Chapter

9
PLANT AND
INTANGIBLE ASSETS
 Plant Assets

Long-lived assets acquired for use in

business operations.
Similar to long-term prepaid expenses
Date Description Debit Credit

As years pass, and the services are

The cost of plant assets is the advance used, the cost is transferred to
purchase of services. depreciation expense.
 Major Categories of Plant Assets

Tangible Plant Intangible Natural

Assets Assets Resources

Long-term Noncurrent assets Sites acquired for

assets having with no physical extracting valuable
physical substance. substance. resources.

Land, buildings, Patents, copyrights, Oil reserves,

equipment, trademarks, timber, other
furniture, fixtures. franchises, goodwill. minerals.
 Accountable Events

Acquisition.
Allocation of the acquisition cost
to expense over the asset’s useful
life (depreciation).
Sale or disposal.
Acquisition of Plant Assets
Asset price

Cost = +
Reasonable and necessary costs
...

. . . for getting the

. . . for getting the
asset to the desired
asset ready for use.
location.

Ex. Sales Tax, Delivery Costs and Installation Costs

 Determining Cost
On May 4, Heat Co., a stove maker, buys a new
machine from Supply Co. The new machine has a
price of $52,000. Sales tax is 8%.
Heat Co. pays $500 shipping cost to get the machine
to its plant. 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
List price $ 52,000
Sales tax ($52,000 × 8%) 4,160
Transportation cost 500
Set-up 1,300
Testing 4,000
Total cost to Heat Co. $ 61,960

Date Description Debit Credit

May 4 Machine 61,960
Cash 61,960
 Special Considerations

Cost includes real estate commissions,

Land escrow fees, legal fees, clearing and
grading the property.

Land Improvements to land such as

driveways, fences, and landscaping are
Improvements recorded separately.
Special Considerations

Repairs made prior to the building being

Buildings put in use are considered part of the
building’s cost.

Related interest, insurance, and

Equipment property taxes are treated as EXPENSES
of the current period.
Special Considerations

Allocation of a Lump-Sum Purchase

The total cost must

be allocated to The allocation is
separate accounts for based on the relative
I think I’ll buy the each asset. Fair Market Value of
whole thing; building, each asset purchased.
land, and contents.
Capital Expenditures and Revenue
Expenditures

Capital Revenue
Expenditure Expenditure

Any material expenditure Expenditure for

that will benefit several ordinary repairs
accounting periods. and maintenance.

To capitalize an expenditure To expense an expenditure

means to charge it to an means to charge it to an
asset account. expense account.
 Depreciation
The allocation of the cost of a plant asset to expense in the periods in which services
are received from the asset.

Balance Sheet
Cost of plant
Assets:
assets
Plant and
equipment

as the services are

Income Statement received

Revenues:
Expenses:
Depreciation
 Depreciation
Book Value
•Cost – Accumulated Depreciation
Depreciation
•Contra-asset
•Represents the portion of an asset’s cost
that has already
been allocated to expense.
Causes of Depreciation
•Physical deterioration
•Obsolescence
 Straight-Line Depreciation

Depreciation Cost - Residual Value

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

On January 1, 2007, Bass Co. buys new equipment. Bass

pays a total of $24,000 for the equipment. The equipment
has an estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2007 using the straight-line
method.

Cost – Residual Value $ 24,000 – $ 3,000

=
Years of Useful Life 5
= $ 4,200 per year
 Straight-Line Depreciation

Bass Co. will record $4,200 depreciation each year for five years. Total depreciation
over the estimated useful life of the equipment is:

Depreciation Accumulated Accumulated Undepreciated

Expense Depreciation Depreciation Balance
Year (debit) (credit) Balance (book value)
$ 24,000
2007 $ 4,200 $ 4,200 $ 4,200 19,800
2008 4,200 4,200 8,400 15,600
2009 4,200 4,200 12,600 11,400
2010 4,200 4,200 16,800 7,200
2011 4,200 4,200 21,000 3,000
$ 21,000 $ 21,000 Salvage Value
 Depreciation for Fractional Periods

When an asset is acquired during the year, depreciation in the

year of acquisition must be prorated.

