6 Plant Assets, Natural Resources,

and Intangible Assets

Cost Flow Assumptions

There are two assumed cost flow methods:

1. First-in, first-out (FIFO)

2. Last in last-out (LIFO)

3. Average-cost

Cost flow does not need be consistent with the physical

movement of the goods.

6-1
 Plant Assets

Plant assets are resources that have

 physical substance (a definite size and
shape),
 are used in the operations of a business,
 are not intended for sale to customers,
 are expected to provide service to the company for a
number of years.

Referred to as property, plant, and equipment; plant and

equipment; and fixed assets.

9-2
 Determining the Cost of Plant Assets

LAND
All necessary costs incurred in making land ready for its
intended use increase (debit) the Land account.

Costs typically include:

1) cash purchase price,
2) closing costs such as title and attorney’s fees,
3) real estate brokers’ commissions,
4) accrued property taxes and other liens assumed by the
purchaser, and
5) clearing, leveling, demo of existing structures.

9-3
 Determining the Cost of Plant Assets

Illustration: MN Company Ltd. acquires real estate at a cash

cost of Birr 2,000,000. The property contains an old warehouse
that is razed at a net cost of Birr 60,000 (Birr 75,000 in costs
less Birr 15,000 proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, Birr 10,000, and the real
estate broker’s commission, Birr 80,000.
Required: Determine the amount to be reported as the cost of
the land.

9-4
 Determining the Cost of Plant Assets

Required: Determine amount to be reported as the cost of

the land.
Land
Cash price of property (Birr 2,000,000) Birr 2,000,000
Net removal cost of warehouse (Birr 60,000) 60,000
Attorney's fees (Birr 10,000) 10,000
Real estate broker’s commission (Birr 80,000) 80,000
Cost of Land Birr 2,150,000

Entry to record the acquisition of the land:

Land 2,150,000

9-5
Cash 2,150,000
 Depreciation

Process of allocating to expense the cost

of a plant asset over its useful (service) life
in a rational and systematic manner.
 Process of cost allocation, not asset valuation.
 Applies to buildings, and equipment, not land.
 Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.

9-6
 FACTORS IN COMPUTING DEPRECIATION

• HELPFUL HINT
Depreciation expense is reported on the
income statement. Accumulated
depreciation is reported on the balance
sheet as a deduction from plant assets.

9-7
 DEPRECIATION METHODS

Management selects the method it believes best measures

an asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method
(2) Units-of-activity method
(3) Declining-balance method

9-8
 DEPRECIATION METHODS

Illustration: Gedi purchased a small delivery truck on January

1, 2017.
Cost €13,000
Expected residual value €1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000

Required: Compute depreciation using the following.

(a) Straight-Line. (b) Units-of-Activity. (c) Declining-Balance.

9-9
 STRAIGHT-LINE METHOD

 Expense is same amount for each year.

 Depreciable cost = Cost less salvage value.

9-10
 STRAIGHT-LINE METHOD

Illustration:
Depreciable Annual Accum. Book
Year Cost x Rate = Expense Deprec. Value

2017 € 12,000 20% € 2,400 € 2,400 € 10,600

2018 12,000 20 2,400 4,800 8,200
2019 12,000 20 2,400 7,200 5,800
2020 12,000 20 2,400 9,600 3,400
2021 12,000 20 2,400 12,000 1,000

2017 Depreciation Expense 2,400

Journal
Accumulated Depreciation 2,400
Entry

9-11
 UNITS-OF-ACTIVITY METHOD

 Companies estimate total units of activity to calculate

depreciation cost per unit.
 Expense varies based on units of activity.
 Depreciable cost is cost less residual value.

9-12
 UNITS-OF-ACTIVITY METHOD

Illustration:
Units of Cost per Annual Accum. Book
Year Activity x Unit = Expense Deprec. Value
2017 15,000 € 0.12 € 1,800 € 1,800 € 11,200
2018 30,000 0.12 3,600 5,400 7,600
2019 20,000 0.12 2,400 7,800 5,200
2020 25,000 0.12 3,000 10,800 2,200
2021 10,000 0.12 1,200 12,000 1,000

2017 Depreciation Expense 1,800

Journal
Accumulated Depreciation 1,800
Entry

9-13
 DECLINING-BALANCE METHOD

 Accelerated method.
 Decreasing annual depreciation expense over the asset’s
useful life.
 Twice the straight-line rate with Double-Declining-Balance.
 Rate applied to book value.

9-14
 DECLINING-BALANCE METHOD

Illustration:
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value

2017 € 13,000 40% € 5,200 € 5,200 € 7,800

2018 7,800 40 3,120 8,320 4,680
2019 4,680 40 1,872 10,192 2,808
2020 2,808 40 1,123 11,315 1,685
2021 1,685 40 685* 12,000 1,000

2017 Depreciation Expense 5,200

Journal
Accumulated Depreciation 5,200
Entry

9-15 * Computation of €674 (€1,685 x 40%) is adjusted to €685.

