1. Chapter 10-1 Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Accounting Principles, Ninth Edition

2. Chapter 10-2 Plant Assets Determining the cost of plant assets Depreciation Expenditures during useful life Plant asset disposals Natural Resources Intangible Assets Statement Presentation and Analysis PresentationAnalysis Accounting for intangibles Research and development costs Plant Assets, Natural Resources, and Intangible Assets Depletion

3. Chapter 10-3 “Used in operations” and not for resale. Long-term in nature and usually depreciated. Possess physical substance. Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools). Major characteristics include: Section 1 – Plant Assets Referred to as property, plant, and equipment; plant and equipment; and fixed assets.

4. Chapter 10-4 Includes all costs to acquire land and ready it for use. Costs typically include: Land Determining the Cost of Plant Assets (1)the 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. SO 1 Describe how the cost principle applies to plant assets.

5. Chapter 10-5 Illustration: 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: Required: Determine amount to be reported as the cost of the land. Determining the Cost of Plant Assets SO 1 Describe how the cost principle applies to plant assets.

6. Chapter 10-6 Land Required: Required: Determine amount to be reported as the cost of the land. Determining the Cost of Plant Assets SO 1 Describe how the cost principle applies to plant assets. Cash price of property of $100,000 Old warehouse razed at a cost of $6,000 Attorney's fees of $1,000 1,000 6,000 $100,000 $115,000Cost of Land Real estate broker’s commission of $8,000 8,000

7. Chapter 10-7 Includes all expenditures necessary to make the improvements ready for their intended use. Land Improvements Determining the Cost of Plant Assets Examples are driveways, parking lots, fences, landscaping, and underground sprinklers. Limited useful lives. Expense (depreciate) the cost of land improvements over their useful lives. SO 1 Describe how the cost principle applies to plant assets.

8. Chapter 10-8 Includes all costs related directly to purchase or construction. Buildings Purchase costs: Purchase price, closing costs (attorney’s fees, title insurance, etc.) 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. Determining the Cost of Plant Assets SO 1 Describe how the cost principle applies to plant assets.

9. Chapter 10-9 Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include: Equipment 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. Determining the Cost of Plant Assets SO 1 Describe how the cost principle applies to plant assets.

10. Chapter 10-10 Illustration: 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. Determining the Cost of Plant Assets SO 1 Describe how the cost principle applies to plant assets. Machinery Cash price Sales taxes Insurance during shipping 500 3,000 $50,000 $54,500Cost of Machinery Installation and testing 1,000

11. Chapter 10-11 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. 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. DepreciationDepreciation SO 2 Explain the concept of depreciation.

12. Chapter 10-12 Factors in Computing Depreciation Cost DepreciationDepreciation SO 2 Explain the concept of depreciation. Useful LifeSalvage Value Illustration 10-6

13. Chapter 10-13 Objective is to select the method that best measures an asset’s contribution to revenue over its useful life. Examples include: Depreciation Methods (1)Straight-line method. (2)Units-of-Activity method. (3)Declining-balance method. DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration 10-8 Use of depreciation methods in 600 large U.S. companies

14. Chapter 10-14 Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2010. Required: Compute depreciation using the following. (a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance. DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration 10-7

15. Chapter 10-15 Straight-Line DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Expense is same amount for each year. Depreciable cost is cost of the asset less its salvage value. Illustration 10-9

16. Chapter 10-16 DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration: (Straight-Line Method) 2010$ 12,00020%$ 2,400 $ 10,600 201112,000202,4004,8008,200 201212,000202,4007,2005,800 201312,000202,4009,6003,400 201412,000202,40012,0001,000 2010 Journal Entry Depreciation expense 2,400 Accumulated depreciation2,400 Illustration 10-10

17. Chapter 10-17 Companies estimate total units of activity to calculate depreciation cost per unit. Expense varies based on units of activity. Depreciable cost is cost less salvage value. Units-of-Activity DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration 10-11

18. Chapter 10-18 DepreciationDepreciation Illustration: (Units-of-Activity Method) 201015,000$ 0.12$ 1,800 $ 11,200 201130,0000.123,6005,4007,600 201220,0000.122,4007,8005,200 201325,0000.123,00010,8002,200 201410,0000.121,20012,0001,000 Depreciation expense 1,800 Accumulated depreciation 1,800 2010 Journal Entry Illustration 10-12 SO 3 Compute periodic depreciation using different methods.

