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9-1
PLANT AND INTANGIBLE ASSETS
Chapter
9
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9-2
Long-lived assets acquired for use in business operations.
Long-lived assets acquired for use in business operations.
Similar to long-term prepaid expenses
The cost of plant assets is the advance purchase
of services.
As years pass, and the services are used, the cost is transferred to depreciation expense.
Plant AssetsPlant Assets
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9-3
Major Categories of Plant AssetsMajor Categories of Plant Assets
L an d , b u ild in g s ,eq u ip m en t,
fu rn itu re , fixtu res .
L on g -te rmasse ts h avin g
p h ys ica l su b s tan ce .
Tangible PlantAssets
P aten ts , cop yrig h ts ,trad em arks ,
fran ch ises , g ood w ill.
N on cu rren t asse tsw ith n o p h ys ica l
su b s tan ce .
IntangibleAssets
O il reserves ,t im b er, o th er
m in era ls .
S ites acq u ired fo rextrac tin g va lu ab le
resou rces .
NaturalResources
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9-4
Acquisition.Allocation of the
acquisition cost to expense over the asset’s useful life (depreciation).
Sale or disposal.
Acquisition.Allocation of the
acquisition cost to expense over the asset’s useful life (depreciation).
Sale or disposal.
Accountable EventsAccountable Events
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9-5
Asset price
Asset price
. . . for getting the asset to the
desired location.
. . . for getting the asset to the
desired location.
. . . for getting the asset ready
for use.
. . . for getting the asset ready
for use.
CostCost
Acquisition of Plant AssetsAcquisition of Plant Assets
=Reasonable and
necessary costs . . .
Reasonable and necessary costs . . .
+
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9-6
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.
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.
Determining CostDetermining Cost
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9-7
Determining CostDetermining Cost
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9-8
Improvements to land such as driveways,
fences, and landscaping are recorded separately.
Improvements to land such as driveways,
fences, and landscaping are recorded separately.
Cost includes real estate commissions, escrow
fees, legal fees, clearing and grading the property.
Cost includes real estate commissions, escrow
fees, legal fees, clearing and grading the property.
Land Improvements
Land Improvements
LandLand
Special ConsiderationsSpecial Considerations
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9-9
Repairs made prior to the building being put in use are considered part of the
building’s cost.
Repairs made prior to the building being put in use are considered part of the
building’s cost.
BuildingsBuildings
Special ConsiderationsSpecial Considerations
EquipmentEquipment
Related interest, insurance, and property
taxes are treated as expenses of the current
period.
Related interest, insurance, and property
taxes are treated as expenses of the current
period.
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9-10
I think I’ll buy the whole thing; barn, land, and animals.
Special ConsiderationsSpecial Considerations
The allocation is based on the relative Fair Market
Value of each asset
purchased.
The allocation is based on the relative Fair Market
Value of each asset
purchased.
The total cost must be
allocated to separate
accounts for each asset.
The total cost must be
allocated to separate
accounts for each asset.
Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase
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CapitalExpenditure
CapitalExpenditure
RevenueExpenditure
RevenueExpenditure
Any material expenditurethat will benefit several
accounting periods.
Any material expenditurethat will benefit several
accounting periods.
To capitalize an expendituremeans to charge it to an
asset account.
To capitalize an expendituremeans to charge it to an
asset account.
Expenditure forordinary repairs
and maintenance.
Expenditure forordinary repairs
and maintenance.
To expense an expendituremeans to charge it to an
expense account.
To expense an expendituremeans to charge it to an
expense account.
Capital Expenditures and Revenue Expenditures
Capital Expenditures and Revenue Expenditures
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The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.
The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.
Cost of plant
assets
Balance SheetBalance Sheet
Assets: Plant and equipment
Assets: Plant and equipment
Income StatementIncome Statement
Revenues:Expenses: Depreciation
Revenues:Expenses: Depreciation
as the services are received
DepreciationDepreciation
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Book Value Cost – Accumulated Depreciation
Accumulated Depreciation Contra-asset Represents the portion of an asset’s
cost that has alreadybeen allocated to expense.
Causes of Depreciation Physical deterioration Obsolescence
Book Value Cost – Accumulated Depreciation
Accumulated Depreciation Contra-asset Represents the portion of an asset’s
cost that has alreadybeen allocated to expense.
