1. Plant Assets, Intangible Assets, and Related Expenses
Chapter 7

2. Learning Objective 1
Determine the cost of a plant asset.

3. Types of Assets Long-lived assets used in operations Plant Assets
Intangible Assets

4. Plant Assets Terminology
Plant Assets - Depreciation
Natural Resources - Depletion
Intangibles - Amortization

5. Determining the Cost of Land
A business signs a $300,000 note payable to purchase land for a new store site. It pays:
$10,000 in back property tax
$8,000 in transfer taxes
$5,000 for removal of an old building
$1,000 survey fee
$260,000 to pave the parking lot.
What is the cost of the land?

6. Determining the Cost of Land
Purchase price of land $300,000
Add related costs:
Back property taxes $10,000
Transfer taxes 8,000
Removal of buildings 5,000
Survey fees 1, ,000
Total cost of land $324,000

7. Determining the Cost of Buildings: Construction
Architectural fees
Building permits
Contractor’s charges
Materials
Labor
Overhead
Cost of interest

8. Determining the Cost of Buildings: Purchase
Purchase price
Brokerage commissions
Sales and other taxes
Repairing or renovating building for its intended purpose

9. Determining the Cost of Machinery and Equipment
Purchase price less discounts
Transportation charges
Insurance in transit
Sales and other taxes
Purchase commission
Installation costs
Expenditures to test the asset
Special platforms

10. Determining the Cost of Land and Leasehold Improvements
Land improvements
Paving
Fences
Sprinkler systems
Lights in parking lot

11. Determining the Cost of Land and Leasehold Improvements
Leasehold Improvement: Cost of improvements to leased assets
Depreciate (amortize) over term of the lease.

12. Lump-Sum (or Basket) Purchases of Assets
Xerox Corporation paid $2,800,000 for a combined purchase of land and a building.
The land is appraised at $300,000 and the building at $2,700,000.
How much of the purchase price is allocated to land and how much to the building?

13. Lump-Sum (or Basket) Purchases of Assets
Total appraised value = $3,000,000
Land: $300,000 ÷ $3,000,000 = 10% $2,800,000 × 10% = $280,000
Building: $2,700,000 ÷ $3,000,000 = 90% $2,800,000 × 90% = $2,520,000

14. Capital Expenditure versus an Immediate ExpenseNO NO

15. Learning Objective 2
Account for depreciation.

16. Depreciation Methods Straight-line (SL) Units-of-production (UOP)
Double-declining balance (DDB)

17. Depreciation Methods Data Items Amount Cost of truck $41,000
Estimated residual value ( 1,000)
Depreciable cost $40,000
Estimated useful life years
Units of production ,000 miles

18. (Cost – Residual value) ÷ Years of useful life
Straight-Line Method
(Cost – Residual value) ÷ Years of useful life
($41,000 – $1,000) ÷ 5 = $8,000
Year 1 depreciation: $ 8,000
Year 2 depreciation: 8,000
Year 3 depreciation: 8,000
Year 4 depreciation: 8,000
Year 5 depreciation: ,000
Total depreciation: $40,000

19. Units-of-Production Method
($41,000 – $1,000) ÷ 100,000 = $.40/mile
Year 1: 20,000 miles × $.40 = $ 8,000
Year 2: 30,000 miles × $.40 = 12,000
Year 3: 25,000 miles × $.40 = 10,000
Year 4: 15,000 miles × $.40 = 6,000
Year 5: 10,000 miles × $.40 = 4,000
$40,000

20. Double-Declining-Balance Method
Straight-line rate per year: 100% ÷ 5 = 20%
Double-declining balance:
2 times the straight-line rate = 40%
Book value of truck at the end of the first year:
$41,000 × 40% = $16,400
$41,000 – $16,400 = $24,600

21. Comparing Depreciation Methods
Amount of Depreciation per Year
Year 1 2 3 4 5
Total SL
$ 8,000
8,000
$40,000
UOP
$ 8,000
12,000
10,000
6,000
4,000
$40,000
DDB
$16,400
9,840
5,904
3,542
4,314
$40,000

22. Depreciation Methods Used by 600 Companies
1% Other
5% Units-of-production
10% Accelerated
84% Straight-line

23. Learning Objective 3
Select the best depreciation method.

24. Relationship Between Depreciation and Taxes
Cash revenues $400,000 $400,000
Cash operating expenses , ,000
Cash provided by
operations before tax $100,000 $100,000
Depreciation expense , ,400
Income before income tax $ 92,000 $ 83,600
Income tax expense (30%) , ,080
Net income $ 64,400 $ 58,520
Straight-line Accelerated
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

25. Relationship Between Depreciation and Taxes
Straight-line Accelerated
Cash-flow analysis $100,000 $100,000
Income tax expense , ,080
Cash provided by
operations before taxes $ 72,400 $ 74,920
Extra cash available for
investment if DDB is used
($74,920 – $72,400) $ 2,520
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

26. Depreciation for Partial Years
Suppose a calendar-year business purchases a building on April 1 for $500,000 with an estimated life of 20 years and an estimated residual value of $80,000.
What is the current year’s depreciation using the straight-line method?

