Slide

9-1

Chapter
PLANT AND INTANGIBLE
9 ASSETS

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

Slide
9-2

Plant
Plant Assets
Assets

Long-lived
Long-lived assets
assets acquired
acquired for
for use
use in
in
business
business operations.
operations.
Similar to long-term prepaid expenses

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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-3

Major
Major Categories
Categories of
of Plant
Plant Assets
Assets

T a n g ib le P la n t In ta n g ib le N a tu ra l
A s s e ts A s s e ts R e s o u rc e s

L o n g -te rm N o n c u rre n t a s s e ts S it e s a c q u ir e d fo r
a s s e t s h a v in g w it h n o p h y s ic a l e x t r a c t in g v a lu a b le
p h y s ic a l s u b s t a n c e . s u b s ta n c e . re s o u rc e s .

L a n d , b u ild in g s , P a t e n t s , c o p y r ig h t s , O il r e s e r v e s ,
e q u ip m e n t , tra d e m a rk s , t im b e r , o t h e r
fu r n it u r e , fix t u r e s . fr a n c h is e s , g o o d w ill. m in e r a ls .

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

Slide
9-4

Accountable
Accountable Events
Events

Acquisition.
 Acquisition.
Allocation
 Allocation of
of the
the
acquisition
acquisition cost
cost toto
expense
expense over
over the
the
asset’s
asset’s useful
useful life
life
(depreciation).
(depreciation).
Sale
 Sale or
or disposal.
disposal.

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

Slide
9-5

Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Asset
Asset
price
price
Cost
Cost +
Reasonable
Reasonableand
and
necessary
necessarycosts
costs.. ....

......for
forgetting
getting ......for
forgetting
getting
the
theasset
assetto
tothe
the the
theasset
assetready
ready
desired
desiredlocation.
location. for
foruse.
use.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-6

Determining
Determining Cost
Cost

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

Compute
Compute the
the cost
cost of
of Heat
Heat Co.’s
Co.’s new
new machine.
machine.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-7

Determining
Determining Cost
Cost

Prepare the journal entry.

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

Slide
9-8

Special
Special Considerations
Considerations

Cost
Cost includes
includesreal
realestate
estate
commissions,
commissions,escrow
escrow
Land
Land fees,
fees,legal
legalfees,
fees,clearing
clearing
and
andgrading
gradingthe
theproperty.
property.

Improvements
Improvementstotoland
land
Land
Land such
suchasasdriveways,
driveways,
Improvements fences,
fences, and
andlandscaping
landscaping
Improvements are
arerecorded
recordedseparately.
separately.

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

Slide
9-9

Special
Special Considerations
Considerations
Buildings
Buildingsare
aresometimes
sometimes
purchased
purchasedwith
withthe
theintention
intentionofof
Buildings
Buildings
remodeling
remodelingthem
in
themprior
priorto
toplacing
placingthem
them
inuse.
use.Costs
Costsincurred
incurredunder
underthese
these
circumstances
circumstancesarearecharged
chargedtotothe
the
Buildings
Buildingsaccount.
account.However,
However,ordinary
ordinary
repairs
repairsare
areconsidered
consideredtotobe
be
maintenance
maintenanceexpense
expensewhen
whenincurred.
incurred.

Related
Relatedinterest,
interest,
insurance,
insurance,and
andproperty
property
Equipment taxes
taxesare
aretreated
treatedas
as
Equipment expenses
expensesof of the
thecurrent
current
period.
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-10

Special
Special Considerations
Considerations

Allocation
Allocation of
of aa Lump-Sum
Lump-Sum Purchase
Purchase

The
Thetotal
totalcost
cost The
Theallocation
allocation
must
mustbe
be is
isbased
basedon on
allocated
allocatedtoto the
the relative
relative
I think I’ll buy the separate
separate Fair
FairMarket
Market
whole thing; barn, accounts
accountsfor
for Value
Valueofofeach
each
land, and animals. each
eachasset.
asset. asset
asset
purchased.
purchased.

