Plant Assets,
Natural Resources,
and Intangibles
Chapter 10
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-1
Learning Objectives
1. Measure the cost of a plant
asset
2. Account for depreciation using
the straight-line, units-ofproduction, and doubledeclining-balance methods
3. Journalize entries for the
disposal of plant assets
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-2
Learning Objectives
4. Account for natural resources
5. Account for intangible assets
6. Use the asset turnover ratio to
evaluate business
performance
7. Journalize entries for the
exchange of plant assets
(Appendix 10A)
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-3
Learning Objective 1
Measure the cost
of a plant asset
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-4
What Are Plant Assets?
Long-lived, tangible assets used in the
operation of the business.
•
•
•
•
•
Land
Buildings
Equipment
Furniture
Automobiles
Cost Principle
The actual cost of a plant
asset is its purchase
price plus all the costs
necessary to get the
asset ready for its
intended use.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-5
The Cost of Land
Includes:
Land is not
• Purchase price
depreciable.
• Brokerage
commissions
• Survey and legal fees
• Delinquent property taxes
• Title transfer fees
• Cost of clearing the land
• Cost of removing old buildings
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-6
The Cost of Land
Does Not Include:
• Fencing
• Paving
• Sprinkler systems
• Lighting
• Signs
These costs are
referred to as
Land
Improvements.
Land
Improvements
ARE depreciated.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-7
The Cost of Land
Smart Touch Learning purchases land on
August 1, 2015, for $50,000 with a note
payable. Other costs related to this transaction
include $4,000 in delinquent property taxes,
$2,000 in transfer taxes, $5,000 to remove an
old building, and a $1,000 survey fee. The
additional costs are paid in cash.
What is the cost of the land on Smart Touch
Learning’s books?
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-8
The Cost of Land
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-9
The Cost of Land
Prepare the journal entry to record the
purchase of the land.
Date
Accounts and Explanation
Debit
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
10-10
The Cost of Land
Prepare the journal entry to record the
purchase of the land.
Date
Accounts and Explanation
Aug. 1 Land
Notes Payable
Cash
To record purchase of land with cash
and note payable.
Debit
62,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
50,000
12,000
10-11
The Cost of Buildings
When a Building is constructed,
the costs include:
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10-12
The Cost of Buildings
When a Building is purchased,
the costs include:
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10-13
The Cost of Machinery and Equipment
and Furniture and Fixtures
The costs include:
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10-14
Lump-Sum Purchases
• Purchasing several
assets for a single
price.
– Sometimes called a
“basket purchase”
• Each asset must be
recorded separately.
• Allocate total cost to
each asset based on
relative market value.
On August 1, Smart
Touch Learning
purchased land and
building with a
$100,000 note. The
land is appraised at
$30,000 and the
building is
appraised at
$90,000.
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10-15
Lump-Sum Purchases
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-16
Lump-Sum Purchases
Asset
Land
Building
Total
Date
Market
Value
$ 30,000
90,000
$ 120,000
% of Total
Value
25%
75%
100%
Total
Purchase
Price
x $ 100,000
x $ 100,000
Accounts and Explanation
Debit
Cost
Assigned to
Each Asset
= $
25,000
= $
75,000
$ 100,000
Credit
Prepare the journal entry.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-17
Lump-Sum Purchases
Asset
Land
Building
Total
Market
Value
$ 30,000
90,000
$ 120,000
% of Total
Value
25%
75%
100%
Total
Purchase
Price
x $ 100,000
x $ 100,000
Aug. 1 Land
Building
Notes Payable
To record purchase of land and
building.
Cost
Assigned to
Each Asset
= $
25,000
= $
75,000
$ 100,000
25,000
75,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
100,000
10-18
Budget Banners pays $200,000 for a bulk purchase
of land, building, and equipment. The land had a
market value of $22,000, the building had a market
value of $187,000, and the equipment had a market
value of $11,000.
