1. Chapter 8 Long-Term Assets
In this chapter, we will study the acquisition and depreciation of productive assets used in a business. In addition, we will take a quick look at accounting for natural resources and intangibles. This chapter contains some challenging accounting procedures, so let’s get started.

2. Conceptual Learning Objectives
Chapter 8:
SELF-STUDY
C1: Describe plant assets and issues in accounting for them.
C2: Explain depreciation and the factors affecting its computation.
C3: Explain depreciation for partial years and changes in estimates.
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3. Analytical Learning Objectives
SELF-STUDY
A1: Compare and analyze alternative depreciation methods.
A2: Compute total asset turnover and apply it to analyze a company’s use of assets.
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4. Procedural Learning Objectives
P1: Apply the cost principle to compute the cost of plant assets.
P2: Compute and record depreciation using the straight-line, units-of-production, and declining- balance methods.
P3: Distinguish between revenue and capital expenditures, and account for them.
P4: Account for asset disposal through discarding or selling an asset.
Self-Study (Quiz)
P5: Account for natural resource assets and their depletion.
P6: Account for intangible assets.
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5. Plant Assets Tangible in Nature Actively Used in Operations
Expected to Benefit Future Periods
Plant assets are tangible assets that are used actively in the operations of the entity. We fully expect these assets, sometimes referred to as property, plant, and equipment, to benefit future periods.
Not all companies have a high percentage of plant assets. McDonald’s, the fast food franchiser, has buildings and equipment in almost all cities in this country and major cities abroad. We would expect a company like McDonald’s to have substantial investments in property, plant, and equipment. One can contrast McDonald’s with the online giant eBay. There is no need for eBay to have plant assets in many major cities. The company is basically an online service run from a central location. We do not mean to imply that eBay has no plant assets, but rather that its plant assets are concentrated in a central location and made up largely of computer equipment.
Called Property, Plant, & Equipment
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6. Decline in asset value over its useful life
Plant Assets
C 1
Decline in asset value over its useful life
When we acquire a plant asset, it is recorded at its historical cost.
The cost of a plant asset includes the purchase price as well as all costs necessary to get the asset in place and ready for its intended use. We record the purchase price net of any cash discounts available.
Finance charges are not included in the cost of an asset. If we elect to finance the purchase over a period of time, the interest cost is charged as an expense when incurred.
Once the asset is placed in service, we will allocate a portion of the asset’s cost to depreciation expense as the asset becomes older.
Finally, at the end of the asset’s useful life, we will dispose of it and remove it from our books and records. The accounting for plant assets usually covers several accounting periods.
Disposal
4. Record disposal.
Acquisition
1. Compute cost.
Use
2. Allocate cost to periods
benefited.
3. Account for subsequent
expenditures.
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7. Land is not a depreciable Asset
Cost includes:
1. The total amount paid for the land.
2. Real estate commissions, title insurance fees, legal fees, and any accrued property taxes paid by the purchaser.
3. Payments for surveying, clearing, grading, and draining, and government assessments (incurred at the time or purchase or later) for public roadways, sewers, and sidewalks.
4. Cost of removal of any existing structures (less proceeds from sale of salvaged material).
Land is not a depreciable plant asset. In addition to the purchase price, there are many costs generally incurred in connection with the acquisition of land. Many of these costs are related to obtaining legal title to the land. Land improvements are depreciated over their useful life. Land improvements include parking lots, driveways, fences, sidewalks, landscaping, and any outdoor lighting systems.
Buildings are depreciated over their useful life. Whether we purchase or construct a building, the cost should include the purchase price plus any attorney fees or title fees. If we construct the building, the cost will include all the necessary construction costs as well as the costs we have just mentioned.
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8. Land Improvements
Land is not a depreciable Asset, but Land Improvements are.
Land Improvements: Costs that increase the usefulness of the land.
Examples: -Parking lot surfaces, -Driveways, -Fences, and -Lighting systems. Land Improvements have limited useful lives: Costs are charged to a separate Land Improvement account so that their costs can be allocated to the periods they benefit.
Land is not a depreciable plant asset. In addition to the purchase price, there are many costs generally incurred in connection with the acquisition of land. Many of these costs are related to obtaining legal title to the land. Land improvements are depreciated over their useful life. Land improvements include parking lots, driveways, fences, sidewalks, landscaping, and any outdoor lighting systems.
Buildings are depreciated over their useful life. Whether we purchase or construct a building, the cost should include the purchase price plus any attorney fees or title fees. If we construct the building, the cost will include all the necessary construction costs as well as the costs we have just mentioned.
