ch10 Plant Assets, Natural Resources

CHAPTER 10
PLANT ASSETS, NATURAL RESOURCES,

AND INTANGIBLE ASSETS
LEARNING OBJECTIVES
1. EXPLAIN THE ACCOUNTING FOR PLANT ASSET

EXPENDITURES.
2. APPLY DEPRECIATION METHODS TO PLANET

ASSETS.
3. EXPLAIN HOW TO ACCOUNT FOR THE DISPOSAL

OF PLANT ASSETS.
4. DESCRIBE HOW TO ACCOUNT FOR NATURAL

RESOURCES AND INTANGIBLE ASSETS.
5. DISCUSS HOW PLANT ASSETS, NATURAL

RESOURCES, AND INTANGIBLE ASSETS ARE
REPORTED AND ANALYZED.
*6. EXPLAIN HOW TO ACCOUNT FOR THE EXCHANGE

OF PLANT ASSETS.
Copyright © 2015 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 12/e, Instructor’s Manual (For Instructor Use Only) 10-1
CHAPTER REVIEW
Plant Assets
1. (L.O. 1) Plant assets are resources that have a physical substance (a definite size and shape),
are used in the operations of a business and are not intended for sale to customers. They are also
called property, plant, and equipment; plant and equipment; or fixed assets.
Cost of Plant Assets
2. Plant assets are recorded at cost in accordance with the historical cost principle. Cost consists
of all expenditures necessary to (1) acquire the asset, and (2) make it ready for its intended use.
3. The cost of land includes the cash purchase price, closing costs such as title and attorney’s fees,
real estate broker’s commission, and accrued property taxes and other liens on the land assumed
by the purchaser. All necessary costs incurred in making land ready for its intended use are
debited to the Land Account.
4. Land improvements are structural additions made to land, such as driveways, parking lots,
fences, landscaping, and underground sprinklers. The cost of land improvements includes all
expenditures needed to make the improvements ready for their intended use.
5. The cost of buildings includes all necessary costs related to the purchase or construction of a
building:
a. When a building is purchased, such costs include the purchase price, closing costs, and real
estate broker’s commission.
b. Costs to make the building ready for its intended use include expenditures for remodeling and
replacing or repairing the roof, floors, wiring, and plumbing.
c. When a new building is constructed, cost consists of the contract price plus payments for
architects’ fees, building permits, interest payments during construction, and excavation costs.
6. The cost of equipment consists of the cash purchase price, sales taxes, freight charges, and
insurance paid by the purchaser during transit. Cost includes all expenditures required in
assembling, installing, and testing the unit. Recurring costs such as licenses and insurance are
expensed as incurred.
Depreciation
7. (L.O. 2) Depreciation is the process of allocating to expense the cost of a plant asset over its
useful (service) life in a rational and systematic manner.
a. The cost allocation is designed to provide for the proper matching of expenses with revenues
in accordance with the expense recognition principle.
b. During an asset’s life, its usefulness may decline because of wear and tear or obsolescence.
c. Recognition of depreciation does not result in the accumulation of cash for the replacement
of the asset.
8. Three factors that affect the computation of depreciation are (1) cost, (2) useful life, and (3) salvage
value.
9. Three methods of recognizing depreciation are (a) straight-line, (b) units-of-activity, and (c) declining-
balance.
a. Each method is acceptable under generally accepted accounting principles.
b. Management selects the method it believes to be appropriate.
c. Once a method is chosen, it should be applied consistently.
Straight-Line Method
10. Under the straight-line method depreciation is the same for each year of the asset’s useful life.
a. The formula for computing annual depreciation expense is:
Depreciable Cost ÷ Useful Life (in years) = Depreciation Expense
b. To illustrate the computation, assume that the Benson Company purchased a delivery truck for
$11,000 on January 1 with an estimated salvage value of $1,000 at the end of its four-year
