Plant and Intangible

Assets
Chapter 9

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 © 2012 The McGraw-Hill Companies,
Plant Assets as a “Stream
of Future Services”
Plant assets represent a bundle of future
services, and can be thought of as long-
term prepaid expenses.

As years pass, and the

The cost of plant assets is the services are used, the cost is
advance purchase of services. transferred to depreciation
expense.

9-2
Plant Assets <Tangible
assets

They are tangible assets, that have physical

substance, used actively in the operations of an entity.

It’s fully expected that these assets, sometimes referred to as

property, plant, and equipment, will benefit future periods.

When a plant asset is acquired, it is recorded at its historical

cost.
Once the asset is placed in service, a portion of the asset’s cost
is allocated to depreciation expense as the asset becomes
older.
9-3
Major Categories of Plant Assets

T angible Plant Intangible Natural

Assets Assets Resources

L on g -term N on c u rren t as s ets S ites ac q u ired for

as s ets h avin g w ith n o p h ys ic al extrac tin g valu ab le
p h ys ic al s u b s tan c e. s u b s tan c e. res ou rc es .

L an d , b u ild in g s , P aten ts , c op yrig h ts , O il res erves ,

eq u ip m en t, trad em ark s , tim b er, oth er
fu rn itu re, fixtu res . fran c h is es , g ood w ill. m in erals .

9-4
Major Categories of Plant Assets

Intangible assets are noncurrent assets with

no physical substance. Examples include
patents, copyrights, trademarks, franchises,
and goodwill.

Natural resources are acquired for extracting

valuable resources to be used in the business.
Examples include oil reserves, timber, and
other minerals.

9-5
3 Accountable Events in
the
Lives of Plant Assets
1. Acquisition (asset is placed in
service).
2. Allocation of the acquisition
cost to expense over the
asset’s useful life (depreciation).
Several years (more than one)
1. Sale or disposal(removed from
the records)
9-6
 Acquisition of Plant Assets

Asset
Cost = price
+
Finance charges not Reasonable and
included in the cost necessary costs . . .
of an asset

......for
forgetting
gettingthe
the ......for
forgetting
getting
asset
assetto tothe
thedesired
desired the
theasset
assetready
ready
location.
location. for
foruse.
use.

9-7
Special Considerations

Cost includes real estate

commissions, escrow
Land fees, legal fees, clearing
and grading the property.

Improvements to land
Land
Land such as driveways,
Improvements fences, and landscaping
are recorded separately.

9-8
Land and Land
Improvements

Land is not depreciable .

Land improvements are

depreciated over their useful
life.

9-9
Special Considerations
Costs incurred for
remodeling prior to the
Buildings building being put in use
are considered part of the
building’s cost.

Related interest,
insurance, and property
Equipment taxes are treated as
expenses of the current
period.
9-10
Allocation of Land and
Building costs
Allocation of a Lump-Sum Purchase
(Building and Land)

The allocation
The total cost of land and
must be building cost
allocated to is based on
separate the relative
accounts for Fair Market
each asset. Value of each
asset
purchased.

9-11
Capital Expenditures and
Revenue Expenditures
Capital Revenue
Expenditure Expenditure

Any
Any material
material expenditure
expenditure Expenditure
Expenditure for
for
that
that will
will benefit
benefit several
several ordinary
ordinary repairs
repairs
accounting
accounting periods.
periods. and
and maintenance.
maintenance.

To
To capitalize
capitalize an
an expenditure
expenditure To
To expense
expense an
an expenditure
expenditure
means
means to
to charge
charge it
it to
to an
an means
means to
to charge
charge it
it to
to an
an
asset
asset account.
account. expense
expense account.
account.

