2 Plant Assets, Natural Resources,

and Intangible Assets

Learning Objectives
1 Explain the accounting for plant asset expenditures

2 Apply depreciation methods to plant assets

3 Explain how to account for the disposal of plant assets

Describe how to account for natural resources and

4 intangible assets
Discuss how plant assets, natural resources, and
5 intangible assets are reported and analyzed
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LEARNING Explain the accounting for plant asset
1
OBJECTIVE expenditures.

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 be of use to the company for a number of
years.

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

equipment; and fixed assets.

10-2 LO 1
 Determining the Cost of Plant Assets

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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 Determining the Cost of Plant Assets

LAND
All necessary costs incurred in making the 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, and

4. accrued property taxes and other liens on the land

assumed by the purchaser.
10-4 LO 1
 Determining the Cost of Plant Assets

Illustration:
Hayes Company acquires real estate at a cash cost of
$100,000. The property contains an old warehouse that is
razed at a net cost of $6,000 ($7,500 in costs less $1,500
proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and
the real estate broker’s commission, $8,000.
Required: Determine the amount to be reported as the cost
of the land.

10-5 LO 1
 Determining the Cost of Plant Assets

Required: Determine amount to be reported as the cost of the

land.
Land
Cash price of property ($100,000) $100,000
Net removal cost of warehouse ($7,500-$1,500) 6,000
Attorney's fees ($1,000) 1,000
Real estate broker’s commission ($8,000) 8,000
Cost of Land $115,000
Illustration 10-2
Computation of cost of land

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 Determining the Cost of Plant Assets

LAND IMPROVEMENTS
Structural additions 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) the cost of land improvements over their
useful lives.

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 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.

10-8 LO 1
 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.
10-9 LO 1
 Determining the Cost of Plant Assets

Illustration: Lenard Company purchases a delivery truck at a

cash price of $22,000. Related expenditures are sales taxes
$1,320, painting and lettering $500, motor vehicle license $80,
and a three-year accident insurance policy $1,600. Compute
the cost of the delivery truck.
Truck
Cash price $22,000
Sales taxes 1,320
Painting and lettering 500

Illustration 10-4
Computation of cost of
delivery truck Cost of Delivery Truck $23,820

10-10 LO 1
 Determining the Cost of Plant Assets

Illustration: Lenard Company purchases a delivery truck at a

cash price of $22,000. Related expenditures are sales taxes
$1,320, painting and lettering $500, motor vehicle license $80,
and a three-year accident insurance policy $1,600. Prepare the
journal entry to record these costs.

Equipment 23,820
License Expense 80
Prepaid Insurance 1,600
Cash 25,500

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 Expenditures During Useful Life

Ordinary Repairs are expenditures to maintain the operating

efficiency and productive life of the unit.
 Debit to Maintenance and Repair 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 the plant asset affected.
 Referred to as capital expenditures.

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 LEARNING Apply depreciation methods to plant
2
OBJECTIVE assets.

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.

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 Factors in Computing Depreciation

Illustration 10-6
Three factors in computing
Helpful Hint
depreciation
Depreciation expense is reported on
the income statement. Accumulated
depreciation is reported on the balance
Alternative Terminology
sheet as a deduction from plant assets.
Another term sometimes used for
salvage value is residual value.

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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

Illustration 10-8
Use of depreciation methods
in major U.S. companies

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 Depreciation Methods

Illustration: Barb’s Florists purchased a small delivery truck on

January 1, 2017.
Illustration 10-7
Delivery truck data
Cost $13,000
Expected salvage 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

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 Depreciation Methods

STRAIGHT-LINE METHOD
 Expense is same amount for each year.
 Depreciable cost = Cost less salvage value.

Illustration 10-9
Formula for straight-line
method

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 Depreciation Methods

Illustration: (Straight-Line)
Illustration 10-10
Annual
Depreciable Depreciation Accumulated Book
Year Cost x Rate = Expense Depreciation 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

10-18 * Book value = Cost - Accumulated depreciation = ($13,000 - $2,400). LO 2

 Depreciation Methods Partial
Year
Illustration: (Straight-Line)
Assume the delivery truck was purchased on April 1, 2017.
Annual Current
Depreciable Depreciation Partial Year Accumulated
Year Cost Rate Expense Year Expense Depreciation
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
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 Depreciation Methods

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 salvage value.

Alternative Terminology
Another term often used
is the units-of-production
method.

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 Depreciation Methods

UNITS-OF-ACTIVITY METHOD

Illustration 10-11
Formula for units-of-activity method

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 Depreciation Methods

Illustration: (Units-of-Activity)
Illustration 10-12
Cost Annual
Miles per Depreciation Accumulated Book
Year Driven x Unit = Expense Depreciation 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
10-22 LO 2
 Depreciation Methods

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.
Illustration 10-13

10-23 LO 2
 Depreciation Methods
Illustration: (Declining-Balance)
Illustration 10-14
Declining Annual
Beginning Balance Depreciation Accumulated Book
Year Book value x Rate = Expense Depreciation 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

10-24 * Computation of $674 ($1,685 x 40%) is adjusted to $685. LO 2

 Depreciation Methods Partial
Year
Illustration: (Declining-Balance)
Declining Annual Current
Beginning Balance Depreciation Partial Year Accumulated
Year Book Value Rate Expense Year Expense Depreciation
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

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 Depreciation Methods
Illustration 10-15

COMPARISON
OF METHODS

Illustration 10-16

Helpful Hint
Under any method,
depreciation stops
when the asset’s book
value equals expected
salvage value.