27. Depreciation for Partial Years
Full-year depreciation:
($500,000 – $80,000) ÷ 20 = $21,000
Partial-year depreciation:
$21,000 × 9/12 = $15,750

28. Changing the Useful Life of a Depreciable Asset
Assume an asset cost of $50,000, a ten-year useful life with no residual value, and the straight-line method.
$50,000 ÷ 10 = $5,000 depreciation per year
What is the book value after four years?
$50,000 – $20,000 = $30,000

29. Changing the Useful Life of a Depreciable Asset
Management determines that the asset will be useful for an additional ten years. How much depreciation expense would be recognized each year starting in year five?
$30,000 / 10 years = $3,000

30. Learning Objective 4
Analyze the effect of a plant asset disposal.

31. Accounting for Disposal of Plant Assets: Example
Fixtures cost: $4,000
Accumulated depreciation: $3,000
Book value $1,000
Accumulated Depreciation 3,000
Loss on Disposal of Asset 1,000
Store Fixtures 4,000
To dispose of store fixtures
Accumulated Depreciation 3,000
Loss of Disposal of Asset 1,000
Store Fixtures 4,000
To dispose of store fixtures
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

32. Selling a Plant Asset: Example
Equipment which cost $10,000 on 1/1/2002 is sold on 9/30/2005 for $5,000. It has been depreciated on a straight-line basis over its 10 years’ estimated useful life. There is no residual value.

33. Selling a Plant Asset: Example
What is the accumulated depreciation on September 30, 2005?
$10,000 ÷ 10 = $1,000/year
$1,000 × 3 years = $3,000
$1,000 × 9/12 = $750
$3,000 + $750 = $3,750

34. Selling a Plant Asset: Example
Sep 30 Cash 5,000
Accumulated Depreciation 3,750
Loss of Sale of Equipment 1,250
Equipment 10,000
To record sale of equipment.
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

35. Exchanging Plant Assets
Assume than an old delivery car with a cost of $9,000 and a book value of $1,000 is exchanged for a new car. Cash payment is $10,000. What is the cost of the new car?
$10,000 + $1,000 = $11,000

36. Exchanging Plant Assets
Delivery Auto (new) 11,000
Accumulated Depreciation (old) 8,000
Delivery Auto (old) 9,000
Cash 10,000
To record exchange of auto.
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

37. Learning Objective 5
Account for natural resources and depletion.

38. Accounting for Natural Resources and Depletion
Natural gas and oil
Precious metals and gems
Timber, coal, and iron ore
(Cost – Residual value) ÷
Estimated units of natural resource =
Depletion per unit

39. Accounting for Natural Resources and Depletion
Assume an oil lease cost $100,000 and contains an estimated 10,000 barrels of oil.
Depletion rate:
$100,000 ÷ 10,000 = $10 per barrel.
If 3,000 barrels are extracted during the
year,depletion expense is $30,000.
Accumulated Depletion is a contra account
similar to Accumulated Depreciation

40. Learning Objective 6
Account for intangible assets and amortization

41. Intangible Assets Have no physical form Patents Copyrights Trademarks
Franchises
Leaseholds
Goodwill

42. Intangible Assets
Amortization expense - can be written off directly against asset account
Assets with an indefinite useful life are not amortized.
All intangible assets are subject to impairment

43. Intangible Assets: Patents
Federal government grants giving holder the right to produce and sell an invention.
Suppose a company pays $170,000 to acquire a patent on January 1. The company believes that its expected useful life is 5 years.

44. Intangible Assets: Patets
Jan 1 Patents 170,000
Cash 170,000
To record acquisition of patent.
Dec 31 Amortization Expense 34,000
Patents 34,000
To amortize cost of patent
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

45. Intangible Assets: Copyrights
Literary compositions (novels)
Musical compositions
Films (movies)
Software
Other works of art
Extend 50 years beyond author’s life.

46. Intangible Assets: Trademarks
Trademarks, Trade Names, or Brand Names - assets that represent distinctive identifications of a product or service

47. Intangible Assets: Franchises
Privileges granted by private business or government to sell a product or service

48. Intangible Assets: Goodwill
Purchase price paid for
Mexana Company $10 million
Assets at market value $9 million
Less: Mexana’s liabilities $1 million
Market value of Mexana’s net assets million
Goodwill $ 2 million

49. Research and Development
Expensed as it is incurred

50. Learning Objective 7
Report plant asset transactions on the statement of cash flows.

51. Reporting Plant Asset Transactions: Statement of Cash Flows
Acquisitions (an investing activity)
Sales
Depreciation (including amortization and depletion)

52. End of Chapter 7