Chapter 10

PLANT ASSETS, NATURAL

RESOURCES, AND INTANGIBLES

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1

PLANT ASSETS
Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

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C1

PLANT ASSETS
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C1

COST DETERMINATION

Purchase All expenditures

price needed to
prepare the
Acquisition asset for its
Cost intended use

Acquisition cost excludes

financing charges and
cash discounts
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C1

LAND
Title insurance premiums
Purchase Delinquent
price taxes

Real estate Surveying

commissions fees

Title search and transfer fees

Land is not depreciable.

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C1

LAND IMPROVEMENTS

Parking lots, driveways, fences, walks, shrubs,

and lighting systems.

Depreciate
over useful life of
improvements.
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C1

BUILDINGS
Cost of purchase or Title fees
construction

Brokerage Attorney fees

fees

Taxes
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C1

MACHINERY AND EQUIPMENT

Purchase
price Taxes

Transportation
charges

Installing,
assembling, and Insurance while
testing in transit
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P1

LUMP-SUM ASSET PURCHASE

The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.

CarMax paid $90,000 cash to acquire a group of items

consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:
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P1

DEPRECIATION

Depreciation is the process of allocating the

cost of a plant asset to expense in the
accounting periods benefiting from its use.

Balance Sheet Income Statement

Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)
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P1 FACTORS IN COMPUTING
DEPRECIATION

The calculation of depreciation requires

three amounts for each asset:
1. Cost
2. Salvage Value
3. Useful Life
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P1

DEPRECIATION METHODS
1. Straight-line
2. Units-of-production
3. Declining-balance
Asset we will depreciate in future screens
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P1

STRAIGHT-LINE METHOD
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P1

STRAIGHT-LINE METHOD

For year ended December 31 As of December 31

Balance Sheet Presentation

Machinery $ 10,000
Less: accumulated depreciation 3,600 $ 6,400
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P1 STRAIGHT-LINE DEPRECIATION
SCHEDULE
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P1

UNITS-OF-PRODUCTION METHOD

Step 1:
Depreciation = Cost - Salvage Value
Per Unit Total Units of Production

Step 2:
Number of Units
Depreciation Depreciation × Produced
=
Expense Per Unit in the Period
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P1

UNITS-OF-PRODUCTION METHOD
Assume that 7,000 units were inspected
during 2011. Depreciation would be
calculated as follows:

Step 1:
Depreciation = Cost - Salvage Value = $9,000 = $0.25/unit
Per Unit Total Units of Production 36,000

Step 2:
Number of Units
Depreciation Depreciation = $0.25 × 7,000 = $1,750
$
= × Produced
Expense Per Unit
in the Period
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P1
UNITS-OF-PRODUCTION
DEPRECIATION SCHEDULE

Units
Units produced
produced and
and sold
sold during
during the
the period.
period.
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P1 DOUBLE-DECLINING-BALANCE
METHOD
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P1 DOUBLE-DECLINING-BALANCE
METHOD
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P1 COMPARING DEPRECIATION
METHODS
Double-
Straight- Units of Declining-
Period Line Production Balance
2011 $ 1,800 $ 1,750 $ 4,000
2012 1,800 2,000 2,400
2013 1,800 2,250 1,440
2014 1,800 1,750 864
2015 1,800 1,250 296
Totals $ 9,000 $ 9,000 $ 9,000
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P1 DEPRECIATION FOR TAX

REPORTING

Most corporations use the Modified

Accelerated Cost Recovery System
(MACRS) for tax purposes.
MACRS depreciation provides for rapid
write-off of an asset’s cost in order to
stimulate new investment.
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C2

PARTIAL-YEAR DEPRECIATION
When
When aa plant
plant asset
asset is
is acquired
acquired during
during the
the year,
year,
depreciation
depreciation is
is calculated
calculated for
for the
the fraction
fraction of
of the
the
year
year the
the asset
asset is
is owned.
owned.
Cost $ 10,000
Assume our machinery was purchased
Salvage value 1,000
on October 8, 2010. Let’s calculate
Depreciable cost $ 9,000
Useful life
depreciation expense for 2010,
Accounting periods 5 years assuming we use straight-line
Units inspected 36,000 units depreciation.
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C2 CHANGE IN ESTIMATES FOR

DEPRECIATION

Predicted Predicted
salvage value useful life

Depreciation
is an estimate

Over the life of an asset, new information may

come to light that indicates the original estimates
were inaccurate.
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C2 CHANGE IN ESTIMATES FOR

DEPRECIATION
Let’s
Let’s look
look atat our
our machinery
machinery from
from the
the previous
previous examples
examples and and
assume
assume that that at
at the
the beginning
beginning ofof the
the asset’s
asset’s third
third year,
year, its
its
book
book value
value is is $6,400
$6,400 ($10,000
($10,000 cost
cost less
less $3,600
$3,600 accumulated
accumulated
depreciation
depreciation usingusing straight-line
straight-line depreciation).
depreciation). AtAt that
that time,
time, itit
is
is determined
determined that that the
the machinery
machinery willwill have
have aa remaining
remaining
useful
useful life
life of
of 44 years,
years, and
and the
the estimated
estimated salvage
salvage value
value will
will be
be
revised
revised downward
downward from from $1,000
$1,000 toto $400.
$400.
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C2

REPORTING DEPRECIATION

Dale Jarrett Racing Adventure

Office furniture and equipment $ 54,593
Shop and track equipment 202,973
Race vehicles and other 975,084
Property and equipment, gross 1,232,650

Less: accumulated depreciation 628,355

Property and equipment, net $ 604,295
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C3

ADDITIONAL EXPENDITURES
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes
Capital Balance sheet
Deferred Higher Higher
Expenditure account debited
Revenue Income statement Currently
Lower Lower
Expenditure account debited recognized

IfIf the
the amounts
amounts involved
involved are
are not
not material,
material,
most
most companies
companies expense
expense the
the item.
item.
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C3
REVENUE AND CAPITAL
EXPENDITURES

Type of Capital or
Expenditure Revenue Identifying Characteristics
1. Maintains normal operating condition.
Ordinary 2. Does not increase productivity.
Revenue
Repairs 3. Does not extend life beyond original
estimate.
Betterments 1. Major overhauls or partial
and replacements.
Extraordinary Capital
Repairs 2. Extends life beyond original estimate.
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P2

DISPOSALS OF PLANT ASSETS

Update depreciation
to the date of disposal.