Causes of Depreciation Physical deterioration Obsolescence
DepreciationDepreciation
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Cost - Residual Value
Years of Useful Life
Depreciation
Expense per Year=
Straight-Line DepreciationStraight-Line Depreciation
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9-15
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.
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.
Straight-Line DepreciationStraight-Line Depreciation
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Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful
life of the boat is:
Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful
life of the boat is:
Salvage ValueSalvage Value
Straight-Line DepreciationStraight-Line Depreciation
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When an asset is acquired during the year, depreciation in the year of acquisition must be
prorated.
When an asset is acquired during the year, depreciation in the year of acquisition must be
prorated.
Half-Year ConventionIn the year of
acquisition, record six months of depreciation.
Half-Year ConventionIn the year of
acquisition, record six months of depreciation. ½
Depreciation for Fractional PeriodsDepreciation for Fractional Periods
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Half-Year ConventionHalf-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.
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
Depreciation = $7,000 × 1/2 = $3,500
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1/2 = $3,500
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9-19
Depreciation in the early years of an asset’s estimated useful life is higher than in later years.
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.
The double-declining balance depreciation rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
Declining-Balance MethodDeclining-Balance Method
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9-20
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.
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.
Declining-Balance MethodDeclining-Balance Method
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Compute depreciation for the rest of the boat’s estimated useful life.
Compute depreciation for the rest of the boat’s estimated useful life.
Declining-Balance MethodDeclining-Balance Method
Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or
the declining-balance method.
Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or
the declining-balance method.
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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.
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.
Financial Statement DisclosuresFinancial Statement Disclosures
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So depreciationis an estimate.
So depreciationis an estimate.
Predicted salvage value
Predicted salvage value
Predicteduseful life
Predicteduseful life
Over the life of an asset, new information may come to light that indicates the
original estimates need to be revised.
Over the life of an asset, new information may come to light that indicates the
original estimates need to be revised.
Revising Depreciation RatesRevising Depreciation Rates
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Revising Depreciation RatesRevising 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.
On January 1, 2002, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2005, the useful
life was revised to 8 years total (5 years remaining).
Calculate depreciation expense for the year ended December 31, 2005, using the straight-
line method.
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When our estimates change, depreciation is:
When our estimates change, depreciation is:
Book value at date of change
Salvage value at date of change
Remaining useful life at date of change
–
Revising Depreciation RatesRevising Depreciation Rates
Asset cost 30,000$ Accumulated depreciation, 12/31/2004 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$
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 ÷ 5Revised annual depreciation 4,200$
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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.
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.
Impairment of Plant AssetsImpairment of Plant Assets
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Update depreciation to the date of disposal.
Update depreciation to the date of disposal.
Recording cashreceived (debit).
Recording cashreceived (debit).
Removing accumulateddepreciation (debit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Recording again (credit)
or loss (debit).
Disposal of Plant and EquipmentDisposal of Plant and Equipment
Journalize disposal by: Journalize disposal by:
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If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Recording cashreceived (debit).
Recording cashreceived (debit).
Removing accumulateddepreciation (debit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Recording again (credit)
or loss (debit).
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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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.
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.
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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The amount of depreciation recorded on September 30, 2005,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
The amount of depreciation recorded on September 30, 2005,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to Sept. 30:9/12 × $8,000 = $6,000
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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After updating the depreciation, the machine’s book value on September 30, 2005, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
After updating the depreciation, the machine’s book value on September 30, 2005, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000$
Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000$
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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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.
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$
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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Disposal of Plant and EquipmentDisposal of Plant and Equipment
Prepare the journal entry to record the sale.
Prepare the journal entry to record the sale.
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Accounting depends on whetherassets are similar or dissimilar.
Accounting depends on whetherassets are similar or dissimilar.
Airplanefor
Airplane
Airplanefor
Airplane
Truckfor
Airplane
Truckfor
Airplane
Only situations where cash is paid will be demonstrated.
Only situations where cash is paid will be demonstrated.
Trading in Used Assetsfor New Ones
Trading in Used Assetsfor New Ones
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Recognize Gains?
Recognize Losses?
Similar Assets and Cash Paid
Yes No
Yes Yes
Dissimilar Assets
Trading in Used Assetsfor New Ones
Trading in Used Assetsfor New Ones
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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.
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
Trading in Used Assetsfor New Ones – Similar Assets
Trading in Used Assetsfor New Ones – Similar Assets
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The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
Cost 40,000$ Accum. Depr. 30,000
Book Value 10,000$ Fair Value 4,000
Loss 6,000$
Prepare a journal entry to record the exchange.
