Financial Accounting

IFRS 5th Edition

Weygandt ● Kimmel

Chapter 9

Plant Assets, Natural Resources, and

Intangible Assets
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Chapter Outline
Learning Objectives
LO 1 Explain the accounting for plant asset
expenditures.
LO 2 Apply depreciation methods to plant assets.
LO 3 Explain how to account for the disposal of plant
assets.
LO 4 Describe how to account for natural resources
and intangible assets.
LO 5Discuss how plant assets, natural resources, and
intangible assets are reported and analyzed.
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Learning Objective 1
Explain the Accounting for Plant
Asset Expenditures.

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Plant Assets
Plant assets are resources that
• have a 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 be of use to the company for a
number of years (unlike land, plant assets decline in
service potential over their useful lives)
Referred to as property, plant, and equipment; plant
and equipment; and fixed assets.
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Plant Assets as % of Total Assets
Plant assets play a key role in ongoing operations.

Illustration 9.1: Percentages of plant assets in relation to total assets

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Historical Cost Principle
• Requires that companies record plant assets at cost
• Cost consists of all expenditures necessary to
acquire an asset and make it ready for its intended
use

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The Cost of Plant Assets – Land
All necessary costs incurred in making land ready for
its intended use increase the Land account (debit).
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 and other liens on land
assumed by the purchaser

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Land Example
Illustration: Lew Ltd. 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. Determine the amount
to be reported as the cost of the land.

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Land Example – Solution
Required: Determine amount to be reported as the cost of
the land.
Land
Cash price of property HK$2,000,000
Net removal cost of warehouse (HK$75,000 − HK$15,000) 60,000
Attorney’s fee 10,000
Real estate broker’s commission 80,000
Cost of land HK$2,150,000

Illustration 9.2: Computation of cost of land

Lew makes the following entry:
Land 2,150,000
Cash 2,150,000
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The Cost of Plant Assets – Land
Improvements
Structural additions with limited lives that are made to
land. Cost 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) cost of land improvements
over their useful lives

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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

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Building Construction Costs
• Contract price
• Payments for architects’ fees
• Building permits
• Excavation costs

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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 purchaser
• Assembling, installing, and testing costs

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Cost of Factory Machinery Example -
Cost
Illustration: Assume Zhang Ltd. 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.
Factory Machinery
Cash price HK$500,000
Sales taxes 30,000
Insurance during shipping 5,000
Installation and testing 10,000
Cost of factory machinery HK$545,000

Illustration 9.3: Computation of cost of factory machinery

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Cost of Plant Assets Example - Cost
Illustration: Lenard Huang Group purchases a delivery truck at a
cash price of HK$420,000. Related expenditures consist of 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.

Delivery Truck
Cash price HK$420,000
Sales taxes 13,200
Painting and lettering 5,000
Cost of delivery truck HK$438,200

Illustration 9.4: Computation of cost of delivery truck

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Cost of Plant Assets Example -
Journal
Illustration: Lenard Huang Group purchases a delivery
truck at a cash price of HK$420,000. Related expenditures
consist of 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 Copyright © John Wiley & Sons, Inc. LO 1
Expenditures During Useful Life
Ordinary Repairs are expenditures to maintain the
operating efficiency and productive life of the unit.
• Debit to Maintenance and Repairs Expense
• Referred to as revenue expenditures
Additions and Improvements are costs incurred to
increase the operating efficiency, productive capacity,
or useful life of a plant asset.
• Debit plant asset affected
• Referred to as capital expenditures

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DO IT! 1: Cost of Plant Assets

Assume that Jing Feng Heating and Cooling purchases a

delivery truck for ¥150,000 cash, plus sales taxes of
¥9,000 and delivery costs of ¥5,000. The buyer also pays
¥2,000 for painting and lettering, ¥6,000 for an annual
insurance policy, and ¥800 for a motor vehicle license.
Explain how each of these costs would be accounted for.

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DO IT! 1: Cost of Plant Assets –
Solution
• The first four payments (¥150,000, ¥9,000, ¥5,000,
and ¥2,000) are included in the cost of the truck
(¥166,000)
• The payments for insurance and the license are
operating costs and therefore are expensed

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Learning Objective 2
Apply Depreciation Methods to Plant
Assets.

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Depreciation
Process of allocating to expense the cost of a plant asset
over its useful 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
these assets will decline over their useful lives
• Does not apply to land: its usefulness and revenue-
producing ability generally remain intact over time

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 Depreciation as Allocation

Illustration 9.5: Depreciation as a cost allocation concept

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Factors in Computing Depreciation

Illustration 9.6: Three factors in computing depreciation

Depreciation expense is reported on the income statement.

