Pant and Intangible Assets

9-1
Chapter
9
PLANT AND
INTANGIBLE ASSETS
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

9-2
Plant Assets
Long-lived assets acquired for use in

business 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.
9-3
Major Categories of Plant Assets
T a ngible Plant Intangible Na tura l

Asse ts Assets Resource s
L on g -te rm N o n c u rre n t a s s ets S ites a c q u ired fo r

as s e ts h a vin g w ith n o p h ys ic a l e xtra c tin g valu ab le
p h ys ic a l s u b s tan c e . s u b s ta n c e . re s ou rc e s .
L a n d , b u ild in g s , P a te n ts , c o p yrig h ts , O il re s e rves ,

eq u ip m e n t, tra d e m a rk s , tim b e r, o th e r
fu rn itu re, fixtu res . fra n c h is es , g o o d w ill. m in e ra ls .

9-4
Accountable Events
Acquisition.
Allocation of the acquisition cost
to expense over the asset’s
useful life (depreciation).
Sale or disposal.

9-5
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.

9-6
Determining Cost
On May 4, Heat Co., a stove maker, buys a new
machine from Supply Co. The new machine
has a price of $52,000. Sales tax is 8%.
Heat Co. pays $500 shipping cost to get the
machine to its plant. 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.

9-7
Determining Cost

9-8
Special Considerations
Cost includes real estate

commissions, escrow
Land fees, legal fees, clearing
and grading the property.
Improvements to land
Land such as driveways,
Improvements fences, and landscaping
are recorded separately.

9-9
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.
9-10
Allocation of a Lump-Sum Purchase
The total cost The allocation

must be is based on
allocated to the relative
I think I’ll buy the separate Fair Market
whole thing; accounts for Value of each
building, land, and
contents.
each asset. asset
purchased.

9-11
Capital Expenditures and Revenue
Expenditures
Capital Revenue
Expenditure Expenditure
Any material expenditure Expenditure for

that will benefit several ordinary repairs
accounting periods. and maintenance.
To capitalize an expenditure To expense an expenditure

means to charge it to an means to charge it to an
asset account. expense account.
9-12
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
9-13
Depreciation
Book Value
• Cost – Accumulated Depreciation
Depreciation
• Contra-asset
• Represents the portion of an asset’s
cost that has already
been allocated to expense.
Causes of Depreciation
• Physical deterioration
• Obsolescence

9-14
Straight-Line Depreciation
Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life

9-15
On January 1, 2007, Bass Co. buys new equipment.

Bass pays a total of $24,000 for the equipment. The
equipment has an estimated residual value of $3,000
and an estimated useful life of 5 years.
Compute depreciation for 2007 using the straight-line
method.

9-16
Bass Co. will record $4,200 depreciation each year for five
years. Total depreciation over the estimated useful life of
the equipment is:
Salvage Value
9-17
Depreciation for Fractional Periods
When an asset is acquired during the year, depreciation

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

9-18
Half-Year Convention
Using the half-year convention, calculate the

straight-line depreciation on December 31, 2007,
for equipment purchased in 2007. The
equipment cost $75,000, has a useful life of 10
years and an estimated residual value of $5,000.
Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for a full year
Depreciation = $7,000 × 1/2 = $3,500

9-19
Declining-Balance Method
Depreciation in the early years of an asset’s estimated

useful life is higher than in later years.
The double-declining balance depreciation

rate is 200% of the straight-line
depreciation rate of (1÷Useful Life).
9-20
On January 1, 2007, Bass Co. buys a new delivery truck.
Bass Co. pays $24,000 for the truck. The truck has an
estimated residual value of $3,000 and an estimated useful
life of 5 years.
Compute depreciation for 2007 using the double-
declining balance method.

9-21
Total depreciation over the estimated useful life of an
Compute depreciation for the rest of the
asset is the same using either the straight-line method or
truck’s estimated useful
the declining-balance life.
method.

