Plant Assets , Intangible

Assets & Natural Resources

Chapter 6
Categories of Plant Assets
Plant assets are often classified into the
following groups:
1. Tangible Plant Assets - w/c has physical
substance such as buildings, land or machine.
This category may be sub divided into 2
distinct classifications such as:
a). Plant property subject to depreciation,
w/c includes building & equipment, &
b). Land
2. Intangible Assets: assets used in the operation
of the business but have no physical substance
& are noncurrent.
Examples include patents, copyrights,
trademarks, franchised & goodwill.
3. Natural Resources: sites acquired for the
purpose of extracting or removing some
valuable resource such as oil, minerals, or
timber is classified as a natural resource, not as
land.
This type of plan asset is gradually converted
into inventory as the natural resource is
extracted from the site.
 Asset Description
Property, plant Productive assets that drive their value from
& Equipment long-term use in operations rather than from
resale.
Equipment Broad term that includes machinery,
computers & other office equipment, vehicles,
furniture & fixtures.
Land Real property used in operations (land held for
speculative investments or future use is
reported as investments or other assets)
Land Enhancements to property such as parking lots,
Improvements driveways, private roads, fences, landscaping &
sprinkler systems.
Buildings Structure that include warehouse, plant
facilities, & office buildings.
Natural Productive resources that are physically
Resources consumed in operation such as timber, mineral
deposits, & oil & gas reserves.
Intangible Productive assets that lack physical substance
Assets & have long-term but typically uncertain
benefits.
Patents Exclusive 20 year right to manufacture a
product or use a process.
Copyrights Exclusive right to benefit from a creative work
such as a song, film, painting, photograph, or
book.
Trademarks Exclusive right to display a word, a slogan, a
(trade names) symbol, or an emblem that distinctively
identifies a company, product, or a service
Franchise A contractual arrangement under which a
franchisor grants the franchisee the exclusive
right to use the franchisor’s trademark or trade
Typical Acquisition Costs
All expenditures necessary to get the asset in
condition & location for its intended use.
Purchase price (less discount), taxes, transportation,
installation, testing, trial runs, reconditioning.
Purchase price, attorney’s fees, title, recording fees,
commission, back taxes, mortgages, liens, clearing,
draining, & removing old buildings.
Separately identifiable costs
Purchase price, attorney’s fees, commissions,
reconditioning.
Acquisition, exploration, development, & restoration
costs.
All expenditures necessary to get the asset in the
location & condition for its intended use.
Purchase price, legal fees, filing fees , not including
internal R&D.
Purchase price, legal fees, filing fees, not including
internal R&D.
Purchase price, legal fees, filing fees, not including
internal R&D
Franchise fee plus any legal fees.
 Plant Assets
Asset Account on Related Expense Account
the Balance Sheet on the Income Statement

Plant Assets
Land……………………………… none
Buildings, Machinery and
Equipment, Furniture
and Fixtures, and Land
Improvements………….… Depreciation
Natural Resources………..…… Depletion
Intangibles………………………. Amortization
 Accountable Events of Plant Assets
For all categories of plant assets, there are
three basic accountable events:
1. Acquisition,
2. Allocation of the acquisition of cost to
expense over the asset’s useful
life( depreciation), &
3. Sale or disposal
Acquisition of Plant Assets

Cost Principle
An asset must be carried on the
balance sheet at the amount paid for it.

The cost of an asset equals the sum of

all of the costs incurred to bring the asset
to its intended purpose, net of discounts
 1. Land

Purchase price of land $500,000

Add related costs:
Back property taxes $40,000
Transfer taxes 8,000
Removal of buildings 5,000
Survey fees 1,000 54,000
Total cost of land $554,000
 2. Land Improvements
All improvements located on the land but
subject to decay:

Paving
Fences
Sprinkler systems
Lights in parking lot
3a. Buildings – Construction

Architectural fees
Building permits
Contractor’s charges

Materials
Labor
Overhead
3b. Buildings – Purchasing

Purchase price
Brokerage commissions
Sales and other taxes
Repairing or renovating building
for its intended purpose
4. Machinery and Equipment

Purchase price less discounts

Transportation charges
Insurance in transit
Sales and other taxes
Purchase commissions
Installation cost
Expenditures to test asset
before it is placed in service
Lump-Sum Purchases Example
Electra Co. Paid $110,000 for a combined
purchase of land and a building.
The land is appraised at $90,000 and the
building at $60,000.
How much of the purchase price is
allocated to land and how much to the
building?
Lump-Sum Purchases Example

Land: $90,000 ÷ $150,000 = 60%

$110,000 × 60% = $66,000

Building: $60,000 ÷ $150,000 = 40%

$110,000 × 40% = $44,000
 Distinction Between Capital and
Revenue Expenditures

Does the expenditure increase capacity

or efficiency or extend useful life?
YES NO

Capital Expenditure Revenue Expenditure

Debit Plant Assets Debit Repairs and
accounts Maintenance account
Measuring the Depreciation
of Plant Assets

Cost or basis

Estimated residual value

Estimated useful life

•Depreciation, is the allocation of the cost of a
tangible plant asset to expense in the periods in
which services are received from the asset.