 Revaluation of Plant Assets

Illustration: ABC Ltd. applies revaluation to equipment purchased on

January 1, 2017, for HK$1,000,000. The equipment has a useful life of
5 years, and no residual value. ABC makes the following entry to
record depreciation for 2017, assuming straight-line depreciation.
Depreciation Expense 200,000
Accumulated Depreciation—Equipment 200,000

At the end of 2017, independent appraisers determine that the asset

has a fair value of HK$850,000. The entry to record the revaluation
is as follows.
Accumulated Depreciation—Equipment 200,000
Equipment 150,000
Revaluation Surplus 50,000
9-16
 Extractable Natural Resources

Natural resources consist of standing timber

and resources extracted from the ground, such
as oil, gas, and minerals.

IFRS defines extractive industries as those businesses

involved in finding and removing natural resources located
in or near the earth’s crust.
Standing timber is considered a biological asset under IFRS.
In the years before they are harvested, the recorded value of
biological assets is adjusted to fair value each period.

9-17
 Extractable Natural Resources

Acquisition cost of an extractable natural resource is the

 price needed to acquire the resource and
 prepare it for its intended use.

Depletion is the allocation of the cost to expense in a rational

and systematic manner over the resource’s useful life.
 Depletion is to natural resources as depreciation is to plant
assets.
 Companies generally use units-of-activity method.
 Depletion generally is a function of the units extracted.

9-18
 Extractable Natural Resources

Illustration: Lane Coal Company invests HK$50 million in a

mine estimated to have 10 million tons of coal and no residual
value. In the first year, Lane extracts and sells 250,000 tons of
coal. Lane computes the depletion expense as follows:

HK$5.00 per ton x 250,000 tons =

HK$1,250,000 annual depletion
9-19
 Intangible Assets

Intangible assets are rights, privileges, and

competitive advantages that result from
ownership of long-lived assets that do not
possess physical substance.

Limited life or indefinite life.

Common types of intangibles:
 Patents  Goodwill
 Copyrights  Franchises
 Trademarks  Leases
 Trade Names
9-20
 Accounting for Intangible Assets

Limited-Life Intangibles:
Companies
Companiesclassify
classify
 Amortize to expense. Amortization
Amortization
 Credit asset account. Expense
Expenseas asan
an
operating
operatingexpense
expense
Indefinite-Life Intangibles: in
inthe
theincome
income

statement.
statement.
No amortization.

Similar
Similarto
toproperty,
property,plant,
plant,and
andequipment,
equipment,IFRS
IFRS
permits
permitsrevaluation
revaluationofofintangible
intangibleassets
assetsto
tofair
fairvalue,
value,
except
exceptforforgoodwill.
goodwill.

9-21
 Accounting for Intangible Assets

PATENTS
 Exclusive right to manufacture, sell, or otherwise control an
invention for a specified number of years from the date of
the grant.
 Capitalize costs of purchasing a patent and amortize
over its legal life or its useful life, whichever is shorter.
 Expense any Research and Development costs in
developing a patent.
 Legal fees incurred successfully defending a patent are
capitalized to Patents account.

9-22
 PATENTS

Illustration: National Labs purchases a patent at a cost of Birr

720,000. National estimates the useful life of the patent to be
eight years. National records the annual amortization for the
ended December 31 as follows.

Cost Birr 720,000

Useful life ÷ 8 years
Annual expense Birr 90,000

Dec. 31
Amortization Expense 90,000
Patents
90,000
9-23
 Accounting for Intangible Assets

COPYRIGHTS
 Give the owner the exclusive right to reproduce and sell
an artistic or published work.
 Granted for the life of the creator plus a specified
number of years, commonly 70 years.
 Capitalize costs of acquiring and defending it.
 Amortized to expense over useful life.

9-24
 Accounting for Intangible Assets

TRADEMARKS AND TRADE NAMES

 Word, phrase, jingle, or symbol that identifies a particular
enterprise or product.
► Wheaties, Monopoly, Kleenex, Coca-Cola, Big Mac, and
Jetta.
 Legal protection for specified number of years, commonly
20 years. Protection may be renewal indefinitely.
 Capitalize cost of acquisition.
 No amortization.

9-25
 Accounting for Intangible Assets

FRANCHISES AND LICENSES

 Contractual arrangement between a franchisor and a
franchisee.
► BP (GBR), Subway (USA), and Europcar are
franchises.
 Franchise (or license) with a limited-life should be
amortized to expense over its useful life.
 Franchise (or license) with an indefinite life is not
amortized.

9-26
 Accounting for Intangible Assets

GOODWILL
 Includes exceptional management, desirable location, good
customer relations, skilled employees, high-quality products,
etc.
 Only recorded when an entire business is purchased.
 Goodwill is recorded as the excess of cost over the fair
value of the net assets acquired.
 Internally created goodwill should not be capitalized.
 Not amortized.

9-27
 END OF CHAPTER SIX

Thank You
Any Question?

12/05/2024 PA, By Sawda M. (MSc)

10-28