Ch09 Plant Assets

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Chapter 9

Plant Assets, NaturalResources, and Intangible

AssetsLearning Objecties

After studying this chapter, you should be able to:

1! "escribe ho# the historical cost principle applies to plant assets!2! $%plain the concept o& depreciation and ho# to co'pute it!

(! "istinguish bet#een reenue and capital e%penditures, and e%plain the

entries &or each!

)! $%plain ho# to account &or the disposal o& a plant asset!

*! Co'pute periodic depletion o& e%tractable natural resources!

+! $%plain the basic issues related to accounting &or intangible assets!

! Indicate ho# plant assets, natural resources, and intangible assets are

reported!


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Preview of Chapter 9

Financial Accounting

IFRS Second Edition

Weygandt Kimmel Kieso


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Plant assets are resources that have phsical substance (a definite size and shape),

are used in the operations of a business,

are not intended &or sale to customers,

are expected to proide serice to the company for a

number of years.

Re&erred to as propert, plant, and e.uip'ent/ plant ande.uip'ent/ and &i%ed assets!

Plant Assets


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Illustration 9-1

Plant Assets

Plant assets are critical to a company’s success.


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In general, companies record plant assets at cost.

LO 1 "escribe ho# the cost principle applies to plant assets!

"eter'ining the Cost o& Plant Assets

Cost consists o& all e%penditures necessar to

ac.uire an asset and 'a0e it read &or its

intended use!


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All necessar costs incurred in making land read &or its

intended use increase debit the Land account.

osts typically include!

") cash purchase price,

#) closing costs such as title and attorney’s fees,

$) real estate brokers’ commissions,

%) accrued property taxes and other liens assumed by the

purchaser, and

&) clearing, leveling, demo of existing structures.



Land


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Illustration4 Le' ompany acuires real estate at a cash cost

of *+#,,. -he property contains an old 'arehouse that

is razed at a net cost of *+, (*+/&, in costs less

*+"&, proceeds from salvaged materials). 0dditional

expenditures are the attorney’s fee, *+",, and the realestate broker’s commission, *+1,.

Re.uired4 2etermine the amount to be reported as the cost of

the land.




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Land

Re.uired4 2etermine amount to be reported as the cost of theland.


ash price of property (*+#,,)

3et removal cost of 'arehouse (*+,)

0ttorney4s fees (*+",) ",

,

*+#,,

5672,1*8,888Cost o& Land

5eal estate broker’s commission (*+1,) 1,



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Includes all e%penditures necessary to make the

improvements read &or their intended use.

Land I'proe'ents

$%a'ples4 drive'ays, parking lots, fences, landscaping,

and lighting.

Limited useful lives.

6xpense (depreciate) the cost of land improvements over

their useful lives.




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Includes all costs related directly to purchase or construction.

Purchase costs4

7urchase price, closing costs (attorney’s fees, title insurance,etc.) and real estate broker’s commission.

5emodeling and replacing or repairing the roof, floors,

electrical 'iring, and plumbing.

Construction costs4

ontract price plus payments for architects’ fees, building

permits, and excavation costs.



uildings


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Include all costs incurred in acuiring the euipment and

preparing it &or use.

osts typically include!

ash purchase price.

8ales taxes.

9reight charges.

Insurance during transit paid by the purchaser.

6xpenditures reuired in assembling, installing, and testing

the unit.



$.uip'ent


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Illustration4 :hang ompany purchases factory machinery at

a cash price of *+&,. 5elated expenditures are for

sales taxes *+$,, insurance during shipping *+&,,

and installation and testing *+",. ompute the cost of

the machinery.


:achiner

ash price

8ales taxes

Insurance during shipping &,

$,

*+&,

567*)*,888Cost o& :achiner


Installation and testing ",


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ash &%&,


6uipment &%&,


Illustration4 :hang ompany purchases factory machinery at

a cash price of *+&,. 5elated expenditures are for sales

taxes *+$,, insurance during shipping *+&,, and

installation and testing *+",. 7repare the ;ournal entry to

record these costs.


