This document discusses accounting for plant and intangible assets. It covers major categories of plant assets including tangible assets like land, buildings and equipment and intangible assets like patents and goodwill. It describes the major events in the life of a plant asset - acquisition, depreciation over its useful life, and sale/disposal. Methods of determining the cost of an acquired asset are presented. The document also discusses accounting for depreciation using methods like straight-line and declining balance and events that would trigger revising depreciation rates or recognizing impairment. Guidelines for recording the disposal of plant assets and trading in used assets for new ones are also summarized.

1. © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
9-1
PLANT AND
INTANGIBLE ASSETS
Chapter
9

2. © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
9-2
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
The cost of plant assets
is the advance purchase
of services.
Date Description Debit Credit
As years pass, and the
services are used, the
cost is transferred to
depreciation expense.
Plant Assets

3. © The McGraw-Hill Companies, Inc., 2005
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9-3
Major Categories of Plant Assets
Land, buildings,
equipment,
furniture, fixtures.
Long-term
assets having
physical substance.
Tangible Plant
Assets
Patents, copyrights,
trademarks,
franchises, goodwill.
Noncurrent assets
with no physical
substance.
Intangible
Assets
Oil reserves,
timber, other
minerals.
Sites acquired for
extracting valuable
resources.
Natural
Resources

4. © The McGraw-Hill Companies, Inc., 2005
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Acquisition.
Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
Sale or disposal.
Accountable Events

5. © The McGraw-Hill Companies, Inc., 2005
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9-5
Asset
price
. . . for getting
the asset to the
desired location.
. . . for getting
the asset ready
for use.
Cost
Acquisition of Plant Assets
=
Reasonable and
necessary costs . . .
+

6. © The McGraw-Hill Companies, Inc., 2005
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9-6
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas
company. The new machine has a price of
$52,000. Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine
arrives, set-up costs of $1,300 are incurred,
along with $4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
Determining Cost

7. © The McGraw-Hill Companies, Inc., 2005
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9-7
List price 52,000
$
Sales tax @ 8% 4,160
Transportation cost 500
Set-up 1,300
Testing 4,000
Total cost to Heat Co. 61,960
$
Date Description Debit Credit
Prepare the journal entry.
Determining Cost
Date Description Debit Credit
May 4 New Machine 61,960
Cash 61,960

8. © The McGraw-Hill Companies, Inc., 2005
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9-8
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Land
Improvements
Land
Special Considerations

9. © The McGraw-Hill Companies, Inc., 2005
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9-9
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
Buildings
Special Considerations
Equipment
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.

10. © The McGraw-Hill Companies, Inc., 2005
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9-10
I think I’ll buy the
whole thing; barn,
land, and animals.
Special Considerations
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
The total cost
must be
allocated to
separate
accounts for
each asset.
Allocation of a Lump-Sum Purchase

11. © The McGraw-Hill Companies, Inc., 2005
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Capital
Expenditure
Revenue
Expenditure
Any material expenditure
that will benefit several
accounting periods.
To capitalize an expenditure
means to charge it to an
asset account.
Expenditure for
ordinary repairs
and maintenance.
To expense an expenditure
means to charge it to an
expense account.
Capital Expenditures and Revenue
Expenditures

12. © The McGraw-Hill Companies, Inc., 2005
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9-12
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Cost of
plant
assets
Balance Sheet
Assets:
Plant and
equipment
Income Statement
Revenues:
Expenses:
Depreciation
as the services
are received
Depreciation

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9-13
Book Value
 Cost – Accumulated Depreciation
Accumulated Depreciation
 Contra-asset
 Represents the portion of an asset’s
cost that has already
been allocated to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence
Depreciation

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Cost - Residual Value
Years of Useful Life
Depreciation
Expense per Year
=
Straight-Line Depreciation

15. © The McGraw-Hill Companies, Inc., 2005
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9-15
On January 1, 2005, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2005 using the
straight-line method.
Cost – Residual Value 24,000
$ – 3,000
$
= 4,200
$ per year
Years of Useful Life
=
5
Straight-Line Depreciation

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Depreciation Accumulated Accumulated Undepreciated
Expense Depreciation Depreciation Balance
Year (debit) (credit) Balance (book value)
24,000
$
2005 4,200
$ 4,200
$ 4,200
$ 19,800
2006 4,200 4,200 8,400 15,600
2007 4,200 4,200 12,600 11,400
2008 4,200 4,200 16,800 7,200
2009 4,200 4,200 21,000 3,000
21,000
$ 21,000
$
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Salvage Value
Straight-Line Depreciation

17. © The McGraw-Hill Companies, Inc., 2005
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9-17
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
Half-Year Convention
In the year of
acquisition, record six
months of depreciation. ½
Depreciation for Fractional Periods

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Half-Year Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31,
2005, for equipment purchased in 2005.
The equipment cost $75,000, has a useful
life of 10 years and an estimated salvage
value of $5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1
/2 = $3,500

