1. Plant Assets and Intangibles
Chapter 10

2. Plant Assets Asset Account on Related Expense Account
the Balance Sheet on the Income Statement
Plant Assets
Land……………………………… none
Buildings, Machinery and
Equipment, Furniture
and Fixtures, and Land
Improvements………….… Depreciation
Natural Resources………..…… Depletion
Intangibles………………………. Amortization

3. Objective 1
Measure the cost
of a plant asset.

4. Cost Principle An asset must be carried on the
balance sheet at the amount paid for it.
The cost of an asset equals the sum of
all of the costs incurred to bring the asset
to its intended purpose, net of discounts

5. Land and Land Improvements
Purchase price of land $500,000
Add related costs:
Back property taxes $40,000
Transfer taxes ,000
Removal of buildings 5,000
Survey fees , ,000
Total cost of land $554,000

6. Land Improvements
All improvements located on the land but subject to decay:
Paving
Fences
Sprinkler systems
Lights in parking lot

7. Buildings – Construction
Architectural fees
Building permits
Contractor’s charges
Materials
Labor
Overhead

8. Buildings – Purchasing
Purchase price
Brokerage commissions
Sales and other taxes
Repairing or renovating building
for its intended purpose

9. Machinery and Equipment
Purchase price less discounts
Transportation charges
Insurance in transit
Sales and other taxes
Purchase commissions
Installation cost
Expenditures to test asset
before it is placed in service

10. Lump-Sum Purchases Example
Andrea Ortiz paid $110,000 for a combined purchase of land and a building.
The land is appraised at $90,000 and the building at $60,000.
How much of the purchase price is allocated to land and how much to the building?

11. Lump-Sum Purchases Example
Land: $90,000 ÷ $150,000 = 60%
$110,000 × 60% = $66,000
Building: $60,000 ÷ $150,000 = 40%
$110,000 × 40% = $44,000

12. Distinction Between Capital and Revenue Expenditures
Does the expenditure increase capacity
or efficiency or extend useful life?
YES NO
Capital Expenditure
Debit Plant Assets
accounts
Revenue Expenditure
Debit Repairs and
Maintenance account

13. Measuring the Depreciation of Plant Assets
Cost or basis
Estimated residual value
Estimated useful life

14. Account for depreciation.
Objective 2
Account for depreciation.

15. Units-of-Production (UOP)
Depreciation Methods
Straight-Line (SL)
Units-of-Production (UOP)
Double-Declining-Balance (DDB)

16. Depreciation Methods Example
Donishia and Richard Catering, Inc., purchased a delivery van on January 1, 200x, for $22,000.
The company expects the van to have a trade-in value of $2,000 at the end of its useful life.
The van has an estimated service life of 100,000 miles or 4 years.

17. Straight-Line Method Example
(Cost – Residual value) ÷ years of useful life
($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000
Year 1 Depreciation: $ 5,000
Year 2 Depreciation: ,000
Year 3 Depreciation: ,000
Year 4 Depreciation: ,000
Total Depreciation: $20,000

18. Units-of-Production Method Example
($22,000 – 2,000) ÷ 100,000 = $.20/mile
Year 1: 30,000 miles = $ 6,000
Year 2: 27,000 miles = 5,400
Year 3: 23,000 miles = 4,600
Year 4: 20,000 miles = 4,000
Total: 100,000 miles = $20,000
(Actual mileage in year 4 was 22,000)

19. Double-Declining-Balance Method Example
Straight-line rate is 100% ÷ 4 = 25%
Double-declining-balance = 2 times the straight-line rate = 50%
What is the book value of the van at the end of the first year?
$22,000 × 50% = $11,000
$22,000 – $11,000 = $11,000

20. Double-Declining-Balance Method Example
Dec. 31, 200x
Depreciation Expense $11,000
Accumulated Depreciation $11,000
To record depreciation expense for a one-year period

21. Depreciation Methods Comparison

22. Use of Depreciation Methods

23. Select the best depreciation method for tax purposes.
Objective 3
Select the best depreciation
method for tax purposes.