Fractional Periods
Depreciation is rounded to
the nearest month.
 Depreciation for Fractional Periods
Example: Assume the truck in our first example had been acquired on October1.
The truck would have been used for only 3 months. To determine depreciation
expense for the truck, you would multiply the yearly depreciation by 3/12.

Depreciation expense in the first year: $3,000 x 3/12 = $750

Monthly depreciation: $750 x 1/3 = $250

Half-Year Convention

Half-Year Convention
In the year of acquisition,
record six months of
depreciation. ½
 Half-Year Convention

Using the half-year convention, calculate the straight-

line depreciation on December 31, 2007, for
equipment purchased in 2007. The equipment cost
$75,000, has a useful life of 10 years and an estimated
residual value of $5,000.

Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for a full year
1
Depreciation = $7,000 × /2 = $3,500
 Declining-Balance Method

Depreciation in the early years of an asset’s estimated useful life is higher than in
later years.

Accelerated
Depreciation Remaining
= × Depreciation
Expense Book Value
Rate

The double-declining balance depreciation rate is 200% of the

straight-line depreciation rate of (1÷Useful Life).
 Declining-Balance Method

On January 1, 2007, Bass Co. buys a new delivery truck. Bass Co. pays $24,000 for the
truck. The truck has an estimated residual value of $3,000 and an estimated useful life
of 5 years.
Compute depreciation for 2007 using the double-declining
balance method.

2007 Depr. Remaining Accelerated

= ×
Expense Book Value Depreciation Rate
= $ 24,000 × 2 × 1/5
= $ 24,000 × 40%
= $ 9,600
 Declining-Balance Method

Compute depreciation for the rest of the

Total depreciation over the estimated useful life of an asset is the same using either the
straight-line method or the declining-balance method.
truck’s estimated useful life.

Depr. Accumulated Book

Year Computation Expense Depreciation Value
2007 $ 24,000 × 40% $ 9,600 $ 9,600 $ 14,400
2008 $ 14,400 × 40% $ 5,760 $ 15,360 $ 8,640
2009 $ 8,640 × 40% $ 3,456 $ 18,816 $ 5,184
2010 $ 5,184 × 40% $ 2,074 $ 20,890 $ 3,110
2011 Plug year # 5 $ 110 $ 21,000 $ 3,000
Total Depreciation $ 21,000
 150% declining-balance method:

• Depreciation expense is 150% of the depreciation rate (1/useful life

of asset)

year computation Depreciation Accumulated Book value

expense depreciation
2007 $24,000 x 30% 7200 7200 16800

2008 $16,800 x 30% 5040 12240 11760

2009 $11,760 x 30% 3528 15768 8232

2010 ($8,232–3000)x1/2 2616 18384 5616

2011 $5616-3000 2616 21000 3000

Total depreciation $21000

 Other Depreciation Methods
Units-of-Output Method
Under this method, depreciation is based on some measure of output other than
time.

Cost – Residual Value Depreciation cost

=
Estimated Units of Output per unit of output
 Other Depreciation Methods
Units-of-Output Method
Ex. Consider the delivery tuck, which cost $17,000 and has an estimated salvage
value of $2,000. Assume the truck will be sold or traded in after 100,000 miles.
To depreciate this asset, you would determine the depreciation rate per mile and
then calculate based upon mileage.

Cost – Residual Value Depreciation cost

=
Estimated Units of Output per unit of output

$17,000-$2,000 .15 per mile

=
100,000 miles
 Depreciation Methods in Use:
A Survey

A survey of 600 Publicly Owned Corporations

Straight-line 579

Declining-balance 22

Sum-of-the-years'-digits 5

Accelerated methods (not specified) 44

Units-of-output 32

Other 9
 Financial Statement Disclosures
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.
Impairment of Plant Assets

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

Journalize disposal by:

Recording cash Recording a

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

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
Disposal of Plant and Equipment

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.