Journalize disposal by:

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
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P2

DISCARDING PLANT ASSETS

Update depreciation
to the date of disposal.

Journalize disposal by:

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
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P2

DISCARDING PLANT ASSETS

A machine costing $9,000, with accumulated depreciation of
$9,000 on December 31st of the previous year was
discarded on June 5th of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero salvage value.
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P2

DISCARDING PLANT ASSETS

Equipment costing $8,000, with accumulated depreciation of
$6,000 on December 31st of the previous year was
discarded on July 1st of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero salvage value.
Step 1: Bring the depreciation up-to-date.

Step 2: Record discarding of asset.

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P2

SELLING PLANT ASSETS

On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31 st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $3,000 cash.
Step 1: Update depreciation to March 31st.

Step 2: Record sale of asset at book value ($16,000 - $13,000 = $3,000).

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P2

SELLING PLANT ASSETS

On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31 st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $2,500 cash.
Step 1: Update depreciation to March 31st.

Step 2: Record sale of asset at a loss (Book value $3,000 - $2,500 cash received).
 10 - 35

P3

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

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P3
COST DETERMINATION AND
DEPLETION
Let’s consider a mineral deposit with an estimated 250,000
tons of available ore. It is purchased for $500,000, and we
expect zero salvage value.
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P3
DEPLETION OF NATURAL
RESOURCES
Depletion expense in the first year would be:

Balance Sheet presentation of natural resources:

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P3
PLANT ASSETS USED IN
EXTRACTING

 Specialized
Specialized plant
plant assets
assets may
may be
be required
required to
to
extract
extract the
the natural
natural resource.
resource.
 These
These assets
assets are
are recorded
recorded in
in aa separate
separate
account
account and
and depreciated.
depreciated.
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P4

INTANGIBLE ASSETS
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.

Intangible
Assets

Useful life is Usually acquired

often difficult for operational
to determine. use.
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P4 COST DETERMINATION AND

AMORTIZATION
Record at current
cash equivalent o Patents
cost, including o Copyrights
purchase price, o Leaseholds
legal fees, and o Leasehold Improvements
filing fees. o Franchises and Licenses
o Goodwill
o Trademarks and Trade Names
o Other Intangibles
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GLOBAL VIEW
There is one area where notable differences exist, and that is in
accounting for changes in the value of plant assets (between the
time they are acquired and disposed of). Namely, how does IFRS
and U.S. GAAP treat decreases and increases in the value of plant
assets subsequent to acquisition?

Decreases in the Value of Plant Assets

Both U.S. GAAP and IFRS require that an
impairment in value be recognized.

Increases in the Value of Plant Assets

U.S. GAAP prohibits recording increase in
value of plant assets. IFRS permits upward
asset revaluation.
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A1

TOTAL ASSET TURNOVER

Total Asset = Net Sales
Turnover Average Total
Assets

Provides information about a company’s

efficiency in using its assets.
Company $ in millions 2008 2007 2006 2005
Molson Coors Net sales $ 4,774 $ 6,191 $ 5,845 $ 5,507

Average total assets 11,934 12,528 11,701 8,228

Total asset turnover 0.40 0.49 0.50 0.67
Boston Beer Net sales $ 398 $ 342 $ 285 $ 238
Average total assets 208 176 137 113
Total asset turnover 1.91 1.94 2.09 2.10
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P5

10A – EXCHANGING PLANT ASSETS

Many plant assets such as machinery, automobiles, and
office equipment are disposed of by exchanging them for
newer assets. In a typical exchange of plant assets, a
trade-in allowance is received on the old asset and the
balance is paid in cash. Accounting for the exchange of
assets depends on whether the transaction has
commercial substance.

Commercial substance implies the company’s

future cash flows will be altered.
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P5
EXCHANGE WITH COMMERCIAL
SUBSTANCE: A LOSS
A
A company
company acquires
acquires $42,000
$42,000 inin new
new equipment.
equipment. In
In exchange,
exchange, the
the company
company
pays
pays $33,000
$33,000 cash
cash and
and trades
trades in
in old
old equipment.
equipment. The
The old
old equipment
equipment
originally
originally cost
cost $36,000
$36,000 andand has
has accumulated
accumulated depreciation
depreciation of
of $20,000
$20,000 (book
(book
value
value is
is $16,000).
$16,000). This
This exchange
exchange hashas commercial
commercial substance.
substance. The
The old
old
equipment
equipment hashas aa trade-in
trade-in allowance
allowance ofof $9,000.
$9,000.
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P5
EXCHANGES WITHOUT COMMERCIAL
SUBSTANCE
Let’s
Let’s assume
assume the
the same
same facts
facts as
as on
on the
the previous
previous screen
screen except
except that
that the
the
market
market value
value of
of the
the new
new equipment
equipment received
received is
is $52,000
$52,000 and
and the
the transaction
transaction
lacks
lacks commercial
commercial substance.
substance.
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END OF CHAPTER 10