- The basic purpose of depreciation is to apply

the matching principle i.e., to offset the
revenue of an accounting period with the costs
of the goods sold & services being consumed
in the effort to generate that revenue.
 Causes of Depreciation
1. Physical deterioration: results from the
use, as well as from exposure to sun, wind
& other climatic factors.
2. Obsolescence: means the process of
becoming output of date or obsolete.
 An airplane, for example, may become
obsolete even though it is in excellent
physical condition; it becomes obsolete
because better planes of superior design &
performance have become available.
Depreciation Methods

Straight-Line (SL)

Units-of-Production (UOP)

Double-Declining-Balance (DDB)
Depreciation Methods Example

Donishia and Richard Catering, Inc.,

purchased a delivery van on January 1,
200x, for $22,000.
The company expects the van to have a
trade-in value of $2,000 at the end of its
useful life.
The van has an estimated service life of
100,000 miles or 4 years.
 Straight-Line Method Example

(Cost – Residual value) ÷ years of useful life

($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000

Year 1 Depreciation: $ 5,000

Year 2 Depreciation: 5,000
Year 3 Depreciation: 5,000
Year 4 Depreciation: 5,000
Total Depreciation: $20,000
 Units-of-Production
Method Example

($22,000 – 2,000) ÷ 100,000 = $.20/mile

Year 1: 30,000 miles = $ 6,000

Year 2: 27,000 miles = 5,400
Year 3: 23,000 miles = 4,600
Year 4: 20,000 miles = 4,000
Total: 100,000 miles = $20,000
Double-Declining-Balance Method
Example
Straight-line rate is 100% ÷ 4 = 25%
Double-declining-balance = 2 times the
straight-line rate = 50%
What is the book value of the van at the
end of the first year?
$22,000 × 50% = $11,000
$22,000 – $11,000 = $11,000
 Double-Declining-Balance Method
Example

Dec. 31, 200x

Depreciation Expense $11,000
Accumulated Depreciation $11,000
To record depreciation expense for a one-year period
 Depreciation Methods Comparison

Year SL UOP DDB

1 $ 5,000 $ 6,000 $11,000
2 $ 5,000 $ 5,400 $ 5,500
3 $ 5,000 $ 4,600 $ 2,750
4 $ 5,000 $ 4,000 $ 750
Totals $20,000 $20,000 $20,000
Use of Depreciation Methods
3%
2%
5% Straight-line
8%
Accelerated –
(not specified)
UOP

Declining-
balance
Other
82%
Depreciation for Partial Years
Assume that Donishia and Richard
Catering, Inc., owned the van for 3
months.
How much is the van’s depreciation?

Straight-line method:
$5,000 × 3/12 = $1,250

Double-declining-balance method:
$11,000 × 3/12 = $2,750
Revising Depreciation Rates

Revised SL depreciation
=
Cost – Accumulated depreciation
–
New residual value
÷
Remaining useful life
Disposing of Plant Assets
1.Selling
2.Exchanging
3. Discarding (scrapping it)
Gain/loss is reported on the income
statement...
– and closed to Income Summary.
Disposing by Discarding Example
On September 1, Joe, manager of Joe’s
Landscaping, is contemplating the
disposal of an old piece of equipment
purchased on September 1, 2006:
Equipment cost: $36,000
Residual value: $ 6,000
Accumulated depreciation: $20,000
Estimated useful life at acquisition: 10
years
Disposing by Discarding
Example
Assume the equipment is discarded on
November 30,2008.
What is the accumulated depreciation on
November 30, 2008?

($36,000 – $6,000) ÷ 10 = $3,000

$3,000 ÷ 12 = $250
$250 × 3 = $750
$20,000 + $750 = $20,750
 Disposing by Discarding
Example

November 30, 2008

Accumulated Depreciation 20,750
Loss on disposal 15,250
Equipment 36,000
To record discarding of equipment
 Selling a Plant Asset Example
Assume the equipment is sold for $10,000.
What is the gain or loss on disposal?
Cash 10,000
Accumulated Depreciation 20,750
Loss on Sale of Equipment 5,250
Equipment 36,000

To record sale of equipment for $10,000

 Selling a Plant Asset Example
Equipment is sold for $20,000.
What is the gain or loss on disposal?