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Illustration4 uang ompany purchases a delivery truck at a

cash price of *+%#,. 5elated expenditures are sales taxes

*+"$,#, painting and lettering *+&,, motor vehicle

license *+1, and a three


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Illustration4 uang ompany purchases a delivery truck at a

cash price of *+%#,. 5elated expenditures are sales taxes

*+"$,#, painting and lettering *+&,, motor vehicle

license *+1, and a three


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7rocess of cost allocation, not asset aluation.

0pplies to land improvements, buildings, and euipment,

not land.

2epreciable, because the reenue-producing abilit o&

asset #ill decline over the asset’s useful life.

7rocess of allocating to e%pense the cost of a plant asset

over its useful (service) life in a rational and systematic

manner.

LO 2 $%plain the concept o& depreciation and ho# to co'pute it!

"epreciation

"epreciation


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ost =seful Life 5esidual >alue

Illustration 9-+

"epreciation


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?anagement selects the method it believes best measures an

asset’s contribution to revenue over its useful life.

6xamples include!(") 8traight


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Illustration4 @arb’s 9lorists purchased a small delivery truck onAanuary ", #"%.

Re.uired4 ompute depreciation using the follo'ing.(a) 8traight


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=traight-Line 6xpense is sa'e a'ount for each year.

2epreciable cost B ost less residual value.Illustration 9-3

"epreciation



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Illustration4 =traight-Line :ethod

281) > 12,888 28? > 2,)88 > 2,)88 > 18,+88

281* 12,888 28 2,)88 ),388 3,288

281+ 12,888 28 2,)88 ,288 *,388

281 12,888 28 2,)88 9,+88 (,)88

2813 12,888 28 2,)88 12,888 1,888

281)@ournal$ntr

"epreciation e%pense 2,)88

Accu'ulated depreciation 2,)88

Illustration 9-18

"epreciation



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Assu'e the delier truc0 #as purchased on April 1, 281)!

"epreciation Partial ear

Illustration4 =traight-Line :ethod

LO 2


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ompanies estimate total units of activity to calculate

depreciation cost per unit.

Bnits-o&-Actiit

Illustration 9-18

6xpense varies based

on units of activity.

2epreciable cost is

cost less residual

value.

"epreciation



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Illustration4 Bnits-o&-Actiit :ethod

281) 1*,888 > 8!12 > 1,388 > 1,388 > 11,288

281* (8,888 8!12 (,+88 *,)88 ,+88

281+ 28,888 8!12 2,)88 ,388 *,288

281 2*,888 8!12 (,888 18,388 2,288

2813 18,888 8!12 1,288 12,888 1,888

"epreciation e%pense 1,388

Accu'ulated depreciation 1,388

281)@ournal$ntr

Illustration 9-11

"epreciation



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"eclining-alance 0ccelerated method.

2ecreasing annual depreciation expense over the asset’s

useful life.

-'ice the straight


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Illustration4 "eclining-alance :ethod

281) > 1(,888 )8? > *,288 > *,288 > ,388

281* ,388 )8 (,128 3,(28 ),+38

281+ ),+38 )8 1,32 18,192 2,383

281 2,383 )8 1,12( 11,(1* 1,+3*

2813 1,+3* )8 +3* 12,888 1,888

Co'putation o& 7+) 71,+3* % )8? is adjusted to 7+3*!

"epreciation e%pense *,288

Accu'ulated depreciation *,288

281)@ournal$ntr

Illustration 9-1(

LO 2

"epreciation


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Illustration4 "eclining-alance :ethod

"epreciation Partial ear



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Co'parison o&

:ethods

Illustration 9-1)

Illustration 9-1*

$ach 'ethod is acceptable

because each recogniDes the

decline in serice potential o&the asset in a rational and

sste'atic 'anner!