service life. Annual depreciation is $2,500 [($11,000 – $1,000 ÷ 4)].
c. The straight-line method predominates in practice.
d. This method is simple to apply and it matches expenses and revenues appropriately when
the use of the asset is reasonably uniform throughout the service life.
Units-of-Activity Method
11. Under the units-of-activity method, service life is expressed in terms of the total units of produc-
tion or expected use from the asset, rather than time.
a. The formulas for computing depreciation expense are:
(1) Depreciable Cost ÷ Total Units of Activity = Depreciable Cost per Unit
(2) Depreciable Cost per Unit X Units of Activity During the Year = Depreciation Expense
b. To illustrate the computation, assume that Benson Company expects to drive the truck
purchased in (10b) above for 100,000 miles and that 30,000 miles are driven in the first year.
Depreciation for the first year is $3,000.
(1) $10,000 ÷ 100,000 = $.10 per mile.
(2) $.10 X 30,000 = $3,000.
c. In using this method, it is often difficult to make a reasonable estimate of total activity.
d. When the productivity of an asset varies significantly from one period to another, this method
results in the best matching of expenses with revenues.
Declining-Balance Method
12. The declining-balance method produces a decreasing annual depreciation expense over the
useful life of the asset.
a. The formula for computing depreciation expense is:
Book Value at Beginning of Year X Declining-Balance Rate = Depreciation Expense
b. To illustrate the computation, assume that Benson Company uses a declining-balance rate
that is double the straight-line rate of 25%. Depreciation in the first year is $5,500 ($11,000 X
50%).
c. Under this method, the depreciation rate remains constant from year to year, but the book
value to which the rate is applied declines each year.
d. This method is compatible with the expense recognition principle because the higher
depreciation in early years is matched with the higher benefits received in these years.
13. Taxpayers must use on their tax returns either the straight-line method or a special accelerated
depreciation method called the Modified Accelerated Cost Recovery System (MACRS).
Revising Periodic Depreciation
14. If wear and tear or obsolescence indicate that annual depreciation is inadequate or
excessive, a change in the periodic amount should be made.
a. When a change is made, (1) there is no correction of previously recorded depreciation
expense, and (2) depreciation expense for current and future years is revised.
b. To determine the new annual depreciation expense, the depreciable cost at the time of the
revision is divided by the remaining useful life.
Expenditures During Useful Life
15. Ordinary repairs are expenditures to maintain the operating efficiency and expected productive
life of the plant asset. They are debited to Maintenance and Repairs Expense as incurred and are
often referred to as revenue expenditures.
16. Additions and improvements are costs incurred to increase the operating efficiency, productive
capacity, or expected useful life of the plant asset. These expenditures are usually material in
amount and occur infrequently during the period of ownership.
17. Capital expenditures increase the company’s investment in productive facilities. These expendi-
tures include additions and improvements.
Plant Asset Disposals
18. (L.O. 3) Plant assets may be disposed of by (a) retirement, (b) sale, or (c) exchange.
19. At the time of disposal, it is necessary to determine the book value of the plant asset.
a. If the disposal occurs during the year, depreciation for the fraction of the year to the date of
disposal must be recorded.
b. The book value is then eliminated by debiting the Accumulated Depreciation account for the
total depreciation to the date of disposal and crediting the asset account for the cost of the
asset.
Retirement of Plant Assets
20. In accounting for a disposal by retirement,