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9. Cost of purchase or construction
Buildings
The cost of buildings include many costs; the purchase price plus the following:
Title fees
Cost of purchase or construction
Land is not a depreciable plant asset. In addition to the purchase price, there are many costs generally incurred in connection with the acquisition of land. Many of these costs are related to obtaining legal title to the land. Land improvements are depreciated over their useful life. Land improvements include parking lots, driveways, fences, sidewalks, landscaping, and any outdoor lighting systems.
Buildings are depreciated over their useful life. Whether we purchase or construct a building, the cost should include the purchase price plus any attorney fees or title fees. If we construct the building, the cost will include all the necessary construction costs as well as the costs we have just mentioned.
Attorney fees
Brokerage fees
Taxes
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10. Machinery and Equipment
Purchase price
Taxes
Transportation
charges
Machinery and equipment is recorded at its purchase price less any available cash discount. The company may have to pay delivery charges on the truck; these costs are included in the cost of the truck. If we need to install any special parts to make the machinery or equipment ready for its intended use, we will include these costs in the price of the assets.
Installing, assembling, and testing
Insurance while in transit
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11. Exercise 2
Exercise 1
Quick Study 1

12. Lump-Sum Asset Purchase
The total cost of a combined purchase of land and building is separated on the basis of their relative market values.
On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values (FMV) are building, $162,500, and land, $87,500.
How much of the $200,000 purchase price will be charged to the building and land accounts?
It is not uncommon to have a lump-sum purchase of assets. The most common example may be when purchasing a building and land. Remember, the land is not depreciable but the building is. We must assign a portion of the purchase price separately to the building and to the land. When faced with this type of problem, accountants normally divide the cost between the assets on the basis of relative fair market values. Let’s see how this works.
Matrix, Incorporated purchased land with a building for two hundred thousand dollars cash. The building was appraised at one hundred sixty-two thousand five hundred dollars, and the land was appraised at eighty-seven thousand five hundred dollars.
We must determine how to divide the two hundred thousand dollar purchase price between the land and building.
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13. Lump-Sum Asset Purchase
Begin by calculating the relative fair value as a percent of the total fair value. The total fair value is two hundred fifty thousand dollars. The land has an appraised value of eighty-seven thousand five hundred dollars. So, land is valued at thirty-five percent of the total. We get the percent by dividing eighty-seven thousand five hundred dollars by the total fair value of two hundred fifty thousand dollars. We do a similar calculation for the building. Next, multiply the percentages we just calculated times the purchase price of two hundred thousand dollars to determine the amount assigned to each asset. In the case of land, we multiply thirty-five percent times two hundred thousand dollars and assign seventy thousand dollars to the land account. The remainder, or one hundred thirty thousand dollars, is assigned to the building account.
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14. Exercise 3

15. Depreciation C2
Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.
Acquisition Cost
(Unused)
Balance Sheet
(Used)
Income Statement
Expense
Cost
Allocation
Depreciation is a process of cost allocation. We allocate the cost of the asset to expense over its useful life in some rational and systematic manner. We do not want to confuse asset valuation, an economic concept, with allocation.
The unused portion of the asset’s cost appears on the balance sheet. We allocate a portion of the cost to expense on the income statement each accounting period. Let’s look at some very common methods of calculating depreciation expense.
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16. Factors in Computing Depreciation
The calculation of depreciation requires three amounts for each asset:
Cost $50,000
Salvage Value $5,000
Useful Life Years
Regardless of the method used to calculate depreciation expense, we must know three variables: the asset’s cost; the estimated salvage value we expect to receive at the end of its useful life, and the estimated useful life of the asset. Once these three amounts are known, we select the depreciation method that we will use to calculate depreciation expense.
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17. Depreciation Methods Straight-line Units-of-production
Declining-balance
There are three popular methods of calculating depreciation expense. The easiest and most widely used method is called straight-line depreciation. In special circumstances, we may wish to use the units-of-productions method. We would elect this method if the life of the asset is generally measured in terms of units of production. For example, airplanes keep highly detailed tracking of the number of hours the engines run. The unit of production may be the hours run by an aircraft. The third method is called the declining-balance method. Under this method, we take more depreciation expense in the early years of the asset’s life and lower amounts of depreciation in later years. Several income-tax depreciation calculations are based on the declining balance method. Let’s begin by looking at straight-line depreciation.
