CHAPTER

2 Plant Assets, Natural Resources,

and Intangible Assets
LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe how the historical cost principle 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.
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.
9-1
9-2
 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.

Referred to as property, plant, and equipment; plant and

equipment; and fixed assets.

9-3
 Determining the Cost of Plant Assets

The 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.

9-4
 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 and other liens assumed by the
purchaser, and
5) clearing, leveling, demo of existing structures.

9-5
 Determining the Cost of Plant Assets

Illustration: MN Company Ltd. acquires real estate at a cash

cost of Birr 2,000,000. The property contains an old warehouse
that is razed at a net cost of Birr 60,000 (Birr 75,000 in costs
less Birr 15,000 proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, Birr 10,000, and the real
estate broker’s commission, Birr 80,000.
Required: Determine the amount to be reported as the cost of
the land.

9-6
 Determining the Cost of Plant Assets

Required: Determine amount to be reported as the cost of

the land.
Land
Cash price of property (Birr 2,000,000) Birr 2,000,000
Net removal cost of warehouse (Birr 60,000) 60,000
Attorney's fees (Birr 10,000) 10,000
Real estate broker’s commission (Birr 80,000) 80,000
Cost of Land Birr 2,150,000

Entry to record the acquisition of the land:

Land 2,150,000

9-7
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 lighting.
 Limited useful lives.
 Expense (depreciate) the cost of land improvements over
their useful lives.

9-8
 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, and excavation costs.
9-9
 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.
9-10
 Determining the Cost of Plant Assets

Illustration: Z Company purchases factory machinery at a

cash price of Birr 500,000. Related expenditures are for sales
taxes Birr 30,000, insurance during shipping Birr 5,000, and
installation and testing Birr 10,000. Compute the cost of the
machinery.
Machinery
Cash price Birr 500,000
Sales taxes 30,000
Insurance during shipping 5,000
Installation and testing 10,000
Cost of Machinery Birr 545,000

9-11
 Determining the Cost of Plant Assets

Illustration: Z Company purchases factory machinery at a

cash price of Birr 500,000. Related expenditures are for sales
taxes Birr 30,000, insurance during shipping Birr 5,000, and
installation and testing Birr10,000. Prepare the journal entry to
record these costs.

Equipment 545,000
Cash 545,000

9-12
 Determining the Cost of Plant Assets

Illustration: H Company purchases a delivery truck at a cash

price of Birr 420,000. Related expenditures are sales taxes Birr
13,200, painting and lettering Birr 5,000, motor vehicle license
Birr 800, and a three-year accident insurance policy Birr 16,000.
Compute the cost of the delivery truck.
Truck
Cash price Birr 420,000
Sales taxes 13,200
Painting and lettering 5,000

Cost of Delivery Truck Birr 438,200

9-13
 Determining the Cost of Plant Assets

Illustration: H Company purchases a delivery truck at a cash

price of Birr 420,000. Related expenditures are sales taxes Birr
13,200, painting and lettering Birr 5,000, motor vehicle license
Birr 800, and a three-year accident insurance policy Birr 16,000.
Prepare the journal entry to record these costs.

Equipment 438,200
License Expense 800
Prepaid Insurance 16,000
Cash 455,000

9-14
 Depreciation

Process of allocating to expense the cost

of a plant asset 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.

9-15
 FACTORS IN COMPUTING DEPRECIATION

• HELPFUL HINT
Depreciation expense is reported on the
income statement. Accumulated
depreciation is reported on the balance
sheet as a deduction from plant assets.

9-16
 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

9-17
 DEPRECIATION METHODS

Illustration: Gedi purchased a small delivery truck on January

1, 2017.
Cost €13,000
Expected residual value €1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000

Required: Compute depreciation using the following.

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

9-18
 STRAIGHT-LINE METHOD

 Expense is same amount for each year.

 Depreciable cost = Cost less salvage value.

9-19
 STRAIGHT-LINE METHOD

Illustration:
Depreciable Annual Accum. Book
Year Cost x Rate = Expense Deprec. Value

2017 € 12,000 20% € 2,400 € 2,400 € 10,600

2018 12,000 20 2,400 4,800 8,200
2019 12,000 20 2,400 7,200 5,800
2020 12,000 20 2,400 9,600 3,400
2021 12,000 20 2,400 12,000 1,000

2017 Depreciation Expense 2,400

Journal
Accumulated Depreciation 2,400
Entry

9-20
 STRAIGHT-LINE METHOD Partial
Year
Illustration:

Assume the delivery truck was purchased on April 1, 2017.

