Chapter 10
PLANT ASSETS, NATURAL
RESOURCES, AND INTANGIBLES
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
10 - 2
C1
PLANT ASSETS
Tangible in Nature
Actively Used in Operations
Expected to Benefit Future Periods
Called Property, Plant, & Equipment
10 - 3
C1
PLANT ASSETS
10 - 4
C1
COST DETERMINATION
Purchase All expenditures
price needed to
prepare the
Acquisition asset for its
Cost intended use
Acquisition cost excludes
financing charges and
cash discounts
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C1
LAND
Title insurance premiums
Purchase Delinquent
price taxes
Real estate Surveying
commissions fees
Title search and transfer fees
Land is not depreciable.
10 - 6
C1
LAND IMPROVEMENTS
Parking lots, driveways, fences, walks, shrubs,
and lighting systems.
Depreciate
over useful life of
improvements.
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C1
BUILDINGS
Cost of purchase or Title fees
construction
Brokerage Attorney fees
fees
Taxes
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C1
MACHINERY AND EQUIPMENT
Purchase
price Taxes
Transportation
charges
Installing,
assembling, and Insurance while
testing in transit
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P1
LUMP-SUM ASSET PURCHASE
The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.
CarMax paid $90,000 cash to acquire a group of items
consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:
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P1
DEPRECIATION
Depreciation is the process of allocating the
cost of a plant asset to expense in the
accounting periods benefiting from its use.
Balance Sheet Income Statement
Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)
10 - 11
P1 FACTORS IN COMPUTING
DEPRECIATION
The calculation of depreciation requires
three amounts for each asset:
1. Cost
2. Salvage Value
3. Useful Life
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P1
DEPRECIATION METHODS
1. Straight-line
2. Units-of-production
3. Declining-balance
Asset we will depreciate in future screens
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P1
STRAIGHT-LINE METHOD
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P1
STRAIGHT-LINE METHOD
For year ended December 31 As of December 31
Balance Sheet Presentation
Machinery $ 10,000
Less: accumulated depreciation 3,600 $ 6,400
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P1 STRAIGHT-LINE DEPRECIATION
SCHEDULE
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P1
UNITS-OF-PRODUCTION METHOD
Step 1:
Depreciation = Cost - Salvage Value
Per Unit Total Units of Production
Step 2:
Number of Units
Depreciation Depreciation × Produced
=
Expense Per Unit in the Period
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P1
UNITS-OF-PRODUCTION METHOD
Assume that 7,000 units were inspected
during 2011. Depreciation would be
calculated as follows:
Step 1:
Depreciation = Cost - Salvage Value = $9,000 = $0.25/unit
Per Unit Total Units of Production 36,000
Step 2:
Number of Units
Depreciation Depreciation = $0.25 × 7,000 = $1,750
$
= × Produced
Expense Per Unit
in the Period
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P1
UNITS-OF-PRODUCTION
DEPRECIATION SCHEDULE
Units
Units produced
produced and
and sold
sold during
during the
the period.
period.
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P1 DOUBLE-DECLINING-BALANCE
METHOD
10 - 20
P1 DOUBLE-DECLINING-BALANCE
METHOD
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P1 COMPARING DEPRECIATION
METHODS
Double-
Straight- Units of Declining-
Period Line Production Balance
2011 $ 1,800 $ 1,750 $ 4,000
2012 1,800 2,000 2,400
2013 1,800 2,250 1,440
2014 1,800 1,750 864
2015 1,800 1,250 296
Totals $ 9,000 $ 9,000 $ 9,000
10 - 22
P1 DEPRECIATION FOR TAX
REPORTING
Most corporations use the Modified
Accelerated Cost Recovery System
(MACRS) for tax purposes.
MACRS depreciation provides for rapid
write-off of an asset’s cost in order to
stimulate new investment.
10 - 23
C2
PARTIAL-YEAR DEPRECIATION
When
When aa plant
plant asset
asset is
is acquired
acquired during
during the
the year,
year,
depreciation
depreciation is
is calculated
calculated for
for the
the fraction
fraction of
of the
the
year
year the
the asset
asset is
is owned.
owned.