24. Relationship Between Depreciation and Taxes
MACRS was created by the Tax Reform Act of 1986.
It is an accelerated method used for depreciating equipment.

25. Depreciation for Partial Years
Assume that Donishia and Richard Catering, Inc., owned the van for 3 months.
How much is the van’s depreciation?
Straight-line method:
$5,000 × 3/12 = $1,250
Double-declining-balance method:
$11,000 × 3/12 = $2,750

26. Revising Depreciation Rates
Revised SL depreciation =
Cost – Accumulated depreciation –
New residual value ÷
Remaining useful life

27. Account for the disposal
Objective 4
Account for the disposal
of a plant asset.

28. Disposing of Plant Assets
selling
exchanging
discarding (scrapping it)
Gain/loss is reported on the income statement...
and closed to Income Summary.

29. Disposing by Discarding Example
On September 1, Joe, manager of Joe’s Landscaping, is contemplating the disposal of an old piece of equipment:
Equipment cost: $36,000
Residual value: $ 6,000
Accumulated depreciation: $20,000
Estimated useful life at acquisition: 10 years

30. Disposing by Discarding Example
Assume the equipment is discarded on November 30.
What is the accumulated depreciation on November 30?
($36,000 – $6,000) ÷ 10 = $3,000
$3,000 ÷ 12 = $250
$250 × 3 = $750
$20,000 + $750 = $20,750

31. Disposing by Discarding Example
November 30, 20xx
Accumulated Depreciation 20,750
Loss on disposal 15,250
Equipment ,000
To record discarding of equipment

32. Selling a Plant Asset Example
Assume the equipment is sold for $10,000.
What is the gain or loss on disposal?
Cash ,000
Accumulated Depreciation 20,750
Loss on Sale of Equipment 5, Equipment ,000
To record sale of equipment for $10,000

33. Selling a Plant Asset Example
Equipment is sold for $20,000.
What is the gain or loss on disposal?
Cash 20,000
Accumulated Depreciation 20, Gain on Sale of Equipment , Equipment ,000
To record sale of equipment for $20,000

34. Exchanging Plant Assets
Assume equipment with a cost of $36,000 and a book value of $15,250 is exchanged for new, similar equipment having a cost of $42,000 with a trade-in of $18,000 allowed.
Cash payment is $24,000.
What is the cost of the new asset?
$24,000 + $15,250 = $39,250

35. Exchanging Plant Assets
Equipment (new) $39,250
Accumulated Depreciation (old) $20,750
Equipment (old) $36,000
Cash $24,000

36. Account for natural resources
Objective 5
Account for natural resources

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

38. Account for intangible assets
Objective 6
Account for intangible assets

39. Intangible Assets Not physical in nature Patents Copyrights Trademarks
Franchises
Leaseholds
Goodwill

40. Intangible Assets: Patents
Patents are federal government grants.
They give the 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.
What are the entries?

41. Intangible Assets: Patents
Jan. 1
Patents ,000
Cash ,000
To acquire a patent
Dec. 31
Amortization Expense 34,000
Patents ,000
To amortize the cost of a patent

42. Intangible Assets: Copyrights
Literary compositions (novels)
Musical compositions
Films (movies)
Software
Other works of art

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

44. Intangible Assets: Franchises
Franchises are privileges granted by private business or government to sell a product or service.

45. Intangible Assets: Goodwill
Goodwill is defined as the excess of purchase price over the fair value of the net assets acquired.
Goodwill can only be recorded in the purchase of another company.
Goodwill is no longer amortized
Goodwill is now subject to an “impairment” test.

46. Intangible Assets: Goodwill
Goodwill Example
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

47. Special Issues International accounting for goodwill
Research and development
Capitalize or expense a cost

48. End of Chapter 10