LO 2

"epreciation


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I958 reuires component depreciation for plant assets.

5euires that any significant parts of a plant asset that

have significantly different estimated useful lives shouldbe separately depreciated.

Co'ponent "epreciation

"epreciation



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Illustration4 Lexure onstruction builds an office building for *+%,,.

-he building is estimated to have a %


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-ax la's often do not reuire corporate taxpayers to use the

same depreciation method on the tax return that is used in

preparing financial statements.

?any corporations use

straight


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0ccounted for in the period of change and future

periods (change in estimate).

3o restatement of prior years depreciation expense.

Reising Periodic "epreciation

"epreciation



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Illustration4 0rcadia 8, purchased euipment for C&",

'hich 'as estimated to have a useful life of " years 'ith a

residual value of C", at the end of that time. 2epreciation

has been recorded for / years on a straight


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6uipment C&",

7roperty, 7lant, and 6uipment

0ccumulated depreciation $&,

3et book value (3@>) C",

@alance 8heet (2ec. $", #")

0fter / years

6uipment cost C&",residual value < ",

2epreciable base &,

=seful life (original) " years

0nnual depreciation C &, x / years B C$&,

9irst, establish 3@>at date of change in

estimate.

9irst, establish 3@>at date of change in

estimate.

"epreciation



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3et book value C",residual value (ne') &,

2epreciable base "&&,

=seful life remaining 1 years

0nnual depreciation C "F,$/&

2epreciation6xpense calculation

for #"/.

2epreciation6xpense calculation

for #"/.

2epreciation expense "F,$/&

0ccumulated depreciation "F,$/&

Aournal entry for #"/ and future years.

"epreciation


0fter / years


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I958 allo's companies to revalue plant assets to fair value atthe reporting date.

If revaluation is used,

it must be applied to all assets in a class of assets.

assets experiencing rapid price changes must be revalued

on an annual basis.

Realuation o& Plant Assets



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Illustration4 7ernice ompany applies revaluation to euipment 'ith a

book (carrying) value of *+",,, a useful life of & years, and no

residual value. 7ernice makes the follo'ing ;ournal entries in year ",

assuming straight


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0s indicated,

*+1&, is the ne' basis of the asset.

2epreciation expense of *+#, in the income statement.

*+&, in other comprehensive income.

0ssuming no change in the total useful life, depreciation in year #

'ill be *+#"#,& (*+1&, G %).

Illustration 9-13=tate'ent presentation o& plant assets

e.uip'ent and realuation surplus

Realuation o& Plant Assets


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Ordinar Repairs - expenditures to 'aintain the operating

efficiency and productive life of the unit.

"ebit H ?aintenance and 5epairs 6xpense.

5eferred to as reenue e%penditures.

Additions and I'proe'ents < costs incurred to increase

the operating efficiency, productive capacity, or useful life of a

plant asset.

"ebit < the plant asset affected.

5eferred to as capital e%penditures.

$%penditures "uring Bse&ul Li&e

LO ( "istinguish bet#een reenue and capital e%penditures,and e%plain the entries &or each!


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ompanies dispose of plant assets in three 'ays8ale,

5etirement, or 6xchange (appendix).

LO ) $%plain ho# to account &or the disposal o& a plant asset!

5ecord depreciation up to the date o& disposal.

$li'inate asset by (") debiting 0ccumulated 2epreciation, and

(#) crediting the asset account.

Illustration 9-19

Plant Asset "isposals


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Retire'ent o& Plant Assets


No cash is received.

"ecrease debit Accu'ulated "epreciation for

the full amount of depreciation taken over the life ofthe asset.

"ecrease credit the asset account for the

original cost of the asset.

5ecord any difference as gain or loss on disposal.



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Illustration4 obart 6nterprises retires its computer printers,

'hich cost C$#,. -he accumulated depreciation on these

printers is C$#,. 7repare the entry to record this retirement.


