10 Plant Assets, Natural Resources, and

Intangible Assets

Learning Objectives
1 Explain the accounting for plant asset expenditures.

2 Apply depreciation methods to plant assets.

3 Explain how to account for the disposal of plant assets.

Describe how to account for natural resources and

4 intangible assets.
Discuss how plant assets, natural resources, and intangible
5 assets are reported and analyzed.
10-1
LEARNING Explain the accounting for plant asset
1
OBJECTIVE expenditures.

Plant assets are resources that have

 physical substance (a definite size and shape),

 are used in the operations of a business,

 are not intended for sale to customers,

 are expected to be of use to the company for a number of years.

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

fixed assets.

10-2 LO 1
 Plant Assets

Plant assets are critical to a company’s success

Illustration 10-1

10-3 LO 1
 Determining the Cost of Plant Assets

Historical Cost Principle requires that companies record plant

assets at cost.

Cost consists of all expenditures necessary to acquire an asset

and make it ready for its intended use.

10-4 LO 1
 Determining the Cost of Plant Assets

LAND
All necessary costs incurred in making the land ready for its
intended use increase (debit) the Land account.

Costs typically include:

1. 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 on the land assumed

by the purchaser.

10-5 LO 1
 Determining the Cost of Plant Assets

Illustration: Hayes Company acquires real estate at a cash cost of

$100,000. The property contains an old warehouse that is razed at a
net cost of $6,000 ($7,500 in costs less $1,500 proceeds from
salvaged materials). Additional expenditures are the attorney’s fee,
$1,000, and the real estate broker’s commission, $8,000.

Required: Determine the amount to be reported as the cost of the

land.

10-6 LO 1
 Determining the Cost of Plant Assets

Required: Determine amount to be reported as the cost of the land.

Land
Cash price of property ($100,000) $100,000
Net removal cost of warehouse ($7,500-$1,500) 6,000
Attorney's fees ($1,000) 1,000
Real estate broker’s commission ($8,000) 8,000
Cost of Land $115,000
Illustration 10-2
Computation of cost of land

10-7 LO 1
 Determining the Cost of Plant Assets

LAND IMPROVEMENTS
Structural additions made to land. Cost includes all expenditures
necessary to make the improvements ready for their intended use.

 Examples: driveways, parking lots, fences, landscaping, and

underground sprinklers.

 Limited useful lives.

 Expense (depreciate) the cost of land improvements over their

useful lives.

10-8 LO 1
 Determining the Cost of Plant Assets

BUILDINGS
Includes all costs related directly to purchase or construction.

Purchase costs:
 Purchase price, closing costs (attorney’s fees, title insurance,
etc.) and real estate broker’s commission.
 Remodeling and replacing or repairing the roof, floors, electrical
wiring, and plumbing.
Construction costs:
 Contract price plus payments for architects’ fees, building
permits, and excavation costs.
10-9 LO 1
 Determining the Cost of Plant Assets

EQUIPMENT
Include all costs incurred in acquiring the equipment and preparing
it for use.

Costs typically include:

 Cash purchase price.
 Sales taxes.
 Freight charges.
 Insurance during transit paid by the purchaser.
 Expenditures required in assembling, installing, and testing the
unit.
10-10 LO 1
 Determining the Cost of Plant Assets

Illustration: Lenard Company purchases a delivery truck at a cash

price of $22,000. Related expenditures are sales taxes $1,320,
painting and lettering $500, motor vehicle license $80, and a three-
year accident insurance policy $1,600. Compute the cost of the
delivery truck.
Truck
Cash price $22,000
Sales taxes 1,320
Painting and lettering 500

Illustration 10-4
Computation of cost of
delivery truck Cost of Delivery Truck $23,820

10-11 LO 1
 Determining the Cost of Plant Assets

Illustration: Lenard Company purchases a delivery truck at a cash

price of $22,000. Related expenditures are sales taxes $1,320,
painting and lettering $500, motor vehicle license $80, and a three-
year accident insurance policy $1,600. Prepare the journal entry to
record these costs.

Equipment 23,820
License Expense 80
Prepaid Insurance 1,600
Cash 25,500

10-12 LO 1
 Expenditures During Useful Life

Ordinary Repairs are expenditures to maintain the operating

efficiency and productive life of the unit.
 Debit to Maintenance and Repair Expense.
 Referred to as revenue expenditures.

