Plant Assets and Intangibles

Chapter 10

Asset Account on Related Expense Accountthe Balance Sheet on the Income Statement

Plant AssetsLand……………………………… noneBuildings, Machinery and

Equipment, Furniture and Fixtures, and Land Improvements………….… Depreciation

Natural Resources………..…… DepletionIntangibles………………………. Amortization

Plant Assets

Measure the cost

of a plant asset.

Objective 1

An asset must be carried on thebalance sheet at the amount paid for it.

The cost of an asset equals the sum ofall of the costs incurred to bring the assetto its intended purpose, net of discounts

Cost Principle

Land and Land Improvements

Purchase price of land$500,000Add related costs:Back property taxes $40,000Transfer taxes 8,000Removal of buildings 5,000Survey fees 1,000 54,000

Total cost of land $554,000

PavingFences

Sprinkler systemsLights in parking lot

Land Improvements

• All improvements located on the land but subject to decay:

Buildings – Construction

Architectural feesBuilding permits

Contractor’s charges

MaterialsLabor

Overhead

Buildings – Purchasing

Purchase priceBrokerage commissions

Sales and other taxesRepairing or renovating building

for its intended purpose

Machinery and Equipment

Purchase price less discountsTransportation charges

Insurance in transitSales and other taxes

Purchase commissionsInstallation cost

Expenditures to test assetbefore it is placed in service

Lump-Sum Purchases Example

• Andrea Ortiz paid $110,000 for a combined purchase of land and a building.

• The land is appraised at $90,000 and the building at $60,000.

• How much of the purchase price is allocated to land and how much to the building?

Lump-Sum Purchases Example

Building: $60,000 ÷ $150,000 = 40%$110,000 × 40% = $44,000

Building: $60,000 ÷ $150,000 = 40%$110,000 × 40% = $44,000

Land: $90,000 ÷ $150,000 = 60%$110,000 × 60% = $66,000

Land: $90,000 ÷ $150,000 = 60%$110,000 × 60% = $66,000

Does the expenditure increase capacityor efficiency or extend useful life?

YES NO

Capital ExpenditureDebit Plant Assets

accounts

Revenue ExpenditureDebit Repairs and

Maintenance account

Distinction Between Capital and Revenue Expenditures

Cost or basis

Estimated residual value

Estimated useful life

Measuring the Depreciationof Plant Assets

Objective 2

Account for depreciation.

Straight-Line (SL)Straight-Line (SL)

Units-of-Production (UOP)Units-of-Production (UOP)

Double-Declining-Balance (DDB)Double-Declining-Balance (DDB)

Depreciation Methods

Depreciation Methods Example

• Donishia and Richard Catering, Inc., purchased a delivery van on January 1, 200x, for $22,000.

• The company expects the van to have a trade-in value of $2,000 at the end of its useful life.

• The van has an estimated service life of 100,000 miles or 4 years.

(Cost – Residual value) ÷ years of useful life

($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000

Year 1 Depreciation: $ 5,000Year 2 Depreciation: 5,000Year 3 Depreciation: 5,000Year 4 Depreciation: 5,000Total Depreciation: $20,000

Straight-Line Method Example

($22,000 – 2,000) ÷ 100,000 = $.20/mile

Year 1: 30,000 miles = $ 6,000Year 2: 27,000 miles = 5,400Year 3: 23,000 miles = 4,600Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000(Actual mileage in year 4 was 22,000)

Units-of-ProductionMethod Example

Double-Declining-Balance Method Example

• Straight-line rate is 100% ÷ 4 = 25%

• Double-declining-balance = 2 times the straight-line rate = 50%

• What is the book value of the van at the end of the first year?

• $22,000 × 50% = $11,000

• $22,000 – $11,000 = $11,000

Double-Declining-Balance Method Example

Dec. 31, 200xDepreciation Expense $11,000

Accumulated Depreciation $11,000To record depreciation expense for a one-year

period

Depreciation Methods Comparison

Year SL UOP DDB1 $ 5,000 $ 6,000 $11,0002 $ 5,000 $ 5,400 $ 5,5003 $ 5,000 $ 4,600 $ 2,7504 $ 5,000 $ 4,000 $ 750

Totals $20,000 $20,000 $20,000

Use of Depreciation Methods

82%

8%

5%

3%2%

Straight-line

Accelerated –(not specified)UOP

Declining-balanceOther

Objective 3

Select the best depreciation

method for tax purposes.