19. Chapter 10-19 Decreasing annual depreciation expense over the asset’s useful life. Declining-balance rate is double the straight-line rate. Rate applied to book value. Declining-Balance DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration 10-13

20. Chapter 10-20 DepreciationDepreciation Illustration: (Declining-Balance Method) 201013,00040%$ 5,200 $ 7,800 20127,800403,1208,3204,680 20134,680401,87210,1922,808 20142,808401,12311,3151,685 20151,68540685*12,0001,000 * Computation of $674 ($1,685 x 40%) is adjusted to $685. Depreciation expense 5,200 Accumulated depreciation5,200 2010 Journal Entry Illustration 10-14

21. Chapter 10-21 SO 3 Compute periodic depreciation using different methods. Comparison of Depreciation Methods DepreciationDepreciation Illustration 10-15 Illustration 10-16

22. Chapter 10-22 The following five 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. Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods.

23. Chapter 10-23 Illustration: Barb’s Florists purchased a small delivery truck on October 1, 2010. Required: Compute depreciation using the following. (a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance. SO 3 Compute periodic depreciation using different methods. Illustration 10-7 Depreciation for Partial Year

24. Chapter 10-24 Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods. Illustration: (Straight-line Method)

25. Chapter 10-25 Illustration: (Units-of-Activity Method) 201015,000$ 0.12$ 1,800 $ 11,200 201130,0000.123,6005,4007,600 201220,0000.122,4007,8005,200 201325,0000.123,00010,8002,200 201410,0000.121,20012,0001,000 Depreciation expense 1,800 Accumulated depreciation 1,800 2010 Journal Entry Illustration 10-12 Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods.

26. Chapter 10-26 Illustration: (Declining-Balance Method) Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods.

27. Chapter 10-27 IRS does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. IRS requires the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS). MACRS is NOT acceptable under GAAP. Depreciation and Income Taxes DepreciationDepreciation SO 3 Compute periodic depreciation using different methods.

28. Chapter 10-28 Revising Periodic Depreciation Accounted for in the period of change and future periods (Change in Estimate). Not handled retrospectively. Not considered error. DepreciationDepreciation SO 4 Describe the procedure for revising periodic depreciation.

29. Chapter 10-29 Illustration: Assume that Barb’s Florists decides on January 1, 2013, to extend the useful life of the truck one year because of its excellent condition. The company has used the straight-line method to depreciate the asset to date, and book value is $5,800 ($13,000 - $7,200).Questions: 1.What is the journal entry to correct the prior years’ depreciation? 2.Calculate the depreciation expense for 2013. No Entry Required DepreciationDepreciation SO 4 Describe the procedure for revising periodic depreciation.

30. Chapter 10-30 DepreciationDepreciation Depreciation expense 1,600 Accumulated depreciation 1,600 Journal entry for 2013 SO 4 Describe the procedure for revising periodic depreciation. Book value, 1/1/13 $5,800 Salvage value Depreciable cost Useful life (revised) / Annual depreciation First, establish Book Value at the date of change in estimate. - 1,000 4,800 3 years $ 1,600 Illustration 10-17

31. Chapter 10-31 Ordinary Repairs - expenditures to maintain the operating efficiency and productive life of the unit. Debit - Repair (or Maintenance) Expense. Referred to as revenue expenditures. Expenditures During Useful Life SO 5 Distinguish between revenue and capital expenditures, and explain the entries for each. 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.

32. Chapter 10-32 Companies dispose of plant assets in three ways — Retirement, Sale, or Exchange (appendix). Plant Asset Disposals SO 6 Explain how to account for the disposal of a plant asset. Illustration 10-18 Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

33. Chapter 10-33 Illustration: Illustration: Assume that Hobart Enterprises retires its computer printers, which cost $32,000. The accumulated depreciation on these printers is $32,000. The journal entry to record this retirement is? Plant Asset Disposals - Retirement SO 6 Explain how to account for the disposal of a plant asset. Accumulated depreciation32,000 Printing equipment32,000 Question: What happens if a fully depreciated plant asset is still useful to the company?