Recording cash Recording a

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

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
 Disposal of Plant and Equipment

On September 30, 2007, Evans Company sells a machine

that originally cost $100,000 for $60,000 cash. The
machine was placed in service on January 1, 2002. 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

The amount of depreciation recorded on

September 30, 2007,
to bring depreciation up to date is:

a. $8,000. Annual Depreciation:

($100,000 - $20,000) ÷ 10 Yrs. = $8,000
b. $6,000.
Depreciation to Sept. 30:
c. $4,000. 9/12 × $8,000 = $6,000

d. $2,000.
Disposal of Plant and Equipment

After updating the depreciation, the

machine’s book value on September 30,
2007, is:

a. $54,000. Cost $ 100,000

Accumulated Depreciation:
b. $46,000.
(5 yrs. × $8,000) + $6,000 = 46,000
c. $40,000. Book Value $ 54,000
d. $60,000.
Disposal of Plant and Equipment

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

Prepare the journal entry to record the

sale.

Date Description Debit Credit

Sept. 30 Cash 60,000
Accumulated Depreciation 46,000
Gain on Sale 6,000
Machinery 100,000
Trading in Used Assets for New Ones

On May 30, 2007, Essex Company exchanges 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.
Trading in Used Assets for New Ones

The exchange resulted in a:

Cost $ 40,000
a. gain of $6,000. Accum. Depr. 30,000
b. loss of $6,000. Book Value $ 10,000
Fair Value 4,000
c. loss of $4,000. Loss $ 6,000

d. gain of $4,000.
Prepare a journal entry
to record the exchange.
Trading in Used Assets for New Ones

Prepare the journal entry to record the

trade.

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
 • (a) Gomez Company retires its
delivery equipment, which cost
$41,000. Accumulated
Scrapping an depreciation is $39,000 on this
Asset delivery equipment. No salvage
value is received.
Trading in Used Assets for New Ones

Prepare the journal entry to record the

scrapping.

Accumulated Depreciation 39,000

Equipment 41,000
Loss on Disposal 2,000
 • Definition: Intangible assets are
the assets that are used in the
operation of the business but
Intangible that have no physical substance
assets: and are non current.
• Method of valuation: cost
Types of intangible assets

Goodwill Patents

Trademarks Franchises

Copyrights
Qualification for being intangible asset

EVIDENCE FOR FUTURE SPECIFIC LIFE TIME

BENEFITS
Amortization

• Systematic write-off of cost

of an intangible asset to
expense
• Recorded same as
depreciation
Goodwill

Definition: Positive attributes:

the established reputation of a business Favorable reputation
regarded as a quantifiable asset and Positive market share
calculated as part of its value when it is
sold. Positive advertising image

Present value of future cashflows Superior management

Reputation for high quality and loyal
employees
Manufacturing and other operating
efficiency
 A B

Fair market value of $1000000 $1000000

net identifiable assets

Normal rate of return 15% 15%

on net assets

Estimating Normal earnings, ($150000) ($150000)

Goodwill
computed as 15% of
net identifiable assets

Calculating excess earnings

Average actual net 150000 200000

income for past five
years

Earnings in excess of $0 $50000

normal
Determining Goodwill

Estimated value of business as a whole( $200000*6.5) $1300000

Fair market value of net identifiable assets (1000000)

Estimated value of goodwill $300000

Patents
• A patent is a form of intellectual
property. A patent gives its owner the
right to exclude others from making,
using, selling, and importing an
invention for a limited period of time,
usually twenty years.
 • A name symbol or design
that identifies a product or
Trademarks group of product
Franchises

• A right granted by a company or a

governmental unit to conduct a
certain type of business in a
specific geographical area.
Copyrights

• An exclusive right granted by federal

government to protect the
production and sale of literary or
artistic material for the life of the
creator plus 70 years.
 • The resources that are physically
removed from their natural
environment and are converted
Natural into inventory
resources • Before extraction: property,
plant, and equipment
• After extraction: inventory
 Depletion of natural resources
A. Purchased coal mine in $45 M, contains 10 M tons of
coal, RV: $5 M-------2 M ton extracted
Account title Debit Credit

inventory $8000000

Accumulated depletion $8000000

B. In Balance sheet
Property, plant, & equipment

Mining properties $45000000

Less: accumulated Depletion 80000000 $37000000

Depreciation of building and equipment
closely related to natural resources

Only useful for particular place

Depreciate by unit of output method

Depreciated for the lifetime which one is shorter

(equipment’s or mine’s)
 Reference

https://www.slideshare.net/Ramilay/pla
nt-equipment-depreciation-and- https://www.wikipedia.org/
intangible-assets-41014760