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18. Cost - Salvage Value Useful life
Straight-Line Method P2
Cost - Salvage Value Useful life
Depreciation
Expense for Period =
$9,000
Depreciation
Expense per Year =
$50,000 - $5,000 5 years
Depreciation expense for any given period is determined by taking the asset’s cost less its estimated salvage value and dividing this amount by the asset’s estimated useful life. If we calculate annual depreciation, we would express the useful life in years. Or we may want to calculate monthly depreciation. We will see how to do this on a later slide. Here is our specific depreciation example. On January first, 2009, a company purchased equipment for fifty thousand dollars. The estimated useful life is five years and the estimated salvage value is five thousand dollars. Can you calculate the amount of annual depreciation?
This calculation was relatively easy. Did you get the annual depreciation of nine thousand dollars? Now let’s make the journal entry on December thirty first, to record depreciation expense for the year. The proper adjusting journal entry is to debit, or increase, depreciation expense and credit, or increase, the contra account, accumulated depreciation dash equipment for nine thousand dollars. Now let’s look at depreciation for this asset for its five-year life.
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19. Straight-Line Method Salvage Value Depreciation Rate =
Notice that depreciation expense is the same amount in each of the five years. If we plot this amount on a graph, it would be a straight line. That is how we got the name of the method. Accumulated depreciation increases by nine thousand dollars each year. The cost of the asset (fifty thousand dollars) less accumulated depreciation at the end of any year is called book value. Book value decreases by nine thousand dollars each year. The ending book value is equal to the estimated salvage value at the end of the asset’s useful life. We want this to be true regardless of the method we use. It’s easy to calculate the rate of depreciation—just divide one hundred percent by the useful life. In this case the rate of depreciation is twenty percent. If we multiply the asset’s cost less its salvage value of forty-five thousand dollars times twenty percent, we get the annual depreciation of nine thousand dollars.
Salvage Value
Depreciation Rate =
(100% ÷ 5 years)
= 20% per year
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20. Exercise 6

21. Declining Balance MethodP2
Depreciation
Repair
Expense
Early Years
High
Low
Later Years
Early years’ total expense approximates later years’ total expense.
One of the reasons to consider the declining-balance method is that it is an attempt to match depreciation expense and repairs expense to focus on the overall cost of ownership. In the early years of the asset’s life, depreciation under the declining-balance method is high and generally repair expenses are low. Conversely, in the later years of an asset’s life, we take less depreciation expense but repairs expense is usually higher. So, over the life of the asset we attempt to smooth the total cost of ownership.
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22. Double-Declining-Balance Method
Step 1:
Straight-line rate =
100 % ÷ Useful life = 100% ÷ 5 = 20%
Step 2:
Double-declining balance rate
= 2 × Straight-line rate = 2 × 20% = 40%
Calculating depreciation expense under the double-declining-balance method is a three-step process. The first step is the calculate the straight-line depreciation rate. Recall that we do this by dividing one hundred percent by the asset’s useful life. In our specific case we divide one hundred percent by the five-year useful life to get a straight-line rate of twenty percent. The second step is to calculate the double-declining-balance rate. We do this by multiplying the straight-line rate times two. In our case that would be twenty percent times two, or forty percent. The third, and final step is to determine depreciation expense. We multiply the double-declining rate times the book value of the asset at the beginning of the period. Under the double-declining-balance method we ignore estimated salvage value. The beginning book value (cost less accumulated depreciation), is fifty thousand dollars. Depreciation expense for 2009 is twenty thousand dollars, forty percent times fifty thousand dollars.
Don’t forget that salvage value is not used in the double-declining-balance method.
Step 3:
Depreciation expense =
Double-declining balance rate ×
Beginning period book value
$20,000 for = % × $50,000
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23. Double-Declining-Balance MethodP2
2009 Depreciation:
40% × $50,000 = $20,000
2010 Depreciation:
At the start of the second year the book value of the asset was thirty thousand dollars (cost of fifty thousand dollars less accumulated depreciation of twenty thousand dollars). To determine depreciation expense, we multiply the book value of thirty thousand dollars times our rate of forty percent to yield twelve thousand dollars. Let’s look at a depreciation table for our asset.
40% × ($50,000 - $20,000) = $12,000
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24. Double-Declining-Balance MethodP2
While we always want the book value to be equal to estimated salvage value at the end of the asset’s useful life, it just will not work properly using the double-declining-balance method. As you can see, the book value of the asset is three thousand eight hundred and eighty-eight dollars. We need for it to be equal to five thousand dollars, the estimated salvage value. The only way we can make this work is to force depreciation expense in the last year to be the amount needed to bring book value down to salvage value. In 2013, if we go by the table, we would record depreciation expense of two thousand five hundred ninety-two dollars. But this can’t be right since the book value can’t go below the salvage value of five thousand dollars. Let’s look at a corrected schedule.