Cash 20,000
Accumulated Depreciation 20,750
Gain on Sale of Equipment 4,750
Equipment 36,000

To record sale of equipment for $20,000

Exchanging Plant Assets
Assume equipment with a cost of $36,000
and a book value of $15,250 is exchanged
for new, similar equipment having a
current fair value of $42,000 with a trade-
in of $18,000 allowed for the old
equipment.
Cash payment is $24,000.
What is the cost of the new asset?
$24,000 + $15,250= $39,250
 Exchanging Plant Assets

Equipment (new) $39,250

Accumulated Depreciation (old) $20,750
Equipment (old) $36,000
Cash $24,000
Assignment Question ( to be submitted)

1.Briefly explain the accounting procedures of

exchanging dissimilar plant assets with
relevant illustrations.
 Accounting for Natural Resources

Natural gas and oil

Precious metals and gems
Timber, coal, and iron ore

(Cost – Residual value) ÷ Estimated units

of natural resources = Depletion per unit
Eg. Assume that the Rainbow Minerals pays
$45 million to acquire the Red Valley Mine,
w/c is believed to contain 10million tons of
coal.
The residual value of the mine after all of the
coal is removed is estimated to be $ 5 million.
The depletion that will occur over the life of the
mine is the original cost minus the residual
value ($ 45mil.-5 mil.= $ 40 mil.)
The depletion will occur at the rate of $4/ton
($40million/10 million tons) as the coal is
removed from the mine.
If we assume that 2 million tons are mined
during the 1st year of operations, the entry to
record the depletion of the mine would be as
follows:
Inventory 8,000,000
Accumulated Depln 8,000,000
Once removed from the mine, coal becomes
merchandise available for sale.
Therefore, the estimated cost of this coal is
Dr. to the Inventory account.
As the coal is sold, this cost is transferred
from the inventory account to the CGS ac/t.
Accumulated Depletion is a contra-asset
account similar to the Accumulated
Depreciation account; it represents the
portion of the mine that has been used up
(depleted) to date.
In Rainbow Mineral’s b/sheet, the Red
Valley Mine now appears as follows:
Property, Plant & Equipment:
Mining properties: RVM $45,000,000
(-)Accumulated Depln (8,000,000) $37,000,000
 Depreciation of Buildings & Equipment
Closely Related to Natural Resources
Buildings & equipment installed at a mine
or drilling site may be useful only at that
particular location.
Consequently, such assets should be
depreciated over their normal useful lives or
over the life of the natural resource,
whichever is shorter.
Often depreciation on such assets is
computed using the units-of-output method.
 Intangible Assets

Not physical in nature

1.Patents
2.Copyrights
3.Trademarks
4. Franchises
5. Leaseholds
6. Goodwill
Intangible Assets: Patents
Patents are federal government grants.
They give the holder the right to produce
and sell an invention.
Patents are granted for a period of 20
years & the amortization should not
exceed that period.
Suppose a company pays $170,000 to
acquire a patent on January 1.
The company believes that its expected
useful life is 5 years.
What are the entries?
 Intangible Assets: Patents

Jan. 1
Patents 170,000
Cash 170,000
To acquire a patent

Dec. 31
Amortization Expense 34,000
Patents 34,000
To amortize the cost of a patent
 Intangible Assets: Copyrights
•Is an exclusive right granted by the federal
gov’t to protect the production & sale of:
1.Literary compositions (novels)
2. Musical compositions
3. Films (movies)
4. Software
5.Other works of art
•Copy right has a useful life of the creator’s
life plus 70 years.
 Intangible Assets: Trademarks

•Trademarks, Trade Names, or Brand Names

are assets that represent distinctive
identifications of a product or service.
•Cost of a trademark should be amortized for
not more than 40 years.
•Eg. Coca-Cola
Intangible Assets: Franchises
Franchises are privileges granted by
private business or government to sell a
product or service in a specific
geographical area.
Eg. To operate an McDonald’s Restaurant
in a specific neighborhood.
If cost is small, should be amortized for 5
years.
If cost is material, should be amortized
for not exceeding 40 years.
Intangible Assets: Goodwill
Goodwill is defined as the excess of
purchase price over the fair value of the
net assets acquired.
Goodwill can only be recorded in the
purchase of another company.
GAAPs have historically required that
goodwill will be amortized over a period
not exceeding 40 periods.
 Intangible Assets: Goodwill
Goodwill Example

Purchase price paid for

Meta Company $10 million
Assets at market value 9 million
Less Meta’s liabilities 1 million
Market value of
Meta’s net assets 8 million
Goodwill $ 2 million
Assignment Questions ( to be submitted)
1.Briefly explain the accounting procedures of
exchanging dissimilar plant assets with
relevant illustrations.
2. Explain the cash effects of transactions
involving plant assets with suitable
examples.
End of Chapter 6