ACC101- PRINCIPLE OF ACCOUNTING

Session 23
CHAPTER 10: PLANT ASSETS, NATURAL RESOURCES,
AND INTANGIBLES

1
 OBJECTIVES
PLANT ASSETS

C1 Explain the cost principle for computing the cost of plant assets..

P1 Compute and record depreciation using the straight-line, units-of-production, and declining-balance
methods
C2 Explain depreciation for partial years and changes in estimates

C3 Distinguish between revenue and capital expenditures, and account for them.

P2 Account for asset disposal through discarding or selling an asset.

NATURAL RESOURCES

P3 Account for natural resource assets and their depletion.

INTANGIBLE ASSETS

P4 Account for intangible assets.

A1 Compute total asset turnover and apply it to analyze a company’s use of assets. 2
 S1. Plant Assets
C1

Tangible in Nature

Actively Used in Operations

plant assets have useful

Expected to Benefit Future Periods lives extending over
more than one
accounting period.

Called Property, Plant, & Equipment

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 S1. Plant Assets
C1

Use
Acquisition 2. Allocate cost to periods Disposal
1. Compute cost. benefited. 4. Record disposal.
3. Account for subsequent
expenditures.
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S1. Plant Assets
1. Cost Determination
P1

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

Acquisition cost excludes financing charges and cash discounts.

(*) The cost of a factory machine, for instance, includes its invoice cost less
any cash discount for early payment, plus any necessary freight, unpacking,
assembling, installing, and testing costs

Finance charges are not included in the cost of an asset and the interest cost
is charged as an expense when incurred. 5
S1. Plant Assets
1. Cost Determination
P1 Land
Title insurance premiums

Purchase Delinquent
price taxes

Real estate Surveying

commissions fees

Title search and transfer fees

Land is not depreciable, unlimited life.

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S1. Plant Assets
1. Cost Determination
P1 Land Improvements

Parking lots, driveways, fences, walks, shrubs, and lighting systems.

▪ They are charged to a separate Land

▪ Improvement account Depreciate over useful life of improvements.

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S1. Plant Assets
1. Cost Determination
P1 Buildings

Necessary repairs or
renovations
Title fees
Cost of purchase or
construction
Attorney fees

Brokerage fees
Taxes
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S1. Plant Assets
1. Cost Determination
P1 Machinery and Equipment

Purchase price Taxes

Transportation
charges

Installing,
assembling, and Insurance while
testing in transit

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S1. Plant Assets
1. Cost Determination
P1 1.1. Lump-Sum Asset Purchase

The total cost of a combined purchase of land and building is

allocated on the basis of their relative fair market values.

Oakley 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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S1. Plant Assets
2. Depreciation
C2
2.1. Factors in Computing 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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S1. Plant Assets
2. Depreciation
C2
2.1. Factors in Computing Depreciation

The calculation of depreciation requires three amounts for each asset:

1. Cost

2. Salvage Value residual value or scrap value

3. Useful Life service life

▪ Inadequacy refers to the insufficient capacity of a company’s plant assets to meet its
growing productive demands.
▪ Obsolescence refers to the condition of a plant asset that is no longer useful in producing
goods or services with a competitive advantage because of new inventions and
improvements
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S1. Plant Assets
2. Depreciation
P2 2.1. Depreciation Methods

1. Straight-line
Depreciation Methods
2. Units-of-production
3. Declining-balance
Asset we will depreciate

Cost $ 10,000
Salvage value 1,000
Depreciable cost $ 9,000
Useful life
Accounting periods 5 years
Units inspected 36,000 units
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S1. Plant Assets
2. Depreciation
P2 2.1. Depreciation Methods

Straight-Line Method

Depreciation Cost - Salvage Value

Expense for Period = Useful life
Cost $ 10,000
Salvage value 1,000
Depreciable cost $ 9,000
$10,000 - $1,000
5 years = $1,800/year
Useful life
Accounting periods 5 years
Units inspected 36,000 units

DR CR
Dec 31 Depreciation Expense 1,800
Accumulated Depreciation - Machinery 1,800
To record annual depreciation expense 14
S1. Plant Assets
2. Depreciation
P2 2.1. Depreciation Methods
Straight-Line Method
Annual Depreciation Expense Book Value
2,500 10,000
8,200
2,000 8,000
6,400
1,500 1,800 1,800 1,800 1,800 1,800 6,000 4,600
1,000 4,000 2,800
500 2,000 1,000

- -
1 2 3 4 5 1 2 3 4 5

Depreciation Expense Book Value

The net balance sheet amount is the asset book value, or simply book value

Balance Sheet Presentation

Machinery $ 10,000
Less: accumulated depreciation 1,800 $ 8,200
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S1. Plant Assets
2. Depreciation
P2 2.1. Depreciation Methods