Below salvage value
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25. Double-Declining-Balance MethodP2
If we force depreciation expense to be one thousand four hundred and eighty dollars in 2013, accumulated depreciation will be forty-five thousand dollars, and book value will be equal to salvage value of five thousand dollars. Let’s summarize our three depreciation methods by looking at some graphs.
We usually must force depreciation expense in the
last year so that book value equals salvage value.
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26. Exercise 5
Exercise 8

27. Units-of-Production Method
Depreciation
Per Unit =
Cost - Salvage Value
Total Units of Production
Step 1:
Step 2:
Depreciation
Expense =
Per Unit ×
Number of Units Produced in the Period
Under the units-of-production method, the first step is to calculate the depreciation expense per unit of production. Take the asset’s cost less its salvage value and divide this amount by the total estimated number of units that will be produced by the assets. Once we complete the first step, we may calculate depreciation expense for the period. Multiply the depreciation expense per unit that we determined in step one by the number of units produced in the current period. Let’s look at a specific example.
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28. Units-of-Production Method
On December 31, 2008, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000. If 22,000 units were produced in 2009, what is the amount of depreciation expense?
At the end of December 2008, the company purchased equipment that had a cost of fifty thousand dollars and estimated salvage value of five thousand dollars. The equipment is expected to produce one hundred thousand units during its useful life. During 2009, the equipment was used to produce twenty-two thousand units. Let’s follow our two-step method of calculating depreciation expense for 2009.
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29. Units-of-Production Method
Step 1:
Depreciation
Per Unit =
$50, $5,000
100,000 units
= $.45 per unit
Step 2:
Depreciation
Expense =
$.45 per unit × 22,000 units = $9,900
First we calculate the depreciation expense per unit of production of forty-five cents per unit. During 2009, the company produced twenty-two thousand units, so we determine depreciation expense of ninety-nine hundred dollars. Just multiply the twenty-two thousand units times the forty-five cents per unit depreciation charge. Let’s look at a table of depreciation expense for this equipment over its five-year life. Remember that we need to know the units produced in each year.
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30. Units-of-Production Method
In the second column we show the units produced in each of the five years. In 2011, no units were produced, so there is no depreciation. The depreciation expense amounts are all determined by multiplying the units produced by forty-five cents per unit. Finally, notice that the book value is equal to the estimated salvage value of five thousand dollars at the end of the asset’s estimated useful life. Now let’s move on to the declining-balance method.
No depreciation expense if the equipment is idle.
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31. Exercise 7

32. Comparing Depreciation Methods
Life in Years
Annual SL Depreciation
Annual Production Depreciation
Life in Years P2
Annual DDB Depreciation
Life in Years
The graph in the upper left corner is depreciation expense using the straight-line method. We have a constant nine thousand dollar expense each year.
In the upper right corner we have the graph of units-of-production depreciation expense. This method does not follow any pattern because it is dependent on the number of units produced each period. Notice that in year three the equipment was idle so no depreciation expense was recorded. At the bottom of the screen is the depreciation expense under the double-declining-balance method. Depreciation expense decreases each year of the asset’s life. The choice of the depreciation method to use is one that should be carefully made by management. Depreciation expense impacts net income in each period of the asset’s useful life.
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33. 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.
When filing a tax return most corporations use the modified accelerated cost recovery system developed by the Internal Revenue Service. Because the title of the method is so long most accountants refer to the tax method as MACRS. MACRS is an accelerated depreciation method. It was designed to permit companies to quickly write off the cost of plant assets and thereby stimulate investment in new plant assets.
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34. Partial-Year Depreciation: SLD
Calculate the straight-line depreciation on December 31, 2009, for equipment purchased on June 30, The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for all 2009
Depreciation = $7,000 × 6/12 = $3,500
To this point we have discussed depreciation of an asset that was purchased at the beginning of the year. Let’s see how we handle depreciation expense for partial periods, that is, assets that are purchased during the year.
In our example, a company purchased equipment for seventy-five thousand dollars on June thirtieth, The equipment has a useful life of ten years and estimated salvage value of five thousand dollars. This company uses straight-line depreciation for all its plant assets.
Let’s calculate depreciation expense for The depreciation expense for the entire year 2009 would be seven thousand dollars. We determine this amount by taking cost less salvage value of seventy thousand dollars and dividing it by ten. The company had the equipment in service for one-half of the year, so we multiply the annual depreciation of seven thousand dollars times one-half, or six twelfths. We use the same procedure for other partial periods.
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35. Partial-Year Depreciation: DDB
Calculate the double-declining balance depreciation on December 31, 2009, for equipment purchased on June 30, The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000.
