Chapter

9
PLANT AND
INTANGIBLE ASSETS
 Plant Assets

Long-lived
Long-lived assets
assets acquired
acquired for
for use
use in
in
business
business operations.
operations.
Similar to long-term prepaid expenses

As years pass, and the services are

The cost of plant assets is the advance used, the cost is transferred to
purchase of services. depreciation expense.
 Major Categories of Plant Assets

T a n g ib le P la n t I n t a n g i b le N a tu ra l
A s s e ts A s s e ts R e s o u rc e s

L o n g -te rm N o n c u r r e n t a s s e ts S it e s a c q u ir e d f o r
a s s e t s h a v in g w it h n o p h y s ic a l e x t r a c t in g v a l u a b le
p h y s ic a l s u b s t a n c e . s u b s ta n c e . re s o u rc e s .

L a n d , b u i l d in g s , P a t e n t s , c o p y rig h t s , O il r e s e r v e s ,
e q u ip m e n t, tra d e m a rk s , t im b e r , o t h e r
f u r n it u r e , f i x t u r e s . f r a n c h is e s , g o o d w i l l. m in e r a ls .
 Accountable Events


Acquisition.
Acquisition.

Allocation
Allocation of
of the
the acquisition
acquisition cost
cost
to
to expense
expense over
over the
the asset’s
asset’s useful
useful
life
life (depreciation).
(depreciation).

Sale
Sale or
or disposal.
disposal.
Acquisition of Plant Assets
Asset
Asset price
price

Cost
Cost = Reasonable
+
Reasonableand
andnecessary
necessary
costs
costs. .. .. .

......for
forgetting
gettingthe
the ......for
forgetting
gettingthe
the
asset
assetto tothe
thedesired
desired asset
assetready
readyfor
foruse.
use.
location.
location.

Ex. Sales Tax, Delivery Costs and Installation Costs

 Determining Cost
On
OnMay
May4,4,Heat
HeatCo.,
Co.,aastove
stovemaker,
maker,buysbuysaanew
new
machine
machinefrom
fromSupply
SupplyCo.
Co. The
Thenew
newmachine
machinehas hasaa
price
priceof
of$52,000.
$52,000. Sales
Salestax
taxisis8%.
8%.
Heat
Heat Co.
Co.pays
pays$500
$500shipping
shippingcost
costto
toget
getthethemachine
machine
to
toits
itsplant.
plant. After
Afterthe
themachine
machinearrives,
arrives,set-up
set-upcosts
costs
of
of$1,300
$1,300are
areincurred,
incurred,along
alongwith
with$4,000
$4,000in intesting
testing
costs.
costs.
Compute
Computethe
thecost
costof
ofHeat
HeatCo.’s
Co.’snew
newmachine.
machine.
Determining Cost
 Special Considerations

Cost
Costincludes
includesreal
realestate
estatecommissions,
commissions,
Land
Land escrow
escrow fees, legal fees, clearingand
fees, legal fees, clearing and
grading
gradingthe
theproperty.
property.

Land
Land Improvements
Improvementsto
driveways,
toland
landsuch
suchas
as
driveways,fences,
fences,and
andlandscaping
landscapingare
are
Improvements
Improvements recorded
recordedseparately.
separately.
Special Considerations

Repairs
Repairsmade
madeprior
priorto
tothe
thebuilding
buildingbeing
being
Buildings
Buildings put
putininuse
useare
areconsidered
consideredpartpartof
ofthe
the
building’s
building’scost.
cost.

Related
Relatedinterest,
interest,insurance,
insurance,and
and
Equipment
Equipment
property taxes are treated as EXPENSES
property taxes are treated as EXPENSES
of
ofthe
thecurrent
currentperiod.
period.
 Special Considerations

Allocation
Allocation of
of aa Lump-Sum
Lump-Sum Purchase
Purchase

The
Thetotal
totalcost
costmust
must
be The
Theallocation
allocationisis
beallocated
allocatedtoto
separate based
basedononthe
therelative
I think I’ll buy the whole separateaccounts
accountsforfor relative
each Fair
FairMarket
MarketValue
Valueof
eachasset.
asset. of
thing; building, land, and each
eachasset
assetpurchased.
purchased.
contents.
Capital Expenditures and Revenue
Expenditures

Capital
Capital Revenue
Revenue
Expenditure
Expenditure Expenditure
Expenditure

Any
Anymaterial
materialexpenditure
expenditure Expenditure
Expenditurefor
for
that
thatwill
willbenefit
benefitseveral
several ordinary
ordinaryrepairs
repairs
accounting
accountingperiods.
periods. and
andmaintenance
maintenance..