a. if the asset is fully depreciated, the entry is a debit to Accumulated Depreciation and a credit
to the plant asset account.
b. if the asset is retired before it is fully depreciated and no scrap or salvage value is received,
a loss on disposal of plant assets occurs.
c. the loss on disposal of plant assets is reported in the Other expenses and losses section of
the income statement.
Sale of Plant Assets
21. In a disposal by sale, the book value of the asset is compared with the proceeds received from
the sale.
a. If the proceeds of the sale exceed the book value, a gain on disposal of plant assets
occurs which is reported in the Other revenues and gains section of the income statement.
b. If the proceeds of the sale are less than the book value of the asset, a loss on disposal of
plant assets occurs which is reported in the Other expenses and losses section of the
income statement.
Natural Resources
22. (L.O. 4) Natural resources consist of standing timber and underground deposits of oil, gas, and
minerals. These assets are frequently called wasting assets.
Acquisition Cost
23. The acquisition cost of a natural resource is the price needed to acquire the resource and prepare
it for its intended use.
Depletion
24. Depletion is the systematic write-off of the cost of natural resources. The units-of-activity
method is generally used to compute depletion because periodic depletion is generally a function
of the units extracted during the year. The formulas for computing depletion expense are:
a. Total Cost minus Salvage Value ÷ Total Estimated Units = Depletion Cost per Unit.
b. Depletion Cost per Unit X Number of Units Extracted and Sold = Depletion Expense.
25. To record depletion expense, Depletion Expense is debited and a contra asset account,
Accumulated Depletion, is credited.
a. Depletion expense is reported as a cost of producing the product.
b. Accumulated Depletion is deducted from the cost of the natural resource in the balance
sheet.
Intangible Assets
26. Intangible assets are rights, privileges, and competitive advantages that result from the
ownership of assets that do not possess physical substance. Intangibles may arise from
government grants, acquisition of another business, and private monopolistic arrangements.
27. In general, accounting for intangible assets parallels the accounting for plant assets. Intangible
assets are (a) recorded at cost, (b) cost is written off over useful life in a rational and systematic
manner, assuming the useful life is limited, and (c) at disposal, book value is eliminated and gain
or loss, if any, is recorded. If the life of the intangible is indefinite, the cost of the intangible should
not be allocated.
28. Differences between the accounting for intangible assets and the accounting for plant assets
include:
a. The systematic write-off of an intangible asset is referred to as amortization.
b. To record amortization, Amortization Expense is debited and the specific intangible asset is
credited.
c. Amortization is typically computed on a straight-line basis.
Patents
29. A patent is an exclusive right issued by the U.S. Patent Office that enables the recipient to
manufacture, sell, or otherwise control his or her invention for a period of twenty years from the
date of grant.
a. The initial cost of a patent is the cash or cash equivalent price paid when the patent is
acquired.
b. When legal costs are incurred in successfully defending the patent, they are added to the
Patents account and amortized over the remaining useful life of the patent.
c. The cost of the patent should be amortized over its legal life (20 years) or useful life,
whichever is shorter.
Copyrights
30. Copyrights are granted by the federal government, giving the owner the exclusive right to
reproduce and sell an artistic or published work. Copyrights extend for the life of the creator plus
70 years.
Trademark or Trade name
31. A trademark or trade name is a word, phrase, jingle, or symbol that distinguishes or identifies
a particular enterprise or product.
Franchise
32. A franchise is a contractual arrangement under which the franchisor grants the franchisee the
right to sell certain products, to perform specific services, or to use certain trademarks or trade
names, usually within a designated geographic area. Another type of franchise, commonly
referred to as a license or permit, is entered into between a governmental body and a business
enterprise and permits the enterprise to use public property in performing its services.
Goodwill
33. Goodwill is the value of all favorable attributes that relate to a business enterprise such as excep-
tional management, skilled employees, high-quality products, fair pricing policies, and harmonious
relations with labor unions.
a. Goodwill can be identified only with the business as a whole.
b. Goodwill is recorded only when there is an exchange transaction that involves the purchase
of an entire business.
c. When an entire business is purchased, goodwill is the excess of cost over the fair value of
the net assets (assets less liabilities) acquired.
34. Goodwill is not amortized because it is considered to have an indefinite life.
Research and Development
35. Research and development costs are costs that are spent on developing new products and
processes. Such costs are usually recorded as an expense when incurred.
Financial Statement Presentation
36. (L.O. 5) In the balance sheet, plant assets and natural resources are usually combined under
Property, Plant, and Equipment and intangibles are shown separately under Intangible Assets.
a. There should be disclosure of the balances in the major classes of assets and accumulated
depreciation of major classes of assets or in total.
b. Depreciation and amortization methods used should be described and the amount of
depreciation and amortization expense for the period disclosed.
Exchanges of Plant Assets
*37. (L.O. 6) Companies usually record a gain or loss on the exchange of plant assets because most
exchanges have commercial substance. An exchange has commercial substance if the future
cash flows change as a result of the exchange.
*38. In recording an exchange at a loss (or gain), three steps are required:
a. Eliminate the book value of the asset given up.
b. Record the cost of the asset acquired.
c. Recognize the loss or gain on disposal of plant assets.
LECTURE OUTLINE
A. Plant Assets.
1. Plant assets, also called property, plant, and equipment, or plant and equip-
ment, are resources that have a physical substance (a definite size and
shape), are used in the operations of a business, and are not intended for
sale to customers.
2. Because plant assets play a key role in ongoing operations, companies:
a. Keep plant assets in good operating condition.
b. Replace worn-out or outdated plant assets.
c. Expand productive resources as needed.
3. Many companies have substantial

