Maki 1

Kaitlyn Maki

Professor Gina Heaney

Accounting 102

June 17, 2020

Chapter 10: Plant Assets, Natural Resources, and Intangibles

1. Property, plant, and equipment (PP&E) are long-lived, tangible assets, such as land,

buildings, and equipment, used in the operation of a business.

2. Plant assets are recorded at historical cost-the amount paid for the asset. The actual cost of a

plant asset is its purchase price plus taxes, purchase commissions, and all other amounts paid

to ready the asset for its intended use.

3. Unlike land, land improvements are subject to depreciation.

4. Capitalize is the recording of the acquisition of land, building, or other asset by debiting

(increasing) an asset account.

5. A lump-sum purchase is when a company pays a single price for several assets as a group.

For accounting purposes, the company must identify the cost of each asset purchase using the

relative-market-value method.

6. A capital expenditure increases the capacity or efficiency of a plant asset or extends its useful

life. Capital expenditures are debited to an asset account. On the other hand, revenue

expenditures don't increase the capacity or efficiency of an asset or extend its useful life.

Revenue expenditures are debited to an expense account.

7. Depreciation is the allocation of a plant asset’s cost to expense over its useful life. Useful life

is the length of the service period expected from an asset. Residual value is the expected
 Maki 2

value of a depreciable asset at the end of its useful life. Depreciable cost is the cost of a plant

asset minus its estimated residual value.

8. The double-declining-balance method ignores residual value until the last year of

depreciation because the calculation is based on book value rather than depreciable cost.

9. A business decides which depreciation method is best to use depending on the asset. A

business should match an asset’s expense against the revenue that the asset produces.

10. The Modified Accelerated Cost Recovery System (MACRS) is the depreciation method that

is used for tax accounting purposes. Under MACRS, assets are divided into specific classes,

such as 3-year, 5-year, 7-year, and 39-years property. Unlike other methods that are required

by GAAP, businesses do not get to choose the useful life of the assets. Instead, the IRS

specifies the useful life based on the specific classes.

11. If a business decides to change the estimated useful life or estimated residual value of a plant

asset, the business must recalculate depreciation expense.

12. Property, plant, and equipment are reported at book value on the balance sheet. Companies

may choose to report plant assets as a single amount, with a note to the financial statements

that provides detailed information, or companies may provide detailed information on the

face of the statement.

13. Discarding of plant assets involves disposing the asset for no cash, rather than selling a plant

asset for cash.

14. Gain or loss is determined by comparing the cash received and the market value of any other

asset received with the book value of the asset disposed of. When a business sells as an asset

for more than its book value, a gain is recorded. On the other hand, when a business sells an

asset for less than its book value or discards or an asset for no cash, a loss is recorded.
 Maki 3

15. A natural resource is an asset that comes from the earth and is consumed. Depletion is the

process by which businesses spread the allocation of a natural resource’s cost over its usage.

16. An intangible asset is an asset with no physical form that is valuable because of the special

rights it carries. Patents, copyrights, trademarks, franchises, licenses, and goodwill are all

considered intangible assets.

17. Amortization is the process by which businesses spread the allocation of an intangible asset’s

cost over its useful life.

18. Goodwill is the excess cost of an acquired company over the sum of the market values of its

net assets (assets minus liabilities). According to GAAP, goodwill is not amortized. If

goodwill’s fair value has decreased, then the company records an impairment loss and writes

the goodwill down by debiting (increasing) the Impairment Loss on Goodwill account and

crediting (decreasing) the Goodwill account.