Relationship Between Depreciation and Taxes

• MACRS was created by the Tax Reform Act of 1986.

• It is an accelerated method used for depreciating equipment.

Straight-line method:$5,000 × 3/12 = $1,250

Double-declining-balance method:$11,000 × 3/12 = $2,750

Depreciation for Partial Years

• Assume that Donishia and Richard Catering, Inc., owned the van for 3 months.

• How much is the van’s depreciation?

Remaining useful life

Revised SL depreciation

=

Cost – Accumulated depreciation

–

New residual value

÷

Revising Depreciation Rates

Objective 4

Account for the disposal

of a plant asset.

Disposing of Plant Assets

– selling

– exchanging

– discarding (scrapping it)

• Gain/loss is reported on the income statement...

– and closed to Income Summary.

Disposing by Discarding Example

• On September 1, Joe, manager of Joe’s Landscaping, is contemplating the disposal of an old piece of equipment:

• Equipment cost: $36,000• Residual value: $ 6,000• Accumulated depreciation: $20,000• Estimated useful life at acquisition: 10

years

($36,000 – $6,000) ÷ 10 = $3,000$3,000 ÷ 12 = $250$250 × 3 = $750$20,000 + $750 = $20,750

Disposing by Discarding Example

• Assume the equipment is discarded on November 30.

• What is the accumulated depreciation on November 30?

Disposing by Discarding Example

November 30, 20xxAccumulated Depreciation 20,750Loss on disposal 15,250

Equipment 36,000

To record discarding of equipment

Selling a Plant Asset Example

• Assume the equipment is sold for $10,000.• What is the gain or loss on disposal? Cash 10,000

Accumulated Depreciation 20,750 Loss on Sale of Equipment 5,250

Equipment 36,000

To record sale of equipment for $10,000

Selling a Plant Asset Example

• Equipment is sold for $20,000.• What is the gain or loss on disposal?

Cash 20,000 Accumulated Depreciation 20,750

Gain on Sale of Equipment 4,750 Equipment 36,000

To record sale of equipment for $20,000

Exchanging Plant Assets

• Assume equipment with a cost of $36,000 and a book value of $15,250 is exchanged for new, similar equipment having a cost of $42,000 with a trade-in of $18,000 allowed.

• Cash payment is $24,000.• What is the cost of the new asset?• $24,000 + $15,250 = $39,250

Exchanging Plant Assets

Equipment (new) $39,250Accumulated Depreciation (old) $20,750

Equipment (old) $36,000Cash $24,000

Objective 5

Account for natural resources

Natural gas and oilPrecious metals and gemsTimber, coal, and iron ore

Cost – Residual value) ÷ Estimated unitsof natural resources = Depletion per unit

Accounting for Natural Resources

Objective 6

Account for intangible assets

PatentsCopyrightsTrademarksFranchisesLeaseholdsGoodwill

PatentsCopyrightsTrademarksFranchisesLeaseholdsGoodwill

Not physical in nature

Intangible Assets

Intangible Assets: Patents

• Patents are federal government grants.• They give the holder the right to produce

and sell an invention.• Suppose a company pays $170,000 to

acquire a patent on January 1.• The company believes that its expected

useful life is 5 years.• What are the entries?

Jan. 1Patents 170,000

Cash 170,000To acquire a patent

Dec. 31Amortization Expense 34,000

Patents 34,000To amortize the cost of a patent

Intangible Assets: Patents

Literary compositions (novels)Musical compositionsFilms (movies)SoftwareOther works of art

Intangible Assets: Copyrights

Trademarks, Trade Names,or Brand Names are assets that representdistinctive identifications of a product or

service.

Intangible Assets: Trademarks

Intangible Assets: Franchises

• Franchises are privileges granted by private business or government to sell a product or service.

Intangible Assets: Goodwill

• Goodwill is defined as the excess of purchase price over the fair value of the net assets acquired.

• Goodwill can only be recorded in the purchase of another company.

• Goodwill is no longer amortized• Goodwill is now subject to an

“impairment” test.

Purchase price paid forMexana Company $10 millionAssets at market value 9 millionLess Mexana’s liabilities 1 millionMarket value ofMexana’s net assets 8 millionGoodwill $ 2 million

Goodwill Example

Intangible Assets: Goodwill

International accounting for goodwill

Research and developmentResearch and development

Capitalize or expense a costCapitalize or expense a cost

Special Issues

End of Chapter 10