Accumulated depreciation is reported on the statement of financial
position as a deduction from plant assets.
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Depreciation Methods
Management selects the method it believes 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

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Depreciation Methods – Example
Data
Compare the three depreciation methods using the following
data for a small delivery truck purchased by Barb’s Florists on
January 1, 2025:
Cost €13,000
Expected residual value €1,000
Estimate useful life in years 5
Estimated useful life in miles 100,000

Illustration 9.7: Delivery truck data

Required: Compute depreciation using the following.

(a) Straight-Line (b) Units-of-Activity (c) Declining Balance

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Straight-Line Method
• Depreciable cost = Cost less residual value
• Expense is the same amount for each year

Illustration 9.8: Formula for straight-line method

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 Cost –SV/UE (Cost- SV) x SL Rate (100%/UE)
13000 – 1000/5 tahun = (13.000-1.000) X 100%/5 =
Cost : $2.400/th $2.400/th
13000
SV :
1000

DE 1 : 2400 DE 2 : 2400 DE 3 : 2400 DE 4 : 2400 DE 5 : 2400

AD 1 : 2400 AD 2 : 4.800 AD 3 : 7.200 AD 4 : 9.600 AD 5 : 12.000

BOOK VALUE : COST – ACCUMULATED DEPRECIATION

BV 1 : 13.000- BV 2 : 13.000-4.800 BV 3 : 13.000- BV 4 : 13.000-

2400 : 10.600 : 8.200 7.200: 5.800 9.600: 3.400

BV 5 : 13.000-
12.000: 1.000
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COST : 13.000
AD 2 : (4.800)
BV 2 8.200
1.800 ( umur 5 menjadi 7 tahun)
COST (BV 2) 10.000 /5 tahun = $2.000/tahun

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TAHUN DEP EXP /TH ACC DEP BV (COST-AD)
1/1/25 13.000
31/12/25 2.400 2400 10.600
31/12/26 2.400 4800 8.200
3 2.400 7200 5.800
4 2.400 9600 3.400
5 2.400 12000 1.000

Depreciation Expense 2.400

Accumutaed Depreciation 2.400

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 TAHUN DEP EXP ACC DEP BV (COST-AD)
/TH
1/5/25 13.000
1 ( 1/5 sd 31/12) : 8 bln 2.400 x 8/12 1.600 11.400
2 ( 1/1 sd 31/12) ; 12 bl 2.400
3 ( 1/1 sd 31/12) ; 12 bl 2.400
4 ( 1/1 sd 31/12) ; 12 bl 2.400
5 ( 1/1 sd 31/12) ; 12 bl 2.400
6 ( 1/1 sd 1/5) : 4 bln 2.400 x 4/12 1000

Depreciation Expense 1 1.600

Accumutaed Depreciation 2 1.600

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T1 : 30.000, T2 : 25.000, T3 : 20.000, T4:
15.000, T5: 10.000 (total : 100.000 km)
Dep exp/ km = Cost –SV/total km
Cost : 13000 – 1000/ 100.000 km = $ 0,12 /km
13000
SV :
1000

DE 1 : 0,12 x 30000 DE 2 : 2400 DE 3 : 2400 DE 4 : 2400 DE 5 : 2400

AD 1 : 2400 AD 2 : 4.800 AD 3 : 7.200 AD 4 : 9.600 AD 5 : 12.000

BOOK VALUE : COST – ACCUMULATED DEPRECIATION

BV 1 : 13.000- BV 2 : 13.000-4.800 BV 3 : 13.000- BV 4 : 13.000-

2400 : 10.600 : 8.200 7.200: 5.800 9.600: 3.400

BV 5 : 13.000-
12.000: 1.000
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Unit of Activity Method
TAHUN DE/KM JML KM DEP EXP /TH ACC DEP BV (COST-AD)
1 $ 0.12 30000 3600 3600 9400
2 $ 0.12 25.000 3000 6600 6400
3 $ 0.12 20.000 2400 9000
4 $ 0.12 15.000 1800 10800
5 $ 0.12 10.000 1200 12000 1000

Depreciation Expense 1 3.600

Accumutaed Depreciation 2 3.600

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Copyright © John Wiley & Sons, Inc.
Straight-Line Method: Schedule

Illustration 9.9: Straight-line depreciation schedule

Journal entry at end of 2025:

Depreciation Expense 2,400
Accumulated Depreciation 2,400

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DO ITT! 2a: Straight-Line
Depreciation
On January 1, 2025, Iron Mountain Ski Corporation
purchased a new snow-grooming machine for €50,000.
The machine is estimated to have a 10-year life with a
€2,000 residual value. What journal entry would Iron
Mountain Ski Corporation make at December 31, 2025,
if it uses the straight-line method of depreciation?