Current
Depreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2017 € 12,000 x 20% = € 2,400 x 9/12 = € 1,800 € 1,800
2018 12,000 x 20% = 2,400 2,400 4,200
2019 12,000 x 20% = 2,400 2,400 6,600
2020 12,000 x 20% = 2,400 2,400 9,000
2021 12,000 x 20% = 2,400 2,400 11,400
2022 12,000 x 20% = 2,400 x 3/12 = 600 12,000
€ 12,000
Journal entry:
2017 Depreciation Expense 1,800
Accumulated Depreciation 1,800
9-21
 UNITS-OF-ACTIVITY METHOD

 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.

9-22
 UNITS-OF-ACTIVITY METHOD

Illustration:
Units of Cost per Annual Accum. Book
Year Activity x Unit = Expense Deprec. Value
2017 15,000 € 0.12 € 1,800 € 1,800 € 11,200
2018 30,000 0.12 3,600 5,400 7,600
2019 20,000 0.12 2,400 7,800 5,200
2020 25,000 0.12 3,000 10,800 2,200
2021 10,000 0.12 1,200 12,000 1,000

2017 Depreciation Expense 1,800

Journal
Accumulated Depreciation 1,800
Entry

9-23
 DECLINING-BALANCE METHOD

 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.

9-24
 DECLINING-BALANCE METHOD

Illustration:
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value

2017 € 13,000 40% € 5,200 € 5,200 € 7,800

2018 7,800 40 3,120 8,320 4,680
2019 4,680 40 1,872 10,192 2,808
2020 2,808 40 1,123 11,315 1,685
2021 1,685 40 685* 12,000 1,000

2017 Depreciation Expense 5,200

Journal
Accumulated Depreciation 5,200
Entry

9-25 * Computation of €674 (€1,685 x 40%) is adjusted to €685.

 DECLINING-BALANCE METHOD Partial
Year
Illustration:
Declining Current
Beginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2017 € 13,000 x 40% = € 5,200 x 9/12 = € 3,900 € 3,900
2018 9,100 x 40% = 3,640 3,640 7,540
2019 5,460 x 40% = 2,184 2,184 9,724
2020 3,276 x 40% = 1,310 1,310 11,034
2021 1,966 x 40% = 786 786 11,820
2022 1,180 x 40% = 472 Plug 180 12,000
€ 12,000
Journal entry:

2017 Depreciation Expense 3,900

Accumulated Depreciation 3,900

9-26
 COMPARISON OF METHODS

Annual depreciation varies considerably among the

methods, but total depreciation expense is the
same (€12,000) for the five-year period.
9-27
 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.

9-28
 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.

9-29
 Depreciation

REVISING PERIODIC DEPRECIATION

 Accounted for in the period of change and future
periods (change in estimate).
 No restatement of prior years’ depreciation expense.

9-30
 REVISING PERIODIC DEPRECIATION

Illustration: Habsa, purchased equipment for Birr 510,000

which was estimated to have a useful life of 10 years with a
residual value of Birr 10,000 at the end of that time.
Depreciation has been recorded for 7 years on a straight-line
basis. In 2020 (year 8), it is determined that the total estimated
life should be 15 years with a residual value of Birr 5,000 at the
end of that time.

Questions:
No Entry
 What is the journal entry to correct prior Required
years’ depreciation expense?
 Calculate the depreciation expense for
2020.
9-31
 REVISING PERIODIC DEPRECIATION

Equipment cost Birr 510,000 First,

First,establish
establishNBV
NBV
Residual value - 10,000 at
atdate
dateof ofchange
changein
in
Depreciable base 500,000 estimate.
estimate.
Useful life (original) 10 years
Annual depreciation Birr 50,000 x 7 years = Birr 350,000

Balance Sheet (Dec. 31, 2019)

Property, Plant, and Equipment
Equipment Birr 510,000
Accumulated depreciation 350,000
Net book value (NBV) Birr 160,000

9-32
 REVISING PERIODIC DEPRECIATION

Net book value Birr 160,000 Depreciation

Depreciation
Residual value (new) 5,000 Expense
Expensecalculation
calculation
Depreciable base 155,000 for
for2020.
2020.
Useful life remaining 8 years
Annual depreciation Birr 19,375

Journal entry for 2020 and future years.

Depreciation Expense 19,375

Accumulated Depreciation
19,375

9-33
 > DO IT!
Chambers plc purchased a piece of equipment for £36,000. It estimated
a 6-year life and £6,000 salvage 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.
Original depreciation expense = [(£36,000 − £6,000) ÷ 6] = £5,000
Accumulated depreciation after 2 years = 2 × £5,000 = £10,000
Book value = £36,000 − £10,000 = £26,000
Book value after 2 years of depreciation £26,000
Less: New salvage value 2,000
Depreciable cost £24,000
Remaining useful life 8 years
Revised annual depreciation (£24,000 ÷ 8) £ 3,000
9-34
 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.