9-12
Additional /Subsequent
Expenditures:
Capital Expenditures &Revenue
Expenditures
After a plant asset is purchased, the company may
incur additional expenditures on that asset. These
expenditures may be for repairs and maintenance,
overhauls, upgrading the asset, and similar.
One way to handle these types of expenditures is to
treat them as Capital Expenditures and charge
the amounts to an asset account on the balance sheet.
In some cases, the expenditures may be treated as
Revenue Expenditures and charged to current period
income as expenses.
Subsequent expenditures for ordinary repairs are
treated as revenue expenditures and charged to
current period income as expenses.
Subsequent expenditures that are for betterments
are classified as extraordinary repairs. These should be
treated as capital expenditures and charged to the
asset account.
9-13
 Depreciation
The allocation of the cost of a plant asset
to expense in the periods in which
services are received from the asset.

Balance
BalanceSheet
Sheet
Purchase
Assets:
Assets:
cost as
Plant
Plantand
and
assets equipment
equipment
purchased

as the services are

Income
IncomeStatement
Statement received
Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation
9-14
 Depreciation
Do not confuse depreciation with asset
valuation. Valuation is an economic
concept, whereas depreciation is only the
allocation of asset cost to the periods
in which services are received from
the asset .
A portion of the cost is allocated to expense
on the income statement each accounting
period. (Depreciation expense) The
unused portion of the asset’s cost
appears on the balance sheet (this is
not the current value of the asset).
9-15
Depreciation
Book Value (Historical) Cost (–)
Accumulated Depreciation( Contra-
asset)
= Net asset value
Accumulated Depreciation
 Represents the portion of an asset’s cost
that has already been allocated to
expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence
(Not measured by Depreciation)

9-16
Straight-Line Depreciation

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life

9-17
Straight-Line Depreciation
On
On January
January 2,2, S&G
S&G Wholesale
Wholesale Grocery
Grocery buys
buys aa
new
new delivery
delivery truck.
truck. The
The truck
truck cost
cost $24,000,
$24,000, has
has
an
an estimated
estimated residual
residual value
value of of $3,000,
$3,000, and
and an
an
estimated
estimated useful
useful life
life of
of 55 years.
years.
Compute
Compute annual
annual depreciation
depreciation usingusing the
the
straight-line
straight-line method.
method.

9-18
Straight-Line Depreciation
S&G will record $4,200 depreciation each year for five
years. Total depreciation over the estimated useful life
of the equipment is:

Salvage Value
9-19
Straight-Line Depreciation
Depreciation expense is the same amount in
each of the 5 years. If this amount was plotted
on a graph, it would be a straight-line.
Accumulated depreciation increases by 4.200
dollars/year. The cost of the asset less
accumulated depreciation at the end of any
year is called book value. Book value
decreases by
4.200 dollars/year.
At the end of the asset’s useful life, the book
value is equal to the estimated residual value.

9-20
Depreciation for Fractional
Periods
When an asset is acquired during the year,
depreciation in the year of acquisition must
be prorated.

½
Half-Year Convention
In the year of
acquisition, record six
months of depreciation.

9-21
Half-Year Convention
Using the half-year convention, calculate
the straight-line depreciation on
December 31st, for equipment purchased
in during the period. The equipment cost
$75,000, has a useful life of 10 years and
an estimated residual value of $5,000.

Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for a full year
Depreciation = $7,000 × 11/22 = $3,500

9-22
Declining-Balance Method
Depreciation in the early years of an asset’s
estimated useful life is higher than in later years.

The
The double-declining
double-declining balance
balance depreciation
depreciation
rate
rate is
is 200%
200% of
of the
the straight-line
straight-line depreciation
depreciation
rate
rate of
of (1÷Useful
(1÷Useful Life).
Life).

9-23
Declining-Balance Method
On
On January
January 22nd
nd , S&G buys a new delivery
, S&G buys a new delivery
truck
truck paying
paying $24,000
$24,000 cash.
cash. The The truck
truck has
has an
an
estimated
estimated residual
residual value
value of of $3,000
$3,000 andand an
an
estimated
estimated useful
useful life
life of
of 55 years.
years.
Compute
Compute depreciation
depreciation for
for the
the first
first year
year using
using
the
the double-declining
double-declining balance
balance method.
method.

9-24
Declining-Balance Method
Total depreciation over the estimated
useful life of an asset is the same using
either the straight-line method or the
declining-balance method.