To
Tocapitalize
capitalizean
anexpenditure
expenditure To
Toexpense
expenseananexpenditure
expenditure
means
meanstotocharge
chargeititto
toan
an means
meanstotocharge
chargeititto
toan
an
asset
assetaccount
account.. expense
expenseaccount
account..
 Depreciation
The
Theallocation
allocationof
ofthe
thecost
costof
ofaaplant
plantasset
assetto
toexpense
expenseininthe
theperiods
periodsininwhich
whichservices
services
are
arereceived
receivedfrom
fromthe
theasset.
asset.

Balance
BalanceSheet
Sheet
Cost of plant
Assets:
Assets:
assets
Plant
Plantand
and
equipment
equipment

as the services are

Income
IncomeStatement
Statement received

Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation
 Depreciation
Book
BookValue
Value
••Cost
Cost––Accumulated
AccumulatedDepreciation
Depreciation
Depreciation
Depreciation
••Contra-asset
Contra-asset
••Represents
Representsthe
theportion
portionof
ofan
anasset’s
asset’scost
cost
that
thathas
hasalready
already
been
beenallocated
allocatedto
toexpense.
expense.
Causes
Causesof
ofDepreciation
Depreciation
••Physical
Physicaldeterioration
deterioration
••Obsolescence
Obsolescence
Methods of computing depreciation:

• Straight line method

• Accelerated depreciation
• Declining balance method
Straight-Line Depreciation

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life
 Straight-Line Depreciation

On
On January
January 1,1, 2007,
2007, Bass
Bass Co.
Co. buys
buys new
new equipment.
equipment. BassBass
pays
pays aa total
total of
of $24,000
$24,000 for
for the
the equipment.
equipment. TheThe equipment
equipment
has
has an
an estimated
estimated residual
residual value
value ofof $3,000
$3,000 and
and an
an estimated
estimated
useful
useful life
life of
of 55 years.
years.
Compute
Compute depreciation
depreciation for
for 2007
2007 using
using the
the straight-line
straight-line
method.
method.
Straight-Line Depreciation

Bass
BassCo.
Co.will
willrecord
record$4,200
$4,200depreciation
depreciationeach
eachyear
yearfor
forfive
fiveyears.
years. Total
Totaldepreciation
depreciation
over
overthe
theestimated
estimateduseful
usefullife
lifeof
ofthe
theequipment
equipmentis: is:

Salvage Value
 Depreciation for Fractional Periods

When
When an
an asset
asset isis acquired
acquired during
during the
the year,
year, depreciation
depreciation in
in the
the
year
year of of acquisition
acquisition must
must be
be prorated.
prorated.

Fractional
Fractional Periods
Periods
Depreciation
Depreciation isis rounded
rounded to
to
the
the nearest
nearest month.
month.
 Depreciation for Fractional Periods
Example: Assume the truck in our first example had been acquired on October1.
The truck would have been used for only 3 months. To determine depreciation
expense for the truck, you would multiply the yearly depreciation by 3/12.

Depreciation expense in the first year: $3,000 x 3/12 = $750

Monthly depreciation: $750 x 1/3 = $250

Half-Year Convention

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

Using
Using the
the half-year
half-year convention,
convention, calculate
calculate the
the straight-
straight-
line
line depreciation
depreciation on on December
December 31,31, 2007,
2007, for
for
equipment
equipment purchased
purchased in in 2007.
2007. The
The equipment
equipment costcost
$75,000,
$75,000, has
has aa useful
useful life
life of
of 10
10 years
years and
and anan estimated
estimated
residual
residual value
value of
of $5,000.
$5,000.

Depreciation
Depreciation == ($75,000
($75,000 -- $5,000)
$5,000) ÷÷ 10
10
== $7,000
$7,000 for
for aa full
full year
year
11
Depreciation
Depreciation == $7,000
$7,000 ×× //22 == $3,500
$3,500
 Declining-Balance Method

Depreciation
Depreciationin
inthe
theearly
earlyyears
yearsof
ofan
anasset’s
asset’sestimated
estimateduseful
usefullife
lifeisishigher
higherthan
thanin
in
later
lateryears.
years.

The
Thedouble-declining
double-decliningbalance
balancedepreciation
depreciationrate
rateisis200%
200%of ofthe
the
straight-line
straight-linedepreciation
depreciationrate
rateof
of(1÷Useful
(1÷UsefulLife).
Life).
 Double Declining-Balance Method

On
OnJanuary
January1,1,2007,
2007,Bass
BassCo.
Co.buys
buysaanew
newdelivery
deliverytruck.
truck. Bass
BassCo.
Co.pays
pays$24,000
$24,000for
forthe
the
truck.
truck.The
Thetruck
truckhas
hasan
anestimated
estimatedresidual
residualvalue
valueofof$3,000
$3,000and
andananestimated
estimateduseful
usefullife
life
of
of55years.
years.
Compute
Compute depreciation
depreciation for
for 2007
2007 using
using the
the double-declining
double-declining
balance
balance method.
method.
 Double Declining-Balance Method