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

Slide
9-11
Capital
Capital Expenditures
Expenditures and
and Revenue
Revenue
Expenditures
Expenditures

Capital
Capital Revenue
Revenue
Expenditure
Expenditure Expenditure
Expenditure

Any
Anymaterial
materialexpenditure
expenditure Expenditure
Expenditurefor
for
that
thatwill
willbenefit
benefit several
several ordinary
ordinaryrepairs
repairs
accounting
accountingperiods.
periods. and
and maintenance.
maintenance.

To
To capitalize
capitalize an
anexpenditure
expenditure To
Toexpense
expensean
anexpenditure
expenditure
means
meansto tocharge
chargeitit to
toan
an means
meansto
tocharge
chargeititto
toan
an
asset
assetaccount.
account. expense
expenseaccount.
account.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-12

Depreciation
Depreciation
The
The allocation
allocation of
of the
thecost
costof
ofaa plant
plantasset
asset to
toexpense
expensein
inthe
the
periods
periodsininwhich
whichservices
servicesare
arereceived
receivedfrom
fromthe
theasset.
asset.

Balance
BalanceSheet
Sheet
Cost of Assets:
Assets:
plant Plant
Plant and
and
assets equipment
equipment

as the services
Income
IncomeStatement
Statement are received
Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-13

Depreciation
Depreciation

Book
Book Value
Value
•• Plant
Plantassets
assetsare
areshown
shownin
inthe
thebalance
balancesheet
sheet
at
attheir
theirbook
bookvalues
values(or
(orcarrying
carryingvalues
values).).
•• Book
BookValue
Value==Cost
Cost––Accumulated
Accumulated
Depreciation
Depreciation
Accumulated
Accumulated Depreciation
Depreciation
 Contra-asset
Contra-asset
 Represents the
Represents theportion
portionof
ofan
anasset’s
asset’scost
cost
that
thathas
hasalready
alreadybeen
beenallocated
allocatedtoto
expense.
expense.

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

Slide
9-14

Causes
Causes of
of Depreciation
Depreciation

Physical deterioration
Physical deterioration of a
plant asset results from use, as
Obsolescence
well as from exposure to sun,
The term obsolescence means the
wind, and other climatic
process of becoming out of date
factors.
because improved, more efficient
assets become available. An
airplane, for example, may become
obsolete even though it is in
excellent physical condition; it
becomes obsolete because
better planes of superior design and
performance become available.

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

Slide
9-15

Straight-Line
Straight-Line Depreciation
Depreciation

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life

Residual value is the estimated amount

that a company will receive when it disposes of
an asset at the end of the asset's useful life.
Often the residual value is estimated to be zero.
However, we may assign some value to the
scrap of some assets. Residual value is also
referred to as disposal value, scrap value, or
salvage value.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-16

Straight-Line
Straight-Line Depreciation
Depreciation

On
OnJanuary
January1,1, 2003,
2003, Bass
BassCo.Co.buys
buysaanewnew boat.
boat. Bass
Bass
Co.
Co.pays
pays$24,000
$24,000for
forthe
theboat.
boat.The
Theboat
boat has
hasanan
estimated
estimated residual
residualvalue
valueof of $3,000
$3,000and
andanan estimated
estimated
useful
useful life
life of
of55years.
years.
Compute
Compute depreciation
depreciation for
for 2003
2003 using
using the
the
straight-line
straight-line method.
method.

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

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9-17

Straight-Line
Straight-Line Depreciation
Depreciation
Bass
BassCo.
Co. will
willrecord
record$4,200
$4,200 depreciation
depreciation each
each year
yearfor
for
five
fiveyears.
years. Total
Totaldepreciation
depreciationover
overthe
theestimated
estimateduseful
useful
life
lifeof
of the
theboat
boat is:
is:

Salvage Value
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-18

Depreciation
Depreciation for
for Fractional
Fractional Periods
Periods

When
Whenananasset
asset isisacquired
acquiredduring
duringthe
theyear,
year,
depreciation
depreciationin
in the
theyear
yearof
ofacquisition
acquisition must
must be
be
prorated.
prorated.

