9-1

Chapter

9
PLANT AND
INTANGIBLE ASSETS

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 9-2

Plant
Plant Assets
Assets

Long-lived
Long-lived assets
assets acquired
acquired for
for use
use in
in
business
business operations.
operations.
Similar to long-term prepaid expenses

As years pass, and the

The cost of plant assets services are used, the
is the advance purchase cost is transferred to
of services. depreciation expense.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-3

Major
Major Categories
Categories of
of Plant
Plant Assets
Assets

T a n g ib le P la n t In ta n g ib le N a tu ra l
A s s e ts A s s e ts R e s o u rc e s

L o n g -te rm N o n c u rre n t a s s e ts S it e s a c q u ir e d fo r
a s s e t s h a v in g w it h n o p h y s ic a l e x t r a c t in g v a lu a b le
p h y s ic a l s u b s t a n c e . s u b s ta n c e . re s o u rc e s .

L a n d , b u ild in g s , P a t e n t s , c o p y r ig h t s , O il r e s e r v e s ,
e q u ip m e n t , tra d e m a rk s , t im b e r , o t h e r
fu r n it u r e , fix t u r e s . fr a n c h is e s , g o o d w ill. m in e r a ls .

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-4

Accountable
Accountable Events
Events

Acquisition.
 Acquisition.
Allocation
 Allocation of
of the
the acquisition
acquisition cost
cost
to
to expense
expense overover the
the asset’s
asset’s
useful
useful life
life (depreciation).
(depreciation).
Sale
 Sale or
or disposal.
disposal.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-5

Learning
Learning Objective
Objective

To determine the
cost of plant
assets.

LO1
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-6

Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Asset
Asset
price
price
Cost
Cost = +
Reasonable
Reasonableand
and
necessary
necessarycosts
costs.. ....

......for
forgetting
getting ......for
forgetting
getting
the
theasset
assetto
tothe
the the
theasset
asset ready
ready
desired
desiredlocation.
location. for
foruse.
use.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-7

Determining
Determining Cost
Cost
On
On May
May 4,
4, Heat
Heat Co.,
Co., aa stove
stove maker,
maker, buys
buys aa new
new
machine
machine from
from Supply
Supply Co.
Co. TheThe new
new machine
machine
has
has aa price
price of
of $52,000.
$52,000. Sales
Sales tax
tax is
is 8%.
8%.
Heat
Heat Co.
Co. pays
pays $500
$500 shipping
shipping cost
cost to
to get
get the
the
machine
machine to to its
its plant.
plant. After
After the
the machine
machine
arrives,
arrives, set-up
set-up costs
costs of
of $1,300
$1,300 areare incurred,
incurred,
along
along with
with $4,000
$4,000 in
in testing
testing costs.
costs.
Compute
Compute the
the cost
cost of
of Heat
Heat Co.’s
Co.’s new
new machine.
machine.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-8

Determining
Determining Cost
Cost

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 9-9

Special
Special Considerations
Considerations

Cost
Cost includes
includesreal
realestate
estate
commissions,
commissions,escrow
escrow
Land
Land fees,
fees,legal
legalfees,
fees,clearing
clearing
and
andgrading
gradingthe
theproperty.
property.

Improvements
Improvementstotoland
land
Land
Land such
suchasasdriveways,
driveways,
Improvements fences,
fences, and
andlandscaping
landscaping
Improvements are
arerecorded
recordedseparately.
separately.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-10

Special
Special Considerations
Considerations

Repairs
Repairsmade
madeprior
prior to
tothe
the
building
building being
beingput
put in
in use
use
Buildings
Buildings are
areconsidered
consideredpart
part of
ofthe
the
building’s
building’scost.
cost.

Related
Relatedinterest,
interest,
insurance,
insurance,and
andproperty
property
Equipment taxes
taxesare
aretreated
treatedas
as
Equipment expenses
expensesof of the
thecurrent
current
period.
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-11

Special
Special Considerations
Considerations

Allocation
Allocation of
of aa Lump-Sum
Lump-Sum Purchase
Purchase

The
Thetotal
totalcost
cost The
Theallocation
allocation
must
mustbe
be is
isbased
basedon on
allocated
allocatedtoto the
the relative
relative
separate
separate Fair
FairMarket
Market
I think I’ll buy the accounts
whole thing; building, accountsfor
for Value
Valueofofeach
each
land, and contents. each
eachasset.
asset. asset
asset
purchased.
purchased.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-12

Learning
Learning Objective
Objective

To distinguish
between capital and
revenue
expenditures.

