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CHAPTER 10

PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS


Accounting Principles, Eighth Edition
Chapter 10-1

Section 1 Plant 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.
Chapter 10-2

Determining the Cost of Plant Assets


Land
Includes all costs to acquire land and ready it for use. Costs typically include: (1) the purchase price; (2) closing costs, such as title and attorneys 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.
Chapter 10-3

LO 1 Describe how the cost principle applies to plant assets.

Determining the Cost of Plant Assets


Buildings
Includes all costs related directly to purchase or construction. Purchase costs:
Purchase price, closing costs (attorneys fees, title insurance, etc.) and real estate brokers commission. emodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing.

Construction costs:
Contract price plus payments for architects fees, building permits, and e cavation costs.
Chapter 10-4

LO 1 Describe how the cost principle applies to plant assets.

Depreciation
Depreciation is the process of allocating the cost of tangible assets to e pense in a systematic and rational manner to those periods e pected to benefit from the use of the asset. Process of cost allocation, not asset valuation. Applies to land improvements, buildings, and equipment, not land.

Chapter 10-5

LO 2 Explain the concept of depreciation.

Depreciation
Factors in Computing Depreciation
Illustration 10-6

Cost

Useful Life

Salvage Value

Chapter 10-6

LO 2 Explain the concept of depreciation.

Depreciation
Depreciation Methods
Objective is to select the method that best measures an assets contribution to revenue over its useful life. E amples include: (1) Straight-line method. (2) Units-of-Activity method. (3) Declining-balance method.
Illustration 10-8 Use of depreciation methods in 600 large U.S. companies
Chapter 10-7

LO 3 Compute periodic depreciation using different methods.

Depreciation
E ercise (Depreciation ComputationsThree Methods) Parish Corporation purchased a new machine for its assembly process on January 2, 2007. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Year-end is December 31. Instructions: Compute the depreciation e pense under the following methods. (a) Straight-Line. (b) Units-of-Activity. (c) Double-Declining Balance.
Chapter 10-8

LO 3 Compute periodic depreciation using different methods.

Depreciation
Straight-Line
E pense is same amount for each year. Depreciable cost is cost of the asset less its salvage value. Straight-line method predominates in practice.

Chapter 10-9

LO 3 Compute periodic depreciation using different methods.

Depreciation
Exercise (Straight-Line Method)
Year 2007 2008 2009 2010 2011 Depreciable Base $ 105,000 105,000 105,000 105,000 105,000 Years 5 = 5 = 5 5 5 = = = Annual Expense $ 21,000 21,000 21,000 21,000 21,000 $ 105,000 Accum. Deprec. $ 21,000 42,000 63,000 84,000 105,000

/ / / / /

Journal entry 2007 Depreciation e pense Accumulated depreciation


Chapter 10-10

21,000 21,000

LO 3 Compute periodic depreciation using different methods.

Depreciation
Units-of-Activity
E pense varies based on units of activity. Depreciable cost is cost less salvage value. Companies estimate total units of activity to calculate depreciation cost per unit.

Chapter 10-11

LO 3 Compute periodic depreciation using different methods.

Depreciation
Exercise (Units-of-Activity Method)
($105,000 / 1,000 hours = $105 per hour)
Year 2007 2008 2009 2010 2011 Hours sed 200 150 250 300 100 1,000 Rate per Hour x $105 = x 105 = x x x 105 105 105 = = = Annual Expense $ 21,000 15,750 26,250 31,500 10,500 $ 105,000 Accum. Deprec. $ 21,000 36,750 63,000 94,500 105,000

Chapter 10-12

LO 3 Compute periodic depreciation using different methods.

Depreciation
Declining-Balance Method
Decreasing annual depreciation e pense over the assets useful life. Rate applied to book value (cost less accumulated depreciation).

Chapter 10-13

LO 3 Compute periodic depreciation using different methods.

Depreciation
Exercise (Declining Balance Method)
ear 008 2009 2010 2011 Net Bookvalue , 70,740 42,444 25,466 15,280 x x x x x Rate er Year 40% 40% 40% 40% 40% = = = = = Annual Expense $ 47, 0 28,296 16,978 10,186 2,380 $105,000 Accum. Deprec. $ 47, 0 75,456 92,434 102,620 105,000

Chapter 10-14

LO 3 Compute periodic depreciation using different methods.

Illustration 10-16

Depreciation
Comparison of Depreciation Methods
Annual Expense
Year 3 4 5 6 7 SL , , , , , 5,
Chapter 10-15

DB 47, 6 , 96 6,97 , ,3 5, 6

Acti ity , 5,75 6, 5 3 ,5 ,5 5,

LO 3 Compute periodic depreciation using different methods.

Plant Asset Disposals


Companies dispose of plant assets in three ways Retirement, Sale, or E change (appendi ).
Illustration 10-18

Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
Chapter 10-16

LO

Explain how to account for the disposal of a plant asset.

Plant Asset Disposals - Retirement


BE10BE10Prepare journal entries to record the following. (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), e cept that accumulated depreciation for Gomez Company is $39,000, instead of $41,000.

(a)

Accumulated depreciation Equipment

41,000 41,000

Chapter 10-17

LO

Explain how to account for the disposal of a plant asset.

Plant Asset Disposals - Retirement


BE10BE10Prepare journal entries to record the following. (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), e cept that accumulated depreciation for Gomez Company is $39,000, instead of $41,000.

(b)

Accumulated depreciation Equipment Loss on disposal

39,000 41,000 2,000

Chapter 10-18

LO

Explain how to account for the disposal of a plant asset.

Plant Asset 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.

Chapter 10-19

LO

Explain how to account for the disposal of a plant asset.

Plant Asset Disposals - Sale

BE10-10 Chan Company sells office equipment on BE10September 30, 2008, for $20,000 cash. The office equipment originally cost $72,000 and as of January 1, 2008, had accumulated depreciation of $42,000. Prepare the journal entries to (a) record the sale of the equipment.

Chapter 10-20

LO

Explain how to account for the disposal of a plant asset.

Plant Asset Disposals - Sale


BE10-10 Prepare the journal entries to (a) record the BE10sale of the equipment.

(a)

Cash Accumulated depreciation Office equipment Loss on disposal

20,000 42,000 72,000 10,000

Chapter 10-21

LO

Explain how to account for the disposal of a plant asset.

Section 2 Natural Resources


Cost - price needed to acquire the resource and prepare it for its intended use. Depletion - allocation of the cost to e pense in a rational and systematic manner over the resources useful life. Depletion is to natural resources as depreciation is to plant assets. Companies generally use units-of-activity method.

Chapter 10-22

LO

Compute periodic depletion of natural resources.

Section 3 Intangible Assets


Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance.
Normally classified as long-term asset. Common types of intangibles:
Patents Copyrights Franchises or licenses Trademarks or trade names Goodwill

Chapter 10-23