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 DO IT! 2a: Straight-Line – Solution

Cost  Residual value €50,000  €2, 000

Depreciation expense Cost    €4, 800
Useful life 10

The entry to record the first year’s depreciation would be:

Dec. 31 Depreciation Expense 4,800
Accumulated Depreciation—Equipment 4,800
(To record annual depreciation on snow-
grooming machine)

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Units-of-Activity Method
• Companies estimate total units of activity to
calculate depreciable cost per unit
• Expense varies based on units of activity
• Depreciable cost is cost less salvage value
• Often referred to as units-of-production method

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 Units-of-Activity Formula

Illustration 9.10: Formula for units-of-activity method

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Units-of-Activity Method Schedule

Illustration 9.11: Units-of-activity depreciation schedule

Journal Entry:
Depreciation Expense 1,800
Accumulated Depreciation 1,800

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Declining-Balance Method
• Accelerated method
• Decreasing annual depreciation expense over
asset’s useful life
• Double declining-balance rate is double the
straight-line rate
• Rate applied to book value

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Declining-Balance Method Formula

Book Value Annual

at Beginning × Declining- = Depreciation
of Year Balance Rate Expense
€13,000 × 40% = €5,200

Illustration 9.12: Formula for declining-balance method

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Declining-Balance Method Schedule

Illustration 9.13: Double-declining-balance depreciation schedule

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 Declining-Balance Method - Purchase
Assume the delivery truck was purchased on April 1, 2025.
Computations End of Year
Beginning Annual Partial Depreciation Accum.
Year Book Value x Rate = Expense x Year = Expense Deprec.
2025 €13,000 x 40% = € 5,200 x 9/12 = € 3,900 €3,900
2026 9,100 x 40 = 3,640 x = 3,640 7,540
2027 5,460 x 40 = 2,184 x = 2,184 9,724
2028 3,276 x 40 = 1,310 x = 1,310 11,034
2029 1,966 x 40 = 786 x = 786 11,820
2030 1,180 x 40 = 472 x = 180 (a) 12,000

(a) Expense adjusted to €180 to result in residual value of €1,000.

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Comparison of Methods
Year Straight-Line Units-of-Activity Declining-Balance
2025 € 2,400 € 1,800 € 5,200
2026 2,400 3,600 3,120
2027 2,400 2,400 1,872
2028 2,400 3,000 1,123
2029 2,400 1,200 685
€12,000 €12,000 €12,000

Illustration 9.14: Comparison of depreciation methods

Annual depreciation expense varies, but total depreciation

expense is the same (€12,000) for the five-year period.

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Comparison of Methods - Graph

Illustration 9.15: Patterns of depreciation

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Component Depreciation
• IFRS requires component depreciation for plant
assets
• Any significant parts of a plant asset that have
significantly different estimated useful lives should
be separately depreciated

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Component Depreciation Example
Illustration: Lexure Construction builds an office building for
HK$4,000,000, not including the cost of the land. If the
HK$4,000,000 is allocated over the 40-year useful life of the
building, Lexure reports HK$100,000 (HK$4,000,000 ÷ 40) of
depreciation per year, assuming straight-line depreciation and
no residual value. However, assume that HK$320,000 of the
cost of the building relates to a heating, ventilation, and air
conditioning (HVAC) system and HK$600,000 relates to
flooring. Because the HVAC system has a depreciable life of
five years and the flooring has a depreciable life of 10 years,
Lexure must use component depreciation. It must reclassify
HK$320,000 of the cost of the building to the HVAC system
and HK$600,000 to the cost of flooring.
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Component Depreciation – Example
Calculated
Assuming that Lexure uses straight-line depreciation, the
following shows the computation of component
depreciation for the first year of the office building.
Building cost adjusted (HK$4,000,000 − HK$320,000 − HK$600,000) HK$3,080,000
Building cost depreciation per year (HK$3,080,000 ÷ 40) HK$ 77,000
HVAC system depreciation (HK$320,000 ÷ 5) 64,000
Flooring depreciation (HK$600,000 ÷ 10) 60,000
Total component depreciation in first year HK$ 201,000

Illustration 9.16: Component of depreciation computation

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Depreciation and Income Taxes
• Tax laws do not require taxpayer to use the same
depreciation method on the tax return that is used
in preparing financial statements.
• Many companies use straight-line in their financial
statements to maximize net income.
• They also use an accelerated depreciation method
on their tax returns to minimize their income taxes.

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Revaluation of Plant Assets
• IFRS allows companies to revalue plant assets to
fair value at the reporting date
• Must be applied to all assets in a class of assets
• Assets that are experiencing rapid price changes
must be revalued on an annual basis

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Gain Situation
Illustration: Pernice Ltd. applies revaluation to equipment
purchased on January 1, 2025, for HK$1,000,000. The
equipment has a useful life of five years and no residual
value. On December 31, 2025, Pernice makes the following
journal entry to record depreciation expense, assuming
straight-line depreciation.