Depreciation = $75,000 x 20%; => (1/10) * 2
= $15,000 for all 2009
Depreciation = $15,000 × 6/12 = $7,500
To this point we have discussed depreciation of an asset that was purchased at the beginning of the year. Let’s see how we handle depreciation expense for partial periods, that is, assets that are purchased during the year.
In our example, a company purchased equipment for seventy-five thousand dollars on June thirtieth, The equipment has a useful life of ten years and estimated salvage value of five thousand dollars. This company uses straight-line depreciation for all its plant assets.
Let’s calculate depreciation expense for The depreciation expense for the entire year 2009 would be seven thousand dollars. We determine this amount by taking cost less salvage value of seventy thousand dollars and dividing it by ten. The company had the equipment in service for one-half of the year, so we multiply the annual depreciation of seven thousand dollars times one-half, or six twelfths. We use the same procedure for other partial periods.
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36. Partial-Year Depreciation: DDB
Calculate the double-declining balance depreciation on December 31, 2009, for equipment purchased on June 30, The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000. Compute 2nd year (2010) depreciation??
1st Year Depreciation = $15,000 × 6/12 = $7,500;
2nd Year Depreciation = $(75,000 – 7,500) x 20%;
= $13,500 for all 2010
To this point we have discussed depreciation of an asset that was purchased at the beginning of the year. Let’s see how we handle depreciation expense for partial periods, that is, assets that are purchased during the year.
In our example, a company purchased equipment for seventy-five thousand dollars on June thirtieth, The equipment has a useful life of ten years and estimated salvage value of five thousand dollars. This company uses straight-line depreciation for all its plant assets.
Let’s calculate depreciation expense for The depreciation expense for the entire year 2009 would be seven thousand dollars. We determine this amount by taking cost less salvage value of seventy thousand dollars and dividing it by ten. The company had the equipment in service for one-half of the year, so we multiply the annual depreciation of seven thousand dollars times one-half, or six twelfths. We use the same procedure for other partial periods.
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37. Exercise 9
Exercise 10

38. Change in Estimates for Depreciation
On January 1, 2009, equipment was purchased that cost $30,000, has a useful life of 10 years, and no salvage value. During 2012, the useful life was revised to eight years (five years remaining).
Calculate depreciation expense for the year ended December 31, 2012, using the straight-line method.
You know that the salvage value and useful life of a plant asset are both estimates. Like all estimates, new information may come to light that will cause us to revise our previous estimate. Let’s see how accountants handle the revision of previous estimates.
In our example, a company purchased equipment on January first, 2009 for thirty thousand cash. The equipment is estimated to have a ten-year useful life and no salvage value at the end of its useful life. The company uses the straight-line method for all plant assets and begins recording depreciation on this equipment in We continue our original computations up until the point where the new information causes us to make a change. During 2012, we learn new information about the equipment. This new information causes us to revise our estimate of the equipment’s useful life. We now believe the equipment will have a total useful life of eight years. We already recorded depreciation expense for three years (2009, 2010, and 2011), so there are five years remaining in the equipment’s useful life. In this case, accountants would take the book value at the date of revision of our estimate, that is, 2012, and subtract any estimated salvage value at the time of revision. This total is to be divided by the remaining useful life of the asset at the date of revision. Let’s calculate the proper depreciation expense for 2012.
Book value at date of change
Salvage value at date of change
Remaining useful life at date of change –
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39. Change in Estimates for Depreciation
The asset had a cost of thirty thousand dollars and a ten-year useful life with no salvage value. Under straight-line depreciation we record three thousand dollars of expense in each of the years 2009, 2010, and Accumulated depreciation has a balance of nine thousand dollars at the beginning of The remaining book value is twenty-one thousand dollars and the remaining useful life of the asset is five years, so depreciation for each of those five years will be four thousand two hundred dollars. Let’s record depreciation expense at December thirtieth, 2012.
We debit depreciation expense for forty-two hundred dollars and credit accumulated depreciation dash equipment for the same amount.
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40. Exercise 11: -Calculate BV at the end of 2nd year;
-Subtract NEW Salvage Value;
-Depreciate using NEW Useful Life.

41. Reporting Depreciation
Total accumulated depreciation is subtracted for the total cost of property, plant, and equipment.
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42. Revenue and Capital Expenditures
Generally, subsequent expenditures for ordinary repairs are treated as revenue expenditures and charged to current period income as an expense. Subsequent expenditures that are for betterments are classified as extraordinary repairs. These should be treated as capital expenditures and charged to the asset account. Let’s look at the proper accounting for the disposal of plant assets.