investments in plant assets.
B. Determining the Cost of Plant Assets.
1. The historical cost principle requires that companies record plant assets
at cost.
2. Cost consists of all expenditures necessary to acquire the asset and make
it ready for its intended use.
3. Once cost is established, the company uses that amount as the basis of
accounting for the plant asset over its useful life.
4. Application of the historical cost principle to the major classes of plant

assets.
a. The cost of land includes (1) the cash purchase price, (2) closing costs
such as title and attorney’s fees, (3) real estate brokers’ commissions,
and (4) accrued property taxes and other liens assumed by the
purchaser.
b. Land improvements are structural additions made to land such as drive-
ways, parking lots, fences, landscaping, and underground sprinklers.
The cost of land improvements includes all expenditures needed to
make the improvements ready for their intended use. These improve-
ments have limited useful lives and their maintenance and replacement
are the responsibility of the company.
c. Costs related to the purchase of a building include the purchase price,

closing costs, and real estate broker’s commission. Costs to make
the building ready for its intended use include expenditures for
remodeling and replacing or repairing the roof, floors, electrical
wiring, and plumbing. Costs related to construction of a building
include the contract price plus payments for architects’ fees,
building permits, and excavation costs. Interest costs incurred to
finance the project are included in the cost of the building when a
significant period of time is required to get the asset ready for use.
d. The cost of equipment includes the cash purchase price, sales taxes,
freight charges, and insurance during transit paid by the purchaser.
It also includes expenditures required in assembling, installing, and
testing the unit. Motor vehicle licenses and accident insurance on
company vehicles are treated as expenses as incurred, because
they represent annual recurring expenditures and do not benefit
future periods.
ACCOUNTING ACROSS THE ORGANIZATION
Leasing is a big business for U.S. companies. As an excellent example of the

magnitude of leasing, leased planes account for nearly 40% of the U.S. fleet of
commercial airlines.
Why might airline managers choose to lease rather than purchase their planes?
Answer: The reasons for leasing include favorable tax treatment, better financing
options, increased flexibility, reduced risk of obsolescence, and low
airline income.
C. Depreciation.
1. Depreciation is the process of allocating to expense the cost of a plant

asset over its useful (service) life in a rational and systematic manner.
2. Cost allocation enables companies to properly match expenses with reve-

nues in accordance with the expense recognition principle.
3. Depreciation is a process of cost allocation, not a process of asset valuation.
4. The book value (cost less accumulated depreciation) of a plant asset may
be quite different from its fair value.
5. Revenue-producing ability of plant assets may decline because of:
a. Wear and tear.
b. Obsolescence, which is the process of becoming out of date before

the asset physically wears out.
6. The balance in Accumulated Depreciation represents the total amount of

the asset’s cost that the company has charged to expense; it is not a
cash fund.
D. Factors in Computing Depreciation/Depreciation Methods.
1. The computation of depreciation expense is based on three factors:
a. Cost.
b. Useful life is an estimate of the expected productive life of the asset for
its owner. Useful life may be expressed in terms of time, units of
activity, or units of output.
c. Salvage value (residual value) is an estimate of the asset’s value at

the end of its useful life.
2. There are three depreciation methods.
a. Under the straight-line method, companies expense the same

amount of depreciation for each year of the asset’s useful life. The
formula for computing annual depreciation expense is depreciable
cost (cost less salvage value) divided by useful life. The straight-
line method is simple to apply, and it matches expenses with
revenues when the use of the asset is reasonably uniform
throughout the service life.
b. Under the units-of-activity method, useful life is expressed in terms

of the total units of production or use expected from the asset. Annual
depreciation expense is computed by multiplying depreciable cost
per unit by the units of activity during the year. This method is not nearly
as popular as the straight-line method because it is often difficult for
companies to reasonably estimate total activity.
c. The declining-balance method produces a decreasing annual