Additions and Improvements are costs incurred to increase the

operating efficiency, productive capacity, or useful life of a plant
asset.
 Debit the plant asset affected.
 Referred to as capital expenditures.

10-13 LO 1
 DO IT! 1 Cost of Plant Assets

Assume that Drummond Heating and Cooling Co. purchases a

delivery truck for $15,000 cash, plus sales taxes of $900 and delivery
costs of $500. The buyer also pays $200 for painting and lettering,
$600 for an annual insurance policy, and $80 for a motor vehicle
license. Explain how each of these costs would be accounted for.
Solution

 The first four payments ($15,000, $900, $500, and $200) are
include in the cost of the truck ($16,600).
 The payments for insurance and the license are operating
costs and therefore are expensed.

10-14 LO 1
 LEARNING
OBJECTIVE
2 Apply depreciation methods to plant assets.

Depreciation
Process of allocating to expense the cost of a plant asset over its
useful (service) life in a rational and systematic manner.

 Process of cost allocation, not asset valuation.

 Applies to land improvements, buildings, and equipment, not

land.

 Depreciable because the revenue-producing ability of asset

will decline over the asset’s useful life.

10-15 LO 2
 Factors in Computing Depreciation

Illustration 10-6
Three factors in computing
Helpful Hint
depreciation
Depreciation expense is reported on the
income statement. Accumulated
depreciation is reported on the balance
Alternative Terminology
sheet as a deduction from plant assets.
Another term sometimes used for
salvage value is residual value.

10-16 LO 2
 Depreciation Methods

Management selects the method it believes best measures an

asset’s contribution to revenue over its useful life.

Examples include:
1. Straight-line method
2. Units-of-activity method
3. Declining-balance method

Illustration 10-8
Use of depreciation methods in
major U.S. companies

10-17 LO 2
 Depreciation Methods

Illustration: Barb’s Florists purchased a small delivery truck on January 1,

2017.
Illustration 10-7
Delivery truck data
Cost $13,000
Expected salvage value $1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000

Required: Compute depreciation using the following.

(a) Straight-Line (b) Units-of-Activity (c) Declining Balance

10-18 LO 2
 Depreciation Methods

STRAIGHT-LINE METHOD
 Expense is same amount for each year.
 Depreciable cost = Cost less salvage value.

Illustration 10-9
Formula for straight-line
method

10-19 LO 2
 Depreciation Methods

Illustration: (Straight-Line)
Illustration 10-10

2017 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600 *

2018 12,000 20 2,400 4,800 8,200
2019 12,000 20 2,400 7,200 5,800
2020 12,000 20 2,400 9,600 3,400
2021 12,000 20 2,400 12,000 1,000

2017 Journal Depreciation expense 2,400

Entry Accumulated depreciation 2,400

10-20 * Book value = Cost - Accumulated depreciation = ($13,000 - $2,400). LO 2

 Depreciation Methods Partial
Year
Illustration: (Straight-Line)
Assume the delivery truck was purchased on April 1, 2017.

10-21 LO 2
 DO IT! 2 Straight-Line Depreciation

On January 1, 2017, Iron Mountain Ski Corporation purchased a new

snow-grooming machine for $50,000. The machine is estimated to have
a 10-year life with a $2,000 salvage value. What journal entry would
Iron Mountain Ski Corporation make at December 31, 2017, if it uses
the straight-line method of depreciation?

Solution

Depreciation expense 4,800

Accumulated depreciation 4,800

($50,000 - $2,000) ÷ 10 = $4,800

10-22 LO 2
 Depreciation Methods

UNITS-OF-ACTIVITY METHOD
 Companies estimate total units of activity to calculate
depreciation cost per unit.

 Expense varies based on units of activity.

 Depreciable cost is cost less salvage value.

Alternative Terminology
Another term often used
is the units-of-production
method.

10-23 LO 2
 Depreciation Methods

UNITS-OF-ACTIVITY METHOD

Illustration 10-11
Formula for units-of-activity method

10-24 LO 2
 Depreciation Methods

Illustration: (Units-of-Activity)
Illustration 10-12

2017 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200

2018 30,000 0.12 3,600 5,400 7,600
2019 20,000 0.12 2,400 7,800 5,200
2020 25,000 0.12 3,000 10,800 2,200
2021 10,000 0.12 1,200 12,000 1,000

2017 Depreciation expense 1,800

Journal Entry Accumulated depreciation 1,800

10-25 LO 2
 Depreciation Methods

DECLINING-BALANCE METHOD
 Accelerated method.