Units-of-Production Method

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

Step 2:
Number of Units
Depreciation Depreciation Produced
Expense = Per Unit ×
in the Period
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S1. Plant Assets
2. Depreciation
P2 2.1. Depreciation Methods
Units-of-Production Method
Cost $ 10,000
Assume that 7,000 units were inspected
Salvage value 1,000
during 2009. Depreciation would be
Depreciable cost $ 9,000
Useful life
calculated as follows:
Accounting periods 5 years
Units inspected 36,000 units

Step 1:
Depreciation = Cost - Salvage Value = $9,000 = $025/unit
Per Unit Total Units of Production 36,000

Step 2:
Number of Units
Depreciation Depreciation = $025 × 7,000 = $1,750
= × Produced
Expense Per Unit
in the Period
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S1. Plant Assets
2. Depreciation
P2 2.1. Depreciation Methods
Double-Declining-Balance Method
Step 1:
Straight-line
= 100 % ÷ Useful life = 100% ÷ 5 = 20%
rate

Step 2:

Double-declining-
balance rate = 2 × Straight-line rate = 2 × 20% = 40%

Step 3:
Depreciation Double-declining- × Beginning period
expense = balance rate book value
40% × $10,000 = $4,000 for 2009
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S1. Plant Assets
2. Depreciation
C2
2.1. Depreciation Methods
Double-Declining-Balance Method

Depreciation for the Period End of Period

Beginning Depreciation Depreciation Accumulated Book
Year Book Value Expense Expense Depreciation Value
Initial cost $10,000
2009 $10,000 40% $4,000 $4,000 6,000
2010 6,000 40% 2,400 6,400 3,600
2011 3,600 40% 1,440 7,840 2,160
2012 2,160 40% 864 8,704 1,296
2013 1,296 40% 296* 9,000 1,000
* Year 2013 depreciation is $1,296 - $1000 = $296
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S1. Plant Assets
2. Depreciation
A1
2.1. Depreciation Methods

Comparing Depreciation Methods

Depreciation Expense Per Year

$4,000

$3,000

$2,000

$1,000

$-
2009 2010 2011 2012 2013

Straight- Line Units-of- Production DDB

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S1. Plant Assets
2. Depreciation
A1
2.1. Depreciation Methods

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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S1. Plant Assets
2. Depreciation
C3 2.2. Partial-Year Depreciation

When a plant asset is acquired during the year, depreciation is

calculated for the fraction of the year the asset is owned.

Cost $ 10,000
Salvage value 1,000 Assume our machinery was purchased
Depreciable cost $ 9,000 on October 1, 2009. Let’s calculate
Useful life depreciation expense for 2009,
Accounting periods 5 years assuming we use straight-line
Units inspected 36,000 units depreciation.

Depreciation = ($10,000 - $1,000) ÷ 5 = $1,800 for all 2009

Depreciation = $1,800 × 3/12 = $450
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S1. Plant Assets
2. Depreciation
C3
2.3. Change in Estimates for Depreciation

Predicted Predicted
salvage value useful life

So 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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S1. Plant Assets
2. Depreciation
C3 2.3. Change in Estimates for Depreciation

▪ Let’s return to our machinery and assume that at the beginning of the asset’s third
year, its book value is $6,400 ($10,000 cost less $3,600 accumulated depreciation using
straight-line depreciation).

▪ At that time, it is determined that the machinery will have a remaining useful life of 4
years (instead of the previous estimate of 3 years), and the estimated salvage value will
change from $1,000 to $400.

Book value at Salvage value at

date of change – date of change
= $6,400 - $400
= $1,500/year
Remaining useful life 4 years
at date of change
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S1. Plant Assets
2. Depreciation
C3
2.4. Reporting Depreciation

Dale Jarrett Racing Adventure

Office furniture and equipment $ 45,386
Shop and track equipment 123,378
Race vehicles and other 775,363
Property and equipment, gross 944,127
Less: accumulated depreciation 715,435
Property and equipment, net $ 228,692

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S1. Plant Assets
3. Additional Expenditures
P3 ▪ Revenue expenditures, also called income statement expenditures, are additional
costs of plant assets that do not materially increase the asset’s life or productive
capabilities.
▪ Capital expenditures, also called balance sheet expenditures, are additional costs of
plant assets that provide benefits extending beyond the current period

F inanc ial S tatement E ffec t

C urrent C urrent
Treatment S tatement E xpens e Inc ome T axes
Capital B a la nc e she e t
Deferred Hig her Hig her
Expenditure a c c ount de bite d
Revenue Income statement C urrently
L ower L ower
Expenditure account debited rec og niz ed

If the amounts involved are not material, most companies expense the item.
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S1. Plant Assets
3. Additional Expenditures
P3
3.1. 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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S1. Plant Assets
4. Disposals of Plant Assets
P4

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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S1. Plant Assets
4. Disposals of Plant Assets
P4 4.1. Discarding Plant Assets
Update depreciation
If Cash > BV,to the adate
record gain of disposal.
(credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.

