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Plant and Intangible

Assets
Chapter 9

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All


Major Categories of Plant Assets

T a n g i b l e P l I a n n t at n g i b l e N a t u r a l
A s s e t s A s s e t s R e s o u r c e

L o n
g - t e r Nm o n c u r r e n S t ia t es ss e a t cs q u
a s s e t s h a wv i in t hg n o p h e y x s t r i ca ac lt i n g
p h y s i c a l s u b s s u t ab ns tc a e n . c e r . e s o u r c e

L a n d ,
b u i Pl d a i nt e g n s t , s , c o pO y i rl i gr e h s t es r, v
e q u i p m e n t t r, a d e m a r k t s i m, b e r , o
f u r n i t u r e , ff ri xa t n u c r eh si s . e s , g m o o i n d e w r ai l l l . s

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Accountable Events in the
Lives of Plant Assets
Acquisition.
Allocation of the acquisition
cost to expense over the
asset’s useful life
(depreciation).
Sale or disposal.

9-3
Acquisition of Plant Assets

Asset
Cost = price
+
Reasonable and
necessary costs . . .

......for
forgetting
getting ......for
forgetting
getting
the
theasset
assetto
tothe
the the
theasset
asset ready
ready
desired
desired location.
location. for
for use.
use.

9-4
Capital Expenditures and
Revenue Expenditures
Capital Revenue
Expenditure Expenditure

Any material expenditure Expenditure for


that will benefit several ordinary repairs
accounting periods. and maintenance.

To capitalize an expenditure To expense an expenditure


means to charge it to an means to charge it to an
asset account. expense account.

9-5
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
Cost of Assets:
Assets:
plant Plant
Plantand
and
assets equipment
equipment

as the services are


Income
IncomeStatement
Statement received
Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation
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Depreciation
Book Value
Cost – Accumulated Depreciation
Depreciation
 Contra-asset
 Represents the portion of an asset’s
cost that has already been allocated
to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence

9-7
Straight-Line Depreciation

Depreciation Cost - Residual Value


=
Expense per Year Years of Useful Life

9-8
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).

9-9
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.
9-10
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.

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

Journalize disposal by:

Recording cash Recording a


received (debit). gain (credit)
or loss (debit).

Removing accumulated Removing the


depreciation (debit). asset cost (credit).

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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 cash Recording a


received (debit). gain (credit)
or loss (debit).

Removing accumulated Removing the


depreciation (debit). asset cost (credit).

9-13
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.

9-14
Intangible Assets
Record at
 Patents
current cash
 Copyrights
equivalent cost,
 Leaseholds
including
 Leasehold
purchase price,
Improvements
legal fees, and
 Goodwill
filing fees.
 Trademarks and
Trade Names

9-15
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

9-16
End of Chapter 9

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