Total Compute
Compute depreciation
depreciation for
Totaldepreciation
depreciationover
overthe for the
the rest
theestimated rest of
estimatedusefulof the
the
usefullife
lifeof
ofan
anasset
assetisisthe
thesame
sameusing
usingeither
eitherthe
the
straight-line
straight-linemethod
methodororthe
thedeclining-balance
declining-balancemethod.
truck’s
truck’s estimated
estimated useful
useful life.
life. method.
 150% declining-balance method:

• Depreciation expense is 150% of the depreciation rate (1/useful life

of asset)

year computation Depreciation Accumulated Book value

expense depreciation
2007 $24,000 x 30% 7200 7200 16800

2008 $16,800 x 30% 5040 12240 11760

2009 $11,760 x 30% 3528 15768 8232

2010 ($8,232–3000)x1/2 2616 18384 5616

2011 $5616-3000 2616 21000 3000

Total depreciation $21000

 Other Depreciation Methods
Units-of-Output Method
Under this method, depreciation is based on some measure of output other than
time.

Cost – Residual Value Depreciation cost

=
Estimated Units of Output per unit of output
 Other Depreciation Methods
Units-of-Output Method
Ex. Consider the delivery tuck, which cost $17,000 and has an estimated salvage
value of $2,000. Assume the truck will be sold or traded in after 100,000 miles. To
depreciate this asset, you would determine the depreciation rate per mile and
then calculate based upon mileage.

Cost – Residual Value Depreciation cost

=
Estimated Units of Output per unit of output

$17,000-$2,000 .15 per mile

=
100,000 miles
Depreciation Methods in Use:
A Survey
 Financial Statement Disclosures
Estimates
Estimates of
of Useful
Useful Life
Life and
and Residual
Residual Value
Value
••May
May differ
differ from
from company
company to to company.
company.
••The
The reasonableness
reasonableness of of management’s
management’s
estimates
estimates isis evaluated
evaluated by
by external
external
auditors.
auditors.
Principle
Principle of
of Consistency
Consistency
••Companies
Companies should
should avoid
avoid switching
switching
depreciation
depreciation methods
methods from
from period
period to
to
period.
period.
Impairment of Plant Assets

IfIf the
the cost
cost ofof an
an asset
asset
cannot
cannot be be recovered
recovered
through
through future
future use
use or
or sale,
sale,
the
the asset
asset should
should bebe written
written
down
down to to its
its net
net realizable
realizable
value.
value.
Disposal of Plant and Equipment
Update
Update depreciation
depreciation
to
to the
the date
date of
of disposal.
disposal.

Journalize
Journalize disposal
disposal by:
by:

Recording
Recordingcash
cash Recording
Recordingaa
received
received(debit).
(debit). gain
gain(credit)
(credit)
or
orloss
loss(debit).
(debit).

Removing
Removingaccumulated
accumulated Removing
Removingthethe
depreciation
depreciation(debit).
(debit). asset
assetcost
cost(credit).
(credit).
Disposal of Plant and Equipment

IfIf Cash
Cash >> BV,
BV, record
record aa gain
gain (credit).
(credit).
IfIf Cash
Cash << BV,
BV, record
record aa loss
loss (debit).
(debit).
IfIf Cash
Cash == BV,
BV, no
no gain
gain or
or loss.
loss.

Recording
Recordingcash
cash Recording
Recordingaa
received
received(debit).
(debit). gain
gain(credit)
(credit)
or
orloss
loss(debit).
(debit).

Removing
Removingaccumulated
accumulated Removing
Removingthethe
depreciation
depreciation(debit).
(debit). asset
assetcost
cost(credit).
(credit).
 Disposal of Plant and Equipment

On
On September
September 30,
30, 2007,
2007, Evans
Evans Company
Company sellssells aa machine
machine
that
that originally
originally cost
cost $100,000
$100,000 for for $60,000
$60,000 cash.
cash. The
The
machine
machine was
was placed
placed in
in service
service onon January
January 1,1, 2002.
2002. ItIt
has
has been
been depreciated
depreciated using
using the
the straight-line
straight-line method
method
with
with an
an estimated
estimated salvage
salvage value
value ofof $20,000
$20,000 and and an
an
estimated
estimated useful
useful life
life of
of 10
10 years.
years.

