9-1

Chapter

9 PLANT AND
INTANGIBLE ASSETS

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-2

Plant Assets

Long-lived assets acquired for use in

business operations.
Similar to long-term prepaid expenses

As years pass, and the

The cost of plant assets services are used, the
is the advance purchase cost is transferred to
of services. depreciation expense.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-3

Major Categories of Plant Assets

T a n g ib le P la n t In ta n g ib 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 rre n t a s s e ts S it e s a c q u ir e d fo 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 lu 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 ild in g s , P a t e n t s , c o p y r ig 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
fu r n it u r e , fix t u r e s . fr a n c h is e s , g o o d w ill. m in e r a ls .

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-4

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-5

Acquisition of Plant Assets

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

. . . for getting . . . for getting

the asset to the the asset ready
desired location. for use.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-6

Determining Cost
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas
company. The new machine has a price of
$52,000. Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine
arrives, set-up costs of $1,300 are incurred,
along with $4,000 in testing costs.

Compute the cost of Heat Co.’s new machine.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-7

Determining Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-8

Special Considerations

Cost includes real estate

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

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-9

Special Considerations

Repairs made prior to the

building being put in use
Buildings are considered part of the
building’s cost.

Related interest,
insurance, and property
Equipment taxes are treated as
expenses of the current
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-10

Special Considerations

Allocation of a Lump-Sum Purchase

The total cost The allocation

must be is based on
allocated to the relative
I think I’ll buy the separate Fair Market
whole thing; barn, accounts for Value of each
land, and animals. each asset. asset
purchased.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Capital Expenditures and Revenue 9-11

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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-12

Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.

Balance Sheet
Cost of Assets:
plant Plant and
assets equipment

as the services
Income Statement
are received
Revenues:
Expenses:
Depreciation
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-13

Depreciation
Book Value
 Cost – Accumulated Depreciation
Accumulated Depreciation
 Contra-asset
 Represents the portion of an asset’s
cost that has already
been allocated to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-14

Straight-Line Depreciation

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-15

Straight-Line Depreciation

On January 1, 2005, Bass Co. buys a new boat. Bass

Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2005 using the
straight-line method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-16

Straight-Line Depreciation

Bass Co. will record $4,200 depreciation each year for

five years. Total depreciation over the estimated useful
life of the boat is:

Salvage Value
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-17

Depreciation for Fractional Periods

When an asset is acquired during the year,

depreciation in the year of acquisition must be
prorated.

Half-Year Convention

½
In the year of
acquisition, record six
months of
depreciation.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-18

Half-Year Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31,
2005, for equipment purchased in 2005.
The equipment cost $75,000, has a useful
life of 10 years and an estimated salvage
value of $5,000.

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

= $7,000 for a full year
1
Depreciation = $7,000 × /2 = $3,500
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-19

Declining-Balance Method

Depreciation in the early years of an asset’s estimated

useful life is higher than in later years.

The double-declining balance depreciation

rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-20

Declining-Balance Method

On January 1, 2005, Bass Co. buys a new boat. Bass

Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2005 using the
double-declining balance method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-21

Declining-Balance Method

Compute depreciation
Total depreciation for theuseful
over the estimated restlife
ofofthe
an
asset is the same using either the straight-line method or
boat’s estimated useful life.
the declining-balance method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-22

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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-23

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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-24

Revising Depreciation Rates

On January 1, 2002, equipment was purchased
that cost $30,000, has a useful life of 10 years
and no salvage value. During 2005, the useful
life was revised to 8 years total (5 years
remaining).

Calculate depreciation expense for the year

ended December 31, 2005, using the straight-
line method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-25

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 cost $ 30,000
Accumulated depreciation, 12/31/2004
($3,000 per year × 3 years) 9,000
Remaining book value $ 21,000
Divide by remaining life ÷5
Revised annual depreciation $ 4,200

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-26

Impairment of Plant Assets

If the cost of an asset

cannot be recovered
through future use or
sale, the asset should
be written down to its
net realizable value.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-27

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).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-28

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).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-29

Disposal of Plant and Equipment

On September 30, 2005, Evans Map Company

sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in
service on January 1, 2000. It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.

Let’s answer the following questions.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-30

Disposal of Plant and Equipment

The amount of depreciation

recorded on September 30, 2005,
to bring depreciation up to date is:

a. $8,000. Annual Depreciation:

b. $6,000. ($100,000 - $20,000) ÷ 10 Yrs. = $8,000

c. $4,000. Depreciation to Sept. 30:

d. $2,000. 9/12 × $8,000 = $6,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-31

Disposal of Plant and Equipment

After updating the depreciation, the

machine’s book value on
September 30, 2005, is:

a. $54,000. Cost $ 100,000

Accumulated Depreciation:
b. $46,000. (5 yrs. × $8,000) + $6,000 = 46,000
c. $40,000. Book Value $ 54,000
d. $60,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-32

Disposal of Plant and Equipment

The machine’s sale resulted in:

a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000. Cost $ 100,000
Accum. Depr. 46,000
Book value $ 54,000
Cash received 60,000
Gain $ 6,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-33

Disposal of Plant and Equipment

Prepare the journal entry to record

the sale.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Trading in Used Assets 9-34

for New Ones

Accounting depends on whether

assets are similar or dissimilar.

Airplane Truck
for for
Airplane Airplane

Only situations where cash

is paid will be demonstrated.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Trading in Used Assets 9-35

for New Ones

Dissimilar Similar Assets

Assets and Cash Paid
Recognize
Yes No
Gains?
Recognize
Yes Yes
Losses?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Trading in Used Assets 9-36

for New Ones – Similar Assets

On May 30, 2005, Essex Company

exchanged a used airplane and $35,000
cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and
a fair value of $4,000.

SIMILAR

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Trading in Used Assets 9-37

for New Ones – Similar Assets

The exchange resulted in a:

Cost $ 40,000
a. gain of $6,000. Accum. Depr. 30,000
Book Value $ 10,000
b. loss of $6,000. Fair Value 4,000
c. loss of $4,000. Loss $ 6,000

d. gain of $4,000.
Prepare a journal entry
to record the exchange.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Trading in Used Assets 9-38

for New Ones – Similar Assets

Prepare the journal entry to record

the trade.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-39

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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-40

Intangible Assets

Record at current
cash equivalent
 Patents
cost, including  Copyrights
purchase price,  Leaseholds
legal fees, and  Leasehold
filing fees. Improvements
 Goodwill
 Trademarks and
Trade Names

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-41

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

Date Description Debit Credit

Amortization Expense ####
Intangible Asset ####

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-42

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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-43

Patents

Exclusive right granted

by federal government to sell or
manufacture an invention.

Cost is purchase Amortize cost

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-44

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,
or 40 years.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-45

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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-46

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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-47

Research and Development Costs

The FASB ruled that all R&D

expenditures should be charged to
expense when incurred.

All of these R&D costs

will really reduce our
net income this year!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-48

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-49

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-50

Depletion of Natural Resources

Total depletion cost for a period is:

Unit Depletion Number of Units
Rate × Extracted in Period

Cost of
Total goods sold
Inventory
depletion
for sale
cost Unsold
Inventory

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-51

Depletion of Natural Resources

Specialized plant assets may be required to

extract the natural resource.

These assets should be depreciated over

their normal useful lives or over the life of
the natural resource, whichever is shorter.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Comparative Use of Depreciation 9-52

Methods

A survey of 600 Publicly Owned Corporations

Straight-line 579

Declining-balance 22

Sum-of-the-years'-digits 6

Accelerated methods (not specified) 49

Units-of-output 32

Other 9

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-53

End of Chapter 9

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005