0ccumulated depreciation $#,

6uipment $#,

Euestion4 Dhat happens if a fully depreciated plant asset is still

useful to the companyE



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Illustration4 8unset ompany discards delivery euipment

that cost C"1, and has accumulated depreciation of

C"%,. -he ;ournal entry isE


0ccumulated depreciation "%,

Loss on disposal of plant assets %,

ompanies report a loss on disposal in the FOther inco'e and

e%penseG section of the income statement.

6uipment "1,



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ompare the boo0 alue of the asset 'ith the proceeds

received from the sale.

If proceeds e%ceed the book value, a gain on disposal

occurs.

If proceeds are less than the book value, a loss on

disposal occurs.



=ale o& Plant Assets


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Illustration4 Jn Auly ", #"%, Dright ompany sells office

furniture for C", cash. -he office furniture originally cost

C,. 0s of Aanuary ", #"%, it had accumulated

depreciation of C%",. 2epreciation for the first six months of#"% is C1,. 7repare the ;ournal entry to record

depreciation expense up to the date of sale.


2epreciation expense 1, 0ccumulated depreciation 1,

Auly "


Hain on =ale


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Illustration4 Dright records the sale as follo's.


ash ",

0ccumulated depreciation %F,

Illustration 9-28

omputation of gainon disposal

6uipment ,

Kain on disposal of plant assets &,

Auly "



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ash F,

0ccumulated depreciation %F,

Illustration 9-21omputation of losson disposal

6uipment ,

Loss on disposal of plant asset #,

Auly "

Illustration4 0ssume that instead of selling the office furniture

for C",, Dright sells it for CF,.



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Natural resources consist of standing timber and resources

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

I958 defines e%tractie industries as those businesses involved

in finding and removing natural resources located in or near

the earths crust.

=tanding ti'ber is considered a biological asset under I958. In

the years before they are harvested, the recorded value of

biological assets is ad;usted to fair value each period.

$%tractable Natural Resources

LO * Co'pute periodic depletion o& e%tractable natural resources!


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Ac.uisition cost of an extractable natural resource is the

price needed to acuire the resource and

prepare it for its intended use.

"epletion < allocation of the cost to expense in a rational andsystematic manner over the resource’s useful life.

2epletion is to natural resources as depreciation is to plant

assets.

ompanies generally use units


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Illustration4 Lane oal ompany invests *+& million in a

mine estimated to have " million tons of coal and no residual

value. In the first year, Lane extracts and sells 1, tons of

coal. Lane computes the depletion expense as follo's!

*+&,, G ",, B *+& depletion cost per ton

*+& x 1, B *+%,, annual depletion expense

2epletion expense %,,

0ccumulated depletion %,,

@ournal entr4




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Illustration 9-2(

8tatement presentation of accumulated depletion

6xtracted resources that have not been sold are reported as

inventory in the current assets section.




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Intangible assets are rights, privileges, and competitive

advantages that result from o'nership of long


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Li'ited-Li&e Intangibles!

A'ortiDe to expense.

redit asset account.

Inde&inite-Li&e Intangibles!

3o amortization.

Accounting &or Intangible Assets

LO + $%plain the basic issues related to accounting &or intangible assets!

8imilar to property, plant, and euipment, I958permits revaluation of intangible assets to fair value,

except for good'ill.

ompanies classifyA'ortiDation

$%pense as an

operating expense

in the incomestatement.


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Patents 6xclusive right to manufacture, sell, or other'ise control an

invention for a speci&ied nu'ber o& ears from the date of

the grant.

CapitaliDe costs o& purchasing a patent and amortize

over its legal life or its useful life, 'hichever is shorter.

$%pense an Research and "eelop'ent costs in

developing a patent.

Legal &ees incurred successfully defending a patent are

capitalized to 7atent account.




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Illustration4 3ational Labs purchases a patent at a cost of

3-+/#,. 3ational estimates the useful life of the patent to

be eight years. 3ational records the annual amortization for the

ended 2ecember $" as follo's.