½
Half-Year
Half-Year Convention
Convention
In
In the
the year
year of
of
acquisition,
acquisition, record
record six
six
months
months of of depreciation.
depreciation.

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

Slide
9-19

Half-Year
Half-Year Convention
Convention

Using the half-year convention, calculate the

straight-line depreciation on December 31,
2001, for equipment purchased in 2003. The
equipment cost $75,000, has a useful life of 10
years and an estimated salvage value of
$5,000.

Depreciation
Depreciation == ($75,000
($75,000 -- $5,000)
$5,000) ÷÷ 1010
== $7,000
$7,000 for
for aa full
full year
year
11
Depreciation
Depreciation == $7,000
$7,000 ×× //22 == $3,500
$3,500
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-20

Declining-Balance
Declining-Balance Method
Method

Depreciation
Depreciation in
inthe
theearly
earlyyears
years of
of an
an asset’s
asset’sestimated
estimated
useful
usefullife
lifeis
ishigher
higherthan
thanininlater
lateryears.
years.

The
Thedouble-declining
double-decliningbalance
balancedepreciation
depreciation
rate
rateis
is200%
200%ofofthe
thestraight-line
straight-line
depreciation
depreciationrate
rateof
of1/Useful
1/UsefulLife.
Life.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-21

Declining-Balance
Declining-Balance Method
Method

On
OnJanuary
January1,1, 2003,
2003, Bass
BassCo.Co.buys
buysaanewnew boat.
boat. Bass
Bass
Co.
Co.pays
pays$24,000
$24,000for
forthe
theboat.
boat.The
Theboat
boat has
hasanan
estimated
estimated residual
residualvalue
valueof of $3,000
$3,000and
andanan estimated
estimated
useful
useful life
life of
of55years.
years.
Compute
Compute depreciation
depreciation for
for 2003
2003 using
using the
the
double-declining
double-declining balance
balance method.
method.

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

Slide
9-22

Declining-Balance
Declining-Balance Method
Method

Compute
Total
Compute depreciation
Total depreciation over
over the
depreciation
depreciation for
for the
theestimated
estimated the rest
useful of
restlife
useful the
ofof
life an
the
of an
asset
asset is
isthe
the same
same using
using either
either the
the straight-line
straight-line method
method or
or
boat’s
boat’s
the
estimated
estimated usefuluseful life.
life.
the declining-balance
declining-balance method.
method.

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

Slide
9-23

MACRS:
MACRS: The
The “Tax
“Tax Method”
Method”

MACRS == M
MACRS odified A
Modified ccelerated C
Accelerated ost R
Cost ecovery S
Recovery System
ystem

The
Theonly
onlyaccelerated
accelerated method
method
Based
Based on
on allowed
allowedbybythe
theIRS
IRSwhen
when
Declining-Balance
Declining-Balance computing
computingdepreciation
depreciationfor
fortax
tax
Methods
Methods return
returnpurposes.
purposes.

Asset
AssetCost
Cost ×× MACRS
MACRSraterate
Rates
Ratesare
areavailable
availablefrom
fromtables
tables
provided
providedbybythe
theIRS.
IRS.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-24

Financial
Financial Statement
Statement Disclosures
Disclosures


Estimates
Estimates of
of Useful
Useful Life
Life and
and
Residual
Residual Value
Value
 May differ from company to
May differ from company to
company.
company.
 The reasonableness of
The reasonableness of
management’s
management’sestimates
estimatesis
is
evaluated
evaluatedby
byexternal
externalauditors.
auditors.

Principle
Principle of
of Consistency
Consistency
 Companies should avoid switching
Companies should avoid switching
depreciation
depreciationmethods
methodsfrom
fromperiod
periodto
to
period.
period.

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

Slide
9-25

Revising
Revising Depreciation
Depreciation Rates
Rates

Predicted
Predicted Predicted
Predicted
salvage
salvagevalue
value useful
usefullife
life

So
So depreciation
depreciation
is
is an
an estimate.
estimate.