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-19
Market
Asset
Value
Land
$ 22,000
Building
187,000
Equipment
11,000
Total
$ 220,000
Date
% of Total
Total Purchase
Cost Assigned
Value
Price
to Each Asset
10%
x $
200,000 = $
20,000
85%
x $
200,000 = $
170,000
5%
x $
200,000 = $
10,000
100%
$
200,000
Accounts and Explanation
Land
Building
Equipment
Cash
To record purchase of land, building
and equipment.
Debit
20,000
170,000
10,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
200,000
10-20
Learning Objective 2
Account for
depreciation using
the straight-line,
units-of-production,
and doubledeclining-balance
methods
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-21
What Is Depreciation?
• Plant assets are recorded as assets
when purchased.
• Depreciation is
Remember, to record
the process of
depreciation, we debit
Depreciation Expense
allocating an
and credit
asset’s cost to
Accumulated
expense over its
Depreciation (a contrauseful life.
asset).
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-22
Factors in Computing Depreciation
The Depreciation computation requires
three main factors:
Estimated
useful life
Capitalized
Cost
The estimated
expected use from an
asset.
Estimated
residual value
The estimated value of
the asset at the end of
its useful life.
Total amount of cost to be allocated.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-23
Depreciation Methods
There are three
common
depreciation
methods:
• Straight-Line
• Units-ofProduction
• DecliningBalance
Smart Touch Learning
purchases a truck on
January 1, 2014
Data Item
Cost of Truck
Est. Residual Value
Depreciable Cost
Amount
$
41,000
1,000
$
40,000
Est. Useful Life - Years
5 years
Est. Useful Life - Units 100,000 miles
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10-24
Straight-Line Method
The most widely
used and most
easily understood
method.
Results in the same
amount of depreciation in
each year of the asset’s
service life.
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10-25
Straight-Line Method
Annual Straight-line
Depreciation
=
=
Residual
Value
Estimated Useful Life in Years
–
Cost
–
$41,000
$1,000
5
= $8,000
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry at
December 31, 2014.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-26
Straight-Line Method
Annual Straight-line
Depreciation
=
=
Residual
Value
Estimated Useful Life in Years
Cost
–
–
$41,000
$1,000
5
= $8,000
Date
Accounts and Explanation
Depreciation Expense - Truck
Accumulated Depreciation - Truck
To record depreciation on truck .
Debit
8,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
8,000
10-27
Units-of-Production Method
• Depreciation is a
function of how
much an asset is
USED, rather than
its age.
• Less predictable
than other methods.
Smart Touch Learning
purchases a truck on
January 1, 2014
Data Item
Cost of Truck
Est. Residual Value
Depreciable Cost
Amount
$
41,000
1,000
$
40,000
Est. Useful Life - Years
5 years
Est. Useful Life - Units 100,000 miles
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-28
Units-of-Production Method
Assuming Smart Touch Learning drives the truck
20,000 miles in the first year, how much
depreciation should be recorded?
Step 1:
Depreciation per
Unit
Compute Depreciation per Unit
=
(
=
=
(
Residual
Value
$41,000 $1,000
$0.40 per mile
Cost
-
) ÷ Useful Life in Units
) ÷
©2014 Pearson Education, Inc. Publishing as Prentice Hall
100,000
miles
10-29
Units-of-Production Method
Assuming Smart Touch Learning drives the truck
20,000 miles in the first year, how much
depreciation should be recorded?
Step 2:
Depreciation
Compute Depreciation for the Period
=
=
=
Depreciation
Current Year
x
per Unit
Usage
$0.40
x
20,000
miles
$8,000 Depr. Exp. - Year 1
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10-30
Double-Declining Balance Method
• An accelerated
method.
• More depreciation
early in an asset’s
life.
• Total depreciation
the same over the
asset’s full life.
Smart Touch Learning
purchases a truck on
January 1, 2014
Data Item
Cost of Truck
Est. Residual Value
Depreciable Cost
Amount
$
41,000
1,000
$
40,000
Est. Useful Life - Years
5 years
Est. Useful Life - Units 100,000 miles
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-31
Double-Declining Balance Method
Multiply an asset’s declining book value
by twice the straight-line depreciation
rate.
