PLANT ASSETS, NATURAL

RESOURCES, AND INTANGIBLES

Chapter 10

2009 The McGraw-Hill

Companies, Inc.,

C1

PLANT ASSETS
Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

McGraw-Hill/Irwin

Slide 2

C1

PLANT ASSETS
Decli
ne in
asse
over
its us t value
eful l
ife

Acquisition
Acquisition
1.
1. Compute
Compute cost.
cost.
McGraw-Hill/Irwin

2.
2.
3.
3.

Use
Use
Allocate
Allocate cost
cost to
to periods
periods
benefited.
benefited.
Account
Account for
for subsequent
subsequent
expenditures.
expenditures.

Disposal
Disposal
4.
4. Record
Record disposal.
disposal.

Slide 3

P1

COST DETERMINATION
Purchase
price

Acquisiti
on
Cost

All expenditures
needed to
prepare the
asset for its
intended use

Acquisition cost excludes

financing charges and
cash discounts.
McGraw-Hill/Irwin

Slide 4

P1

LAND
Title insurance premiums
Purchase
price

Delinquent
taxes

Real estate
commissions

Surveying
fees
Title search and transfer fees

Land is not depreciable.

McGraw-Hill/Irwin

Slide 5

P1

LAND IMPROVEMENTS
Parking lots, driveways, fences, walks,
shrubs, and lighting systems.
Depreciate
over useful
life of
improvement
s.
McGraw-Hill/Irwin

Slide 6

P1

BUILDINGS
Cost of purchase or
construction

Title fees

Brokerage
fees

Attorney fees

Taxes
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Slide 7

P1

MACHINERY AND EQUIPMENT

Purchase
price

Taxes

Transportation
charges
Installing,
assembling, and
testing
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Insurance while
in transit
Slide 8

P1

LUMP-SUM ASSET PURCHASE

The total cost of a combined purchase of land and
building is separated on the basis of their relative fair
market values.
Oakley paid $90,000 cash to acquire a group of items
consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:

McGraw-Hill/Irwin

Slide 9

C2

DEPRECIATION
Depreciation is the process of allocating the
cost of a plant asset to expense in the
accounting periods benefiting from its use.
Balance Sheet

Acquisition
Cost
(Unused)

McGraw-Hill/Irwin

Income Statement
Cost
Allocation

Expense
(Used)

Slide 10

FACTORS IN COMPUTING
DEPRECIATION

C2

The calculation of depreciation requires three

amounts for each asset:

1. Cost
2.

Salvage Value

3.

Useful Life

McGraw-Hill/Irwin

Slide 11

P2

DEPRECIATION METHODS
1.

Straight-line

2.

Units-of-production

3.

Declining-balance
Asset we will
depreciate

$
10,000

McGraw-Hill/Irwin

Cost
Salvage
value
1,000
Depreciable $
cost
9,000

Slide 12

P2

STRAIGHT-LINE METHOD
Depreciation
Expense for Period
$
10,000

Cost
Salvage value

Cost - Salvage Value

Useful life
$10,000 - $1,000
= $1,800/year
5 years

1,000
$

Depreciable cost
Useful life
Accounting periods
Units inspected
McGraw-Hill/Irwin

9,000

5 years
36,000
units
Slide 13

P2

Balance Sheet
Presentation
$
10,
Machinery 000
Less:
accumulate
$
McGraw-Hill/Irwin

Slide 14

P2

UNITS-OF-PRODUCTION METHOD
Step 1:
Depreciation
Per Unit

Cost - Salvage Value

Total Units of Production

Step 2:
Depreciatio
n
Expense

McGraw-Hill/Irwin

Depreciatio
n
Per Unit

Number of Units
Produced

in the Period

Slide 15

P2

UNITS-OF-PRODUCTION METHOD
$
10,000

Cost
Salvage value

Step 1: cost
Depreciable
Useful Depreciation
life

Per Unit
Accounting
periods

1,000

Assume that 7,000 units were inspected

during 2009. Depreciation would be
calculated as follows:

$
9,000

Cost - Salvage Value

Total
Units of Production
5
years

$9,000
36,000

= $025/unit

36,000

Stepinspected
2:
Units
units
Number of Units
Depreciation
Depreciation
= $025 7,000 = $1,750
Produced

=
Expense
Per Unit
in the Period

McGraw-Hill/Irwin

Slide 16

P2

DOUBLE-DECLINING-BALANCE
METHOD
Step 1:
Straight-line
rate

= 100 % Useful life = 100% 5 = 20%

Step 2:
Double-decliningbalance rate

Step 3:
Depreciation
expense

McGraw-Hill/Irwin

= 2 Straight-line rate = 2 20% = 40%

Double-decliningBeginning period

balance rate
book value
40% $10,000 = $4,000 for 2009
Slide 17

C2

DOUBLE-DECLINING-BALANCE
METHOD

Depreciation
for the Period
Dep Dep
Beg reci reci
inni atio atio
ng n
n
Boo
k Exp Exp
Ye Val ens ens
ar ue e
e

End of
Period
Acc
umu
late Bo
d ok
Dep
reci
atio Val
n ue
$1
0,0
00

Initial
cost
$10
20 ,00
$4,0 $4,0 6,0
09
0 40% 00 00 00
20
6,0
2,40 6,40 3,6
McGraw-Hill/Irwin

Slide 18

A1

COMPARING DEPRECIATION METHODS

McGraw-Hill/Irwin

Slide 19

A1

DEPRECIATION FOR TAX REPORTING

Most corporations use the Modified
Accelerated Cost Recovery System
(MACRS) for tax purposes.
MACRS depreciation provides for rapid
write-off of an assets cost in order to
stimulate new investment.

McGraw-Hill/Irwin

Slide 20

C3

PARTIAL-YEAR DEPRECIATION
When
When aa plant
plant asset
asset is
is acquired
acquired during
during the
the year,
year,
depreciation
depreciation is
is calculated
calculated for
for the
the fraction
fraction of
of the
the year
year the
the
asset
asset is
is owned.
owned.

Cost

$
10,000

Salvage value

1,000
$

Depreciable cost
Useful life
Depreciation
==
Depreciation
Accounting periods
Depreciation
Depreciation ==
Units inspected

McGraw-Hill/Irwin

Assume our machinery was purchased

on October 1, 2009. Lets calculate
depreciation expense for 2009,
assuming we use straight-line
depreciation.

9,000

($10,000
($10,000 -- $1,000)
$1,000) 55 == $1,800
$1,800 for
for all
all 2009
2009
5 years
$1,800
= $450
$1,800 33//12
12 = $450
36,000
units

Slide 21

C3

CHANGE IN ESTIMATES FOR

DEPRECIATION
Predicted
salvage
value

Predicted
useful life

So depreciation
is an estimate.
Over the life of an asset, new information may
come to light that indicates the original estimates
were inaccurate.
McGraw-Hill/Irwin

Slide 22

C3

CHANGE IN ESTIMATES FOR

DEPRECIATION
Lets return to our machinery and assume that at the
beginning of the assets third year, its book value is $6,400
($10,000 cost less $3,600 accumulated depreciation using
straight-line depreciation). At that time, it is determined that
the machinery will have a remaining useful life of 4 years
(instead of the previous estimate of 3 years), and the
estimated salvage value will change from $1,000 to $400.
Book value at
date of change

Salvage value at
date of change

Remaining useful life

at date of change
McGraw-Hill/Irwin

$6,400 $400
= $1,500/year
4 years

Slide 23

C3

REPORTING DEPRECIATION
Dale Jarrett
Racing
Adventure
Office
furniture
$
and
45,
equipment 386
Shop and
123
track
,37
equipment 8
McGraw-Hill/Irwin

Slide 24

P3

ADDITIONAL EXPENDITURES

IfIf the
the amounts
amounts involved
involved are
are not
not material,
material,
most
most companies
companies expense
expense the
the item.
item.
McGraw-Hill/Irwin