Trading in Used Assetsfor New Ones – Similar Assets
Trading in Used Assetsfor New Ones – Similar Assets
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Trading in Used Assetsfor New Ones – Similar Assets
Trading in Used Assetsfor New Ones – Similar Assets
Prepare the journal entry to record the trade.
Prepare the journal entry to record the trade.
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9-39
Noncurrent assetswithout physical
substance.
Noncurrent assetswithout physical
substance.
Useful life isoften difficultto determine.
Useful life isoften difficultto determine.
Usually acquired for operational
use.
Usually acquired for operational
use.
Often provideexclusive rights
or privileges.
Often provideexclusive rights
or privileges.
Intangible AssetsIntangible Assets
CharacteristicsCharacteristics
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Patents Copyrights Leaseholds Leasehold
Improvements Goodwill Trademarks and
Trade Names
Record at current cash equivalent cost, including purchase price, legal fees, and
filing fees.
Intangible AssetsIntangible Assets
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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.
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.
AmortizationAmortization
Date Description Debit CreditAmortization Expense #### Intangible Asset ####
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The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
Occurs when onecompany buys
another company.
Occurs when onecompany buys
another company.
Only purchased goodwill is an
intangible asset.
Only purchased goodwill is an
intangible asset.
GoodwillGoodwill
Goodwill is NOT amortized. It is tested annually to determine if there has been
an impairment loss.
Goodwill is NOT amortized. It is tested annually to determine if there has been
an impairment loss.
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Exclusive right grantedby federal government to sell or
manufacture an invention.
Exclusive right grantedby federal government to sell or
manufacture an invention.
Cost is purchaseprice plus legalcost to defend.
Cost is purchaseprice plus legalcost to defend.
Amortize costover the shorter of
useful life or 20 years.
Amortize costover the shorter of
useful life or 20 years.
PatentsPatents
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A symbol, design, or logo associated with a business.
A symbol, design, or logo associated with a business.
Purchasedtrademarks
are recordedat cost, and
amortized overshorter of legal
or economic life,or 40 years.
Internallydevelopedtrademarks
have norecorded
asset cost.
Trademarks and Trade NamesTrademarks and Trade Names
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Legally protected right to sell products or provide services purchased by franchisee from
franchisor.
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.
Purchase price is intangible asset which is amortized over the shorter of
the protected right or useful life.
FranchisesFranchises
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Exclusive right granted by the federal government to protect
artistic or intellectual properties.
Exclusive right granted by the federal government to protect
artistic or intellectual properties.
Amortize costover period benefited.
Amortize costover period benefited.
Legal life islife of creatorplus 70 years.
Legal life islife of creatorplus 70 years.
CopyrightsCopyrights
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The FASB ruled that all R&D expenditures should be charged to
expense when incurred.
The FASB ruled that all R&D expenditures should be charged to
expense when incurred.
Research and Development CostsResearch and Development Costs
All of these R&D costs will really reduce our net income this year!
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Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Examples: oil, coal, goldExamples: oil, coal, gold
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Natural ResourcesNatural Resources
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Depletion is calculated using theunits-of-production method.
Unit depletion rate is calculated as follows:
Total Units of Natural Resource
Cost – Residual Value
Depletion of Natural ResourcesDepletion of Natural Resources
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Total depletion cost for a period is:
Unit Depletion
Rate
Number of Units
Extracted in Period×
Totaldepletion
cost
Totaldepletion
cost
Inventoryfor sale
Inventoryfor sale
UnsoldInventory
UnsoldInventory
Cost ofgoods sold
Cost ofgoods sold
Depletion of Natural ResourcesDepletion of Natural Resources
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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.
Depletion of Natural ResourcesDepletion of Natural Resources
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A survey of 600 Publicly Owned Corporations
579
22
6
49
32
9
Straight-line
Declining-balance
Sum-of-the-years'-digits
Accelerated methods (not specified)
Units-of-output
Other
A survey of 600 Publicly Owned Corporations
579
22
6
49
32
9
Straight-line
Declining-balance
Sum-of-the-years'-digits
Accelerated methods (not specified)
Units-of-output
Other
Comparative Use of Depreciation Methods
Comparative Use of Depreciation Methods
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End of Chapter 9End of Chapter 9