DoubleDecliningBalance
Depreciation
= (
Cost
-
Accumulated
Depreciation
) x ( 2 ÷
= ( $ 41,000 $0
) x ( 2 ÷
=
$ 16,400 Depreciation in Year 1
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Useful
Life
)
5 years
)
10-32
Double-Declining Balance Method
Multiply an asset’s declining book value
by twice the straight-line depreciation
rate.
DoubleDecliningBalance
Depreciation
Useful
Life
)
= ( $ 41,000 $0
) x ( 2 ÷
=
$ 16,400 Depreciation in Year 1
5 years
)
= ( $ 41,000 $16,400
) x ( 2 ÷
=
$ 9,840 Depreciation in Year 2
5 years
)
= (
Cost
-
Accumulated
Depreciation
) x ( 2 ÷
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10-33
Learning Objective 3
Journalize entries for
the disposal of plant
assets
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10-34
Discarding Plant Assets
• When an asset is
disposed, sold, or
retired, it must be
removed from the
books.
• All related
Accumulated
Depreciation must also
be removed from the
books.
• Gains/Losses on
disposal are recorded.
STEPS
• Bring depreciation up to
date.
• Remove original cost of
asset and accumulated
depreciation from the
books.
• Record any cash
received.
• Record the difference
between book value and
the cash received as a
gain or loss.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-35
Discarding Plant Assets
Example #1
On July 1, Smart Touch Learning
discards equipment that cost $10,000.
The accumulated depreciation on the
asset is $10,000.
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry at
July 1, 2013.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-36
Discarding Plant Assets
Example #1
On July 1, Smart Touch Learning
discards equipment that cost $10,000.
The accumulated depreciation on the
asset is $10,000.
Date
July 1
Accounts and Explanation
Accumulated Depreciation--Equip.
Equipment
Discarded fully depreciated equip.
Debit
10,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
10,000
10-37
Discarding Plant Assets
Example #2
On July 1, Smart Touch Learning discards
equipment that cost $10,000. As of December
31 the previous year, the accumulated
depreciation on the asset was $8,000. Annual
depreciation per year is $1,000.
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry at
July 1, 2013.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-38
Discarding Plant Assets
Example #2
On July 1, Smart Touch Learning discards
equipment that cost $10,000. As of December
31 the previous year, the accumulated
depreciation on the asset was $8,000. Annual
depreciation per year is $1,000.
Date
Accounts and Explanation
Debit
Credit
First, we have to update the
depreciation.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-39
Discarding Plant Assets
Example #2
On July 1, Smart Touch Learning discards
equipment that cost $10,000. As of December
31 the previous year, the accumulated
depreciation on the asset was $8,000. Annual
depreciation per year is $1,000.
Date
July 1
Accounts and Explanation
Depreciation Expense--Equip.
Accumulated Depreciation--Equip.
To record depreciation.
$1,000 x 6/12 = $500
Debit
500
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
500
10-40
Discarding Plant Assets
Example #2
On July 1, Smart Touch Learning discards
equipment that cost $10,000. As of December
31 the previous year, the accumulated
depreciation on the asset was $8,000. Annual
depreciation per year is $1,000.
Date
Accounts and Explanation
Debit
Credit
Second, record the disposal.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-41
Discarding Plant Assets
Example #2
On July 1, Smart Touch Learning discards
equipment that cost $10,000. As of December
31 the previous year, the accumulated
depreciation on the asset was $8,000. Annual
depreciation per year is $1,000.
Date
July 1
Accounts and Explanation
Accumulated Depreciation--Equip.
Loss on Disposal
Equipment
To record disposal of equipment.
Debit
8,500
1,500
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
10,000
10-42
Discarding Plant Assets
Example #3
On July 1, Smart Touch Learning sells
equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year,
the accumulated depreciation on the asset was
$8,000. Annual depreciation per year is $1,000.
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entries at
July 1, 2013.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-43
Discarding Plant Assets
Example #3
On July 1, Smart Touch Learning sells
equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year,
the accumulated depreciation on the asset was
$8,000. Annual depreciation per year is $1,000.