Over
Over the
the life
life of
of an
an asset,
asset, new
new information
information
may
may come
come to to light
light that
that indicates
indicates the
the
original
original estimates
estimates need
need to to be
be revised.
revised.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-26

Revising
Revising Depreciation
Depreciation Rates
Rates

On
On January
January 1,1, 2003,
2003, equipment
equipment was was
purchased
purchased that that cost
cost $30,000,
$30,000, has
has aa useful
useful
life
life of
of 10
10 years
years and
and no
no salvage
salvage value.
value.
During
During 2006,
2006, the
the useful
useful life
life was
was revised
revised to
to 88
years
years total
total (5
(5 years
years remaining).
remaining).

Calculate
Calculate depreciation
depreciation expense
expense for
for the
the year
year
ended
ended December
December 31, 31, 2006,
2006, using
using the
the
straight-line
straight-line method.
method.

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Slide
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Revising
Revising Depreciation
Depreciation Rates
Rates
When
Whenour
our estimates
estimateschange,
change,
depreciation
depreciationis:
is:
Book value at Salvage value at
date of change – date of change

Remaining useful life at date of change

Asset
Assetcost
cost $$ 30,000
30,000
Accumulated
Accumulated depreciation,
depreciation, 12/31/2005
12/31/2005
($3,000
($3,000per
per year
year×× 33years)
years) 9,000
9,000
Remaining
Remaining bookbookvalue
value $$ 21,000
21,000
Divide
Divide by
byremaining
remaining life
life ÷÷55
Revised
Revised annual
annual depreciation
depreciation $$ 4,200
4,200
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-28

Impairment
Impairment of
of Assets
Assets

An impaired
An impaired asset is
asset is
an asset that
an asset thathas
hasaamarket
marketvalue
valueless
less
than
thanthe
thevalue
valuelisted
listedon
onthe
the
company's
company'sbalance
balancesheet
sheet(Book
(Book
Value). If
Value). Ifthe
thecost
costofofan
anasset
assetcannot
cannot
be
berecovered
recoveredthrough
throughfuture
futureuse
useoror
sale,
sale,the
theasset
assetshould
shouldbe bewritten
written
down
downto toits
itsnet
netrealizable
realizablevalue
value
(Market
(MarketValue).
Value).

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Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
Update
Update depreciation
depreciation
to
to the
the date
date of
of disposal.
disposal.

Journalize
Journalize disposal
disposal by:
by:

Recording
Recordingcash
cash Recording
Recordingaa
received
received(debit)
(debit) gain
gain(credit)
(credit)
or
orpaid
paid(credit).
(credit). or
or loss
loss(debit).
(debit).

Removing
Removingaccumulated
accumulated Removing
Removingthethe
depreciation
depreciation(debit).
(debit). asset
assetcost
cost(credit).
(credit).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-30

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

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

Recording
Recordingcash
cash Recording
Recordingaa
received
received(debit)
(debit) gain
gain(credit)
(credit)
or
orpaid
paid(credit).
(credit). or
or loss
loss(debit).
(debit).

Removing
Removingaccumulated
accumulated Removing
Removingthethe
depreciation
depreciation(debit).
(debit). asset
assetcost
cost(credit).
(credit).
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Slide
9-31
Trading
Trading in
in Used
Used Assets
Assets
for
for New
New Ones
Ones
The
Thenew
newFASB
FASBstandard
standardnonolonger
longerdistinguishes
distinguishesbetween
between
dissimilar
dissimilarand
andsimilar
similarasset
assetexchanges.
exchanges.Instead
Insteaditit
differentiates
differentiatesbetween
betweenexchanges
exchangesthatthathave
havecommercial
commercial
substance
substanceandandthose
thosethat
thatdo
donot
nothave
havecommercial
commercial
substance.
substance.An Anexchange
exchangehas commercial
has commercialsubstance if,
substance if,
as
asaaresult
resultof
ofthe
theexchange,
exchange,future
futurecash
cashflows
flowsare
are
expected
expectedto tochange
changesignificantly. 
significantly. 