Depreciation Expense 200,000

Accumulated Depreciation—Equipment 200,000

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Gain Situation – Example Continued
At the end of 2025, independent appraisers determine that the
asset has a fair value of HK$850,000. To report the equipment
at its fair value of HK$850,000 on December 31, 2025, Pernice
eliminates the Accumulated Depreciation—Equipment account,
reduces Equipment to its fair value of HK$850,000, and records
Revaluation Surplus of HK$50,000. The entry to record the
revaluation is as follows.
Accumulated Depreciation—Equipment 200,000
Equipment
150,000
Revaluation Surplus
50,000
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Revaluation of Plant Assets – Example

Pernice reports
• Depreciation expense of HK$200,000 in the income
statement
• HK$50,000 in other comprehensive income as
revaluation surplus
• HK$850,000 is the new basis of the asset
Assuming no change in the total useful life, depreciation
in 2026 will be HK$212,500 (HK$850,000 ÷ 4).

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 Presentation of Equipment and
Surplus
In this example, the revaluation surplus is HK$50,000, which is the
difference between the fair value of HK$850,000 and the book value of
HK$800,000. Revaluation surplus is an example of an item reported as
other comprehensive income, as discussed in Chapter 5. Pernice now
reports the following information in its statement of financial position at
the end of 2025 as shown in Illustration 9.17.
Equipment (HK$1,000,000 − HK$150,000) HK$850,000
Accumulated depreciation—equipment 0
HK$850,000
Revaluation surplus (equity) HK$ 50,000

Illustration 9.17: Statement presentation of plant assets (equipment) and

revaluation surplus

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Loss Situation
Illustration: Pernice’s equipment has a carrying amount of HK$800,000
(HK$1,000,000 − HK$200,000). However, at the end of 2025, independent
appraisers determine that the asset has a fair value of HK$775,000, which
results in an impairment loss of HK$25,000 (HK$800,000 − HK$775,000). The
entry to record the equipment and report the impairment loss is as follows.
* Impairment loss is reported on the income statement.

Accumulated Depreciation—Equipment 200,000

Impairment Loss* 25,000
Equipment 225,000

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Revising Periodic Depreciation
• Accounted for in period of change and future
periods (Change in Estimate)
• No change in depreciation reported for prior years
• Not considered an error
• Use a step-by-step approach:
1. determine new depreciable cost
2. divide by remaining useful life

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Revising Periodic Depreciation
Example
Illustration: Barb’s Florists decides on January 1, 2028, to
extend the useful life of the truck by 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 to date. Depreciation for the first 3 years is as
follows.
Equipment cost €13,000
Residual value − 1,000
Depreciable cost 12,000
Useful life (original) ÷ 5 years
Annual depreciation € 2,400 × 3 years = €7,200

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Revising Depreciation Example –
Book Value
Net book value at date of change in estimate (after 3 years).
Plant Assets:
Equipment €13,000
Accumulated depreciation 7,200
Net book value € 5,800

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Revising Depreciation Example – New
Amount
Calculation of depreciation expense for 2028, year 4.
Book value, 1/1/28 (€13,000 − €7,200) €5,800
Less: New residual value 2,200
Depreciable cost €3,600
Remaining useful life 3 years (2028 − 2030)
Revised annual depreciation (€3,600 ÷ 3) €1,200

Illustration 9.18: Revised depreciation computation

Journal entry for 2028 and future years:

Depreciation Expense 1,200

Accumulated Depreciation
1,200
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DO IT! 2b: Revised Depreciation

Chambers Corporation purchased a piece of equipment for

£36,000. It estimated a 6-year life and £6,000 residual value.
Thus, straight-line depreciation was £5,000 per year [(£36,000 −
£6,000) ÷ 6]. At the end of year three (before the depreciation
adjustment), it estimated the new total life to be 10 years and
the new salvage value to be £2,000. Compute the revised
depreciation.

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DO IT! 2b: Revised Depreciation –
Solution (1 of 2)
Calculation of depreciation expense for first 2 years.
Equipment cost £36,000
Salvage value − 6,000
Depreciable cost 30,000
Useful life (original) ÷ 6 years
Annual depreciation £ 5,000 × 2 years = £10,000

Net book value at date of change in estimate (after 2 years).

Plant Assets:
Equipment £36,000
Accumulated depreciation 10,000
Net book value £26,000

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DO IT! 2b: Revised Depreciation –
Solution (2 of 2)
Calculation of revised depreciation expense for remaining years.
Net book value after year 2 £26,000
Salvage value (revised) − 2,000
Depreciable cost 24,000
Remaining life ÷ 8 years
Annual depreciation £ 3,000

Journal entry for remaining years.