34. Chapter 10-34 Illustration: Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulated depreciation of $14,000. The journal entry is? Plant Asset Disposals - Retirement SO 6 Explain how to account for the disposal of a plant asset. Accumulated depreciation14,000 Loss on disposal4,000 Companies report a loss on disposal in the “Other expenses and losses” section of the income statement. Delivery equipment18,000

35. Chapter 10-35 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. Plant Asset Disposals SO 6 Explain how to account for the disposal of a plant asset.

36. Chapter 10-36 Illustration: Assume that on July 1, 2010, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As of January 1, 2010, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2010 is $8,000. Prepare the journal entry to record depreciation expense up to the date of sale. SO 6 Explain how to account for the disposal of a plant asset. Plant Asset Disposals - Sale Depreciation expense8,000 Accumulated depreciation 8,000

37. Chapter 10-37 Illustration: Wright records the sale as follows. SO 6 Explain how to account for the disposal of a plant asset. Plant Asset Disposals - Sale Cash16,000 Accumulated depreciation 49,000 Illustration 10-19 Computation of gain on disposal Office equipment60,000 Gain on disposal 5,000 July 1

38. Chapter 10-38 Physically extracted in operations. Replaceable only by an act of nature. Natural resources consist of standing timber and underground deposits of oil, gas, and minerals. Distinguishing characteristics: Section 2 – Natural Resources

39. Chapter 10-39 Depletion is to natural resources as depreciation is to plant assets. Companies generally use units-of-activity method. Depletion generally is a function of the units extracted. Cost - price needed to acquire the resource and prepare it for its intended use. Depletion - allocation of the cost to expense in a rational and systematic manner over the resource’s useful life. Section 2 – Natural Resources SO 7 Compute periodic depletion of natural resources.

40. Chapter 10-40 Illustration: Assume that Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, Lane extracts and sells 800,000 tons of coal. Lane computes the depletion expense as follows: Section 2 – Natural Resources SO 7 Compute periodic depletion of natural resources. $5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton $.50 x 800,000 = $400,000 depletion expense Depletion expense400,000 Accumulated depreciation 400,000 Journal entry:

41. Chapter 10-41 Section 2 – Natural Resources SO 7 Compute periodic depletion of natural resources. Illustration 10-22 Statement presentation of accumulated depletion Extracted resources that have not been sold are reported as inventory in the current assets section.

42. Chapter 10-42 Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance. Section 3 – Intangible Assets Patents Copyrights Franchises or licenses Trademarks or trade names Goodwill Intangible assets are categorized as having either a limited life or an indefinite life. Common types of intangibles: SO 8 Explain the basic issues related to accounting for intangible assets.

43. Chapter 10-43 Purchased Intangibles: Recorded at cost. Includes all costs necessary to make the intangible asset ready for its intended use. Valuation Internally Created Intangibles: Generally expensed. Only capitalize direct costs incurred in perfecting title to the intangible, such as legal costs. Accounting for Intangible Assets SO 8 Explain the basic issues related to accounting for intangible assets.

44. Chapter 10-44 Amortization of Intangibles Limited-Life Intangibles: Amortize to expense. Credit asset account or accumulated amortization. Indefinite-Life Intangibles: No foreseeable limit on time the asset is expected to provide cash flows. No amortization. Accounting for Intangible Assets SO 8 Explain the basic issues related to accounting for intangible assets.

45. Chapter 10-45 Patents Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant. Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter. Expense any R&D costs in developing a patent. Legal fees incurred successfully defending a patent are capitalized to Patent account. Accounting for Intangible Assets SO 8 Explain the basic issues related to accounting for intangible assets.

46. Chapter 10-46 Illustration: Assume that National Labs purchases a patent at a cost of $60,000. National estimates the useful life of the patent to be eight years. National records the annual amortization as follows. Accounting for Intangible Assets SO 8 Explain the basic issues related to accounting for intangible assets. Amortization expense 7,500 Patent 7,500

47. Chapter 10-47 Copyrights Give the owner the exclusive right to reproduce and sell an artistic or published work.  plays, literary works, musical works, pictures, photographs, and video and audiovisual material. Copyright is granted for the life of the creator plus 70 years. Capitalize acquisition costs. Amortized to expense over useful life. Accounting for Intangible Assets SO 8 Explain the basic issues related to accounting for intangible assets.