0mortization expense F,

7atent F,

ost 3-+/#,

=seful life G 1 years

0nnual expense 3-+ F,

"ec! (1

LO +



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Coprights Kive the o'ner the exclusive right to reproduce and sell

an artistic or published 'ork.

Kranted for the life of the creator plus a specified

number of years, commonly / years.

apitalize costs of acuiring and defending it.

0mortized to expense over useful life.




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;rade'ar0s and ;rade Na'es Dord, phrase, ;ingle, or symbol that identifies a particular

enterprise or product.

Dheaties, ?onopoly, *leenex, oca


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Hood#ill Includes exceptional management, desirable location, good

customer relations, skilled employees, high


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C


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$%penditures that may lead to

patents,

copyrights,

ne' processes, and

ne' products.

0ll 5 M 2 costs

are e%pensed

#hen incurred.

Research and "eelop'ent Costs


R h d " l t C t


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Illustration4 Laser 8canner ompany spent 3-+" million on

research and 3-+# million on development of ne' products. Jf

the 3-+# million in development costs 3-+&, 'as incurred

prior to technological feasibility and 3-+",&, 'as incurred

after technological feasibility had been demonstrated. -he

company 'ould record these costs as follo's.

5esearch expense ",,

2evelopment expense &,

2evelopment costs ",&,

ash $,,

Research and "eelop'ent Costs



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". -he allocation of the cost of an extractable

natural resource to expense in a rational and

systematic manner.

#. 5ights, privileges, and competitive

advantages that result from the o'nership of

long


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Illustration4 Identify the term most directly associated 'ith

each statement.

%. 0 right to sell certain products or services

or to use certain trademarks or trade

names 'ithin a designated geographic

area.

&. osts incurred by a company that often

lead to patents or ne' products. -hese

costs must be expensed as incurred.


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Presentation

LO

=tate'ent Presentation and Analsis

Illustration 9-2)

=t t t P t ti d A l i


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6ach *orean 'on invested in assets produced D ". in sales

for LK. If a company is using its assets efficiently, each

investment in assets 'ill create a high amount of sales.

Illustration 9-2*

LO Indicate ho# plant assets, natural resources, andintangible assets are reported!

Analsis

=tate'ent Presentation and Analsis

APP$N"IJ 9A


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Jrdinarily, companies record a gain or loss on theexchange of plant assets.

?ost exchanges have co''ercial substance.

Co''ercial substance < if the future cash flo's

change as a result of the exchange.

LO 3 $%plain ho# to account &or the e%change o& plant assets!

APP$N"IJ 9A $JC5ANH$ O< PLAN; A==$;=

APP$N"IJ 9A


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ost of used trucks C%,Less! 0ccumulated depreciation ##,

@ook value %#,

9air market value of used trucks #,

Loss on disposal >1+,888

9air market value of used trucks C#,

ash paid "/,

ost of semi


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Illustration4 5oland o. exchanged used trucks (cost C%,

less C##, accumulated depreciation) plus cash of C"/,

for a ne' semi


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Illustration4 ?ark 6xpress 2elivery trades its old delivery

euipment (cost C%, less C#1, accumulated

depreciation) for ne' delivery euipment. -he old euipment

had a fair market value of C"F,. ?ark also paid C$,.


ost of old euipment C%,Less! 0ccumulated depreciation #1,

@ook value "#,

9air market value of old euipment "F,

Hain on disposal > ,888

9air market value of old euipment C"F,

ash paid $,

ost of ne' euipment C##,

Illustration9A-( K 9A-)


APP$N"IJ 9A


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Illustration4 ?ark 6xpress 2elivery trades its old delivery

euipment (cost C%, less C#1, accumulated

depreciation) for ne' delivery euipment. -he old euipment

had a fair market value of C"F,. ?ark also paid C$,.

