that the asset has a fair value of $850,000. To report
the plant assets at fair value, Pernice makes the following entry.

Accumulated depreciation 200,000

Plant assets 150,000
Revaluation surplus 50,000

Revaluation surplus is an example of an item reported as other

comprehensive income, as discussed in Chapter 5.

Slide
9-38
SO 4 Describe the procedure for revising periodic depreciation.
 Revaluation
Revaluation of
of Plant
Plant Assets
Assets
Pernice now reports the following information in its statement of
financial position at the end of year 1.
Illustration 9-18

$850,000 is the new basis of the asset. Pernice reports depreciation

expense of $200,000 in the income statement and $50,000 in other
comprehensive income. Depreciation in year 2 will be $212,500
($850,000 / 4).
Slide
9-39
SO 4 Describe the procedure for revising periodic depreciation.
 Expenditures
Expenditures During
During Useful
Useful Life
Life

Ordinary Repairs - expenditures to maintain the operating

efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.

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.

Slide SO 5 Distinguish between revenue and capital expenditures,

9-40 and explain the entries for each.
 Plant
Plant Asset
Asset Disposals
Disposals
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Illustration 9-19

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Slide
9-41
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement

Retirement of Plant Assets

Illustration: Assume that Hobart Enterprises retires
its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry to
record this retirement is:

Accumulated depreciation 32,000

Printing equipment 32,000

Question: What happens if a fully depreciated plant asset is still useful

to the company?

Slide
9-42
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement
Illustration: Assume that Sunset Company discards delivery
equipment that cost $18,000 and has accumulated
depreciation of $14,000. The journal entry is:

Accumulated depreciation 14,000

Loss on disposal 4,000
Delivery equipment 18,000

Companies report a loss on disposal in the “Other income and

expense” section of the income statement.

Slide
9-43
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals

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.

Slide
9-44
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Gain on Disposal
Illustration: Assume that on July 1, 2011, Wright Company
sells office furniture for $16,000 cash. The office furniture
originally cost $60,000. As of January 1, 2011, it had
accumulated depreciation of $41,000. Depreciation for the first
six months of 2011 is $8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.

Depreciation expense 8,000

Accumulated depreciation 8,000

Slide
9-45
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Illustration 9-20
Computation of gain on
disposal

Illustration: Wright records the sale as follows.

July 1 Cash 16,000

Accumulated depreciation 49,000
Office equipment 60,000
Gain on disposal 5,000

Slide
9-46
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Loss on Disposal Illustration 9-21

Computation of loss on disposal

Illustration: Assume
that instead of selling
the office furniture for
$16,000, Wright sells it
for $9,000.

July 1 Cash 9,000

Accumulated depreciation 49,000
Office equipment 60,000
Loss on disposal 5,000
Slide
9-47
SO 6 Explain how to account for the disposal of a plant asset.
 Section 22 –– Natural
Section Natural Resources
Resources

Natural resources consist of standing timber and

resources extracted from the ground, such as oil, gas,
and minerals.
Standing timber is considered a biological asset under
IFRS.
In the years before they are harvested, the recorded
value of biological assets is adjusted to fair value each
period.

Slide
9-48
SO 7 Compute periodic depletion of extractable natural resources.
 Section 22 –– Natural
Section Natural Resources
Resources
IFRS defines extractive industries as those businesses
involved in finding and removing natural resources located in
or near the earth’s crust.
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.
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.
Slide
9-49
SO 7 Compute periodic depletion of extractable natural resources.
 Section 22 –– Natural
Section Natural Resources
Resources
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

Journal entry:
Depletion expense 400,000
Accumulated depletion 400,000

Slide
9-50
SO 7 Compute periodic depletion of extractable natural resources.
 Financial
Financial Statement
Statement Presentation
Presentation

Illustration 9-23
Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported as

inventory in the current assets section.

Slide
9-51
SO 7 Compute periodic depletion of extractable natural resources.
 Section 33 –– Intangible
Section Intangible Assets
Assets

Intangible assets are rights, privileges, and competitive

advantages that do not possess physical substance.

Intangible assets are categorized as having either a

limited life or an indefinite life.
Common types of intangibles:

Patents Trademarks and trade

Copyrights names
Franchises or licenses Goodwill

IFRS permits revaluation of intangible assets to fair value, except for goodwill.
Slide
9-52
SO 8 Explain the basic issues related to accounting for intangible assets.
 Types
Types of
of Intangible
Intangible Assets
Assets

Patents
Exclusive right to manufacture, sell, or otherwise control
an invention for a specified number of years from the
date of the grant.

Legal life in many countries is 20 years.

Capitalize costs of purchasing a patent and amortize

over its legal life or its useful life, whichever is shorter.

Legal fees incurred successfully defending a patent are

capitalized to Patent account.

Slide
9-53
SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Intangible assets are typically amortized on a straight-line

basis.

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 annual
amortization as follows.

Amortization expense 7,500

Patent 7,500

Slide
9-54
SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

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.

Granted for the life of the creator plus a specified number

of years, which can vary by country but is commonly 70
years.

Capitalize costs of acquiring and defending it.

Amortized to expense over useful life.

Slide
9-55
SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

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 Jetta.

Registration provides a specified number of years of

protection, which can vary by country, but is commonly 20
years.