9-25
Financial Statement
Disclosures
Estimates of Useful Life and Residual
Value
•May differ from company to
company.
•The reasonableness of
management’s estimates is
evaluated by external auditors.
Principle of Consistency
•Companies should avoid
switching depreciation
methods from period to period.

9-26
Revising Depreciation
Rates
Predicted Predicted
salvage value useful life

So depreciation
is an estimate.

Over the life of an asset, new

information may come to light
that indicates the original
estimates need to be revised.
9-27
Revising Depreciation
Rates
On January 1st, equipment was
purchased that cost $30,000, has a
useful life of 10 years and no salvage
value. Three years later, the useful life
was revised to 8 years total (5 years
remaining).
Calculate depreciation expense for the
year ended December 31st of the fourth
year, using the straight-line method.

9-28
Revising Depreciation
Rates
When our estimates change,
depreciation is:

Book value at Salvage value at

date of change – date of change

Remaining useful life at date of change

Asset
Asset cost
cost $$ 30,000
30,000
Accumulated
Accumulated depreciation,
depreciation, 12/31/2008
12/31/2008
($3,000
($3,000 per
per year
year ×× 33 years)
years) 9,000
9,000
Remaining
Remaining bookbook value
value $$ 21,000
21,000
Divide
Divide by
by remaining
remaining life
life ÷÷ 55
Revised
Revised annual
annual depreciation
depreciation $$ 4,200
4,200
9-29
EXERCISE . Machinery acquired new on January 1 at a cost of $80,000
was estimated to have a useful life of 10 years and a residual salvage
value of $20,000. Straight-line depreciation was used. On January 1,
following six full years of use of the machinery, management decided
that the estimate of useful life had been too long and that the machinery
would have to be retired after three years, that is, at the end of the ninth
year of service. Under this revised estimate, the depreciation expense for
the seventh year of use would be:
ORIGINAL DEPRECIATION
($80,000 - $20,000)/10 = $6,000

6 000 x 6 = $36,000;

REVISION OF DEPRECIATION
$60,000 - $36,000 = $24,000
24 000/3 = $8,000

9-30
Impairment of Plant Assets

IfIf the
the cost
cost of
of an
an asset
asset
cannot
cannot be be recovered
recovered
through
through future
future use
use oror
sale,
sale, thethe asset
asset should
should
be
be written
written down
down toto its
its
net
net realizable
realizable value.
value.

9-31
Disposal of Plant and
Equipment
Update depreciation
to the date of disposal.

Journalize disposal by:

Recording
Recording cash
cash Recording
Recording aa
received
received (debit).
(debit). gain
gain (credit)
(credit)
or
or loss
loss (debit).
(debit).

Removing
Removing accumulated
accumulated Removing
Removing the
the
depreciation
depreciation (debit).
(debit). asset
asset cost
cost (credit).
(credit).

9-32
Disposal of Plant and
Equipment
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.

Recording
Recording cash
cash Recording
Recording aa
received
received (debit).
(debit). gain
gain (credit)
(credit)
or
or loss
loss (debit).
(debit).

Removing
Removing accumulated
accumulated Removing
Removing the
the
depreciation
depreciation (debit).
(debit). asset
asset cost
cost (credit).
(credit).

9-33
Disposal of Plant and
Equipment
Assume that a machine costing $10,000,
had accumulated depreciation of $8,000
and book value of $2,000 (10,000 - $8,000)
at the time it was sold for $3,000 cash.
Determine the gain or loss on sale of this
machine.
Cost of machine $ 10,000
Accumulated depreciation (8,000)
Book value at time of sale 2,000
Cash received 3,000
Gain on sale of machine $ 1,000

9-34
Disposal of Plant and
Equipment
Assume that a machine costing $10,000,
had accumulated depreciation of $8,000
and book value of $2,000 (10,000 - $8,000)
at the time it was sold for $3,000 cash.
Determine the gain or loss on sale of this
machine.
Description Debit Credit
Cash 3,000
Accumulated Depreciation: Machinery 8,000
Gain on Disposal of Plant Asset 1,000
Machinery 10,000

9-35
Trading in Used Assets
for New Ones
Assume that Essex Company exchanges a
used earthmover and $35,000 cash for a
new earthmoving machine. The old
machine originally cost $40,000, had up-
to-date accumulated depreciation of
$30,000, and a fair value of $4,000.

