CHAPTER 9

Plant Assets, Natural Resources, and Intangibles

Learning Objectives
• Compute the cost of plant assets.
• Explain depreciation for partial years and changes in estimates.
• Distinguish between revenue and capital expenditures, and account for
them.
• Compute and record depreciation using the straight-line, units-of-
production, and declining-balance methods.
• Account for asset disposal through discarding or selling an asset.
• Account for natural resource assets and their depletion.
• Account for intangible assets.
• Compute total asset turnover and apply it to analyze a company’s use
of assets.

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 Learning Objective 1

Compute the cost of plant

assets.

Plant Assets: Definition

Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

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 Plant Assets

Use
Acquisition 2. Allocate cost to periods Disposal
1. Compute cost. benefited. 4. Record disposal
3. Account for subsequent
expenditures.

Cost Determination
All expenditures
needed to
Purchase prepare the asset
price Acquisition for its intended
Cost use

Acquisition cost includes all

normal and reasonable
expenditures necessary to get the
asset in place and ready for
intended use

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 Machinery and Equipment
Purchase
price Taxes

Machinery Transportation
and charges
Equipment
Installing,
assembling, and Insurance while
testing in transit

Buildings
Cost of purchase or
Title fees
construction

Brokerage
fees Buildings Attorney fees
Phí môi giới Phí luật sư

Taxes
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 Land Improvements
Parking lots, driveways, fences, walks, shrubs,
and lighting systems.

Depreciate
over useful life of
improvements.

Land
Title insurance premiums
Phí bảo hiểm quyền sở hữu
Purchase
Property
price
Taxes
Thuế trước bạ
Land
Real estate
Surveying
Commissions
fees
Phí hoa hồng môi giới
Phí khảo sát
Title search and transfer fees
Phí nghiên cứu và chuyển giao

Land is not depreciable.

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 Lump-Sum Asset Purchase
The total cost of a combined purchase of land and
building is separated on the basis of their relative market
values.

On January 1, Matrix, Inc. purchased land and building for

$200,000 cash. The appraised values are building,
$162,500, and land, $87,500.

How much of the $200,000 purchase price will be charged to

the building and land accounts?

Lump-Sum Asset Purchase

Appraised % of
%of Purchase Apportioned
Asset Value Value Price Cost
a b* c b×c
Land $ 87,500 35% × $ 200,000 = $ 70,000
Building 162,500
162,500 65% × 200,000 = 130,000
Total $$ 250,000
250,000 100% $ 200,000

* $87,500 ÷ $250,000 = 35%

$162,500 ÷ $250,000 = 65%

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 Learning Objective 2
Compute and record
depreciation using the straight-
line, units-of-production, and
declining-balance methods.

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Depreciation

Depreciation is the process of allocating the cost of

a plant asset to expense in the accounting periods
benefiting from its use.

Balance Sheet Income Statement

Cost
Acquisition
Allocation Expense
Cost
(Unused) (Used)

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Factors in Computing Depreciation
The calculation of depreciation
requires three amounts for each
asset:
1. Cost
2. Salvage Value
3. Useful Life

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Straight-Line Method

Depreciation Cost - Salvage Value

Expense for Period = Useful life in periods

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 Units-of-Production Method:
Two-Step Process
Step 1:
Depreciation = Cost − Salvage Value
Per Unit Total Units of Production

Step 2:
Number of Units
Depreciation = Depreciation × Produced
Expense Per Unit
in the Period

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Declining Balance Method

Depreciation Repair
Expense Expense
Early Years High Low
Later Years Low High

Early years’ total expense approximates

later years’ total expense.

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Double-Declining-Balance Method
Step 1:
Straight-line
= 100 % ÷ Useful life
rate

Step 2:
Double-declining- = 2 × Straight-linerate
balance rate

Step 3:
Depreciation Double-declining- Beginning period
= ×
expense balance rate book value

Learning Objective 3

Explain depreciation for partial

years and changes in
estimates.

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 Partial-Year Depreciation

When a plant asset is purchased (or sold) during the

year, depreciation is calculated for the fraction of the
year the asset is owned.

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Changes in Estimates
Predicted Predicted
salvage value useful life

Depreciation
is an estimate

Over the life of an asset, new information

may come to light that indicates the
original estimates were inaccurate.
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Changes in Estimates for Depreciation

Book value at Salvage value at

date of change – date of change

Remaining useful life at date of change

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Learning Objective 4
Distinguish between revenue
and capital expenditures, and
account for them.

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 Additional Expenditures
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes

Capital Balance sheet

Expenditure account debited Deferred Higher Higher
Revenue Income statement Currently
Expenditure account debited recognized Lower Lower

If the amounts involved are not material, most

companies expense the item.

Revenue and Capital Expenditures

Type of Capital or
Expenditure Revenue Identifying Characteristic
1. Maintains normal opera
Ordinary 2. Does not increase
Revenue 3. Does not e
Repairs
estim
Betterments 1
and
Extraordinary
Rep

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 Learning Objective 5
Account for asset disposal through
discarding or selling an asset.

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Disposals of Plant Assets

Update depreciation
to the date of disposal.

Journalize disposal by:

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
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 Discarding Plant Assets

If Cash >Update depreciation

BV, record a gain (credit).
to the date of disposal.
If Cash < BV, record a loss (debit).
If CashJournalize
= BV, nodisposal
gain or by:
loss.

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
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Learning Objective 5
Account for natural resource
assets and their depletion.

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Natural Resources
Extracted from
Total cost the natural
is charged to environment
depletion expense and reported
over periods at cost less
benefited. accumulated
depletion.

Examples: oil, coal, gold

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Learning Objective 6

Account for intangible assets.

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 Intangible Assets
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.

Intangible
Assets

Useful life is Usually acquired

often difficult for operational
to determine. use.
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Cost Determination and Amortization

o Patents
Record at cost, o Copyrights
including o Franchises and Licenses
purchase price, o Trademarks and Trade Names
legal fees, and
o Goodwill
filing fees.
o Right-of-Use Asset (Lease)
o Leasehold Improvements
o Research and Development
o Other Intangibles
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 Learning Objective 7
Compute total asset turnover
and apply it to analyze a
company’s use of assets.

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Total Asset Turnover

Total asset = Net sales

turnover Average total assets

Provides information about a company’s

efficiency in using its assets.

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End of Chapter 9

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