Course: Financial Accounting

Session: 1

 Instructor: M Faisal
 Course: Program: BBA/BS(A&F)
 Semester: 3rd/2nd
 Topic: Ch 9: Plant & Intangible Assets
Ch 9: Plant & Intangible Assets

1
Session # Contents Activities
 Introduction
Class activity1:
PLANT ASSETS
Title of the Case Study – A Tale of Two Airlines?
 Major Categories of
Plant assets Theme:The theme of this case study is to highlight
the importance of Plant Assets.
 Accounting for Plant
Task: Student will read the case study and participate
Assets
in the class discussion for KNOWLEDGE
 Acquisition of plant ENHANCEMENT & SKILL BUILDING.
assets Availability: Accounting: Tools for Business Decision Making, 4th Edition, By
1 Kimmel, Weygandt, Kieso.
 Determining cost: an
example
Class activity 2: Handout’s End of the Chapter
practice question(s) – Pr 9.1A (a, b, & c)

Home assignment:

Revise the lecture & problem solved in the class.

Read the topic due for discussion in the next class.

Pr 9.1B (a, b, & c)

Plant
Plant Assets
Assets

Plant assets are

 long-lived assets
 acquired for use in the operations of a business and
 are not intended for resale to customers
 Examples:
 Trademark
 Building
 Copyright
 Vehicle
 Goodwill
 Equipment
Latest
LatestCorolla
Corollabought
boughtby
byToyota
ToyotaSouthern
SouthernMotors
Motors

To provide
For selling to
transportation to its
customers
staff

MERCHANDISE
PLANT ASSET
INVENTORY

3
Major
Major Categories
Categories of
of Plant
Plant Assets
Assets

1. Tangible Plant Assets are assets with physical substance

• Examples: Building, Vehicle, Equipment, etc

1. Plant property subject to depreciation

• Limited useful life

2. Land – The only plant asset not subjected to

depreciation
• Unlimited term of existence
Plant
Plant Assets
Assets

 Examples:
 Building,
 Vehicle,
 Equipment, etc

Referred to as property, plant, and equipment; plant and

equipment; and fixed assets.
Major
Major Categories
Categories of
of Plant
Plant Assets
Assets

2. Intangible Assets are assets that lacks physical substance

& are non-current.
 Examples: Patents, copyrights, trademarks, franchise &
goodwill

3. Natural resources are sites acquired for the purpose of

extracting or removing some valuable resource such as oil,
minerals, or timber
 These assets are gradually converted into Inventory as
natural resources are extracted from the site
6
Total number of Walmart stores worldwide
2008 to 2018
Plant
Plant Assets
Assets

Plant assets are critical to a company’s success

 Accounting
Accounting for
for Plant
Plant Assets
Assets

Accounting for Plant Assets include:

1.Acquisition

• Cost/Expenditures

a) At the time of Acquisition

b) Post Acquisition

2.Allocation of the acquisition cost to expense over the

asset’s useful life (recording depreciation)

3.Sale or disposal
Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Entry to record acquisition of a Plant Asset

The Cost of Plant Asset

1.Cost /Expenditures - at the time of Acquisition
All material expenditures that are reasonable &
necessary for getting the asset to the desired
location & in ready to use condition should be
capitalized
Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Examples of Capitalized Costs:

At the time of Acquisition

 Cash purchase price.
 Sales taxes.
 Freight charges.
 Insurance during transit
paid by the purchaser.
 Expenditures required in
assembling, installing,
and testing the unit.
Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Determining Cost : Example 1

A factory in Karachi orders a machine from a Faisalabad
tool manufacturer at a list price of $ 10,000. Sales taxes of
$ 600 must be paid, as well as freight charges of $ 1,350.
Installation & other set-up costs amount to $ 500.

Calculate the cost of machinery that should be Capitalized?