 Decreasing annual depreciation expense over the asset’s useful

life.

 Twice the straight-line rate with Double-Declining-Balance.

 Rate applied to book value.

Illustration 10-13

10-26 LO 2
 Depreciation Methods

Illustration: (Declining-Balance)
Illustration 10-14

2017 $13,000 40% $ 5,200 $ 5,200 $ 7,800

2018 7,800 40 3,120 8,320 4,680
2019 4,680 40 1,872 10,192 2,808
2020 2,808 40 1,123 11,315 1,685
2021 1,685 40 685* 12,000 1,000

2017 Depreciation expense 5,200

Journal Entry Accumulated depreciation 5,200

10-27 * Computation of $674 ($1,685 x 40%) is adjusted to $685. LO 2

 Depreciation Methods Partial
Year
Illustration: (Declining-Balance)

10-28 LO 2
 Depreciation Methods
Illustration 10-15

COMPARISON OF
METHODS

Illustration 10-16

Helpful Hint
Under any method,
depreciation stops when
the asset’s book value
equals expected salvage
value.

10-29 LO 2
 Depreciation and Income Taxes

IRS does not require taxpayer to use the same depreciation method
on the tax return that is used in preparing financial statements.

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

depreciation method called the Modified Accelerated Cost Recovery
System (MACRS).

MACRS is NOT acceptable under GAAP.

10-30 LO 2
 Revising Periodic Depreciation

 Accounted for in the period of change and future

periods (Change in Estimate).

 No change in depreciation reported for prior years.

 Not considered an error.

Helpful Hint
Use a step-by-step
approach: (1) determine
new depreciable cost;
(2) divide by remaining
useful life.

10-31 LO 2
 Revising Periodic Depreciation

Illustration: Arcadia HS, purchased equipment for $510,000 which

was estimated to have a useful life of 10 years with a salvage value of
$10,000 at the end of that time. Depreciation has been recorded for
7 years on a straight-line basis. In 2015 (year 8), it is determined that
the total estimated life should be 15 years with a salvage value of
$5,000 at the end of that time.

Questions:
 What is the journal entry to correct the
No Entry
prior years’ depreciation? Required
 Calculate the depreciation expense for
2015.

10-32 LO 2
 Revising Depreciation After 7 years

Equipment cost $510,000 First, establish NBV at

Salvage value - 10,000 date of change in
Depreciable base 500,000 estimate.
Useful life (original) ÷ 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2014)

Plant Assets:
Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

10-33 LO 2
 Revising Depreciation After 7 years

Net book value $160,000 Depreciation Expense

Salvage value (new) - 5,000 calculation for 2015.
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation $ 19,375

Journal entry for 2015 and future years.

Depreciation Expense 19,375

Accumulated Depreciation 19,375

10-34 LO 2
 LEARNING Explain how to account for the disposal of
3
OBJECTIVE plant assets.

Companies dispose of plant assets in three ways —Retirement, Sale,

or Exchange (appendix). Illustration 10-18
Methods of plant
asset disposal

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and (2)

crediting the asset account.

10-35 LO 3
 Retirement of Plant Assets

 No cash is received.

 Decrease (credit) the asset account for the original cost in

the asset.

 Decrease (debit) Accumulated Depreciation for the full

amount of depreciation taken over the life of the asset.

10-36 LO 3
 Retirement of Plant Assets

Illustration: Hobart Enterprises retires its computer printers,

which cost $32,000. The accumulated depreciation on these
printers is $32,000. Prepare the entry to record this retirement.

Accumulated Depreciation 32,000

Equipment 32,000

Question: What happens if a fully depreciated plant asset is still

useful to the company?
Company continues to use the asset with no additional depreciation
being recorded as the asset is fully depreciated.
10-37 LO 3
 Retirement of Plant Assets

Illustration: Sunset Company discards delivery equipment that

cost $18,000 and has accumulated depreciation of $14,000. The
journal entry is?

Accumulated Depreciation 14,000

Loss on Disposal of Plant Assets 4,000
Equipment 18,000

Companies report a loss on disposal in the “Other expenses and

losses” section of the income statement.