9-35
 Revaluation of Plant Assets

Illustration: ABC Ltd. applies revaluation to equipment purchased on

January 1, 2017, for HK$1,000,000. The equipment has a useful life of
5 years, and no residual value. ABC makes the following entry to
record depreciation for 2017, assuming straight-line depreciation.
Depreciation Expense 200,000
Accumulated Depreciation—Equipment 200,000

At the end of 2017, 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—Equipment 200,000
Equipment 150,000
Revaluation Surplus 50,000
9-36
 Revaluation of Plant Assets

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
9-37
year 2 will be HK$212,500 (HK$850,000 ÷ 4).
 Revaluation of Plant Assets

Illustration: Assume again that ABC’s equipment has a carrying

amount of HK$800,000 (HK$1,000,000 − HK$200,000). However, at
the end of 2017, 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). To record the equipment at
fair value and to record this loss, ABC makes the following entry.

Accumulated Depreciation—Equipment 200,000

Impairment Loss 25,000
Equipment 225,000

The impairment loss of HK$25,000 reduces net income.

9-38
 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.

9-39
 Plant Asset Disposals

Companies dispose of plant assets in three

ways—Sale, Retirement, or Exchange.

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.

9-40
 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 loss on disposal.

9-41
 RETIREMENT OF PLANT ASSETS

Illustration: Hobart ASA 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—Equipment 32,000

Equipment
32,000

Question: What happens if a fully depreciated plant asset is still

useful to the company?

9-42
 RETIREMENT OF PLANT ASSETS

Illustration: Sunset A/S discards delivery equipment that cost

€18,000 and has accumulated depreciation of €14,000. The
journal entry is?

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.

9-43
 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.

9-44
 SALE OF PLANT ASSETS

GAIN ON SALE
Illustration: On July 1, 2017, Wright Company sells office
furniture for €16,000 cash. The office furniture originally cost
€60,000. As of January 1, 2017, it had accumulated
depreciation of €41,000. Depreciation for the first six months of
2017 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—Equipment 8,000

9-45
 SALE OF PLANT ASSETS

Illustration: Wright records the sale on July 1 as follows.

Cash 16,000
Accumulated Depreciation—Equipment 49,000
Equipment 60,000
Gain on Disposal of Plant Assets 5,000

9-46
 SALE OF PLANT ASSETS

Illustration: Assume that instead of selling the office furniture for

€16,000, Wright sells it for €9,000 on July 1.

July 1
Cash 9,000
Accumulated Depreciation—Equipment 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000
9-47
 > DO IT!

Overland Trucking has an old truck that cost £30,000 and has
accumulated depreciation of £16,000. Assume two different
situations:
1. Overland sells the old truck for £17,000 cash.
2. Overland sells the old truck for £10,000 cash.
What entry should Overland use to record scenario 1?

Cash 17,000
Accumulated Depreciation—Equipment 16,000
Equipment 30,000
Gain on Disposal of Plant Assets 3,000

9-48
 > DO IT!

Overland Trucking has an old truck that cost £30,000 and has
accumulated depreciation of £16,000. Assume two different
situations:
1. Overland sells the old truck for £17,000 cash.
2. Overland sells the old truck for £10,000 cash.
What entry should Overland use to record scenario 2?

Cash 10,000
Accumulated Depreciation—Equipment 16,000
Loss on Disposal of Plant Assets 4,000
Equipment 30,000

9-49
 Extractable Natural Resources

Natural resources consist of standing timber

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 under IFRS.
In the years before they are harvested, the recorded value of
biological assets is adjusted to fair value each period.

9-50
 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 is the 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.

9-51
 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 250,000 tons of
coal. Lane computes the depletion expense as follows:

HK$5.00 per ton x 250,000 tons =

HK$1,250,000 annual depletion
9-52
 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 250,000 tons of
coal. Lane records the depletion as follows:

Journal entry:
Inventory (coal) 1,250,000
Accumulated Depletion
1,250,000

9-53
 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  Goodwill
 Copyrights  Franchises
 Trademarks  Leases
 Trade Names
9-54
 Accounting for Intangible Assets

Limited-Life Intangibles:
Companies
Companiesclassify
classify
 Amortize to expense. Amortization
Amortization
 Credit asset account. Expense
Expenseas asan
an
operating
operatingexpense
expense
Indefinite-Life Intangibles: in
inthe
theincome
income

statement.
statement.
No amortization.

Similar
Similarto
toproperty,
property,plant,
plant,and
andequipment,
equipment,IFRS
IFRS
permits
permitsrevaluation
revaluationofofintangible
intangibleassets
assetsto
tofair
fairvalue,
value,
except
exceptforforgoodwill.
goodwill.

9-55
 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 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 Patents account.

9-56
 PATENTS

Illustration: National Labs purchases a patent at a cost of Birr

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 Birr 720,000

Useful life ÷ 8 years
Annual expense Birr 90,000

Dec. 31
Amortization Expense 90,000
Patents
90,000
9-57
 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.