depreciation expense over the asset’s useful life. Companies
compute annual depreciation expense by multiplying the book
value at the beginning of the year by the constant declining-balance
depreciation rate. This method is compatible with the expense
recognition principle in that it matches the higher depreciation
expense in early years with the higher benefits received in these
years.
E. Depreciation and Income Taxes.
1. The Internal Revenue Service (IRS) does not require taxpayers to use
the same depreciation method on the tax return that is used in preparing
financial statements.
2. Taxpayers must use either the straight-line method or a special accelerated-

depreciation method called the Modified Accelerated Cost Recovery System
(MACRS) on their tax returns.
F. Revising Periodic Depreciation.
1. If wear and tear or obsolescence indicate that annual depreciation estimates

are inadequate or excessive, the company should change the amount of
depreciation expense.
2. Companies make revisions of periodic depreciation in current and future

years, not in prior periods.
3. To determine the new annual depreciation expense, the company allocates

the asset’s depreciable cost at the time of the revision to the remaining
useful life.
G. Expenditures During Useful Life.
1. Companies incur revenue expenditures to maintain the operating efficiency

and productive life of the asset. These expenditures are fairly small
amounts that occur frequently and are debited to Maintenance and
Repairs Expense as incurred.
2. Capital expenditures (additions and improvements) increase the operating

efficiency, productive capacity, or expected useful life of the asset. These
expenditures are usually material in amount and occur infrequently.
H. Plant Asset Disposals.
1. Disposal by retirement: the plant asset is scrapped or discarded
a. Eliminate the book value of the plant asset at the date of disposal by
debiting Accumulated Depreciation and crediting the asset account
for its cost.
b. Debit Cash to record any cash proceeds from scrap or salvage value.
c. Record the loss.
(1) If a company retires a plant asset before it is fully depreciated,

and no cash is received, a loss is recorded by debiting Loss on
Disposal of Plant Assets.
(2) Companies report a loss on disposal of plant assets in the

“Other expenses and losses” section of the income statement.
2. Disposal by sale: the plant asset is sold to another party.
a. Eliminate the book value of the plant asset at the date of sale by deb-
iting Accumulated Depreciation and crediting the asset account for
its cost.
b. Debit Cash to record the cash proceeds from the sale.
c. Compute gain or loss.
(1) If the cash proceeds exceed the book value, recognize a gain by
crediting Gain on Disposal of Plant Assets for the difference.
(2) If the cash proceeds are less than the book value, recognize a loss
by debiting Loss on Disposal of Plant Assets for the difference.
I. Natural Resources.
1. Natural resources consist of standing timber and underground deposits of

oil, gas, and minerals.
2. Natural resources have two distinguishing characteristics.
a. They are physically extracted in operations (mining, cutting,

pumping).
b. They are replaceable only by an act of nature.
3. The acquisition cost of a natural resource is the price needed to acquire

the resource and prepare it for its intended use.
4. The allocation of the cost of natural resources to expense in a rational

and systematic manner over the resource’s useful life is called depletion.
Companies generally use the units-of-activity method to compute depletion,
because depletion generally is a function of the units extracted during
the year.
J. Accounting for Intangible Assets.
1. The accounting for intangible assets and plant assets is much the same.
a. Companies record intangible assets at cost.
b. If an intangible has a limited life, companies allocate its cost over the
asset’s useful life, using a process referred to as amortization.
2. There are several differences between accounting for intangible assets and
accounting for plant assets.
a. The term used to describe the allocation of the cost of an intangible

asset to expense is amortization, rather than depreciation.
b. To record amortization of an intangible asset, companies debit Amor-

tization Expense and credit the specific intangible asset rather than
a contra account.
c. Intangible assets with a limited life are normally amortized on a straight-

line basis. An indefinite-life intangible asset should not be amortized.
3. Patents are an exclusive right issued by the U.S. Patent Office that enables
the recipient to manufacture, sell, or otherwise control an invention for a
period of 20 years from the date of the grant.
a. The initial cost of a patent is the cash or cash equivalent price paid
to acquire the patent.
b. If the owner incurs legal costs in successfully defending a patent in