Depreciation Expense 3,000

Accumulated Depreciation 3,000

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Learning Objective 3
Explain How to Account for the
Disposal of Plant Assets.

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Plant Asset Disposals
Companies dispose of plant assets in three ways:
1. Retirement: Equipment is scrapped or discarded
2. Sale: Equipment is sold to another party
3. Exchange: Equipment is traded for new equipment
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and (2)
crediting the asset account.

Illustration 9.19: Methods of plant asset disposal

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Retirement of Plant Assets
• No cash is received
• Assume asset is fully depreciated
• Decrease (debit) Accumulated Depreciation for full
amount of depreciation taken over life of asset
• Decrease (credit) asset account for original cost of
asset

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Plant Asset Retirement – Example
Illustration: Hobart Publishing retires its computer printers,
which cost €32,000. The accumulated depreciation on these
printers is €32,000. Prepare the entry to record this
retirement. This asset is fully depreciated.

Accumulated Depreciation—Equipment 32,000

Equipment 32,000

Question: What happens if a fully depreciated plant asset

is still useful to the company?

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Plant Asset Discarded - Example
Illustration: Sunset Shipping discards delivery equipment
that cost €18,000 and has accumulated depreciation of
€14,000. The asset is retired before it is fully depreciated.

Accumulated Depreciation—Equipment 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.

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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

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Sale of Plant Assets – Example
Illustration: On July 1, 2025, Wright Interiors sells office
furniture for €16,000 cash. The office furniture originally
cost €60,000. As of January 1, 2025, it had accumulated
depreciation of €41,000. Depreciation for the first six
months of 2025 is €8,000. Prepare the journal entry to
record depreciation expense up to the date of sale.

Depreciation Expense 8,000

Accumulated Depreciation—Equipment 8,000

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Sale of Plant Assets – Computing Gain
Cost of office furniture €60,000
Less: Accumulated depreciation (€41,000 + €8,000) 49,000
Book value at date of disposal 11,000
Proceeds from sale 16,000
Gain on disposal of plant asset € 5,000

Illustration 9.20: Computation of gain on disposal

Wright records the sale as follows on July 1.
Cash 16,000
Accumulated Depreciation—Equipment 49,000
Equipment 60,000
Gain on Disposal of Plant Assets 5,000

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Sale of Plant Assets – Computing Loss
Illustration: Assume that instead of selling the office
furniture for €16,000, Wright sells it for €9,000.
Cost of office furniture €60,000
Less: Accumulated depreciation 49,000
Book value at date of disposal 11,000
Proceeds from sale 9,000
Loss on disposal of plant asset € 2,000

Illustration 9.21: Computation of loss on disposal

Cash 9,000
Accumulated Depreciation—Equipment 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000
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DO IT! 3: Plant Asset Disposal (a)
Overland Trucking has decided to sell an old truck that cost
£30,000 and has accumulated depreciation of £16,000. (a)
What entry would Overland Trucking make to record the
sale of the truck for £17,000 cash?
Solution

Copyright © John Wiley & Sons, Inc. LO 3

DO IT! 3: Plant Asset Disposal (b)

Overland Trucking has decided to sell an old truck that cost

£30,000 and has accumulated depreciation of £16,000. (b)
What entry would Overland Trucking make to record the
sale of the truck for £10,000 cash?
Solution

Copyright © John Wiley & Sons, Inc. LO 3

Learning Objective 4
Describe How to Account for Natural
Resources and Intangible Assets.

Copyright © John Wiley & Sons, Inc. LO 4

Natural Resources and Depletion
Common Natural resources consist of standing timber
and resources extracted from the ground such as oil,
gas, and minerals.
Distinguishing characteristics:
• Physically extracted in operations
• Replaceable only by an act of nature
Cost is the price needed to acquire the resource and
prepare it for its intended use.

Copyright © John Wiley & Sons, Inc. LO 4

Depletion
The allocation of the cost to expense in a rational and
systematic manner over the resource’s useful life.
• Companies generally use units-of-activity method
• Depletion generally is a function of the units
extracted

Copyright © John Wiley & Sons, Inc. LO 4

Depletion Illustration
Illustration: Lane Coal Company invests HK$50 million in a
mine estimated to have 10 million tons of coal and no
residual value. Compute the depletion cost per unit.

