Slide

9-1
 Chapter 9
Plant Assets,
Natural Resources, and
Intangible Assets
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
9-2
 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
9-3
 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
plant assets presentation development
Expenditures costs
during useful life
Plant asset
disposals
Slide
9-4
 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
9-5
 Section 11 –– Plant
Section Plant Assets
Assets
Illustration 9-1
Percentages of plant assets
in relation to total assets

Slide
9-6
 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
9-7
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
9-8
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
9-9
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
9-10
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
9-11
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
9-12
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
9-13
SO 1 Describe how the cost principle applies to plant assets.
Slide Answer on notes page
9-14
 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
9-15
SO 2 Explain the concept of depreciation.
 Depreciation
Depreciation

Factors in Computing Depreciation

Illustration 9-6

Cost Useful Life Residual Value

Slide
9-16
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
9-17
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

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
9-19
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
9-20
SO 3 Compute periodic depreciation using different methods.
 Depreciation
Depreciation

Comparison of Methods
Illustration 9-14

Illustration 9-15

Slide
9-21
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
9-22
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
9-23
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
9-24
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
9-25
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
9-26
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
9-27
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
9-28
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
9-29
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,

9-30 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
9-31
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
9-32
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
Gain on disposal 60,000
5,000
Slide
9-33
SO 6 Explain how to account for the disposal of a plant asset.