Chapter 9

Plant Assets, Natural Resources, and

Intangible Assets
Learning Objectives
Chapter 9 how the historical cost principle
1. Describe
applies to plant assets.
2. Explain the concept of depreciation and
how to compute it.
3. Distinguish between revenue and capital
expenditures, and explain the entries for
each.
4. Explain how to account for the disposal of
a plant asset.
Learning
Chapter Objectives
9 (Cont.)
5. Compute periodic depletion of extractable
natural resources.
6. Explain the basic issues related to
accounting for intangible assets.
7. Indicate how plant assets, natural
resources, and intangible assets are
reported.
Preview of Chapter 9
Plant Assets
Plant assets are resources that have
 physical substance (a definite size and shape),
 are used in the operations of a business,
 are not intended for sale to customers,
 are expected to provide service to the company for a
number of years.
Determining the Cost of Plant Assets
In general, companies record plant assets at cost.

Cost consists of all expenditures necessary to

acquire an asset and make it ready for its
intended use.
Determining the Cost of Plant Assets
Land
All necessary costs incurred in making land ready for its
intended use increase (debit) the Land account.

Costs typically include:

1) cash purchase price,
2) closing costs such as title and attorney’s fees
3) real estate brokers’ commissions,
4) accrued property taxes by the purchaser, and
5) demolition and removal costs of existing building.
Determining the Cost of Plant Assets
Illustration: Lew Company acquires real estate at a
cash cost of HK$2,000,000. The property contains
an old warehouse that is razed at a net cost of
HK$60,000 (HK$75,000 in costs less HK$15,000
proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, HK$10,000, and
the real estate broker’s commission, HK$80,000.

Required: Determine the amount to be reported as

the cost of the land.
Determining the Cost of Plant Assets
Required: Determine amount to be reported as the cost of
the land.
Land
Cash price of property (HK$2,000,000) $2,000,000
Net removal cost of warehouse (HK$60,000) 60,000
Attorney's fees (HK$10,000) 10,000
Real estate broker’s commission (HK$80,000) 80,000
Cost of Land $2,150,000
Journal Entry
Land 2,150,000
Cash 2,150,000
Determining the Cost of Plant Assets
Land Improvements
Includes all expenditures necessary to make the
improvements ready for their intended use.

 Examples: driveways parking lots , fences,

landscaping , and underground sprinklers.
 Limited useful lives.
 Expense (depreciate) the cost of land improvements
over their useful lives.
Determining the Cost of Plant Assets
Buildings
Includes all costs related directly to purchase or
construction.

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 , excavation costs , interest costs incurred to
finance the project.
Determining the Cost of Plant Assets
Equipment
Include all costs incurred in acquiring the equipment
and preparing it for use.

Costs typically include:

 Cash purchase price.
 Sales taxes.
 Freight charges
 Insurance during transit paid by the purchaser.
 Expenditures required in assembling, installing, and
testing the unit.
Determining the Cost of Plant Assets
Illustration: Zhang Company purchases factory machinery at
a cash price of HK$500,000. Related expenditures are for
sales taxes HK$30,000, insurance during shipping HK$5,000,
and installation and testing HK$10,000. Compute the cost of
the machinery.
Machinery
Cash price $500,000
Sales taxes 30,000
Insurance during shipping 5,000
Installation and testing 10,000
Cost of Machinery HK$545,000
Determining the Cost of Plant Assets
Illustration: Zhang Company purchases factory machinery at
a cash price of HK$500,000. Related expenditures are for sales
taxes HK$30,000, insurance during shipping HK$5,000, and
installation and testing HK$10,000. Prepare the journal entry to
record these costs.