Total cost  Residual value

= Depletion Cost per Unit
Total Estimated Units Available

HK$50,000,000 = HK$5.00 per ton

10,000,000
Illustration 9.22: Computation of depletion cost per unit

Copyright © John Wiley & Sons, Inc. LO 4

Depletion Journal Entry
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 250,000 tons of coal.
Lane computes the depletion as follows:
HK$50,000,000 ÷ 10,000,000 = HK$5.00 depletion cost per ton
HK$5.00 × 250,000 = HK$1,250,000 annual depletion
Journal entry:
Inventory (coal) 1,250,000
Accumulated Depletion
1,250,000

Copyright © John Wiley & Sons, Inc. LO 4

Intangible Assets
Rights, privileges, and competitive advantages that result
from ownership of long-lived assets that do not possess
physical substance.
Record at cost.
Can have limited life or an indefinite life.
Common types of intangibles:
• Patents • Trademarks
• Copyrights • Trade names
• Franchises and Licenses • Goodwill

Copyright © John Wiley & Sons, Inc. LO 4

Accounting for Intangible Assets
Limited-Life Intangibles:
• Amortize to expense
• Credit asset account or accumulated amortization
Indefinite-Life Intangibles:
• No amortization

Copyright © John Wiley & Sons, Inc. LO 4

Patents
• Exclusive right to manufacture, sell, or otherwise
control an invention for specified number of years
from the date of grant
• Legal life is 20 years in many countries
• Capitalize cost of a patent and amortize it over its
legal or its useful life, whichever is shorter
• Legal fees incurred in successfully defending a
patent are capitalized to Patents account

Copyright © John Wiley & Sons, Inc. LO 4

Accounting for Intangible Assets
Example
Illustration: National Labs purchases a patent at a cost of
NT$720,000. National estimates the useful life to be eight
years. Prepare the journal entry to record the annual
amortization for the year ended December 31.
Cost NT$720,000
Useful life ÷ 8
Amortization NT$ 90,000

Dec. 31 Amortization Expense 90,000

Patents
90,000

Copyright © John Wiley & Sons, Inc. LO 4

Copyrights
• Give owner exclusive right to reproduce and sell an
artistic or published work
• Granted for life of creator plus a specified number
of years (70 years in most countries)
• Capitalize costs of acquiring and defending it
• Amortized to expense over its useful life, which is
generally shorter than its legal life

Copyright © John Wiley & Sons, Inc. LO 4

Trademarks and Trade Names
• Word, phrase, jingle, or symbol that distinguishes
or identifies a particular enterprise or product
o Big Mac, Coca-Cola, and Jetta
• Legal protection for specified number of years
(often 20 years)
• Registration may be renewed indefinitely as long as
the trademark is in use
• Capitalize acquisition costs
• Indefinite life; no amortization

Copyright © John Wiley & Sons, Inc. LO 4

Franchises
• Contractual arrangement between a franchisor and
a franchisee
o CPC, Subway, and Europcar are franchises
• Franchise (or license) with a limited life should be
amortized to expense over its useful life
• If life is indefinite, the cost is not amortized

Copyright © John Wiley & Sons, Inc. LO 4

Goodwill
• Includes exceptional management, desirable
location, good customer relations, skilled
employees, high-quality products, and harmonious
relationship with labor unions
• Can be identified only with the business as a whole
• Only recorded when an entire business is
purchased
• Goodwill is recorded as the excess of purchase
price over fair value of net assets acquired
• Not amortized

Copyright © John Wiley & Sons, Inc. LO 4

Research and Development Costs
Expenditures that may lead to
• Patents, copyrights, new processes, new products
Costs in the research phase are expensed when
incurred
Costs in the development phase are expensed until
specific criteria are met, primarily that technological
feasibility is achieved
Development costs incurred after technological
feasibility is achieved are capitalized to Development
Costs, an intangible asset

Copyright © John Wiley & Sons, Inc. LO 4

LO4 Review Question
Which of the following statements is false?
a. If an intangible asset has a finite life, it should be
amortized.
b. The amortization period of an intangible asset can
exceed 20 years.
c. Goodwill is recorded only when a business is
purchased.
d. Development costs are always expensed when
incurred.

Copyright © John Wiley & Sons, Inc. LO 4

LO4 – Solution
Which of the following statements is false?
a. If an intangible asset has a finite life, it should be
amortized.
b. The amortization period of an intangible asset can
exceed 20 years.
c. Goodwill is recorded only when a business is
purchased.
d. Development costs are always expensed when
incurred. (Correct)

Copyright © John Wiley & Sons, Inc. LO 4

 DO IT! 4: Classification Concepts
Match the statement with the term most directly associated with it.
Copyrights Depletion
Intangible assets Franchises
Research costs
1. The allocation of the cost of an intangible asset to expense in a systematic manner.
2. Rights, privileges, and competitive advantages that result from the ownership of long-
lived assets that do not possess physical substance.
3. An exclusive right granted by a government to reproduce and sell an artistic or
published work.
4. A right to sell certain products or services, or use certain trademarks or trade names
within a designated geographic area.
5. Costs incurred by a company that often lead to patents or new products. These costs
must be expensed as incurred.