19. © The McGraw-Hill Companies, Inc., 2005
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Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
Depreciation
Expense
=
Remaining
Book Value
×
Accelerated
Depreciation
Rate
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
Declining-Balance Method

20. © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
9-20
On January 1, 2005, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2005 using the
double-declining balance method.
Declining-Balance Method
2005 Depr.
Expense
=
Remaining
Book Value
×
Accelerated
Depreciation Rate
= 24,000
$ × 2 × 1
/5
= 24,000
$ × 40%
= 9,600
$

21. © The McGraw-Hill Companies, Inc., 2005
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9-21
Compute depreciation for the rest of the
boat’s estimated useful life.
Year Computation
Depr.
Expense
Accumulated
Depreciation
Book
Value
2005 24,000
$ × 40% 9,600
$ 9,600
$ 14,400
$
2006 14,400
$ × 40% 5,760
$ 15,360
$ 8,640
$
2007 8,640
$ × 40% 3,456
$ 18,816
$ 5,184
$
2008 5,184
$ × 40% 2,074
$ 20,890
$ 3,110
$
2009 110
$ 21,000
$ 3,000
$
Total Depreciation 21,000
$
Plug year # 5
Declining-Balance Method
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.

22. © The McGraw-Hill Companies, Inc., 2005
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9-22
Estimates of Useful Life and
Residual Value
 May differ from company to
company.
 The reasonableness of
management’s estimates is
evaluated by external auditors.
Principle of Consistency
 Companies should avoid
switching depreciation methods
from period to period.
Financial Statement Disclosures

23. © The McGraw-Hill Companies, Inc., 2005
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9-23
So depreciation
is an estimate.
Predicted
salvage value
Predicted
useful life
Over the life of an asset, new information
may come to light that indicates the
original estimates need to be revised.
Revising Depreciation Rates

24. © The McGraw-Hill Companies, Inc., 2005
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9-24
Revising Depreciation Rates
On January 1, 2002, equipment was purchased
that cost $30,000, has a useful life of 10 years
and no salvage value. During 2005, the useful
life was revised to 8 years total (5 years
remaining).
Calculate depreciation expense for the year
ended December 31, 2005, using the straight-
line method.

25. © The McGraw-Hill Companies, Inc., 2005
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9-25
When our estimates change,
depreciation is:
Book value at
date of change
Salvage value at
date of change
Remaining useful life at date of change
–
Revising Depreciation Rates
Asset cost 30,000
$
Accumulated depreciation, 12/31/2004
($3,000 per year × 3 years) 9,000
Remaining book value 21,000
$
Divide by remaining life ÷ 5
Revised annual depreciation 4,200
$

26. © The McGraw-Hill Companies, Inc., 2005
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9-26
If the cost of an asset
cannot be recovered
through future use or
sale, the asset should
be written down to its
net realizable value.
Impairment of Plant Assets

27. © The McGraw-Hill Companies, Inc., 2005
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Update depreciation
to the date of disposal.
Recording cash
received (debit).
Removing accumulated
depreciation (debit).
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
Disposal of Plant and Equipment
Journalize disposal by:

28. © The McGraw-Hill Companies, Inc., 2005
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9-28
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Recording cash
received (debit).
Removing accumulated
depreciation (debit).
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
Disposal of Plant and Equipment

29. © The McGraw-Hill Companies, Inc., 2005
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9-29
On September 30, 2005, Evans Map Company
sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in
service on January 1, 2000. It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
Disposal of Plant and Equipment

30. © The McGraw-Hill Companies, Inc., 2005
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9-30
The amount of depreciation
recorded on September 30, 2005,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to Sept. 30:
9/12 × $8,000 = $6,000
Disposal of Plant and Equipment

31. © The McGraw-Hill Companies, Inc., 2005
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9-31
After updating the depreciation, the
machine’s book value on
September 30, 2005, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
Cost 100,000
$
Accumulated Depreciation:
(5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000
$
Disposal of Plant and Equipment

32. © The McGraw-Hill Companies, Inc., 2005
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9-32
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000. Cost 100,000
$
Accum. Depr. 46,000
Book value 54,000
$
Cash received 60,000
Gain 6,000
$
Disposal of Plant and Equipment

33. © The McGraw-Hill Companies, Inc., 2005
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Date Description Debit Credit
Disposal of Plant and Equipment
Date Description Debit Credit
Sept. 30 Cash 60,000
Accumulated Depreciation 46,000
Gain on Sale 6,000
Machinery 100,000
Prepare the journal entry to record
the sale.