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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S1. Plant Assets
4. Disposals of Plant Assets
P4 4.1. 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: Update depreciation to July 1st:
($8,000 ÷ 8 years = $1,000 per year × ½ year = $500)
DR CR
Jul 1 Depreciation Expense 500
Accumulated Depreciation - Equipment 500
To record one-half year depreciation

Step 2: Record discarding of the equipment:

Accumulated depreciation at July 1st = $6,000 + $500 = $6,500.
DR CR
Jul 1 Accumulated depreciation - Equipment 6,500
Loss on Disposal of Equipment 1,500
Equipment 8,000
To record discarding of equipment 30
S1. Plant Assets
4. Disposals of Plant Assets
P4 4.2. Selling Plant Assets

On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st 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:
($4,000 × ¼ year = $1,000)
DR CR
Mar 31 Depreciation Expense 1,000
Accumulated Depreciation - Equipment 1,000
To record three month's depreciation expense

Calculate Book Value

Cost $ 16,000
Accumulated Depreciation:
($12,000 + $1,000) 13,000
Book Value $ 3,000
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S1. Plant Assets
4. Disposals of Plant Assets
P3 4.2. Selling Plant Assets

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.

Step 2: Next, we calculate the gain or loss on the sale:

Book Value 3,000
Cash Received 2,500
Loss on sale $ (500)

Finally, we record the sale:

DR CR
Mar 31 Accumulated depreciation - Equipment 13,000
Loss on Disposal of Equipment 500
Cash 2,500
Equipment 16,000
To record sale of equipment 32
S2. Natural Resources
1. Cost Determination and Depletion
P5

Total cost, including

Extracted from the natural
exploration and
environment and reported
development, is charged
at cost less accumulated
to depletion expense over
depletion.
periods benefited.

Examples: oil, coal, gold

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S2. Natural Resources
1. Cost Determination and Depletion
P5
Depletion is the process of allocating the cost of a natural resource to the
period when it is consumed.

Step 1:
Depletion Per Unit Cost - Salvage Value
=
Total Units of Capacity

Step 2:
Units Extracted and
Depletion Expense = Depletion Per Unit ×
Sold in Period

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S2. Natural Resources
1. Cost Determination and Depletion
P5

Consider mineral deposits with an estimated 250,000 tons of available

ore. It is purchased for $500,000, and we expect zero salvage value.

Step 1:
$500,000 - $0
Depletion per Unit = 250,000 tons
= $2 per ton

Step 2: If the company extracts and sells 85,000 tons of ore during the year:
85,000 tons × $2 per ton = $170,000 depletion expense
DR CR
Dec 31 Depletion Expense - Ore Deposit 170,000
Accumulated Depletion - Ore Deposit 170,000
To record annual depletion expense

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S2. Natural Resources
2. Plant Assets Used in Extracting
P5

Specialized plant assets may be required to extract the natural resource.

These assets are recorded in a separate account and depreciated.

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S3. Intangible Assets
1. Cost Determination and Amortization
P6

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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S3. Intangible Assets
1. Cost Determination and Amortization
P6

Record at current cash o Patents

equivalent cost, o Copyrights
including purchase
o Leaseholds
price, legal fees, and
o Leasehold Improvements
filing fees.
o Franchises & Licenses

o Goodwill

o Trademarks & Trade Names

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 For Ind.
Assignment, Total Asset Turnover
A2 read pg. 433
Net Sales
Total Asset
Turnover = Average Total Assets

Provides information about a company’s efficiency in using its assets.

Company $ in millions 2006 2005 2004 2003

Molson Coors Net sales $ 5,845 $ 5,507 $ 4,306 $ 4,000
Average total assets 11,701 8,228 4,551 4,392
Total asset turnover 0.50 0.67 0.95 0.91
Anheuser-Busch Net sales $ 15,717 $ 15,036 $ 14,934 $ 14,147
Average total assets 16,466 16,362 15,431 14,405
Total asset turnover .95 .92 .97 .98
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Homework

HOMEWORK:
E10-2, pg. 442,10-17, 10-18, pg. 444
Problem 10-1A, pg. 445, Problem 10-2A, pg. 445, 10-4A, 10-5A
pg. 447 (Wild 22nd ed)

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