Copyright © John Wiley & Sons, Inc. LO 4

DO IT! 4: Classification Concepts –
Solution 1 of 2
1. The allocation of the cost of a natural resource in a
rational and systematic manner. Depletion
2. Rights, privileges, and competitive advantages that
result from the ownership of long-lived assets that
do not possess physical substance. Intangible
assets
3. An exclusive right granted by the government to
reproduce and sell an artistic or published work.
Copyrights

Copyright © John Wiley & Sons, Inc. LO 4

DO IT! 4: Classification Concepts –
Solution 2 of 2
4. A right to sell certain products or services or to use
certain trademarks or trade names within a
designated geographic area. Franchises
5. Costs incurred by a company that often lead to
patents or new products. These costs must be
expensed as incurred. Research costs

Copyright © John Wiley & Sons, Inc. LO 4

Learning Objective 5
Discuss How Plant Assets, Natural
Resources, and Intangible Assets are
Reported and Analyzed.

Copyright © John Wiley & Sons, Inc. LO 5

Presentation
• Usually, companies combine plant assets and
natural resources under “Property, plant, and
equipment” in the statement of financial position
• Intangible assets are shown separately

Copyright © John Wiley & Sons, Inc. LO 5

Statement Presentation

Illustration 9.23: Presentation of property, plant, and equipment, and intangible assets

Copyright © John Wiley & Sons, Inc. LO 5

 Analysis
Illustration: LG’s net sales for a recent year were ₩58,140
billion. Its total ending assets were ₩35,528 billion, and
beginning assets were ₩34,766 billion.

Net Sales ÷ Average Total Assets = Asset Turnover

₩58,140 ÷ = 1.65 times

Illustration 9.24: Asset turnover formulas and computation

Each won invested in assets produced ₩1.65 in sales. If a

company is using its assets efficiently, each investment in assets
will create a high amount of sales.
Copyright © John Wiley & Sons, Inc. LO 5
DO IT! 5: Asset Turnover

Paramour Company reported net income of $180,000,

net sales of $420,000, and had total assets of $460,000
on January 1, 2025, and total assets on December 31,
2025, of $540,000 billion. Determine Paramour’s asset
turnover for 2025.

Copyright © John Wiley & Sons, Inc. LO 5

DO IT! 5: Asset Turnover – Solution

The asset turnover for Paramour Company is

computed as follows.
Net Sales ÷ Average Total Assets = Asset Turnover

$420,000 ÷ $460,000  $540,000 = .84 times

2

Copyright © John Wiley & Sons, Inc. LO 5

Learning Objective 6
Explain How to Account for the
Exchange of Plant Assets.

Copyright © John Wiley & Sons, Inc. LO 6

Appendix 9A Exchange of Plant Assets
• Ordinarily, companies record a gain or loss on
exchange of plant assets
• Most exchanges have commercial substance
• An exchange has commercial substance if future
cash flows change as a result of exchange

Copyright © John Wiley & Sons, Inc. LO 6

Loss Treatment Example - Calculation
Illustration: Roland NV exchanged used trucks with combined
book value of €42,000 (cost €64,000 less €22,000 accumulated
depreciation) plus cash of €17,000 for a new semi-truck. The
old trucks had a fair value of €26,000.
Cost of used trucks €64,000
Less: Accumulated depreciation 22,000
Book value 42,000
Fair value of used trucks 26,000
Loss on disposal of plant assets €16,000
Fair value of used trucks €26,000
Cash paid 17,000
Cost of new truck €43,000

Illustration 9A.1-2: Cost of semi-truck (1) and Computation of loss on disposal (2)
Copyright © John Wiley & Sons, Inc. LO 6
Loss Treatment Example - Journal
Illustration: Roland NV exchanged old trucks with combined book
value of €42,000 (cost €64,000 less €22,000 accumulated
depreciation) plus cash of €17,000 for a new semi-truck. The old
trucks had a fair value of €26,000. Prepare the entry to record the
exchange of assets by Roland.
Equipment (new) 43,000
Accumulated Depreciation—Equipment 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old) 64,000
Cash
17,000

Copyright © John Wiley & Sons, Inc. LO 6

Gain Treatment Example - Calculation
Illustration: Mark Express traded its old delivery equipment with
book value of €12,000 (cost €40,000 less €28,000 accumulated
depreciation) for new delivery equipment. Mark also paid €3,000.
The old equipment had a fair value of €19,000.
Fair value of old delivery equipment €19,000
Cash paid 3,000
Cost of new delivery equipment €22,000
Fair value of old delivery equipment €19,000
Less: Book value of old delivery equipment (€40,000 − €28,000) 12,000
Gain on disposal of plant assets € 7,000

Illustration 9A.3-4: Cost of new delivery equipment (3) and Computation

of gain on disposal (4)

Copyright © John Wiley & Sons, Inc. LO 6

Gain Treatment Example - Journal
Illustration: Mark Express trades its old delivery equipment with
book value of €12,000 (cost €40,000 less €28,000 accumulated
depreciation) for new delivery equipment. Mark also paid €3,000.
The old equipment had a fair value of €19,000.
Equipment (new) 22,000
Accumulated Depreciation—Equipment 28,000
Equipment (old)
40,000
Gain on Disposal of Plant Assets 7,000
Cash 3,000

Copyright © John Wiley & Sons, Inc. LO 6

Learning Objective 7
Compare the Accounting For Long-
lived Assets Under IFRS and U.S.
GAAP.