9-58
 Accounting for Intangible Assets

TRADEMARKS AND TRADE NAMES

 Word, phrase, jingle, or symbol that identifies a particular
enterprise or product.
► Wheaties, Monopoly, Kleenex, 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.

9-59
 Accounting for Intangible Assets

FRANCHISES AND LICENSES

 Contractual arrangement between a franchisor and a
franchisee.
► BP (GBR), Subway (USA), 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.

9-60
 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.

9-61
 Research and Development Costs

Expenditures that may lead to

 patents,
 copyrights, All R & D costs
 new processes, and are expensed
when incurred.
 new products.

9-62
 Research and Development Costs

Illustration: Mina Water Manufacturing Company. spent Birr 1

million on research and Birr 2 million on development of new
products, of the Birr 2 million in development costs Birr 400,000
was incurred prior to technological feasibility and Birr 1,600,000
was incurred after technological feasibility had been
demonstrated. The company would record these costs as
follows.

Research and Development Expense 1,400,000

Development Costs 1,600,000
Cash 3,000,000

9-63
 > DO IT!

Illustration: Identify the term most directly associated with

each statement.

1. The allocation of the cost of an extractable

natural resource to expense in a rational and Depletion
systematic manner.
2. Rights, privileges, and competitive
Intangible
advantages that result from the ownership of
Assets
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 Copyrights
work.

9-64
 > DO IT!

Illustration: Identify the term most directly associated with

each statement.

4. A right to sell certain products or services

or to use certain trademarks or trade Franchises
names within a designated geographic
area.
5. Costs incurred by a company that often Research
lead to patents or new products. These Costs
costs must be expensed as incurred.

9-65
 Statement Presentation

9-66
 Statement Analysis

Each Korean won invested in assets produced ₩1.65 in sales

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

9-67
 > DO IT!

Paramour Company reported net income of $180,000, net

sales of $420,000, and had total assets of $460,000 on
January 1, 2017, and total assets on December 31, 2017, of
$540,000. Determine Paramour’s asset turnover for 2017.

Solution
The asset turnover is computed as follows.
Net Sales ÷ Average Total Assets = Asset Turnover

$460,000 + $540,000
$420,000 ÷ = .84
2

9-68
 Exchange of Plant Assets

 Ordinarily, companies record a gain or

loss on the exchange of plant assets.
 Most exchanges have commercial substance.
 Commercial substance - if the future cash flows
change as a result of the exchange.

9-69
 Loss Treatment

Illustration: Roland NV exchanged used trucks (cost €64,000

less €22,000 accumulated depreciation) plus cash of €17,000
for a new semi-truck. The used trucks had a fair market value of
€26,000.

Cost of used trucks €64,000

Less: Accumulated depreciation 22,000
Book value 42,000
Fair market value of used trucks 26,000
Loss on disposal €16,000
Fair market value of used trucks €26,000
Cash paid 17,000
Cost of semi-truck €43,000

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 Loss Treatment

Illustration: Roland NV exchanged used 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
NV.
Equipment (new) 43,000
Accumulated Depreciation—Equipment 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old) 64,000
Cash 17,000

9-71
 Gain Treatment

Illustration: Mark Express 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.

Cost of old equipment €40,000

Less: Accumulated depreciation 28,000
Book value 12,000
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

9-72
 Gain Treatment

Illustration: Mark Express 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.
Equipment (new) 22,000
Accumulated Depreciation—Equipment (old) 28,000
Equipment (old) 40,000
Gain on Disposal of Plant Assets 7,000
Cash 3,000

9-73
 A Look at U.S. GAAP
Key Points
Similarities
 The definition for plant assets for both GAAP and IFRS 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 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.
 The accounting for subsequent expenditures, such as ordinary repairs and
additions, are essentially the same under GAAP and IFRS.

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 A Look at U.S. GAAP
Key Points
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.
 IFRS allows companies to revalue plant assets to fair value at the reporting
date.

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 A Look at U.S. GAAP
Key Points
Differences
 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 GAAP and IFRS. 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.

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 A Look at U.S. GAAP
Key Points
Differences
 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.

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 A Look at U.S. GAAP
Looking to the Future
With respect to revaluations, as part of the conceptual framework project, the
Boards will examine the measurement bases used in accounting. It is too
early to say whether a converged conceptual framework will recommend fair
value measurement (and revaluation accounting) for plant assets and
intangibles. However, this is likely to be one of the more contentious issues,
given the longstanding use of historical cost as a measurement basis in
GAAP. The IASB and FASB have identified a project that would consider
expanded recognition of internally generated intangible assets. IFRS permits
more recognition of intangibles compared to GAAP. Thus, it will be challenging
to develop converged standards for intangible assets, given the long-standing
prohibition on capitalizing internally generated intangible assets and research
and development costs in GAAP.

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