7repare the entry to record the exchange of assets by ?ark6xpress.


6uipment (ne') ##,

0ccumulated depreciation #1,

6uipment (old) %,

Kain on disposal of plant assets /,

ash $,


A th P ti


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6e Points -he definition for plant assets for both K007 and I958 is essentially

the same.

@oth I958 and K007 follo' the historical cost principle 'hen

accounting for property, plant, and euipment at date of acuisition.ost consists of all expenditures necessary to acuire the asset and

make it ready for its intended use.

=nder both K007 and I958, interest costs incurred during

construction are capitalized. 5ecently, I958 converged to K007

reuirements in this area.

Another Perspectie

A th P ti


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6e Points K007, like I958, capitalizes all direct costs in self


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6e Points o'ever, K007 permits companies to use component depreciation.

K007 uses the term salvage value, rather than residual value, to

refer to an o'ner ’s estimate of an asset’s value at the end of its

useful life for that o'ner.

I958 allo's companies to revalue and sell plant assets to fair value

at the reporting date.

=nder both K007 and I958, changes in the depreciation method

used and changes in useful life are handled in current and futureperiods. 7rior periods are not affected. K007 recently conformed to

I958 in the accounting for changes in depreciation methods.

Another Perspectie

A th P ti


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6e Points -he accounting for subseuent expenditures, such as ordinary

repairs and additions, are essentially the same under K007 and

I958.

-he accounting for plant asset disposals is essentially the sameunder K007 and I958.

Initial costs to acuire natural resources are essentially the same

under K007 and I958.

-he definition of intangible assets is essentially the same underK007 and I958.

Another Perspectie

A th P ti


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6e Points 0s in I958, under K007 the costs associated 'ith research and

development are segregated into the t'o components. osts in the

research phase are al'ays expensed under both K007 and I958.

=nder I958, ho'ever, costs in the development phase are

capitalized as 2evelopment osts once technological feasibility is

achieved.

I958 permits revaluation of intangible assets (except for good'ill).

K007 prohibits revaluation of intangible assets.

Another Perspectie

A th P ti


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6e Points I958 reuires an impairment test at each reporting date for plant

assets and intangibles and records an impairment if the asset ’s

carrying amount exceeds its recoverable amount. -he recoverable

amount is the higher of the asset’s fair value less costs to sell or its

value


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6e Points I958 allo's reversal of impairment losses 'hen there has been a

change in economic conditions or in the expected use of the asset.

=nder K007, impairment losses cannot be reversed for assets to be

held and usedN the impairment loss results in a ne' cost basis for

the asset. I958 and K007 are similar in the accounting for

impairments of assets held for disposal.

-he accounting for exchanges of non


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Loo0ing to the


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Dhich of the follo'ing statements is correctE

a) @oth I958 and K007 permit revaluation of property, plant, and

euipment and intangible assets (except for good'ill).

b) I958 permits revaluation of property, plant, and euipment

and intangible assets (except for good'ill).

c) @oth I958 and K007 permit revaluation of property, plant, and

euipment but not intangible assets.

d) K007 permits revaluation of property, plant, and euipment

but not intangible assets.

HAAP =el&-;est Euestions

Another Perspectie

Another Perspectie


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5esearch and development costs are!

a) expensed under K007.

b) expensed under I958.

c) expensed under both K007 and I958.

d) 3one of the above.

HAAP =el&-;est Euestions

Another Perspectie

Another Perspectie


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>alue


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Oopyright P #"$ Aohn Diley M 8ons, Inc. 0ll rights reserved.

5eproduction or translation of this 'ork beyond that permitted in

8ection ""/ of the "F/ =nited 8tates opyright 0ct 'ithout the

express 'ritten permission of the copyright o'ner is unla'ful.

5euest for further information should be addressed to the

7ermissions 2epartment, Aohn Diley M 8ons, Inc. -he purchaser may

make back

Documents

Ch09 Plant Assets