48. Chapter 10-48 Trademarks and Trade Names Word, phrase, jingle, or symbol that identifies a particular enterprise or product.  Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca-Cola, and Jeep. Trademark or trade name has legal protection for indefinite number of 20 year renewal periods. Capitalize acquisition costs. No amortization. Accounting for Intangible Assets SO 8 Explain the basic issues related to accounting for intangible assets.

49. Chapter 10-49 Franchises and Licenses Contractual arrangement between a franchisor and a franchisee.  Shell, Taco Bell, or Rent-A-Wreck are franchises. Franchise (or license) with a limited life should be amortized to expense over the life of the franchise. Franchise with an indefinite life should be carried at cost and not amortized. Accounting for Intangible Assets SO 8 Explain the basic issues related to accounting for intangible assets.

50. Chapter 10-50 Goodwill Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc. Only recorded when an entire business is purchased. Goodwill is recorded as the excess of... over purchase price over the FMV of the identifiable net assets acquired. Internally created goodwill should not be capitalized. Accounting for Intangible Assets SO 8 Explain the basic issues related to accounting for intangible assets.

51. Chapter 10-51 Research and Development Costs Frequently results in something that a company patents or copyrights such as: new product, process, idea, formula, composition, or literary work. All R & D costs are expensed when incurred. SO 8 Explain the basic issues related to accounting for intangible assets.

52. Chapter 10-52 Presentation Companies usually include natural resources under “Property, plant, and equipment” and show intangibles separately. Statement Presentation and Analysis SO 9 Indicate how plant assets, natural resources, and intangible assets are reported. Illustration 10-24

53. Chapter 10-53 Analysis Each dollar invested in assets produced $0.56 in sales. If a company is using its assets efficiently, each dollar of assets will create a high amount of sales. Statement Presentation and Analysis SO 9 Indicate how plant assets, natural resources, and intangible assets are reported. Illustration 10-25

54. Chapter 10-54 Ordinarily, companies record a gain or loss on the exchange of plant assets. The rationale for recognizing a gain or loss is that most exchanges have commercial substance. An exchange has commercial substance if the future cash flows change as a result of the exchange. Exchange of Plant Assets SO 10 Explain how to account for the exchange of plant assets.

55. Chapter 10-55 Cost of old trucks$64,000 Less: Accumulated depreciation 22,000 Book value42,000 Fair market value of old trucks 26,000 Loss on disposal$16,000 Fair market value of old trucks$26,000 Cash paid 17,000 Cost of new semi-truck$43,000 Illustration: Roland Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck. The old trucks had a fair market value of $26,000. SO 10 Explain how to account for the exchange of plant assets. Exchange of Plant Assets Illustration 10A-1 & 10A-2

56. Chapter 10-56 Illustration: Roland Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck. The old trucks had a fair market value of $26,000. Prepare the entry to record the exchange of assets by Roland Co. SO 10 Explain how to account for the exchange of plant assets. Exchange of Plant Assets Semi-truck 43,000 Accumulated depreciation 22,000 Loss on disposal 16,000 Used trucks64,000 Cash 17,000

57. Chapter 10-57 Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of $19,000. Mark also paid $3,000. SO 10 Explain how to account for the exchange of plant assets. Exchange of Plant Assets Cost of old equipment$40,000 Less: Accumulated depreciation 28,000 Book value12,000 Fair market value of old equipment 19,000 Gain on disposal$ 7,000 Fair market value of old equipment$19,000 Cash paid 3,000 Cost of new equipment$22,000 Illustration 10A-3 & 10A-4

58. Chapter 10-58 Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of $19,000. Mark also paid $3,000. Prepare the entry to record the exchange of assets by Mark Express. SO 10 Explain how to account for the exchange of plant assets. Exchange of Plant Assets Delivery equipment (new) 22,000 Accumulated depreciation 28,000 Delivery equipment (used) 40,000 Gain on disposal7,000 Cash 3,000

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