 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Determining Cost : Example 1

The cost of machine to be capitalized in Machinery Account:

Machinery
List price of machinery ($ 10,000) $10,000
Sales taxes ($600) 600
Freight charges ($1,350) 1,350
Installation costs ($500) 500
Cost of Machinery $12,450
Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Only reasonable & necessary costs should be

Capitalized
Assume that a machine is dropped and damaged while it
is being unloaded

• The cost of repairing this damage should be

recognized as expense of the current period,
not capitalized

• Although it is necessary to repair the machine,

it was not necessary to drop it, that’s what
brought the need to repair the machine
Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Examples Non-Capitalized Costs:

At the time of Acquisition

 Plant Asset damaged
 During unloading
 During installation

 Plant Assets that are not

material in amount
 E.g.
 Auto Batteries
 Waste Baskets
 Pencil Sharpeners
Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Determining Cost : Example 2

A factory in Karachi orders a machine from a Faisalabad
tool manufacturer at a list price of $10,000. Sales taxes
of $600 must be paid, as well as freight charges of
$1,350. Installation & other set-up costs amount to $500.
The machine was damaged while it was been unloaded.
It cost $350 to repair it.

Calculate the cost of machinery that should be

capitalized?
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Determining Cost : Example 2

The cost of machine to be capitalized in Machinery Account:

Machinery
List price of machinery ($ 10,000) $10,000
Sales taxes ($600) 600
Freight charges ($1,350) 1,350
Installation costs ($500) 500
Cost of Machinery $12,450
Acquisition
Acquisition of
of Plant
Plant Asset
Asset through
through installment
installment
plan
plan or
or by
by issuing
issuing aa note
note payable
payable

Interest charges paid

After asset is ready to During construction period

use are recorded as are recorded by

Interest expense Capitalizing it

Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Determining Cost : Example 3a

A factory in Karachi orders a machine from a Faisalabad
tool manufacturer at a list price of $ 10,000. Payment will
be made in 48 monthly installment of $ 250, which include
$ 2,000 in interest charges. Sales taxes of $ 600 must be
paid, as well as freight charges of $ 1,350. Installation &
other set-up costs amount to $ 500.

Calculate the cost of machinery that should be

capitalized?
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Determining Cost : Example 3a

The cost of machine to be capitalized in Machinery Account:

Machinery
List price of machinery ($ 10,000) $10,000
Sales taxes ($600) 600
Freight charges ($1,350) 1,350
Installation costs ($500) 500
Cost of Machinery $12,450
Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Determining Cost : Example 3a

The $ 2,000 in interest charges on the installment purchase

• will not be capitalized (rather than)

• recognized as interest expense

 over the next 48 months
 Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Determining Cost : Example 3b
Logan Industries constructed entire building during the current year. Construction
began on February 1 and was completed on November 1. The payments to the
contractor were as follows:

Date Payment

2/1 $ 120,000

6/1 $ 360,000

9/1 $ 480,000

11/1 $ 540,000

To finance construction of the building, a $600,000, 12% construction loan was

taken out on February 1. The principal amount of loan was repaid on November 1
along with interest of $54,000. The firm had $200,000 of other outstanding debt
during the year at a borrowing rate of 8%.

Instruction: Record the acquisition of this asset.

Acquisition
Acquisition of
of Plant
Plant Assets
Assets

2. Post Acquisition Expenditures

All material expenditures incurred to enhance
the operating efficiency, productive capacity, or
expected life of the plant asset should be
capitalized
Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Examples of Capitalized Costs:

Post Acquisition
 Reconditioning a Plant
Asset
 Replacing an old engine
with a new one
 Expansion of existing
capacity – adding 2 more
Shuttle-less Looms to the
existing 12 Shuttle-less
Looms
Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Examples Non-Capitalized Costs:

Post Acquisition
 Motor tune-ups & oil
changes
 The painting of buildings
 Replacing of worn-out
gears on factory machine
 Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Example 4

Sabina Company had the 1

following two transactions Maintenance & Repair Exp 38
related to its delivery truck.
Cash 38
2
1. Paid $38 for an oil
change. Equipment 400
Cash 400

2. Paid $400 to install special

shelving units, which
increase the operating
efficiency of the truck.
Prepare Sabina’s journal entries
to record these two transactions.
Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Class Activity:
1.Problem 9.1A (a)

2.Problem 9.1A (b)

3.Problem 9.1A (c)

4.Problem 9.1A (d)

Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Questions & Answers