Cost $ 10,000
Assume our machinery was purchased
Salvage value 1,000
on October 8, 2010. Let’s calculate
Depreciable cost $ 9,000
Useful life
depreciation expense for 2010,
Accounting periods 5 years assuming we use straight-line
Units inspected 36,000 units depreciation.
10 - 24
C2 CHANGE IN ESTIMATES FOR
DEPRECIATION
Predicted Predicted
salvage value useful life
Depreciation
is an estimate
Over the life of an asset, new information may
come to light that indicates the original estimates
were inaccurate.
10 - 25
C2 CHANGE IN ESTIMATES FOR
DEPRECIATION
Let’s
Let’s look
look atat our
our machinery
machinery from
from the
the previous
previous examples
examples and and
assume
assume that that at
at the
the beginning
beginning ofof the
the asset’s
asset’s third
third year,
year, its
its
book
book value
value is is $6,400
$6,400 ($10,000
($10,000 cost
cost less
less $3,600
$3,600 accumulated
accumulated
depreciation
depreciation usingusing straight-line
straight-line depreciation).
depreciation). AtAt that
that time,
time, itit
is
is determined
determined that that the
the machinery
machinery willwill have
have aa remaining
remaining
useful
useful life
life of
of 44 years,
years, and
and the
the estimated
estimated salvage
salvage value
value will
will be
be
revised
revised downward
downward from from $1,000
$1,000 toto $400.
$400.
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C2
REPORTING DEPRECIATION
Dale Jarrett Racing Adventure
Office furniture and equipment $ 54,593
Shop and track equipment 202,973
Race vehicles and other 975,084
Property and equipment, gross 1,232,650
Less: accumulated depreciation 628,355
Property and equipment, net $ 604,295
10 - 27
C3
ADDITIONAL EXPENDITURES
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes
Capital Balance sheet
Deferred Higher Higher
Expenditure account debited
Revenue Income statement Currently
Lower Lower
Expenditure account debited recognized
IfIf the
the amounts
amounts involved
involved are
are not
not material,
material,
most
most companies
companies expense
expense the
the item.
item.
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C3
REVENUE AND CAPITAL
EXPENDITURES
Type of Capital or
Expenditure Revenue Identifying Characteristics
1. Maintains normal operating condition.
Ordinary 2. Does not increase productivity.
Revenue
Repairs 3. Does not extend life beyond original
estimate.
Betterments 1. Major overhauls or partial
and replacements.
Extraordinary Capital
Repairs 2. Extends life beyond original estimate.
10 - 29
P2
DISPOSALS OF PLANT ASSETS
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording a
Recording cash
gain (credit)
received (debit)
or paid (credit). or loss (debit).
Removing accumulated Removing the
depreciation (debit). asset cost (credit).
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P2
DISCARDING PLANT ASSETS
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording a
Recording cash
gain (credit)
received (debit)
or paid (credit). or loss (debit).
Removing accumulated Removing the
depreciation (debit). asset cost (credit).
10 - 31
P2
DISCARDING PLANT ASSETS
A machine costing $9,000, with accumulated depreciation of
$9,000 on December 31st of the previous year was
discarded on June 5th of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero salvage value.
10 - 32
P2
DISCARDING PLANT ASSETS
Equipment costing $8,000, with accumulated depreciation of
$6,000 on December 31st of the previous year was
discarded on July 1st of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero salvage value.
Step 1: Bring the depreciation up-to-date.
Step 2: Record discarding of asset.
10 - 33
P2
SELLING PLANT ASSETS
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31 st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $3,000 cash.
Step 1: Update depreciation to March 31st.
Step 2: Record sale of asset at book value ($16,000 - $13,000 = $3,000).
10 - 34
P2
SELLING PLANT ASSETS
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31 st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $2,500 cash.
Step 1: Update depreciation to March 31st.
Step 2: Record sale of asset at a loss (Book value $3,000 - $2,500 cash received).
10 - 35
P3
NATURAL RESOURCES
Total cost,
Extracted from
including
the natural
exploration and
environment
development,
and reported
is charged to
at cost less
depletion expense
accumulated
over periods
depletion.
benefited.