+ $35,000

9-36
Trading in Used Assets
for New Ones
Cost of equipment $ 40,000
Accumulated derpreciation: Equipment 30,000
Book value of equipment $ 10,000
Fair market value of equipment 4,000
Loss on disposal of plant asset $ 6,000

Description Debit Credit

Equipment (New earthmover) 39,000
Accumulated depreciation: Equipment 30,000
Loss on Disposal of Asset 6,000
Equipment (Old earthmover) 40,000
Cash 35,000

9-37
Intangible Assets
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.

Characteristics

Useful life is Usually acquired

often difficult for operational
to determine. use.

9-38
Intangible Assets
Record at
 Patents
current cash
 Copyrights
equivalent cost,
including  Leaseholds
purchase price,  Leasehold
legal fees, and Improvements
filing fees.  Goodwill
 Trademarks and
Trade Names

9-39
Amortization
•• Amortization
Amortization is
is the
the systematic
systematic write-
write-
off
off to
to expense
expense ofof the
the cost
cost of
of
intangible
intangible assets
assets over
over their
their useful
useful life
life
or
or legal
legal life,
life, whichever
whichever is
is shorter.
shorter.
•• Use
Use the
the straight-line
straight-line method
method to
to
amortize
amortize most
most intangible
intangible assets.
assets.

Date Description Debit Credit

Amortization Expense $$$$$
Intangible Asset $$$$$
9-40
Goodwill
Occurs when one Only purchased
company buys goodwill is an
another company. intangible asset.

The amount by which the

purchase price exceeds the fair
market value of net assets acquired.

Goodwill is NOT amortized. It is tested

annually to determine if there has been
an impairment loss.

9-41
Patents
Exclusive
Exclusive right
right granted
granted
by
by federal
federal government
government to to
sell
sell or
or manufacture
manufacture anan
invention.
invention.

Cost is purchase Amortize cost

price plus legal over the shorter of
cost to defend. useful life or 20 years.

9-42
Trademarks and Trade
Names
A symbol, design, or logo
associated with a business.

Purchased
Internally trademarks
developed are recorded
trademarks at cost, and
have no amortized over
recorded shorter of legal
asset cost. or economic life.

9-43
Franchises
Legally protected right to sell products
or provide services purchased by
franchisee from franchisor.

Purchase price is intangible

asset which is amortized over
the shorter of the protected
right or useful life.
9-44
Copyrights
Exclusive right granted by
the federal government to
protect artistic or intellectual
properties.

Legal life is Amortize cost

life of creator over period
plus 70 years. benefited.

9-45
Research and Development
Costs
All expenditures classified as
research and development should
be charged to expense when
incurred.
All
All of
of these
these R&D
R&D costs
costs
will
will really
really reduce
reduce our
our
net
net income
income this
this year!
year!

9-46
Research and development expenditures
(charged to expenses)

83. The basic purpose of the matching principle

is to allocate the cost of an asset to expense
over the years in which the asset
contributes to revenue. Current accounting
practice does not strictly apply this principle
to expenditures for:
A. Natural resources.
B. Research and development.
C. Trademarks.
D. Equipment.

9-47
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

9-48
Depletion of Natural
Resources
Depletion is calculated using the
units-of-production method.

Unit depletion rate is calculated as follows:

Cost – Residual Value

Total Units of Natural
Resource

9-49
Plant Transactions and the
Statement of Cash Flows
Cash payments for plant assets represent a
cash outflow for investing activities on the
statement of cash flows. A disposal of a plant
asset for cash results in a cash inflow to the
company.

Depreciation is a
non-cash charge to
income and has no
effect on cash flows.

9-50
9-51
End of Chapter 9

9-52