an infringement suit, such costs are considered necessary to establish
the patent’s validity. The owner adds these costs to the Patents
account and amortizes them over the remaining life of the patent.
c. The patent holder amortizes the cost of a patent over its 20-year legal
life or its useful life, whichever is shorter.
4. The federal government grants copyrights which give the owner the exclusive
right to reproduce and sell an artistic or published work.
a. Copyrights extend for the life of the creator plus 70 years.
b. The cost of a copyright is the cost of acquiring and defending it.
c. The useful life of a copyright is generally significantly shorter than its

legal life; therefore, copyrights are amortized over a relatively short
period of time.
5. A trademark or trade name is a word, phrase, jingle, or symbol that identifies

a particular enterprise or product.
a. The creator or original user may obtain exclusive legal right to a trade-
mark or trade name by registering it with the U.S. Patent Office, provid-
ing 20 years of protection. The registration may be renewed indefinitely
as long as the trademark or trade name is in use.
b. If a company purchases the trademark or trade name, its cost is the

purchase price. If a company develops and maintains the trademark or
trade name, any costs related to these activities are expensed as
incurred.
c. Because trademarks and trade names have indefinite lives, they are
not amortized.
6. A franchise is a contractual arrangement between a franchisor and a fran-

chisee that grants the franchisee the right to sell certain products,
perform specific services, or use certain trademarks or trade names,
usually within a designated geographic area.
a. When a company can identify costs with the purchase of a franchise or

license, it should recognize an intangible asset.
b. Companies should amortize the cost of a limited-life franchise over

its useful life.
c. If the life is indefinite, the cost is not amortized.
7. Goodwill represents the value of all favorable attributes that relate to a

company. These include exceptional management, desirable location, good
customer relations, skilled employees, high-quality products, and harmonious
relations with labor unions.
a. Goodwill cannot be sold individually in the marketplace; it can be

identified only with the business as a whole.
b. Companies record goodwill only when an entire business is

purchased.
c. When an entire business is purchased, goodwill is the excess of cost

over the fair value of the net assets (assets less liabilities) acquired.
d. Goodwill is not amortized because it is considered to have an indefinite

life.
8. Research and development costs are expenditures that may lead to pat-
ents, copyrights, new processes, and new products. These costs are not
intangible assets. Companies usually record R&D costs as an expense
when incurred, whether the research and development is successful or not.
K. Statement Presentation and Analysis.
1. Usually companies combine plant assets and natural resources under

“Property, plant, and equipment,” and show intangibles separately.
2. Companies disclose either in the balance sheet or the notes the balances of
the major classes of assets, such as land, buildings, and equipment, and
accumulated depreciation by major classes or in total.
3. They should describe the depreciation and amortization methods that were
used, and disclose the amount of depreciation and amortization expense
for the period.
4. The asset turnover is a measure of how efficiently a company uses its

assets to generate sales. This ratio is computed by dividing net sales by
average total assets for the period.
*L. Exchange of Plant Assets.
1. Usually companies record a gain or loss on the exchange of plant assets

since most exchanges have commercial substance. An exchange has
commercial substance if the future cash flows change as a result of the
exchange.
2. Losses on the exchange of plant assets are recognized by debiting Loss

on Disposal of Plant Assets.
a. The cost of the new asset received is equal to the fair value of the
old asset exchanged plus any cash paid.
b. A loss results when the book value is greater than the fair value of the
asset given up.
3. Gains on exchange of plant assets are recognized by crediting Gain on

Disposal of Plant Assets.
a. The cost of the new asset received is equal to the fair value of the
old asset exchanged plus cash paid.
b. A gain results when the fair value is greater than the book value of
the asset given up.
A Look at IFRS
IFRS follows most of the same principles as GAAP in the accounting for property,
plant, and equipment. There are, however, some significant differences in the
implementation. IFRS allows the use of revaluation of property, plant, and
equipment, and it also requires the use of component depreciation. In addition,
there are some significant differences in the accounting for both intangible assets
and impairments.
KEY POINTS
The following are the key similarities and differences between GAAP and IFRS
as related to the recording process for long-lived assets.
 The definition for plant assets for both IFRS and GAAP is essentially the
same.
 Both IFRS and GAAP follow the historical cost principle when accounting
for property, plant, and equipment at date of acquisition. Cost consists of all
expenditures necessary to acquire the asset and make it ready for its
intended use.
 Under both IFRS and GAAP, interest costs incurred during construction are
capitalized. Recently, IFRS converged to GAAP requirements in this area.
 IFRS also views depreciation as an allocation of cost over an asset’s useful