Let’s
Let’s answer
answer the
the following
following questions.
questions.
Disposal of Plant and Equipment

The
The amount
amount ofof depreciation
depreciation recorded
recorded on on
September
September 30,
30, 2007,
2007,
to
to bring
bring depreciation
depreciation up
up to
to date
date is:
is:
a.
a. $8,000.
$8,000. Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000
b.
b. $6,000.
$6,000. Depreciation to Sept. 30:
c.c. $4,000.
$4,000. 9/12 × $8,000 = $6,000

d.
d. $2,000.
$2,000.
Disposal of Plant and Equipment

After
After updating
updating the
the depreciation,
depreciation, the
the
machine’s
machine’s book
book value
value on
on September
September 30,
30,
2007,
2007, is:
is:
a.
a. $54,000.
$54,000. Cost
Cost $$ 100,000
100,000
Accumulated
Accumulated Depreciation:
Depreciation:
b.
b. $46,000.
$46,000. (5
(5 yrs.
yrs. ×× $8,000)
$8,000) ++ $6,000
$6,000 == 46,000
46,000
c.
c. $40,000.
$40,000. Book
Book Value
Value $$ 54,000
54,000
d.
d. $60,000.
$60,000.
Disposal of Plant and Equipment

The
The machine’s
machine’s sale
sale resulted
resulted in:
in:
a.
a. aa gain
gain of
of $6,000.
$6,000.
b.
b. aa gain
gain of
of $4,000.
$4,000.
c.
c. aa loss
loss of
of $6,000.
$6,000.
d.
d. aa loss
loss of
of $4,000.
$4,000. Cost $ 100,000
Accum. Depr. 46,000
Book value $ 54,000
Cash received 60,000
Gain $ 6,000
Disposal of Plant and Equipment

Prepare
Prepare the
the journal
journal entry
entry to
to record
record the
the
sale.
sale.
Trading in Used Assets for New Ones

On
On May
May 30,
30, 2007,
2007, Essex
Essex Company
Company exchanges
exchanges aa
used
used airplane
airplane and
and $35,000
$35,000 cash
cash for
for aa new
new
airplane.
airplane. The
The old
old airplane
airplane originally
originally cost
cost
$40,000,
$40,000, had
had up-to-date
up-to-date accumulated
accumulated
depreciation
depreciation ofof $30,000,
$30,000, and
and aa fair
fair value
value of
of
$4,000.
$4,000.
Trading in Used Assets for New Ones

The
The exchange
exchange resulted
resulted in
in a:
a:

Cost $ 40,000
a.
a. gain
gain of
of $6,000.
$6,000. Accum. Depr. 30,000

b.
b. loss
loss of
of $6,000.
$6,000.
Book Value
Fair Value
$ 10,000
4,000
c.c. loss
loss of
of $4,000.
$4,000. Loss $ 6,000

d.
d. gain
gain of
of $4,000.
$4,000.
Prepare a journal entry
to record the exchange.
Trading in Used Assets for New Ones

Prepare
Prepare the
the journal
journal entry
entry to
to record
record the
the
trade.
trade.
 • (a) Gomez Company retires its
delivery equipment, which cost
$41,000. Accumulated
Scrapping depreciation is $39,000 on this
an Asset delivery equipment. No salvage
value is received.
Trading in Used Assets for New Ones

Prepare
Prepare the
the journal
journal entry
entry to
to record
record the
the
scrapping.
scrapping.

Accumulated Depreciation 39,000

Equipment 41,000
Loss on Disposal 2,000
 • Definition: Intangible assets are
the assets that are used in the
operation of the business but
Intangible that have no physical substance
assets: and are non current.
• Method of valuation: cost
Types of intangible assets
Qualification for being intangible
asset
Amortization

• Systematic write-off of cost

of an intangible asset to
expense
• Recorded same as
depreciation
Goodwill
 A B

Fair market value of $1000000 $1000000

net identifiable assets

Estimatin Normal rate of return 15%

on net assets
15%

g Normal earnings,
computed as 15% of
($150000) ($150000)

Goodwill net identifiable assets

Calculating excess earnings

Average actual net 150000 200000

income for past five
years

Earnings in excess of $0 $50000

normal
Determining Goodwill

Estimated value of business as a whole( $200000*6.5) $1300000

Fair market value of net identifiable assets (1000000)

Estimated value of goodwill $300000

Patents
• A patent is a form of intellectual
property. A patent gives its owner the
right to exclude others from making,
using, selling, and importing an
invention for a limited period of time,
usually twenty years.
 • A name symbol or design
Trademark that identifies a product or
group of product
s
Franchises

• A right granted by a company or a

governmental unit to conduct a
certain type of business in a
specific geographical area.
Copyrights

• An exclusive right granted by federal

government to protect the
production and sale of literary or
artistic material for the life of the
creator plus 70 years.
 • The resources that are physically
Natural removed from their natural
environment and are converted
resources into inventory
 Depletion of natural resources

Account title Debit Credit

inventory 8000000

Accumulated depletion 8000000

Property, plant, & equipment

Mining properties $450000000

Less: accumulated Depletion 80000000 $37000000

Reference