Date
Accounts and Explanation
Debit
Credit
First, update depreciation.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-44
Discarding Plant Assets
Example #3
On July 1, Smart Touch Learning sells
equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year,
the accumulated depreciation on the asset was
$8,000. Annual depreciation per year is $1,000.
Date
July 1
Accounts and Explanation
Depreciation Expense--Equip.
Accumulated Depreciation--Equip.
To record depreciation.
$1,000 x 6/12 = $500
Debit
500
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
500
10-45
Discarding Plant Assets
Example #3
On July 1, Smart Touch Learning sells
equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year,
the accumulated depreciation on the asset was
$8,000. Annual depreciation per year is $1,000.
Date
Accounts and Explanation
Debit
Credit
Second, record the sale.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-46
Discarding Plant Assets
Example #3
On July 1, Smart Touch Learning sells
equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year,
the accumulated depreciation on the asset was
$8,000. Annual depreciation per year is $1,000.
Date
July 1
Accounts and Explanation
Cash
Accumulated Depreciation--Equip.
Gain on Sale of Equipment
Equipment
To record sale of equipment.
Debit
4,000
8,500
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
2,500
10,000
10-47
Learning Objective 4
Account for
natural resources
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10-48
Natural Resources
• Assets that come
from the earth and
are consumed.
• The value of the
“reserves” that a
company
owns/controls is a
long-term asset.
Includes:
• Iron ore
• Oil
• Natural Gas
• Coal
• Timber
• Diamonds
• Gold and silver
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10-49
Natural Resources
• As the resources are extracted, Depletion
Expense is recorded.
• A contra-asset Accumulated Depletion is
also recorded.
• Steps (similar to Units-of-Production)
1. Compute Depletion per Unit (based on
estimated reserves)
2. Compute Depletion for the period (based on
actual extraction)
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-50
Natural Resources
A company owns oil reserves that cost
$700,000 and is estimated to contain 70,000
barrels of oil. During the year, 3,000 barrels of
oil are extracted.
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry for
Depletion Expense.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-51
Natural Resources
Step 1:
Compute Depletion per Unit
Depletion per Unit
=
=
=
Date
Residual
Value
( $ 700,000 $0
$ 10.00 per barrel
(
Cost
-
Accounts and Explanation
) ÷ Estimated Reserves
) ÷
Debit
70000 barrels
Credit
Step 1: Compute Depletion per
Unit.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-52
Natural Resources
Step 2:
Depletion
Compute Depletion for the Period
=
=
=
Date
Depletion per
Current Year
x
Unit
Extraction
$
10.00 x
3,000
barrels
$ 30,000.00 Depletion Expense
Accounts and Explanation
Debit
Credit
Step 2: Compute Depletion for
the Period.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-53
Natural Resources
Step 2:
Depletion
Compute Depletion for the Period
=
=
=
Date
Depletion per
Current Year
x
Unit
Extraction
$
10.00 x
3,000
barrels
$ 30,000.00 Depletion Expense
Accounts and Explanation
Debit
Credit
Prepare the journal entry for
Depletion Expense.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-54
Natural Resources
Step 2:
Compute Depletion for the Period
Depletion
=
=
=
Date
Depletion per
Current Year
x
Unit
Extraction
$
10.00 x
3,000
barrels
$ 30,000.00 Depletion Expense
Accounts and Explanation
Depletion Expense--Oil
Accumulated Depletion--Oil
To record depletion.
Debit
30,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
30,000
10-55
Amplify Petroleum holds reserves of oil
representing an estimated 100 million barrels. The
cost of those reserves was $80,000,000. If Amplify
Petroleum extracts and sells 20 million barrels in
2015, what is the depletion for the year?
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-56
Amplify Petroleum holds reserves of oil
representing an estimated 100 million barrels. The
cost of those reserves was $80,000,000. If Amplify
Petroleum extracts and sells 20 million barrels in
2015, what is the depletion for the year?
Date
Accounts and Explanation
Dec. 31 Depletion Expense--Oil
Accumulated Depletion--Oil
To record depletion for the year.