life. IFRS permits the same depreciation methods (e.g., straight-line, accel-
erated, and units-of-activity) as GAAP.
 Under both GAAP and IFRS, changes in the depreciation method used and
changes in useful life are handled in current and future periods. Prior
periods are not affected. GAAP recently conformed to international
standards in the accounting for changes in depreciation methods.
 The accounting for subsequent expenditures, such as ordinary repairs and

additions, are essentially the same under IFRS and GAAP.
 The accounting for plant asset disposals is essentially the same under
IFRS and GAAP.
 Initial costs to acquire natural resources are essentially the same under
IFRS and GAAP.
 The definition of intangible assets is essentially the same under IFRS and
GAAP.
 The accounting for exchanges of nonmonetary assets has recently

converged between IFRS and GAAP. GAAP now requires that gains on
exchanges of nonmonetary assets be recognized if the exchange has
commercial substance. This is the same framework used in IFRS.
 IFRS uses the term residual value, rather than salvage value, to refer to an
owner’s estimate of an asset’s value at the end of its useful life for that
owner.
 IFRS allows companies to revalue plant assets to fair value at the reporting
date. Companies that choose to use the revaluation framework must follow
revaluation procedures. If revaluation is used, it must be applied to all
assets in a class of assets. Assets that are experiencing rapid price
changes must be revalued on an annual basis, otherwise less frequent
revaluation is acceptable.
 IFRS requires component depreciation. Component depreciation specifies

that any significant parts of a depreciable asset that have different
estimated useful lives should be separately depreciated. Component
depreciation is allowed under GAAP but is seldom used.
 As in GAAP, under IFRS the costs associated with research and
development are segregated into the two components. Costs in the
research phase are always expensed under both IFRS and GAAP. Under
IFRS, however, costs in the development phase are capitalized as
Development Costs once technological feasibility is achieved.
 IFRS permits revaluation of intangible assets (except for goodwill). GAAP

prohibits revaluation of intangible assets.
LOOKING TO THE FUTURE
The IASB and FASB have identified a project that would consider expanded
recognition of internally generated intangible assets. IFRS permits more
recognition of intangibles compared to GAAP. Thus, it will be challenging to
develop converged standards for intangible assets, given the long-standing
prohibition on capitalizing internally generated intangible assets and research
and development costs in GAAP.
20 MINUTE QUIZ
Circle the correct answer.

True/False
1. The cost of equipment consists of the cash purchase price plus certain related costs such
as sales taxes and freight charges.
True False
2. Cost to construct a plant includes the contract price, architect’s fees, building fees, excavation
costs but not interest costs incurred to finance the project.
True False
3. The book value of an asset equals its cost less accumulated depreciation.
True False
4. Under the declining-balance method of depreciation, an asset may not be depreciated below
its estimated salvage value.
True False
5. Ordinary repairs are expenditures to increase the operating efficiency, productive capacity,
or expected useful life of a plant asset.
True False
6. The useful life of a copyright is generally shorter than its legal life.
True False
7. Unlike other assets that can be sold individually in the marketplace, goodwill can be identified
only with the business as a whole.
True False
8. The process of allocating the cost of natural resources to expense is called amortization.
True False
*9. Gains on exchanges of plant assets are recorded in the period the exchange occurs.
True False
*10. When plant assets are exchanged, the cost of the new equipment is always equal to the
fair value of the new equipment plus the cash paid.
True False
Multiple Choice
1. The cost of a factory machine includes all of the following costs except
a. invoice price less discount taken.
b. sales tax and insurance during shipping.
c. three-year insurance policy on the machine.
d. testing and installation cost.
2. On January 1, a machine with a useful life of 5 years and a salvage value of $8,000 was
purchased for $160,000. What is the depreciation expense in year 2 under the double
declining-balance method?
a. $38,400
b. $36,480
c. $25,600
d. $24,320
3. An asset that cost $80,000 and has accumulated depreciation of $60,000 is sold for $12,000.
The journal entry would include a
a. debit to Loss on Disposal of Plant Assets of $20,000.
b. debit to Loss on Disposal of Plant Assets of $8,000.
c. credit to Gain on Disposal of Plant Assets of $8,000.
d. credit to Accumulated Depreciation for $60,000.
4. The exclusive right to reproduce and sell an artistic or published work is called a
a. patent.
b. trademark.
c. license.
d. copyright.
*5. A company decides to exchange old equipment with a book value of $81,000 ($150,000
cost less accumulated depreciation of $69,000) plus $129,000 cash for new equipment
(similar asset). The fair value of the old equipment is $90,000. The entry to record the
new equipment would include a debit to
a. Equipment (new) for $210,000.
b. Equipment (old) for $150,000.
c. Loss on Disposal of Plant Assets for $9,000.
d. Equipment (new) for $219,000.
ANSWERS TO QUIZ
True/False
1. True 6. True
2. False 7. True
3. True 8. False
4. True *9. True
5. False *10. False
Multiple Choice
1. c.
2. a.
3. b.
4. d.
*5. d.