9-22
Other Depreciation Methods

Units-of-Output/Production Method
Cost – Residual Value Depreciation cost
=
Estimated Units of Output per unit of output
Step #1: The depreciation per unit formula is represented as
below,
Depreciation per Unit = ( Cost- Salvage Value) / Total
Estimated Production Unit
Step #2: The depreciation Expense formula is represented as
below,
Depreciation Expense = Depreciation Rate per Unit × unit
Produced in a Particular Year.
Units-of-Output/Production Method
9-23
• Depreciation Expense = 4000 Hours × 2.3 per Hour

• Depreciation Expense (Total Depreciation) = $ 9200

9-24
Other Depreciation Methods

Sum-of-the-Years’ Digits Method
In general, depreciation calculated under this
accelerated method falls between the double-
declining amount and 150-percent-declining
method. It is not used by many companies
because the computations are complex.

9-25
Sum-of-the-Years’ Digits Method
Let us understand how to calculate

depreciation using the sum of the
year’s digits depreciation method.
Depreciation Base= cost – salvage value
Sum of Years Digits = 1+2+3+4+5= 15

9-26
 A Computer Company has purchased some computers
worth $ 5,000,000. It cost them $ 200,000 to transport the
Computer to their location. The Company considers that the
useful life of Computers is five years and they can expire
the computers at a value of 100,000.
Depreciable Amount
•Total Acquisition Cost = 5000000 + 200000 = 5200000, Salvage Value = 100000
Depreciable Amount = Acquisition Cost – Salvage Value = 5200000 – 100000 =
5,100,000
Sum of useful life = 5 + 4 + 3 + 2 + 1 = 15
Year 5 depreciation is not calculated As we depreciate the full amount

left for depreciation
9-27
Financial Statement Disclosures

Estimates of Useful Life and Residual
Value
• May differ from company to
company.
• The reasonableness of
management’s estimates is
evaluated by external auditors.
Principle of Consistency
• Companies should avoid
switching depreciation methods
from period to period.
9-28
Revising Depreciation Rates
Predicted Predicted
salvage value useful life
So depreciation
is an estimate.
Over the life of an asset, new information

may come to light that indicates the
original estimates need to be revised.
9-29
On January 1, 2004, equipment was

purchased that cost $30,000, has a useful
life of 10 years and no salvage value.
During 2007, the useful life was revised to
8 years total (5 years remaining).
Calculate depreciation expense for the year

ended December 31, 2007, using the
straight-line method.
9-30
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, 12/31/2006
($3,000 per year × 3 years) 9,000
Remaining book value $ 21,000
Divide by remaining life ÷5
Revised annual depreciation $ 4,200
9-31
Impairment of Plant Assets
If the cost of an asset

cannot be recovered
through future use or
sale, the asset should
be written down to its
net realizable value.

9-32
Disposal of Plant and Equipment

Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash Recording a

received (debit). gain (credit)
or loss (debit).
Removing accumulated Removing the

depreciation (debit). asset cost (credit).
9-33
If Cash > BV, record a gain (credit).

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

received (debit). gain (credit)
or loss (debit).
Removing accumulated Removing the

depreciation (debit). asset cost (credit).
9-34
On September 30, 2007, Evans Company sells a

machine that originally cost $100,000 for
$60,000 cash. The machine was placed in
service on January 1, 2002. It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.

9-35
The amount of depreciation

recorded on September 30, 2007,
to bring depreciation up to date is:
a. $8,000. Annual Depreciation:

($100,000 - $20,000) ÷ 10 Yrs. = $8,000
b. $6,000.
c. $4,000. Depreciation to Sept. 30:
d. $2,000. 9/12 × $8,000 = $6,000

9-36
After updating the depreciation, the

machine’s book value on
September 30, 2007, is:
a. $54,000. Cost $ 100,000

Accumulated Depreciation:
b. $46,000. (5 yrs. × $8,000) + $6,000 = 46,000
c. $40,000. Book Value $ 54,000
d. $60,000.

9-37
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000. Cost $ 100,000
Accum. Depr. 46,000
Book value $ 54,000
Cash received 60,000
Gain $ 6,000

9-38
Prepare the journal entry to record

the sale.

9-39
Trading in Used Assets for New
Ones
On May 30, 2007, Essex Company

exchanges 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.

9-40
Ones
The exchange resulted in a:
Cost $ 40,000
a. gain of $6,000. Accum. Depr. 30,000
Book Value $ 10,000
b. loss of $6,000. Fair Value 4,000
c. loss of $4,000. Loss $ 6,000
d. gain of $4,000.
Prepare a journal entry
to record the exchange.
9-41
Ones
Prepare the journal entry to record

the trade.