34. © The McGraw-Hill Companies, Inc., 2005
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9-34
Accounting depends on whether
assets are similar or dissimilar.
Airplane
for
Airplane
Truck
for
Airplane
Only situations where cash
is paid will be demonstrated.
Trading in Used Assets
for New Ones

35. © The McGraw-Hill Companies, Inc., 2005
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9-35
Recognize
Gains?
Recognize
Losses?
Similar Assets
and Cash Paid
Yes No
Yes Yes
Dissimilar
Assets
Trading in Used Assets
for New Ones

36. © The McGraw-Hill Companies, Inc., 2005
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9-36
On May 30, 2005, Essex Company
exchanged a used airplane and $35,000
cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and
a fair value of $4,000.
SIMILAR
Trading in Used Assets
for New Ones – Similar Assets

37. © The McGraw-Hill Companies, Inc., 2005
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The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
Cost 40,000
$
Accum. Depr. 30,000
Book Value 10,000
$
Fair Value 4,000
Loss 6,000
$
Prepare a journal entry
to record the exchange.
Trading in Used Assets
for New Ones – Similar Assets

38. © The McGraw-Hill Companies, Inc., 2005
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Date Description Debit Credit
May 30
Date Description Debit Credit
May 30 Airplane (new) 39,000
Accumulated Depreciation 30,000
Loss on Exchange 6,000
Airplane (old) 40,000
Cash 35,000
Trading in Used Assets
for New Ones – Similar Assets
Prepare the journal entry to record
the trade.

39. © The McGraw-Hill Companies, Inc., 2005
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9-39
Noncurrent assets
without physical
substance.
Useful life is
often difficult
to determine.
Usually acquired
for operational
use.
Often provide
exclusive rights
or privileges.
Intangible Assets
Characteristics

40. © The McGraw-Hill Companies, Inc., 2005
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 Patents
 Copyrights
 Leaseholds
 Leasehold
Improvements
 Goodwill
 Trademarks and
Trade Names
Record at current
cash equivalent
cost, including
purchase price,
legal fees, and
filing fees.
Intangible Assets

41. © The McGraw-Hill Companies, Inc., 2005
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Amortization is the systematic write-off
to expense of the cost of intangible
assets over Their useful life or legal life,
whichever is shorter.
Use the straight-line method to amortize
most intangible assets.
Amortization
Date Description Debit Credit
Amortization Expense ####
Intangible Asset ####

42. © The McGraw-Hill Companies, Inc., 2005
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9-42
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
Goodwill
Goodwill is NOT amortized. It is tested
annually to determine if there has been
an impairment loss.

43. © The McGraw-Hill Companies, Inc., 2005
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Exclusive right granted
by federal government to sell or
manufacture an invention.
Cost is purchase
price plus legal
cost to defend.
Amortize cost
over the shorter of
useful life or 20 years.
Patents

44. © The McGraw-Hill Companies, Inc., 2005
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9-44
A symbol, design, or logo
associated with a business.
Purchased
trademarks
are recorded
at cost, and
amortized over
shorter of legal
or economic life,
or 40 years.
Internally
developed
trademarks
have no
recorded
asset cost.
Trademarks and Trade Names

45. © The McGraw-Hill Companies, Inc., 2005
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Legally protected right to sell products or
provide services purchased by franchisee from
franchisor.
Purchase price is intangible asset
which is amortized over the shorter of
the protected right or useful life.
Franchises

46. © The McGraw-Hill Companies, Inc., 2005
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9-46
Exclusive right granted by the
federal government to protect
artistic or intellectual properties.
Amortize cost
over period
benefited.
Legal life is
life of creator
plus 70 years.
Copyrights

47. © The McGraw-Hill Companies, Inc., 2005
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9-47
The FASB ruled that all R&D
expenditures should be charged to
expense when incurred.
Research and Development Costs
All of these R&D costs
will really reduce our
net income this year!

48. © The McGraw-Hill Companies, Inc., 2005
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9-48
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Examples: oil, coal, gold
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Natural Resources

49. © The McGraw-Hill Companies, Inc., 2005
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9-49
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Total Units of Natural
Resource
Cost – Residual Value
Depletion of Natural Resources

50. © The McGraw-Hill Companies, Inc., 2005
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Total depletion cost for a period is:
Unit Depletion
Rate
Number of Units
Extracted in Period
×
Total
depletion
cost
Inventory
for sale
Unsold
Inventory
Cost of
goods sold
Depletion of Natural Resources

51. © The McGraw-Hill Companies, Inc., 2005
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9-51
Specialized plant assets may be required to
extract the natural resource.
These assets should be depreciated over
their normal useful lives or over the life of
the natural resource, whichever is shorter.
Depletion of Natural Resources

52. © The McGraw-Hill Companies, Inc., 2005
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A survey of 600 Publicly Owned Corporations
579
22
6
49
32
9
Straight-line
Declining-balance
Sum-of-the-years'-digits
Accelerated methods (not specified)
Units-of-output
Other
Comparative Use of Depreciation
Methods

53. © The McGraw-Hill Companies, Inc., 2005
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9-53
End of Chapter 9