For
Forinstance,
instance,ififaacompany
companyexchanges
exchangesaabuilding
buildingfor
forland
land
(a
(adissimilar
dissimilarexchange),
exchange),the
thetiming
timingand
andthe thefuture
futurecash
cash
flows
flowsare
arelikely
likelytotobe
bedifferent
differentthan
thanififthe
theexchange
exchange
had
hadnot
notoccurred.
occurred.

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Slide
9-32
Trading
Trading in
in Used
Used Assets
Assets
for
for New
New Ones
Ones
If a company exchanges one truck for another truck (a similar
exchange) that will perform the same function as the old truck
and for the same time period so that the future cash flows are
not significantly different, then the exchange does not result in
commercial substance.

However, if the future cash flows are likely to be significantly

different, then the exchange of similar assets has commercial
substance.

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Slide
9-33
Trading
Trading in
in Used
Used Assets
Assets
for
for New
New Ones
Ones

Boot: Exchange transactions are oftentimes accompanied

by giving or receiving boot. 

Boot is the term used to describe additional monetary

consideration that may accompany an exchange transaction.

Its presence only slightly modifies the accounting procedure

by adding one more account (typically Cash) to the journal
entry.

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Slide
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Intangible
Intangible Assets
Assets
Intangible assets have no physical substance but they have value
because of the exclusive privileges and rights they provide to a
business.
Intangible assets generally arise from two sources:
(1)exclusive privileges granted by governmental authority or by
legal contract, such as patents, copyrights, franchises, trademarks
and trade names, and leases; and
(2)superior entrepreneurial capacity or management know-how and
customer loyalty, which is called goodwill.
All intangible assets are nonphysical, but not all nonphysical assets
are intangibles. Such as accounts receivable and prepaid expenses.
Intangible assets are generally both nonphysical and noncurrent;
they appear in a separate long-term section of the balance sheet
entitled “Intangible assets”.

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Intangible
Intangible Assets
Assets

Noncurrent
Noncurrent assets
assets Often
Oftenprovide
provide
without
withoutphysical
physical exclusive
exclusiverights
rights
substance.
substance. or
or privileges.
privileges.

Characteristics
Characteristics

Useful
Usefullife
lifeis
is Usually
Usuallyacquired
acquired
often
oftendifficult
difficult for
foroperational
operational
to
todetermine.
determine. use.
use.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
9-36

Intangible
Intangible Assets
Assets
Record at current cash equivalent cost, including
purchase price, legal fees, and filing fees.

 Examples:
 Patents .
 Copyrights
 Leaseholds
 Goodwill
 Trademarks and
 Trade Names

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Intangible
Intangible Assets:
Assets: Amortization
Amortization


Amortization is
Amortization isthe
thesystematic
systematicwrite-off
write-offof
ofthe
thecost
costof
ofan
an
intangible
intangibleasset
assetto
toexpense.
expense.

Straight-line
Straight-lineamortization
amortizationisiscalculated
calculatedthe
thesame
sameway
wayasas
straight-line
straight-linedepreciation
depreciationfor
forplant
plantassets.
assets.

Generally,
Generally,we werecord
recordamortization
amortizationbybydebiting
debitingAmortization
Amortization
Expense
Expenseand andcrediting
creditingthe
theintangible
intangibleasset
assetaccount.
account.

AnAnaccumulated
accumulatedamortization
amortizationaccount
accountcould
couldbebeused
usedto
torecord
record
amortization.
amortization.

Amortize
Amortizeintangible
intangibleassets
assetsover
overshorter
shorterof
ofeconomic
economiclife
lifeor
or
legal
legallife,
life,subject
subjecttotoaamaximum
maximumof of40
40years.
years.

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Intangible
Intangible Assets
Assets –– Goodwill
Goodwill

Goodwill
Goodwill
Occurs
Occurs when
when one
one Only
Only purchased
purchased
company
company buys
buys goodwill
goodwill is
is an
an
another
another company.
company. intangible
intangible asset.
asset.

