Chapter 8

Reporting and Interpreting

Property, Plant, and Equipment; Intangibles; and
Natural Resources
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw­Hill/Irwin Copyright © 2014 by The McGraw­Hill Companies, Inc. All rights reserved.
 Classifying Long-Lived Assets
§ Definite life
q Patents
n Land
q
n Assets subject to depreciation
q Buildings and equipment
Copyrights
q
q Furniture and fixtures
Franchises
n Natural resource assets § Indefinite life
subject to depletion q
q Mineral deposits and timber Trademark
s
q Goodwill

Tangible Intangible
Physical No Physical
Substance Substance

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 Measuring and Recording Acquisition
Cost
Acquisition cost includes the purchase price and all
expenditures needed to prepare the asset for its intended use.
Acquisition cost does not include
financing charges and cash discounts.

Buildings
• Purchase price
• Renovation and repair costs
• Legal and realty fees
• Title fees

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 Measuring and Recording
Acquisition Cost
Equipment Land
• Purchase price • Purchase price
• Installation costs • Real estate commissions
• Modification to building • Title insurance premiums
necessary to install • Delinquent taxes
equipment
• Surveying fees
• Transportation costs
• Title search and transfer fees

Land is not depreciated

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 Acquisition by Construction

Asset cost includes:

All materials and A reasonable Interest on debt

labor traceable to amount of incurred during
the construction. overhead. the construction.

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 Repairs, Maintenance, and
improvements
Type of Accounting
Expenditure Identifying Characteristics Treatment
Ordinary 1. Maintains normal operating condition Expense
repairs and 2. Does not increase productivity in period
maintenance 3. Does not extend life beyond original incurred
estimate
4. Recurring in nature and involve small
amounts of money at each occurence
Additions and 1. Major overhauls or partial Add to
Improvements replacements asset
2. Usually occur infrequently account
3. Increases efficiency (Capitalize)
4. May extend useful life
5. Involve large amounts of money

8-6
Repairs, Maintenance, and
improvements

Financial Statement Effect

Current Current
Treatment Statement Expense Income Taxes
Capitalize Balance sheet
account debited Deferred Higher Higher
Expense Income statement Currently
account debited recognized Lower Lower

To aid with the capitalize/expense decision,

many companies record all expenditures below
a certain dollar amount as expenses.
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Depreciation Concepts
Depreciation is the process of allocating the cost of
buildings and equipment over their productive lives
using a systematic and rational method.

Balance Sheet Income Statement

Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)

Depreciation Depreciation for Income

Expense the current year Statement

Accumulated Total depreciation Balance

Depreciation to date on an asset Sheet

8-8
Depreciation Concepts

The calculation of depreciation requires

three amounts for each asset:
ΠAcquisition cost.
 Estimated useful life.
Ž Estimated residual value.

Alternative depreciation methods:

Œ
Straight-line

Units-of-production
Ž
Accelerated Method: Declining balance
8-9
 Measuring Asset Impairment

Impairment is the loss of a significant portion Recognize a

of the utility of an asset through . . . loss when
• Casualty. an asset
• Obsolescence.
suffers a
permanent
• Lack of demand for the asset’s services.
impairment.

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Disposal of Property, Plant
and Equipment

Disposal of Property, Plant and Equipment

Voluntary disposals:
• Sale
• Trade-in
• Retirement
Involuntary disposals:
• Fire
• Accident

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Disposal of Property, Plant
and Equipment
Œ
Update depreciation
to the date of disposal.


Journalize disposal by:

Recording cash Recording a

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

Writing off accumulated Writing off the

depreciation (debit). asset cost (credit).

8-12
 Acquisition and Amortization of
Intangible Assets
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.
Intangible
Assets Usually acquired
Useful life is
often difficult for operational
to determine. use.

Only purchased intangibles are recorded, and they are

normally recorded at current cash equivalent cost, including
purchase price, legal fees, and filing fees.
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 Acquisition and Amortization of
Intangible Assets

Definite Life Indefinite Life

• Amortize over shorter • Not amortized.
of • Tested at least annually
economic life or legal for possible impairment,
life. and book value is reduced
• Use straight-line to fair value if impaired.
method.

Amortization is a cost allocation process

similar to depreciation and depletion.

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Acquisition and Amortization of
Intangible Assets
Goodwill

Occurs when one Only purchased

company buys goodwill is an
another company. intangible asset.

The amount by which the purchase price exceeds

the fair market value of net assets acquired.

Goodwill is not amortized. Its value must be reviewed

at least annually for possible impairment, and the
book value is reduced to fair value if impaired.

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Acquisition and Depletion of Natural
Resources
A noncurrent
Extracted from asset presented
the natural at cost less
environment. accumulated
depletion.

Total cost of Total cost is

asset is the cost allocated over
of acquisition, periods benefited
exploration, by means of
and development. depletion.

Examples: oil, coal, gold

Depletion is like units-of-production depreciation.

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 Acquisition and Depletion of Natural
Resources
The unit depletion rate is calculated as follows:

Acquisition and Residual

Development Cost – Value
Estimated Recoverable Units
Depletion cost for a period is:
UNIT DEPLETION NUMBER OF UNITS
RATE × EXTRACTED IN PERIOD
Cost of
goods sold
Depletion Inventory
cost for sale Unsold
Inventory
8-17
End of Chapter 8

8-18