Equipment 545,000
Cash 545,000
Determining the Cost of Plant Assets
Illustration: Huang Company purchases a delivery truck at a
cash price of HK$420,000. Related expenditures are sales
taxes HK$13,200, painting and lettering HK$5,000, motor vehicle
license HK$800, and a three-year accident insurance policy
HK$16,000. Compute the cost of the delivery truck.
Truck
Cash price $420,000
Sales taxes 13,200
Painting and lettering 5,000

Cost of Delivery Truck $438,200

Determining the Cost of Plant Assets
Illustration: Huang Company purchases a delivery truck at a
cash price of HK$420,000. Related expenditures are sales
taxes HK$13,200, painting and lettering HK$5,000, motor vehicle
license HK$800, and a three-year accident insurance policy
HK$16,000. Prepare the journal entry to record these costs.

Equipment 438,200
License Expense 800
Prepaid Insurance 16,000
Cash 455,000
Depreciation
Depreciation
Process of allocating the cost of a plant asset to expense
over its useful (service) life in a rational and systematic
manner.

 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
Factors in Computing Depreciation
Illustration 9-6

Residual Value
Cost Useful Life ( 殘值 )
Depreciation
Depreciation Methods
Management selects the method that best measures an
asset’s contribution to revenue over its useful life.

Examples include:
(1) Straight-line method
(2) Units-of-activity method
(3) Declining-balance method
(4) MACRS
Depreciation
Illustration: Barb’s Florists purchased a small delivery truck on
January 1, 2014.
Illustration 9-7

Required: Compute depreciation using the following.

(a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance.
Depreciation
Straight-Line
 Expense is same amount for each year.
 Depreciable cost = Cost less residual value.
Illustration 9-8
 Depreciation
Illustration: (Straight-Line Method)
Illustration 9-10
Depreciable Annual Accum. Book
Year Cost x Rate = Expense Deprec. Value

2014 € 12,000 20% € 2,400 € 2,400 € 10,600

2015 12,000 20 2,400 4,800 8,200
2016 12,000 20 2,400 7,200 5,800
2017 12,000 20 2,400 9,600 3,400
2018 12,000 20 2,400 12,000 1,000

2014
Journal
Depreciation Expense 2,400
Entry Accumulated Depreciation 2,400
 Depreciation
Partial
Illustration: (Straight-Line Method)
Year
Assume the delivery truck was purchased on April 1, 2014.
Current
Depreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2014 € 12,000 x 20% = € 2,400 x 9/12 = € 1,800 € 1,800
2015 12,000 x 20% = 2,400 2,400 4,200
2016 12,000 x 20% = 2,400 2,400 6,600
2017 12,000 x 20% = 2,400 2,400 9,000
2018 12,000 x 20% = 2,400 2,400 11,400
2019 12,000 x 20% = 2,400 x 3/12 = 600 12,000
€ 12,000
Journal entry:
2014 Depreciation expense 1,800
Accumulated depreciation 1,800
Depreciation
Units-of-Activity
 Companies estimate total units of activity to
calculate depreciation cost per unit.
 Expense varies based on units of activity.
 Depreciable cost is cost less residual value.
Illustration 9-10
 Depreciation
Illustration: (Units-of-Activity Method)
Illustration 9-11
Units of Cost per Annual Accum. Book
Year Activity x Unit = Expense Deprec. Value
2014 15,000 € 0.12 € 1,800 € 1,800 € 11,200
2015 30,000 0.12 3,600 5,400 7,600
2016 20,000 0.12 2,400 7,800 5,200
2017 25,000 0.12 3,000 10,800 2,200
2018 10,000 0.12 1,200 12,000 1,000

2014
Journal
Depreciation Expense 1,800
Entry Accumulated Depreciation 1,800
Depreciation
Declining-Balance
 Accelerated method .
 Decreasing annual depreciation expense over the
asset’s useful life.
 Twice the straight-line rate with Double-Declining-
Balance.
 Rate applied to book value (cost less accumulated
depreciation). Illustration 9-12
 Depreciation
Illustration: (Declining-Balance Method)
Declining Illustration 9-13
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value

2014 € 13,000 40% € 5,200 € 5,200 € 7,800

2015 7,800 40 3,120 8,320 4,680
2016 4,680 40 1,872 10,192 2,808
2017 2,808 40 1,123 11,315 1,685
2018 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.