9-42
Intangible Assets
Noncurrent assets Often provide

without physical exclusive rights
substance. or privileges.
Characteristics
Useful life is Usually acquired

often difficult for operational
to determine. use.

9-43
Intangible Assets
Record at current
cash equivalent
 Patents
cost, including  Copyrights
purchase price,  Leaseholds
legal fees, and  Leasehold
filing fees.
Improvements
 Goodwill
 Trademarks and
Trade Names

9-44
Amortization
• Amortization is the systematic write-off to
expense of the cost of intangible assets
over their useful life or legal life,
whichever is shorter.
• Use the straight-line method to amortize
most intangible assets.
Date Description Debit Credit

Amortization Expense $$$$$
Intangible Asset $$$$$

9-45
Goodwill
Occurs when one Only purchased

company buys goodwill is an
another company. intangible asset.
The amount by which the

purchase price exceeds the fair
market value of net assets acquired.
Goodwill is NOT amortized. It is tested

annually to determine if there has been
an impairment loss.
9-46
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 20 years.

9-47
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.

9-48
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 useful life.
9-49
Copyrights
Exclusive right granted by the

federal government to protect
artistic or intellectual properties.
Legal life is Amortize cost

life of creator over period
plus 70 years. benefited.

9-50
Research and Development Costs
All expenditures classified as research and

development should be charged to
expense when incurred.
All of these R&D costs

will really reduce our
net income this year!

9-51
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

9-52
Depletion of Natural Resources
Depletion is calculated using the

units-of-production method.
Unit depletion rate is calculated as follows:
Cost – Residual Value

Total Units of Natural
Resource

9-53
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

9-54
Specialized plant assets may be required to

extract the natural resource.
These assets should be depreciated over their

normal useful lives or over the life of the
natural resource, whichever is shorter.
9-55
Plant Transactions and the

Statement of Cash Flows
Cash payments for plant assets represent a cash

outflow for investing activities on the statement of
cash flows. A disposal of a plant asset for cash
results in a cash inflow to the company.
Depreciation is a
non-cash charge to
income and has no
effect on cash flows.

9-56
Depreciation Methods in Use:

A Survey
A survey of 600 Publicly Owned Corporations
Straight-line 579
Declining-balance 22
Sum-of-the-years'-digits 5
Accelerated methods (not specified) 44
Units-of-output 32
Other 9

Pant and Intangible Assets

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9-1

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Long-lived assets acquired for use in

As years pass, and the

Major Categories of Plant Assets

T a ngible Plant Intangible Na tura l

L on g -te rm N o n c u rre n t a s s ets S ites a c q u ired fo r

L a n d , b u ild in g s , P a te n ts , c o p yrig h ts , O il re s e rves ,

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Acquisition of Plant Assets

. . . for getting . . . for getting

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Cost includes real estate

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Repairs made prior to the

Allocation of a Lump-Sum Purchase

The total cost The allocation

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Any material expenditure Expenditure for

To capitalize an expenditure To expense an expenditure

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Depreciation Cost - Residual Value

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

On January 1, 2007, Bass Co. buys new equipment.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Depreciation for Fractional Periods

When an asset is acquired during the year, depreciation

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Using the half-year convention, calculate the

Depreciation = ($75,000 - $5,000) ÷ 10

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Depreciation in the early years of an asset’s estimated

The double-declining balance depreciation

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Other Depreciation Methods

• Depreciation Expense = 4000 Hours × 2.3 per Hour

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Other Depreciation Methods

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Sum-of-the-Years’ Digits Method

Let us understand how to calculate

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Year 5 depreciation is not calculated As we depreciate the full amount

Financial Statement Disclosures

Revising Depreciation Rates

Over the life of an asset, new information

Revising Depreciation Rates

On January 1, 2004, equipment was

Calculate depreciation expense for the year

Revising Depreciation Rates

When our estimates change, depreciation

Book value at Salvage value at

Remaining useful life at date of change

Asset cost $ 30,000

Impairment of Plant Assets

If the cost of an asset

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008