The
The amount
amount by
by which
which the
the
purchase
purchase price
price exceeds
exceeds the
the fair
fair
market
market value
value of
of net
net assets
assets acquired.
acquired.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
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Intangible
Intangible Assets
Assets –– Goodwill
Goodwill

Eddy
Eddy Company
Company paid paid $1,000,000
$1,000,000 to
to
purchase
purchase all
all of
of James
James Company’s
Company’s assets
assets
and
and assumed
assumed liabilities
liabilities of
of $200,000.
$200,000. The
The
acquired
acquired assets
assets were
were appraised
appraised at
at aa fair
fair
value
value ofof $900,000
$900,000..

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Intangible
Intangible Assets
Intangible Assets ––– Goodwill
Assets Goodwill
Goodwill

What
What amount
amount of
of goodwill
goodwill should
should be
be
recorded
recorded on
on Eddy
Eddy Company
Company books?
books?

a.
a. $100,000.
$100,000.
b.
b. $200,000.
$200,000.
c.
c. $300,000.
$300,000.
d.
d. $400,000.
$400,000.

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

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Intangible
Intangible Assets
Assets –– Patents
Patents

Exclusive
Exclusive right
right granted
granted
by
by federal
federal government
government to to sell
sell or
or
manufacture
manufacture an an invention.
invention.

Cost
Cost is
is purchase
purchase Amortize
Amortize costcost
price
price plus
plus legal
legal over
over the
the shorter
shorter of
of
cost
cost to
to defend.
defend. useful
useful life
life or
or 17
17 years.
years.

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Slide

Intangible
Intangible Assets
Assets ––
9-42

Trademarks
Trademarks and
and Trade
Trade Names
Names
A
A symbol,
symbol, design,
design, oror logo
logo
associated
associated with
with aa business.
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
Intangible Assets
Assets –– Franchises
Franchises

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

Purchase
Purchase price
price is
is intangible
intangible asset
asset
which
which is
is amortized
amortized over
over the
the shorter
shorter of
of
the
the protected
protected right
right oror 40
40 years.
years.
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Intangible
Intangible Assets
Assets –– Copyrights
Copyrights

Exclusive
Exclusive right
right granted
granted by
by the
the
federal
federal government
government to to protect
protect
artistic
artistic or
or intellectual
intellectual properties.
properties.

Legal
Legal life
life is
is Amortize
Amortize cost
cost
life
life of
of creator
creator over
over aa period
period not
not
plus
plus 5050 years.
years. to
to exceed
exceed 40
40 years.
years.

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

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Natural
Natural Resources
Resources

Resources supplied by nature, such as ore deposits, mineral

deposits, oil reserves, gas deposits, and timber stands, are natural
resources or wasting assets. Natural resources represent
inventories of raw materials that can be consumed (exhausted)
through extraction or removal from their natural setting (e.g.
removing oil from the ground).

Natural resources are recorded at their cost of acquisition plus

exploration and development costs. On the balance sheet, we
report them at total cost less accumulated depletion.
(Accumulated depletion is similar to the accumulated
depreciation used for plant assets.)

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Depletion
Depletion of
of Natural
Natural Resources
Resources
Depletion is the exhaustion that results from the physical removal of
a part of a natural resource. To record depletion, debit a Depletion
account and credit an Accumulated Depletion account, which is a
contra account to the natural resource asset account.

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
Depletion of
of Natural
Natural Resources
Resources

Total depletion cost for a period is:

Unit Depletion Number of Units
Rate × Extracted in Period

Cost
Costof
of
Total goods
goodssold
sold
Total Inventory
depletion Inventory
depletion for
cost forsale
sale
cost Unsold
Unsold
Inventory
Inventory
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Depletion
Depletion of
of Natural
Natural Resources
Resources

 To illustrate the depletion of a natural resource, assume that Rainbow

Minerals pays $45 million to acquire the Red Valley Mine, which is
believed to contain 10 million 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, or $40 million. This depletion will occur at the rate
of $4 per ton ($40 million 10 million tons) as the coal is removed from the
mine.

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

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End
End of
of Chapter
Chapter 99

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