2014 Depreciation Expense 5,200

Journal
Entry Accumulated Depreciation 5,200
 Depreciation
Illustration: (Declining-Balance Method) Partial
Year
Declining Current
Beginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2014 € 13,000 x 40% = € 5,200 x 9/12 = € 3,900 € 3,900
2015 9,100 x 40% = 3,640 3,640 7,540
2016 5,460 x 40% = 2,184 2,184 9,724
2017 3,276 x 40% = 1,310 1,310 11,034
2018 1,966 x 40% = 786 786 11,821
2019 1,179 x 40% = 472 Plug 179 12,000
€ 12,000
Journal entry:

2014 Depreciation expense 3,900

Accumulated depreciation 3,900
Depreciation
Illustration 9-14

Comparison of
Methods

Illustration 9-15

Each method is acceptable

because each recognizes the
decline in service potential of
the asset in a rational and
systematic manner.
Depreciation
Component Depreciation

 IFRS requires component depreciation for plant

assets.
 Requires that any significant parts of a plant
asset that have significantly different estimated
useful lives should be separately depreciated.
Depreciation
Illustration: Lexure Construction builds an office building for
HK$4,000,000. The building is estimated to have a 40-year useful
life, however HK$320,000 of the cost of the building relates to
personal property and HK$600,000 relates to land improvements.
Because the personal property has a depreciable life of 5 years
and the land improvements have a depreciable life of 10 years,
Lexure must use component depreciation. Assuming that Lexure
uses straight-line depreciation and no residual value, component
depreciation for the first year of the office building is computed
as follows. Illustration 9-16
Depreciation
Depreciation and Income Taxes

Tax laws often do not require corporate taxpayers to use

the same depreciation method on the tax return that is
used in preparing financial statements.

Many corporations use

 straight-line in their financial statements to maximize
net income.
 an accelerated-depreciation method on their tax
returns to minimize their income taxes.
Depreciation
Revising Periodic Depreciation

 Depreciation is an estimation in the

accounting process.
 The company makes the change in the
current and future periods (change in
estimate).
 No restatement of prior years depreciation
expense.
Depreciation
Illustration: Barb’s Florists purchased truck for $13,000 which
was estimated to have a useful life of 5 years with a residual value
of $1,000 at the beginning of 2014. Assume that Barb’s Florists
decides on January 1, 2017, to extend the useful life of the
truck one year (a total life of six years) and increase its
residual value to $2,200. The company has used the straight-
line method to depreciate the asset.

Questions:
1. What is the journal entry to correct No Entry
Required
the prior years’ depreciation?
2. Calculate the depreciation expense
for 2017.
 After 3 years
Depreciation
Equipment cost $13,000 First, establish NBV
residual value - 1,000 at date of change in
Depreciable base 12,000 estimate.
Useful life (original) 5 years
Annual depreciation $2,400 x 3 years = $7,200

Balance Sheet (Dec. 31, 2016)

Property, Plant, and Equipment
Equipment $13,000
Accumulated depreciation 7,200
Net book value (NBV) $5,800
Depreciation
Net book value $5,800 Depreciation
residual value (new) - 2,200 Expense calculation
Depreciable base 3,600 for 2017.
Useful life (revised) 3 years (2017-2019)
Annual depreciation $1,200

Journal entry for 2017 and future years.

Depreciation Expense 1,200

Accumulated Depreciation 1,200
 MACRS
• MACRS stands for Modified Accelerated
Cost Recovery System.
• Class asset life is determined.
• Depreciation rates are found in the
relevant table provided by the IRS.
• Listed property items are those which are
subject to personal use such as computers
and automobiles.
Revaluation of Plant Assets
IFRS allows companies to revalue plant assets
to fair value at the reporting date.
If revaluation is used,
 it must be applied to all assets in a class of
assets.
 assets experiencing rapid price changes
must be revalued on an annual basis.
 Revaluation of Plant Assets
Illustration: Pernice Company applies revaluation to equipment
with a book (carrying) value of HK$1,000,000, a useful life of 5
years, and no residual value. Pernice makes the following journal
entries in year 1, assuming straight-line depreciation.