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 LEARNING Explain how to account for the disposal
3
OBJECTIVE of plant assets.

Companies dispose of plant assets in three ways —

Illustration 10-18
Retirement, Sale, or Exchange (appendix). Methods of plant
asset disposal

Record depreciation up to the date of disposal.

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

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 Retirement of Plant Assets

 No cash is received.
 Decrease (credit) the asset account for the original
cost in the asset.
 Decrease (debit) Accumulated Depreciation for the
full amount of depreciation taken over the life of the
asset.

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 Retirement of Plant Assets

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
Question: What happens if a fully depreciated plant asset is
still useful to the company?
Company continues to use the asset with no additional
depreciation being recorded as the asset is fully depreciated.
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 Retirement of Plant Assets

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 expenses

and losses” 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.
10-31 LO 3
 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
10-32 8,000 LO 3
 GAIN ON SALE Illustration 10-19
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
10-33 LO 3
 LOSS ON SALE

Illustration: Assume that instead of selling the office

furniture for $16,000, Wright sells it for $9,000.
Illustration 10-20
Computation of
loss on disposal

July 1 Cash 9,000

Accumulated Depreciation 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000
10-34 LO 3
 LEARNING Describe how to account for natural
4
OBJECTIVE resources and intangible assets.

Natural resources consist of standing timber and

underground deposits of 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.

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 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.

Illustration 10-21
Formula to compute depletion expense

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 Depletion
Illustration: Lane Coal Company invests $5 million in a
mine estimated to have 1 million tons of coal and no
salvage value.

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 Depletion

Illustration: Lane Coal Company invests $5 million in a mine

estimated to have 1 million tons of coal and no salvage value.
In the first year, Lane extracts and sells 250,000 tons of coal.
Lane computes the depletion expense as follows:

$5,000,000 ÷ 1,000,000 = $5.00 depletion cost per ton

$5.00 x 250,000 = $1,250,000 annual depletion expense

Journal entry:
Inventory (coal) 1,250,000
Accumulated Depletion
1,250,000
10-38 LO 4
 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 Names

 Copyrights  Franchises
 Goodwill

10-39 LO 4
 Accounting for Intangible Assets

Limited-Life Intangibles:
Helpful Hint
 Amortize to expense. Amortization is to
intangibles what
depreciation is to plant
 Credit asset account. assets and depletion is to
natural resources.

Indefinite-Life Intangibles:
 No foreseeable limit on time the asset is expected to
provide cash flows.
 No amortization.

10-40 LO 4
 Accounting for Intangible Assets

PATENTS
 Exclusive right to manufacture, sell, or otherwise control
an invention for a period of 20 years from the date of the
grant.
 Capitalize costs of purchasing a patent and amortize
over its 20-year life or its useful life, whichever is shorter.
 Expense any R&D costs in developing a patent.
 Legal fees incurred successfully defending a patent are
capitalized to the Patent account.

10-41 LO 4
 Accounting for Intangible Assets

Illustration: National Labs purchases a patent at a cost of

$60,000. National estimates the useful life of the patent to be
eight years. Prepare the journal entry to record the annual
amortization expense.

Cost $60,000
Useful life ÷ 8
Annual expense $ 7,500

Amortization Expense 7,500

Patents
7,500

10-42 LO 4
 Accounting for Intangible Assets

COPYRIGHTS
 Give the owner the exclusive right to reproduce and sell
an artistic or published work.
 Extend for the life of the creator plus 70 years.
 Cost of the copyright is the cost of acquiring and
defending it.
 Amortized to expense over useful life.

10-43 LO 4
 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 Jeep.
 Legal protection for indefinite number of 20 year
renewal periods.
 Capitalize acquisition costs.
 No amortization.

10-44 LO 4
 Accounting for Intangible Assets

FRANCHISES
 Contractual arrangement between a franchisor and a
franchisee.
► Shell, Subway, and Rent-A-Wreck are franchises.
 Franchise (or license) with a limited life should be
amortized to expense over its useful life.
 If the life is indefinite, the cost is not amortized.

10-45 LO 4
 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 purchase price
over the fair value of the net assets acquired.
 Not amortized.

10-46 LO 4
 Research and Development Costs

Expenditures that may lead to

 patents, All R & D costs
are expensed
 copyrights, when incurred.
 new processes, and
 new products. Helpful Hint
Research and development
(R&D) costs are not intangible
assets. But because they may
lead to patents and copyrights,
we discuss them in this section.

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 THANK U

THE END

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