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43. Additional Expenditures
After a plant asset is purchased, the company may incur additional expenditures on that asset. These expenditures may be for repairs and maintenance, overhauls, upgrading the asset, and similar expenditures. One way to handle these types of expenditures is to treat them as a Capital Expenditure and charge the amount to a balance sheet account like the asset or accumulated depreciation. In some cases, the expenditures may be treated as Revenue Expenditures and charged to current period income as an expense. For each expenditure subsequent to acquisition of a plant asset we must decide if the expenditure is to be treated as a Capital or Revenue expenditure.
If the amounts involved are not material, most companies expense the item.
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44. Exercise 14 #1: Age = AD / Annual Depreciation; Depr. =(Cost / UL);
#2: JE = Capitalize Major Expenditure (Structural Repairs);
#3: New Book Value = Old BV + Major Expenditure; #4: Current Year’s Depreciation
=New Book value / New useful Life

45. Disposals of Plant Assets
1. Update depreciation to the date of disposal.
2. Calculate date of Disposal
4. Record (Journalize) disposal by:
Recording cash received (debit) or paid (credit).
3. Recording a gain (credit)
or loss (debit).
Whenever we dispose of a plant asset, the first thing we do is update depreciation to the date of disposal. After completing the update we can begin on the journal entry. We start the journal entry by recording a debit to the cash account, if cash was received, or credit the cash account, if cash was paid by the company. In addition, we must determine whether a gain or loss is associated with the disposal. A gain is recorded with a credit, just like revenue, and a loss is recorded with a debit, just like an expense account. We complete the entry by removing the plant asset’s cost from our books with a credit, and remove the related accumulated depreciation with a debit. Let’s see how we calculate the gain or loss associated with the disposal.
Removing accumulated depreciation (debit).
Removing the asset cost (credit).
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46. Discarding Plant Assets
Journalize disposal by:
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Update depreciation to the date of disposal.
Recording a gain (credit)
or loss (debit).
Recording cash received (debit) or paid (credit).
If the amount of cash received is greater than the book value of the asset (cost less accumulated depreciation), a gain is associated with the disposal. If the cash received is less than the book value of the asset, a loss will be recorded. When the amount of cash is exactly equal to the book value of the asset, there will be no gain or loss in connection with the disposal. Now let’s look at a specific example of disposal of a plant asset.
Removing accumulated depreciation (debit).
Removing the asset cost (credit).
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47. Disposal of Assets
On September 30, 2009, Evans Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years.
1. UPDATE DEPRECIATION (Partial Year)
2. CALCULATE BV = (Cost – AD)
3. CALCULATE GAIN (LOSS) = (Cash – BV)
4. JOURNALIZE DISPOSAL
On September thirtieth, 2009, Evans Company sells a machine for sixty thousand dollars cash. The machine was purchased on January first, 2009, for one hundred thousand dollars, had an estimated salvage value of twenty thousand dollars, and a useful life of ten years. Evans uses straight-line depreciation.
Annual depreciation is eight thousand dollars. For the nine months ending September thirtieth, Evans will record six thousand dollars in depreciation.
Next, we make the journal entry to bring the depreciation up-to-date. The required journal entry is to debit depreciation expense and credit accumulated depreciation dash machine. Now we need to make the journal entry to record the disposal.
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48. Disposal of Assets 1. Update depreciation to the date of disposal
Annual Depreciation ($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to September 30, 2009:9/12 × $8,000 = $6,000
On September thirtieth, 2009, Evans Company sells a machine for sixty thousand dollars cash. The machine was purchased on January first, 2009, for one hundred thousand dollars, had an estimated salvage value of twenty thousand dollars, and a useful life of ten years. Evans uses straight-line depreciation.
Annual depreciation is eight thousand dollars. For the nine months ending September thirtieth, Evans will record six thousand dollars in depreciation.
Next, we make the journal entry to bring the depreciation up-to-date. The required journal entry is to debit depreciation expense and credit accumulated depreciation dash machine. Now we need to make the journal entry to record the disposal.
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49. 2. Determine Book Value of Asset
The balance in the accumulated depreciation account is thirty thousand dollars at the date of disposal. We recorded three years of depreciation at eight thousand dollars and the partial year depreciation of six thousand dollars. Once we determine the book value of the asset, we can calculate any gain or loss involved with the disposal.
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50. 3. Determine Gain or Loss on Disposal
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
The book value of seventy thousand dollars is less than the cash received of sixty thousand dollars, so this disposal involves a loss of ten thousand dollars. Let’s record the journal entry.