Depreciation Expense 200,000

Accumulated Depreciation 200,000

At the end of year 1, independent appraisers determine that

the asset has a fair value of HK$850,000.The entry to record
the revaluation is as follows.

Accumulated Depreciation 200,000

Equipment 150,000
Revaluation Surplus 50,000
 Revaluation of Plant Assets
Illustration 9-18

As indicated,
 HK$850,000 is the new basis of the asset.
 Depreciation expense of HK$200,000 in the income
statement.
 HK$50,000 in other comprehensive income .
 Assuming no change in the total useful life, depreciation in
year 2 will be HK$212,500 (HK$850,000 ÷ 4).
Expenditures During Useful Life
Ordinary Repairs - expenditures to maintain the
operating efficiency and productive life of the unit.
 Debit – Maintenance and Repairs Expense.
 Referred to as revenue expenditures.

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.
Plant Asset Disposals
Companies dispose of plant assets in three ways—Sale,
Retirement ( 報廢 ) , or Exchange (appendix).
Illustration 9-19

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation,
and (2) crediting the Asset account.
Plant Asset Disposals
Retirement of Plant Assets

 No cash is received.
 Decrease (debit) Accumulated Depreciation for
the full amount of depreciation taken over the life of
the asset.
 Decrease (credit) the asset account for the original
cost of the asset.
 Record any difference as gain or loss on disposal.
Plant Asset Disposals
Illustration: Hobart Enterprises retires its computer printers,
which cost €32,000. The accumulated depreciation on these
printers is €32,000. Prepare the entry to record this retirement.

Accumulated Depreciation 32,000

Equipment
32,000
Plant Asset Disposals
Illustration: Sunset Company discards delivery equipment
that cost €18,000 and has accumulated depreciation of
€14,000. The journal entry is?

Accumulated Depreciation 14,000

Loss on Disposal of Plant Assets 4,000
Equipment
18,000

Companies report a loss on disposal in the “Other income

and expense” section of the income statement.
Plant Asset Disposals
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
Gain on Sale
Illustration: On July 1, 2014, Wright Company sells office
furniture for €16,000 cash. The office furniture originally cost
€60,000. As of January 1, 2014, it had accumulated
depreciation of €41,000. Depreciation for the first six months
of 2014 is €8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.

July 1 Depreciation Expense 8,000

Accumulated Depreciation
8,000
 Plant Asset Disposals
Illustration 9-20
Computation of
gain on disposal

Illustration: Wright records the sale as follows.

July 1 Cash 16,000

Accumulated Depreciation 49,000
Equipment 60,000
Gain on Disposal of Plant Assets
5,000
 Plant Asset Disposals
Illustration: Assume that instead of selling the office furniture
for €16,000, Wright sells it for €9,000.

Illustration 9-21
Computation of
loss on disposal

July 1 Cash 9,000

Accumulated Depreciation 49,000
Loss on Disposal of Plant Asset 2,000
Equipment 60,000
 Extractable Natural Resources
Natural resources consist of standing timber ( 林木 ) and
resources extracted from the ground, such as oil, gas, and
minerals .