20,000,000 barrels x $.80 per barrel
Debit
16,000,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
16,000,000
10-57
Learning Objective 5
Account for
Intangible Assets
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10-58
Intangible Assets
• Assets that have no
physical substance.
• Usual convey rights
to the owner.
• Recorded at cost.
• Research and
development costs
are NOT included.
Includes
• Patents
• Copyrights
• Trademarks
• Franchise
Agreements
• Licenses
• Goodwill
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-59
Intangible Assets
• As intangible assets “expire,” they must be
“amortized.”
• Amortization expense is recorded:
– Based on the straight-line method
– Use the shorter of the useful life or the legal
life
– Only for intangible assets with definite life
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-60
Intangible Assets
• There is no contra-asset account used
with the amortization process.
– The intangible asset is credited directly.
– Each year the asset’s book value will
decrease by the amount of the amortization.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-61
On January 1, Orange Manufacturing paid
$40,000 for a patent. It has a legal life of 20
years. The patent is expected to give legal
protection for 8 years.
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-62
On January 1, Orange Manufacturing paid
$40,000 for a patent. It has a legal life of 20
years. The patent is expected to give legal
protection for 8 years.
Date
Accounts and Explanation
Dec. 31 Amortization Expense--Patent
Patent
To record amortization of patent.
Debit
5,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
5,000
10-63
Learning Objective 6
Use the asset
turnover ratio to
evaluate business
performance
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-64
Asset Turnover Ratio
• Used to measure how well a company is
using its assets to generate sales revenue.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-65
Learning Objective 7
Journalize entries
for the exchange of
plant assets
(Appendix 10A)
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-66
Exchange Plant Assets
• An exchange includes aspects of a sale
and a disposal.
• Special accounting is required if the
exchange transaction has commercial
substance.
– i.e.; the future cash flows will change as a
result of the exchange.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-67
Exchange Plant Assets
If an exchange lacks An auto dealer trades a
blue sedan to another
commercial
substance, the new auto dealer for a similar
asset is recorded at sedan in black to satisfy
a customer’s preference.
the book value of the
asset that is given
There is no commercial
up, plus/minus any substance related to this
transaction. The future
cash exchanged as
cash flows do not
part of the
change.
transaction.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-68
Exchange Plant Assets
If an exchange has
commercial
substance, the new
asset is recorded at
its market value on
the date of the
exchange.
Gains or losses may
have to be recorded.
On December 31, Smart
Touch Learning exchanges
used equipment and $2,000
cash for new equipment.
The old equipment has a cost
of $10,000 and accumulated
depreciation of $9,000.
The new equipment has a
market value of $8,000.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-69
Exchange Plant Assets
1.
2.
3.
4.
Take the old equipment off the books.
Record the cash payment.
Record the new asset.
Record any gain or loss.
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-70
Exchange Plant Assets
1.
2.
3.
4.
Take the old equipment off the books.
Record the cash payment.
Record the new asset.
Record any gain or loss.
Date
Accounts and Explanation
Dec. 31 Equipment (new)
Accumulated Depreciation--Equip.
Equipment (old)
Cash
Gain on Exchange
Exchanged old equipment for new.
Debit
8,000
9,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
10,000
2,000
5,000
10-71
Area Salvage Company purchased equipment
for $10,000. Over the asset’s life, they recorded
accumulated depreciation of $8,000. They
exchange the old equipment and $4,000 for
new equipment with a market value of $5,000.
Date
Accounts and Explanation
Debit
Credit
Prepare the journal entry.
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-72
Area Salvage Company purchased equipment
for $10,000. Over the asset’s life, they recorded
accumulated depreciation of $8,000. They
exchange the old equipment and $4,000 for
new equipment with a market value of $5,000.
Date
Accounts and Explanation
Equipment (new)
Accumulated Depreciation--Equip.
Loss on Exchange
Equipment (old)
Cash
To exchange old equipment for new.
Debit
5,000
8,000
1,000
©2014 Pearson Education, Inc. Publishing as Prentice Hall
Credit
10,000
4,000
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End of Chapter 10
©2014 Pearson Education, Inc. Publishing as Prentice Hall
10-74