Copyright © John Wiley & Sons, Inc. LO 7

U.S. GAAP and IFRS – Similarities
• The definition for plant assets for both IFRS and GAAP is
essentially the same.
• GAAP, like IFRS, capitalizes all direct costs in self-constructed
assets such as raw materials and labor. IFRS does not address the
capitalization of fixed overhead although in practice these costs
are generally capitalized.
• GAAP, like IFRS, also capitalizes interests costs incurred during the
construction period for self-constructed assets such as buildings.
• GAAP also views depreciation as an allocation of cost over an
asset’s useful life. GAAP permits the same depreciation methods
(e.g., straight-line, accelerated, and units-of activity) as IFRS.

Copyright © John Wiley & Sons, Inc. LO 7

U.S. GAAP and IFRS – Additional
Similarities
• The accounting for subsequent expenditures (such as ordinary
repairs and additions) are essentially the same under IFRS and
GAAP.
• Under both GAAP and IFRS, changes in the depreciation method
used and changes in useful life are handled in current and future
periods. Prior periods are not affected. GAAP recently conformed
to IFRS in the accounting for changes in depreciation methods.
• The accounting for plant asset disposals is essentially the same
under IFRS and GAAP.
• Initial costs to acquire natural resources are recorded in
essentially the same manner under IFRS and GAAP.

Copyright © John Wiley & Sons, Inc. LO 7

U.S. GAAP and IFRS – Similarities
Continued
• The definition of intangible assets is essentially the same under
IFRS and GAAP.
• The accounting for exchanges of non-monetary assets has
converged between IFRS and GAAP. GAAP now requires that gains
on exchanges of non-monetary assets be recognized if the
exchange has commercial substance. This is the same framework
used in IFRS.
• Both IFRS and GAAP follow the historical cost principle when
accounting for property, plant, and equipment at date of
acquisition. Acquisition cost consists of all expenditures necessary
to acquire the asset and make it ready for its intended use.
• Under both IFRS and GAAP, interest costs incurred during
construction are capitalized. Recently, IFRS converged to GAAP
requirements in this area.
Copyright © John Wiley & Sons, Inc. LO 7
U.S. GAAP and IFRS – Differences
• Under GAAP, an item of property, plant, and equipment
with multiple parts is generally depreciated over the useful
life of the total asset. Thus, component depreciation is
generally not used. However, GAAP permits companies to
use component depreciation.
• GAAP uses the term salvage value, rather than residual
value, to refer to an owner’s estimate of an asset’s value at
the end of its useful life for that owner.
• While both IFRS and US GAAP capitalize interest costs
during the construction period for self-constructed assets,
the method used to determine the amount of interest
capitalized is different.

Copyright © John Wiley & Sons, Inc. LO 7

U.S. GAAP and IFRS – Additional
Differences
• IFRS allows companies to revalue plant assets to fair value at
the reporting date.
• As in IFRS, under GAAP the costs associated with research
and development are segregated into the two components.
Costs in the research phase are always expensed under both
IFRS and GAAP. Under IFRS, however, costs in the
development phase are capitalized as Development Costs
once technological feasibility is achieved. Under GAAP all
development costs are expensed as incurred.
• IFRS permits revaluation of intangible assets (except for
goodwill). GAAP prohibits revaluation of intangible assets.

Copyright © John Wiley & Sons, Inc. LO 7

U.S. GAAP and IFRS – Differences
Continued
• IFRS requires an impairment test at each reporting date for plant
assets and intangibles and records an impairment if the asset’s
carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of the asset’s fair value less costs to sell or its
value-in-use. Value-in-use is the future cash flows to be derived
from the particular asset, discounted to present value. Under GAAP,
impairment loss is measured as the excess of the carrying amount
over the asset’s fair value.
• IFRS allows reversal of impairment losses when there has been a
change in economic conditions or in the expected use of the asset.
Under GAAP, impairment losses cannot be reversed for assets to be
held and used; the impairment loss results in a new cost basis for
the asset. IFRS and GAAP are similar in the accounting for
impairments of assets held for disposal.
Copyright © John Wiley & Sons, Inc. LO 7
Copyright
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