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51. Record the Disposal (Journalize)
We record the disposal with a debit to the cash account for sixty thousand dollars, a debit to accumulated depreciation dash machine for thirty thousand dollars (this eliminates the account balance), and a debit to the loss on disposal account for ten thousand dollars. Finally, we credit the asset account, machine, for one hundred thousand dollars, the historical cost of the machine.
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52. Exercise 16
Exercise 17

53. Natural Resources: Cost Determination and Depletion
Natural Resources —assets that are physically consumed when used. Example: Timber, mineral deposits, and oil and gas fields. Since they are consumed when used, they are also called wasting assets.

54. Natural Resources: Cost Determination and Depletion
1. Natural resources are recorded at cost, which includes all expenditures necessary to acquire the resource and prepare it for its intended use.
2. Depletion is the process of allocating the cost of a natural resource to the period when it is consumed.
3. Natural resources are reported on the balance sheet at cost less accumulated depletion.
4. The depletion expense per period is based on the units extracted.

55. Natural Resources: Cost Determination and Depletion
Per Unit =
Cost - Salvage Value
Total Units of Capacity
Step 1:
Step 2:
Depletion
Expense =
Per Unit ×
Units Extracted and Sold in Period
Let’s change the subject away from disposals of plant assets and discuss natural resources.
Natural resources abound. We have accounting issues with oil, coal, timber, gold, gravel, and a wide variety of other natural resources. In general, natural resources can be thought of as anything extracted from our natural environment. As accountants, we report natural resources at their cost less accumulated depletion. The depletion we will study in this text is very similar to units-of-production depreciation. The cost of any natural resource must include all exploration and development costs as well as extraction costs. A portion of these total costs will be charged to income each period through the depletion expense account. Let’s see how this works.
We begin the process of calculating depletion expense by determining the depletion expense per unit of natural resource. The numerator of the equation contains the resource cost less any estimated salvage value. The denominator of the equation is our estimated total capacity of the natural resource we expect to extract. For oil we express the denominator in terms of barrels, for coal we use tons, for timber we use board feet, and the like for other resources. The current period depletion expense is determined by multiplying the depletion expense per unit, determined in the first step, by the number of extracted units sold during the period. Depletion expense is based on the number of units sold, not the number of units extracted. Let’s go over a specific example.
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56. Depletion of Natural Resources
Apex Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the first year of operations Apex extracted and sold 13,000 tons of ore.
Apex Mining paid one million dollars cash to acquire and develop an ore site. The engineers at Apex estimate that the site will eventually produce forty thousand tons of ore. During the first year of operation, the company extracted and sold thirteen thousand tons of ore. Let’s start by calculating the depletion charge per ton of ore.
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57. Depletion Expense Step 1: Step 2: = Depletion Per Unit =
$1,000, $0
40,000 tons
= $25 per ton
Step 2:
The depletion charge per ton of ore is twenty-five dollars. The site has no residual value so we divide one million dollars by forty thousand tons to get the twenty-five dollar per ton depletion charge. Depletion expense for the first year will be three hundred twenty-five thousand dollars. We extracted and sold thirteen thousand tons of ore at twenty-five dollars per ton.
Depletion
Expense =
$25 per ton × 13,000 Tons = $325,000
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58. Depletion of Natural Resources
Plant Assets Used in Extracting: When the usefulness of plant assets used in extracting resources is directly related to the depletion of the natural resource,
its cost is depreciated using the units-of-production method in proportion to the depletion of the natural resource.

59. Intangible Assets Intangible AssetsP6
Noncurrent assets without physical substance.
Often provide exclusive rights or privileges.
Intangible Assets
Now let’s turn to the last major subject we will cover in the presentations…intangible assets.
Intangible assets lack physical substance and that makes it difficult to determine the asset’s useful life or any residual value. Many intangible assets involve exclusive rights or privileges. We will review the major types of intangible assets and related accounting on the remaining screens.
Useful life is often difficult to determine.
Usually acquired for operational use.
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60. Cost Determination and AmortizationP6
Cost Determination and Amortization
Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.
Patents
Copyrights
Leaseholds
Leasehold Improvements
Franchises & Licenses
Goodwill
Trademarks & Trade Names
We have provided you with a list of intangible assets that will be discussed. Intangible assets are normally recorded at the purchase price plus any legal or related fees.
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61. Types of Intangibles Patents
The exclusive right granted to its owner to manufacture and sell a patented item or use a process for 20 years. A patent is generally amortized, using the straight-line method, over its useful life not to exceed 20 years.
Matrix, Inc. purchased a patent for $10,000. The patent is expected to have a useful life of 10 years.