IFRS defines extractive industries as those businesses

involved in finding and removing natural resources located in
or near the earth’s crust .
Standing timber is considered a biological asset ( 生物資產 )
under IFRS. In the years before they are harvested, the
recorded value of biological assets is adjusted to fair value each
period.
Extractable Natural Resources
Acquisition cost of an extractable natural resource is the
 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.
 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.
 Extractable Natural Resources
Illustration: Lane Coal Company invests HK$50 million in a
mine estimated to have 10 million tons of coal and no residual
value. In the first year, Lane extracts and sells 800,000 tons of
coal. Lane computes the depletion expense as follows:

HK$50,000,000 ÷ 10,000,000 = HK$5 depletion cost per ton

HK$5 x 800,000 = HK$4,000,000 annual depletion expense

Journal entry:
Depletion Expense 4,000,000
Accumulated Depletion
4,000,000
Extractable Natural Resources
Illustration 9-23
Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported

as inventory in the current assets section.
Intangible Assets
Intangible assets are rights, privileges (, and competitive
advantages that result from ownership of long-lived assets
that do not possess physical substance.
Limited life or indefinite life.
Common types of intangibles:

 Patents  Trademarks and Trade Name

 Copyrights  Franchises or licenses
 Goodwill
Accounting for Intangible Assets
Limited-Life Intangibles: Companies classify
 Amortize to expense . Amortization Expense
as an operating expense
 Credit asset account.
in the income statement.
Indefinite-Life Intangibles:
 No amortization.

Similar to property, plant, and equipment, IFRS

permits revaluation of intangible assets to fair
value, except for goodwill.
Accounting for Intangible Assets
Patents
 Exclusive right to manufacture, sell, or otherwise
control an invention for a specified number of years
from the date of the grant.
 Capitalize costs of purchasing a patent and
amortize over its legal life (20 years) or its useful life,
whichever is shorter.
 Expense any Research and Development costs in
developing a patent.
 Legal fees incurred successfully defending a patent
are capitalized to Patent account.
Accounting for Intangible Assets
Illustration: National Labs purchases a patent at a cost of
NT$720,000. National estimates the useful life of the patent to
be eight years. National records the annual amortization for the
ended December 31 as follows.

Cost NT$720,000
Useful life ÷ 8 years
Annual expense NT$ 90,000

Dec. 31
Amortization Expense 90,000
Patents
90,000
Accounting for Intangible Assets
Copyrights

 Give the owner the exclusive right to reproduce

and sell an artistic or published work.
 Granted for the life of the creator plus a
specified number of years, commonly 70 years.
 Capitalize costs of acquiring and defending it.
 Amortized to expense over useful life.
Accounting for Intangible Assets
Trademarks and Trade Names
 Word, phrase, jingle, or symbol that identifies a
particular enterprise or product.
► HTC, Starbucks, Apple, 7-11, Windows, Coca-Cola,
Big Mac, and Jetta.
 Legal protection for specified number of years,
commonly 20 years. Protection may be renewal
indefinitely.
 Capitalize cost of acquisition.
 No amortization.
Accounting for Intangible Assets
Franchises and Licenses
 Contractual arrangement between a franchisor and a
franchisee.
► Subway (USA), , McDonald's, Pizza Hut, Dunkin'
Donuts, BP (GBR), and Europcar are franchises.
 Franchise (or license) with a limited-life should be
amortized to expense over its useful life.
 Franchise (or license) with an indefinite life is not
amortized.
Accounting for Intangible Assets
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 cost over the
fair value of the net assets acquired.
 Internally created goodwill should not be capitalized.
 Not amortized.
Research and Development Costs
Expenditures that may lead to
 patents,
All R & D costs
 copyrights, are expensed
when incurred.
 new processes, and
 new products.
Research and Development Costs
Illustration: Laser Scanner Company spent NT$1 million on
research and NT$2 million on development of new products. Of
the NT$2 million in development costs NT$500,000 was incurred
prior to technological feasibility and NT$1,500,000 was incurred
after technological feasibility had been demonstrated. The
company would record these costs as follows.

Research Expense 1,000,000

Development Expense 500,000
Development Costs 1,500,000
Cash 3,000,000
Statement Presentation and Analysis
Presentation Illustration 9-24
Statement Presentation and Analysis
Analysis
Illustration 9-25

Each Korean won invested in assets produced W 1.52 in

sales for LG. If a company is using its assets efficiently,
each investment in assets will create a high amount of
sales.