10-38 LO 3
 Sale of Plant Assets

Compare the book value of the asset with the proceeds received
from the sale.
 If proceeds exceed the book value, a gain on disposal occurs.

 If proceeds are less than the book value, a loss on disposal

occurs.

10-39 LO 3
 Sale of Plant Assets

GAIN ON SALE
Illustration: On July 1, 2017, Wright Company sells office furniture
for $16,000 cash. The office furniture originally cost $60,000. As of
January 1, 2017, it had accumulated depreciation of $41,000.
Depreciation for the first six months of 2017 is $8,000. Prepare the
journal entry to record depreciation expense up to the date of sale.

July 1 Depreciation Expense 8,000

Accumulated Depreciation 8,000

10-40 LO 3
 GAIN ON SALE Illustration 10-19
Computation of gain
on disposal

Illustration: Wright records the sale as follows.

July 1 Cash 16,000

Accumulated Depreciation 49,000
Equipment 60,000
Gain on Disposal of Plant Assets 5,000

10-41 LO 3
 LOSS ON SALE

Illustration: Assume that instead of selling the office furniture for

$16,000, Wright sells it for $9,000.
Illustration 10-20
Computation of loss
on disposal

July 1 Cash 9,000

Accumulated Depreciation 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000
10-42 LO 3
 DO IT! 3 Plant Asset Disposal

Overland Trucking has an old truck that cost $30,000, and it has
accumulated depreciation of $16,000 on this truck. Overland has
decided to sell the truck. (a) What entry would Overland Trucking make
to record the sale of the truck for $17,000 cash?

Solution

Cash 17,000
Accumulated Depreciation—Equipment 16,000
Equipment 30,000
Gain on Disposal of Plant Assets 3,000
[$17,000 - ($30,000 - $16,000)]

10-43 LO 3
 DO IT! 3 Plant Asset Disposal

Overland Trucking has an old truck that cost $30,000, and it has
accumulated depreciation of $16,000 on this truck. Overland has
decided to sell the truck. (b) What entry would Overland Trucking make
to record the sale of the truck for $10,000 cash?

Solution

Cash 10,000
Accumulated Depreciation—Equipment 16,000
Loss on Disposal of Plant Assets 4,000
Equipment 30,000
[$10,000 - ($30,000 - $16,000)]

10-44 LO 3
 LEARNING Describe how to account for natural resources
4
OBJECTIVE and intangible assets.

Natural resources consist of standing timber and underground

deposits of oil, gas, and minerals.

Distinguishing characteristics:
 Physically extracted in operations.

 Replaceable only by an act of nature.

Cost is the price needed to acquire the resource and prepare it for
its intended use.

10-45 LO 4
 Depletion

The allocation of the cost to expense in a rational and systematic

manner over the resource’s useful life.
 Companies generally use units-of-activity method.
 Depletion generally is a function of the units extracted.

Illustration 10-21
Formula to compute depletion expense

10-46 LO 4
 Depletion

Illustration: Lane Coal Company invests $5 million in a mine

estimated to have 1 million tons of coal and no salvage value.

Illustration 10-21
Formula to compute depletion expense

10-47 LO 4
 Depletion

Illustration: Lane Coal Company invests $5 million in a mine

estimated to have 1 million tons of coal and no salvage value. In the
first year, Lane extracts and sells 250,000 tons of coal. Lane computes
the depletion expense as follows:

$5,000,000 ÷ 1,000,000 = $5.00 depletion cost per ton

$5.00 x 250,000 = $1,250,000 annual depletion expense

Journal entry:
Inventory (coal) 1,250,000
Accumulated Depletion 1,250,000

10-48 LO 4
 Intangible Assets

Intangible assets are rights, privileges, and competitive

advantages that result from ownership of long-lived assets that
do not possess physical substance.

Limited life or indefinite life.

Common types of intangibles:

 Patents  Trademarks and Trade Names

 Copyrights  Franchises
 Goodwill

10-49 LO 4
 Accounting for Intangible Assets

Limited-Life Intangibles:
Helpful Hint
 Amortize to expense. Amortization is to intangibles
what depreciation is to plant
assets and depletion is to
 Credit asset account. natural resources.

Indefinite-Life Intangibles:
 No foreseeable limit on time the asset is expected to provide
cash flows.
 No amortization.