A patent gives the holder the exclusive right to manufacture and sell an item or process for twenty years. A patent is amortized (a process just like depreciation) using the straight-line method over its useful life, but never more than twenty years. Most companies amortize patents over a very short period of time.
Part One
In our example, Matrix purchased a patent for ten thousand dollars cash. The useful life of the patent is estimated at ten years. Let’s prepare the journal entry to record the annual amortization expense. Part Two We will debit amortization expense dash patents for one thousand dollars (one-tenth of the ten thousand dollar cost), and credit accumulated amortization dash patents for the same amount. This entry will be made each year for the next nine years.
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62. Types of Intangibles Copyrights Leaseholds
The exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 70 years.
Leaseholds
The rights the lessor grants to the lessee under the terms of a lease. Most leases have a determinable life.
A copyright grants to the holder the exclusive right to publish and sell musical, literary, or artistic work for the life of the creator plus seventy years. Most copyrights are amortized over a short period of time using the straight-line method. A leasehold is the right to the beneficial use of property owned by a lessor. The lessee does not own the property but gets to use it over some extended period of time.
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63. Leasehold Improvements
Types of Intangibles P6
Leasehold Improvements
A lessee may pay for alterations or improvements to the leased property such as partitions, painting, and storefronts. These costs are usually amortized over the term of the lease.
Franchises and Licenses
The right granted by a company or the government to deliver a product or service under specified conditions.
Leasehold improvements are any alterations or improvements to leased property. Leasehold improvements are normally amortized using the straight-line method over the term of the lease. The holder of a franchise has the right to deliver a product or service under conditions granted by the franchisor. You really can’t drive down any major street without finding a number of franchise operations. The accounting for franchises can become quite complex. At this point it is sufficient to be able to define the nature of a franchise.
A trademark or trade name is any symbol, name, phrase, or jingle that is identified with a company, product or service. No other party may use the trademark or trade name without the permission of the holder. Many trademarks are extremely valuable. The name “Mercedes-Benz” is quite valuable, or the name “Harley-Davidson.” How about the phrase, “Coke is it.” It should be noted that if the company that owns the trademark plans to renew indefinitely its right the trademark or trade name, the cost is not amortized.
Other intangibles include such items as software, non-compete covenants, customer lists, and so forth. The accounting for them is much the same as described above.
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64. Trademarks and Trade Names
Types of Intangibles P6
Trademarks and Trade Names
A symbol, name, phrase, or jingle identified with a company, product, or service. Indefinite life.
Cost of developing, maintaining, or enhancing the value of the trademark or trade name (eg. Advertising) is charged to expense.
Purchased trademark is an asset.
Leasehold improvements are any alterations or improvements to leased property. Leasehold improvements are normally amortized using the straight-line method over the term of the lease. The holder of a franchise has the right to deliver a product or service under conditions granted by the franchisor. You really can’t drive down any major street without finding a number of franchise operations. The accounting for franchises can become quite complex. At this point it is sufficient to be able to define the nature of a franchise.
A trademark or trade name is any symbol, name, phrase, or jingle that is identified with a company, product or service. No other party may use the trademark or trade name without the permission of the holder. Many trademarks are extremely valuable. The name “Mercedes-Benz” is quite valuable, or the name “Harley-Davidson.” How about the phrase, “Coke is it.” It should be noted that if the company that owns the trademark plans to renew indefinitely its right the trademark or trade name, the cost is not amortized.
Other intangibles include such items as software, non-compete covenants, customer lists, and so forth. The accounting for them is much the same as described above.
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65. Goodwill Goodwill Occurs when one company buys another company.
Only purchased goodwill is an intangible asset.
An intangible asset called goodwill can be created when one company buys another company. If the purchase price of the company is greater than the fair value of the net assets and liabilities acquired, we have goodwill associated with the transaction. Goodwill is not amortized. Each year we must test to see if there has been any impairment in the carrying value of the goodwill. If an impairment is determined to exist, we will reduce the goodwill account and recognize the loss in value.
Goodwill is not amortized. It is tested each year to determine if there has been any impairment in carrying value.
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66. Other Intangibles:
-Software, -Covenant not-to-compete, -Customer lists, etc.

67. Provides information about a company’s efficiency in using its assets.
Total Asset Turnover A2
Total Asset
Turnover =
Net Sales
Average Total Assets
Provides information about a company’s efficiency in using its assets.
Total asset turnover is equal to the net sales for the period divided by the average total assets. The average total assets is computed by taking the beginning balance of total assets, adding the ending balance, and dividing the result by two. Total asset turnover provides us with information about how efficiently a company uses its assets. The ratio should be interpreted in comparison to prior years and also to its competitors.
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