Slide 25

P3

McGraw-Hill/Irwin

REVENUE AND CAPITAL

EXPENDITURES

Slide 26

P4

DISPOSALS OF PLANT ASSETS

Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
McGraw-Hill/Irwin

Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
Slide 27

P4

DISCARDING PLANT ASSETS

depreciation
If Cash >Update
BV, record
a gain (credit).
to the date of disposal.
If Cash < BV, record a loss (debit).
If CashJournalize
= BV, nodisposal
gain orby:
loss.
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
McGraw-Hill/Irwin

Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
Slide 28

P4

DISCARDING PLANT ASSETS

Equipment costing $8,000, with accumulated depreciation of
$6,000 on December 31st of the previous year was
discarded on July 1st of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero salvage value.
Update depreciation to July 1st:
($8,000 8 years = $1,000 per year year = $500)

McGraw-Hill/Irwin

Slide 29

P4

DISCARDING PLANT ASSETS

Equipment costing $8,000, with accumulated depreciation of
$6,000 on December 31st of the previous year was
discarded on July 1st of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero salvage value.
Record discarding of the equipment:
Accumulated depreciation at July 1st = $6,000 + $500 = $6,500.

McGraw-Hill/Irwin

Slide 30

P4

SELLING PLANT ASSETS

On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31 st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $2,500 cash.
Update depreciation to March 31st:
($4,000 year = $1,000)

Calculate Book Value

McGraw-Hill/Irwin

Slide 31

P3

SELLING PLANT ASSETS

If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Next, we calculate the gain or loss on the sale:

Finally, we record the sale:

McGraw-Hill/Irwin

Slide 32

P5

NATURAL RESOURCES
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.

Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.

Examples: oil, coal, gold

McGraw-Hill/Irwin

Slide 33

COST DETERMINATION AND

DEPLETION

P5

Step 1:
Depletion
Per Unit

Cost - Salvage Value

Total Units of Capacity

Step 2:
Depletion
Expense

McGraw-Hill/Irwin

Depletion
Per Unit

Units Extracted
and Sold in
Period

Slide 34

DEPLETION OF NATURAL
RESOURCES

P5

Consider mineral deposits with an estimated 250,000

tons of available ore. It is purchased for $500,000,
and we expect zero salvage value.
Depletion
per Unit

$500,000 - $0
= $2 per ton
250,000 tons

If the company extracts and sells 85,000 tons of ore during the year:
85,000 tons $2 per ton = $170,000 depletion expense

McGraw-Hill/Irwin

Slide 35

PLANT ASSETS USED IN

EXTRACTING

P5

Specialized plant assets may be required to

extract the natural resource.
These assets are recorded in a separate
account and depreciated.

McGraw-Hill/Irwin

Slide 36

P6

INTANGIBLE ASSETS
Often
Often provide
provide
exclusive
exclusive rights
rights
or
or privileges.
privileges.

Noncurrent
Noncurrent assets
assets
without
without physical
physical
substance.
substance.

Intangible
Assets
Useful
Useful life
life is
is
often
often difficult
difficult
to
to determine.
determine.
McGraw-Hill/Irwin

Usually
Usually acquired
acquired
for
for operational
operational
use.
use.
Slide 37

COST DETERMINATION AND

AMORTIZATION

P6

Record at
current cash
equivalent
cost, including
purchase
price, legal
fees, and filing
fees.

McGraw-Hill/Irwin

Patents
Copyrights
Leaseholds
Leasehold

Improvements
Franchises & Licenses
Goodwill
Trademarks & Trade
Names
Slide 38

A2

TOTAL ASSET TURNOVER

Net Sales
Total Asset = Average Total Assets
Turnover

Provides information about a companys

efficiency in using its assets.
Comp
any
Molso
n
Coors

$ in
200 200 200 200
millions 6 5 4 3
$ $ $ $
Net
5,8 5,5 4,3 4,0
sales
45 07 06 00

Average
total
11, 8,2 4,5 4,3

assets 701 28 51 92
Total
asset
McGraw-Hill/Irwin
turnove 0.5 0.6 0.9 0.9

Slide 39

END OF CHAPTER 10

McGraw-Hill/Irwin

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