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ch10 Plant Assets, Natural Resources

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CHAPTER 10

PLANT ASSETS, NATURAL RESOURCES,

1. EXPLAIN THE ACCOUNTING FOR PLANT ASSET

2. APPLY DEPRECIATION METHODS TO PLANET

3. EXPLAIN HOW TO ACCOUNT FOR THE DISPOSAL

4. DESCRIBE HOW TO ACCOUNT FOR NATURAL

5. DISCUSS HOW PLANT ASSETS, NATURAL

*6. EXPLAIN HOW TO ACCOUNT FOR THE EXCHANGE

Cost of Plant Assets

Depreciable Cost ÷ Useful Life (in years) = Depreciation Expense

(1) $10,000 ÷ 100,000 = $.10 per mile.

(2) $.10 X 30,000 = $3,000.

Book Value at Beginning of Year X Declining-Balance Rate = Depreciation Expense

Revising Periodic Depreciation

Expenditures During Useful Life

Plant Asset Disposals

20. In accounting for a disposal by retirement,

Sale of Plant Assets

Trademark or Trade name

34. Goodwill is not amortized because it is considered to have an indefinite life.

Research and Development

Financial Statement Presentation

Exchanges of Plant Assets

2. Because plant assets play a key role in ongoing operations, companies:

a. Keep plant assets in good operating condition.

b. Replace worn-out or outdated plant assets.

c. Expand productive resources as needed.

3. Many companies have substantial

B. Determining the Cost of Plant Assets.

4. Application of the historical cost principle to the major classes of plant

c. Costs related to the purchase of a building include the purchase price,

Leasing is a big business for U.S. companies. As an excellent example of the

1. Depreciation is the process of allocating to expense the cost of a plant

2. Cost allocation enables companies to properly match expenses with reve-

3. Depreciation is a process of cost allocation, not a process of asset valuation.

5. Revenue-producing ability of plant assets may decline because of:

a. Wear and tear.

b. Obsolescence, which is the process of becoming out of date before

6. The balance in Accumulated Depreciation represents the total amount of

1. The computation of depreciation expense is based on three factors:

c. Salvage value (residual value) is an estimate of the asset’s value at

2. There are three depreciation methods.

a. Under the straight-line method, companies expense the same

b. Under the units-of-activity method, useful life is expressed in terms

c. The declining-balance method produces a decreasing annual

2. Taxpayers must use either the straight-line method or a special accelerated-

F. Revising Periodic Depreciation.

1. If wear and tear or obsolescence indicate that annual depreciation estimates

2. Companies make revisions of periodic depreciation in current and future

3. To determine the new annual depreciation expense, the company allocates

G. Expenditures During Useful Life.

1. Companies incur revenue expenditures to maintain the operating efficiency

2. Capital expenditures (additions and improvements) increase the operating

1. Disposal by retirement: the plant asset is scrapped or discarded

c. Record the loss.

(1) If a company retires a plant asset before it is fully depreciated,

(2) Companies report a loss on disposal of plant assets in the

2. Disposal by sale: the plant asset is sold to another party.

b. Debit Cash to record the cash proceeds from the sale.