Capitalize acquisition costs.

Renewed indefinitely, no amortization.

Slide
9-56
SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Franchises and Licenses

Contractual arrangement between a franchisor and a
franchisee.

 BP (GBR), Taco Bell (USA), or Rent-A-Wreck (USA)

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.

Slide
9-57
SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

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 fair value of the identifiable net
assets acquired.

Internally created goodwill should not be capitalized.

Slide
9-58
SO 8 Explain the basic issues related to accounting for intangible assets.
Slide Answer on notes page
9-59
 Research
Research and
and Development
Development Costs
Costs

Frequently results in something that a company patents

or copyrights such as:

new product, formula,

process, composition, or
idea, literary work.

 Costs in the research phase are always expensed as

incurred.
 Costs in the development phase are expensed until
specific criteria are met, primarily that technological
feasibility is achieved.
Slide
9-60
SO 8 Explain the basic issues related to accounting for intangible assets.
 Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Presentation Illustration 9-24

Slide SO 9 Indicate how plant assets, natural resources,

9-61 and intangible assets are reported.
 Statement
Statement Presentation
Presentation and
and Analysis
Analysis

Analysis
Illustration 9-25

Each dollar invested in assets produced in sales. If a

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

Slide SO 9 Indicate how plant assets, natural resources,

9-62 and intangible assets are reported.
 Understanding
Understanding U.S.
U.S. GAAP
GAAP

Key Differences Plant Assets, Natural

Resources, and Intangible
Assets
As in IFRS, under GAAP, the costs associated with research
and development are segregated into the two components.
Costs in the research phase are always expensed under
both IFRS and GAAP. Under GAAP, however, costs in the
development phase are also always expensed. As shown in
this chapter, under IFRS, development costs can be
capitalized once technological feasibility is achieved.

IFRS permits revaluation of intangible assets (except for

goodwill). GAAP prohibits revaluations of intangible assets.

GAAP does not require component depreciation.

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 Understanding
Understanding U.S.
U.S. GAAP
GAAP

Key Differences Plant Assets, Natural

Resources, and Intangible
Assets
GAAP does not permit the use of revaluation accounting for
property, plant, and equipment, which is allowed under
IFRS.

Under both GAAP and IFRS, changes in the depreciation

method used and changes in useful life are handled in
current and future periods. Prior periods are not affected.
GAAP recently conformed to IFRS in the accounting for
changes in depreciation methods.

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 Understanding
Understanding U.S.
U.S. GAAP
GAAP

Key Differences Plant Assets, Natural

Resources, and Intangible
Assets
IFRS allows reversal of impairment losses when there has
been a change in economic conditions or in the expected
use of the asset. Under GAAP, impairment losses cannot be
reversed for assets to be held and used; the impairment
loss results in a new cost basis for the asset. IFRS and
GAAP are similar in the accounting for impairments of
assets held for disposal.

The accounting for exchanges of non-monetary assets has

recently converged between IFRS and GAAP.

Slide
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 Understanding
Understanding U.S.
U.S. GAAP
GAAP
Plant Assets, Natural Resources,
Looking to the Future and Intangible Assets

It is too early to say whether a converged conceptual framework

will recommend fair value measurement (and revaluation
accounting) for plant assets and intangibles. However, this is likely
to be one of the more contentious issues, given the long-standing
use of historical cost as a measurement basis in GAAP. The IASB
and FASB have identified a project that would consider expanded
recognition of internally generated intangible assets. IFRS permits
more recognition of intangibles compared to GAAP. Thus, it will be
challenging to develop converged standards for intangible assets,
given the long-standing prohibition on capitalizing internally
generated intangible assets and research and development in
GAAP.
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 Exchange
Exchange of
of Plant
Plant Assets
Assets Appendix

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.

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SO 10 Explain how to account for the exchange of plant assets.
 Exchange
Exchange of
of Plant
Plant Assets
Assets
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 value of
$26,000.

Cost of old trucks $64,000

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

Fair value of old trucks $26,000

Cash paid 17,000
Cost of new semi-truck $43,000
Slide
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SO 10 Explain how to account for the exchange of plant assets.
 Exchange
Exchange of
of Plant
Plant Assets
Assets
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
Accumulated depreciation 22,000
Loss on disposal 16,000
Used trucks 64,000
Cash 17,000
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9-69
SO 10 Explain how to account for the exchange of plant assets.
 Exchange
Exchange of
of Plant
Plant Assets
Assets
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 value of $19,000. Mark also paid $3,000.

Cost of old equipment $40,000

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

Fair value of old equipment $19,000

Cash paid 3,000
Cost of new equipment $22,000
Slide
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SO 10 Explain how to account for the exchange of plant assets.
 Exchange
Exchange of
of Plant
Plant Assets
Assets
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 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
Accumulated depreciation 28,000
Delivery equipment (used) 40,000
Gain on disposal 7,000
Cash 3,000
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SO 10 Explain how to account for the exchange of plant assets.
 Exchange
Exchange of
of Plant
Plant Assets
Assets

Review Question
In exchanges of assets in which the exchange has
commercial substance:
a. neither gains nor losses are recognized immediately.
b. gains, but not losses, are recognized immediately.
c. losses, but not gains, are recognized immediately.
d. both gains and losses are recognized immediately.

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

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