10-50 LO 4
 Accounting for Intangible Assets

PATENTS
 Exclusive right to manufacture, sell, or otherwise control an
invention for a period of 20 years from the date of the grant.

 Capitalize costs of purchasing a patent and amortize over its

20-year life or its useful life, whichever is shorter.

 Expense any R&D costs in developing a patent.

 Legal fees incurred successfully defending a patent are

capitalized to the Patent account.

10-51 LO 4
 Accounting for Intangible Assets

Illustration: National Labs purchases a patent at a cost of $60,000.

National estimates the useful life of the patent to be eight years.
Prepare the journal entry to record the annual amortization expense.

Cost $60,000
Useful life ÷ 8
Annual expense $ 7,500

Amortization Expense 7,500

Patents 7,500

10-52 LO 4
 Accounting for Intangible Assets

COPYRIGHTS
 Give the owner the exclusive right to reproduce and sell an
artistic or published work.

 Extend for the life of the creator plus 70 years.

 Cost of the copyright is the cost of acquiring and defending it.

 Amortized to expense over useful life.

10-53 LO 4
 Accounting for Intangible Assets

TRADEMARKS AND TRADE NAMES

 Word, phrase, jingle, or symbol that identifies a particular
enterprise or product.
► Wheaties, Monopoly, Kleenex, Coca-Cola, Big Mac, and
Jeep.

 Legal protection for indefinite number of 20 year renewal

periods.

 Capitalize acquisition costs.

 No amortization.

10-54 LO 4
 Accounting for Intangible Assets

FRANCHISES
 Contractual arrangement between a franchisor and a
franchisee.
► Shell, Subway, and Rent-A-Wreck are franchises.

 Franchise (or license) with a limited life should be amortized

to expense over its useful life.

 If the life is indefinite, the cost is not amortized.

10-55 LO 4
 Accounting for Intangible Assets

GOODWILL
 Includes exceptional management, desirable location, good
customer relations, skilled employees, high-quality products,
etc.

 Only recorded when an entire business is purchased.

 Goodwill is recorded as the excess of purchase price over

the fair value of the net assets acquired.

 Not amortized.

10-56 LO 4
 Research and Development Costs

Expenditures that may lead to

 patents, All R & D costs are
expensed when
 copyrights, incurred.
 new processes, and

 new products. Helpful Hint

Research and development (R&D)
costs are not intangible assets. But
because they may lead to patents
and copyrights, we discuss them
in this section.

10-57 LO 4
 DO IT! 4 Classification Concepts

Illustration: Identify the term most directly associated with each

statement.
1. The allocation of the cost of a natural resource
to expense in a rational and systematic manner. Depletion
2. Rights, privileges, and competitive advantages
that result from the ownership of long-lived
Intangible
assets that do not possess physical substance. Assets
3. An exclusive right granted by the federal
government to reproduce and sell an artistic or
published work.
Copyrights

10-58 LO 4
 DO IT! 4 Classification Concepts

Illustration: Identify the term most directly associated with each

statement.
4. A right to sell certain products or services or to
use certain trademarks or trade names within a Franchise
designated geographic area.
5. Costs incurred by a company that often lead to
patents or new products. These costs must be Research and
expensed as incurred. Development
Costs

10-59 LO 4
 LEARNING Discuss how plant assets, natural resources, and
OBJECTIVE
5 intangible assets are reported and analyzed.

10-60 Illustration 10-22 LO 5

 Presentation

Illustration 10-22

Illustration 10-23
Owens-Illinois’ presentation of
property, plant, and equipment,
and intangible assets

10-61 LO 5
 Analysis

Illustration: P&G’s net sales for 2013 were $84,167 million. Its total
ending assets were $139,263 million, and beginning assets were
$132,244 million. Illustration 10-24
Asset turnover formula and computation

Each dollar invested in assets produced $0.62 in sales. If a company is

using its assets efficiently, each dollar of assets will create a high
amount of sales.
10-62 LO 5
 DO IT! 5 Asset Turnover

Paramour Company reported net income of $180,000, net sales of

$420,000, and had total assets of $460,000 on January 1, 2017, and
total assets on December 31, 2017, of $540,000 billion. Determine
Paramour’s asset turnover for 2017.

Solution

The asset turnover for Paramour Company is computed as follows.

Net Sales ÷ Average Total Assets = Asset Turnover

$420,000 ÷ $460,000 + $540,000 = .84

2

10-63 LO 5