Examples: oil, coal, gold
10 - 36
P3
COST DETERMINATION AND
DEPLETION
Let’s consider a mineral deposit with an estimated 250,000
tons of available ore. It is purchased for $500,000, and we
expect zero salvage value.
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P3
DEPLETION OF NATURAL
RESOURCES
Depletion expense in the first year would be:
Balance Sheet presentation of natural resources:
10 - 38
P3
PLANT ASSETS USED IN
EXTRACTING
Specialized
Specialized plant
plant assets
assets may
may be
be required
required to
to
extract
extract the
the natural
natural resource.
resource.
These
These assets
assets are
are recorded
recorded in
in aa separate
separate
account
account and
and depreciated.
depreciated.
10 - 39
P4
INTANGIBLE ASSETS
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.
Intangible
Assets
Useful life is Usually acquired
often difficult for operational
to determine. use.
10 - 40
P4 COST DETERMINATION AND
AMORTIZATION
Record at current
cash equivalent o Patents
cost, including o Copyrights
purchase price, o Leaseholds
legal fees, and o Leasehold Improvements
filing fees. o Franchises and Licenses
o Goodwill
o Trademarks and Trade Names
o Other Intangibles
10 - 41
GLOBAL VIEW
There is one area where notable differences exist, and that is in
accounting for changes in the value of plant assets (between the
time they are acquired and disposed of). Namely, how does IFRS
and U.S. GAAP treat decreases and increases in the value of plant
assets subsequent to acquisition?
Decreases in the Value of Plant
Assets
Both U.S. GAAP and IFRS require
that an impairment in value be
recognized.
Increases in the Value of Plant
Assets
U.S. GAAP prohibits recording
increase in value of plant assets.
IFRS permits upward asset
revaluation.
10 - 42
A1
TOTAL ASSET TURNOVER
Total Asset = Net Sales
Turnover Average Total
Assets
Provides information about a company’s
efficiency in using its assets.
Company $ in millions 2008 2007 2006 2005
Molson Coors Net sales $ 4,774 $ 6,191 $ 5,845 $ 5,507
Average total assets 11,934 12,528 11,701 8,228
Total asset turnover 0.40 0.49 0.50 0.67
Boston Beer Net sales $ 398 $ 342 $ 285 $ 238
Average total assets 208 176 137 113
Total asset turnover 1.91 1.94 2.09 2.10
10 - 43
P5
10A – EXCHANGING PLANT ASSETS
Many plant assets such as machinery, automobiles, and
office equipment are disposed of by exchanging them for
newer assets. In a typical exchange of plant assets, a
trade-in allowance is received on the old asset and the
balance is paid in cash. Accounting for the exchange of
assets depends on whether the transaction has
commercial substance.
Commercial substance implies the
company’s future cash flows will be
altered.
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P5
EXCHANGE WITH COMMERCIAL
SUBSTANCE: A LOSS
A
A company
company acquires
acquires $42,000
$42,000 inin new
new equipment.
equipment. In
In exchange,
exchange, the
the company
company
pays
pays $33,000
$33,000 cash
cash and
and trades
trades in
in old
old equipment.
equipment. The
The old
old equipment
equipment
originally
originally cost
cost $36,000
$36,000 andand has
has accumulated
accumulated depreciation
depreciation of
of $20,000
$20,000 (book
(book
value
value is
is $16,000).
$16,000). This
This exchange
exchange hashas commercial
commercial substance.
substance. The
The old
old
equipment
equipment hashas aa trade-in
trade-in allowance
allowance ofof $9,000.
$9,000.
10 - 45
P5
EXCHANGES WITHOUT COMMERCIAL
SUBSTANCE
Let’s
Let’s assume
assume the
the same
same facts
facts as
as on
on the
the previous
previous screen
screen except
except that
that the
the
market
market value
value of
of the
the new
new equipment
equipment received
received is
is $52,000
$52,000 and
and the
the transaction
transaction
lacks
lacks commercial
commercial substance.
substance.