LO2
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-13

Capital
Capital Expenditures
Expenditures and
and Revenue
Revenue
Expenditures
Expenditures

Capital
Capital Revenue
Revenue
Expenditure
Expenditure Expenditure
Expenditure

Any
Any material
material expenditure
expenditure Expenditure
Expenditure for
for
that
that will
will benefit
benefit several
several ordinary
ordinary repairs
repairs
accounting
accounting periods.
periods. and
and maintenance
maintenance..

To
To capitalize
capitalize an
an expenditure
expenditure To
To expense
expense an
an expenditure
expenditure
means
means toto charge
charge itit to
to an
an means
means to
to charge
charge itit to
to an
an
asset
asset account
account.. expense
expense account
account..
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-14

Depreciation
Depreciation
The
The allocation
allocation of
of the
the cost
cost of
of aa plant
plant asset
asset toto expense
expense in
in the
the
periods
periods in
in which
which services
services are
are received
received from
from the
the asset.
asset.

Balance
BalanceSheet
Sheet
Cost of Assets:
Assets:
plant Plant
Plant and
and
assets equipment
equipment

as the services
Income
IncomeStatement
Statement are received
Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-15

Depreciation
Depreciation
Book
BookValue
Value
•• Cost
Cost –– Accumulated
Accumulated Depreciation
Depreciation
Depreciation
Depreciation
•• Contra-asset
Contra-asset
•• Represents
Represents thethe portion
portion of
of an
an asset’s
asset’s
cost
cost that
that has
has already
already
been
been allocated
allocated to
to expense.
expense.
Causes
Causesof
ofDepreciation
Depreciation
•• Physical
Physical deterioration
deterioration
•• Obsolescence
Obsolescence

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-16

Learning
Learning Objective
Objective

To compute
depreciation by the
straight-line and
declining-balance
methods.

LO3
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-17

Straight-Line
Straight-Line Depreciation
Depreciation

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life

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 9-18

Straight-Line
Straight-Line Depreciation
Depreciation

On
On January
January 1,
1, 2007,
2007, Bass
Bass Co.
Co. buys
buys newnew equipment.
equipment.
Bass
Bass pays
pays aa total
total of
of $24,000
$24,000 for
for the
the equipment.
equipment. TheThe
equipment
equipment has
has anan estimated
estimated residual
residual value
value ofof $3,000
$3,000
and
and an
an estimated
estimated useful
useful life
life of
of 55 years.
years.
Compute
Compute depreciation
depreciation for for 2007
2007 using
using thethe straight-line
straight-line
method.
method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-19

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

Salvage Value
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-20

Depreciation
Depreciation for
for Fractional
Fractional Periods
Periods

When
When an
an asset
asset is
is acquired
acquired during
during the
the year,
year, depreciation
depreciation
in
in the
the year
year ofof acquisition
acquisition must
must bebe prorated.
prorated.

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-21

Half-Year
Half-Year Convention
Convention

Using
Using the
the half-year
half-year convention,
convention, calculate
calculate thethe
straight-line
straight-line depreciation
depreciation on
on December
December 31, 31, 2007,
2007,
for
for equipment
equipment purchased
purchased inin 2007.
2007. TheThe
equipment
equipment cost
cost $75,000,
$75,000, has
has aa useful
useful life
life of
of 10
10
years
years and
and an
an estimated
estimated residual
residual value
value of
of $5,000.
$5,000.

Depreciation
Depreciation == ($75,000
($75,000 -- $5,000)
$5,000) ÷÷ 10
10
== $7,000
$7,000 for
for aa full
full year
year
11
Depreciation
Depreciation == $7,000
$7,000 ×× //22 == $3,500
$3,500

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-22

Declining-Balance
Declining-Balance Method
Method

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

The
The double-declining
double-declining balance
balance depreciation
depreciation
rate
rate is
is 200%
200% of
of the
the straight-line
straight-line
depreciation
depreciation rate
rate of
of (1÷Useful
(1÷Useful Life).
Life).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-23

Declining-Balance
Declining-Balance Method
Method
On
On January
January 1,
1, 2007,
2007, Bass
Bass Co. Co. buys
buys aa new
new delivery
delivery truck.
truck.
Bass
Bass Co.
Co. pays
pays $24,000
$24,000 for for the
the truck.
truck. The
The truck
truck has
has an
an
estimated
estimated residual
residual value
value of of $3,000
$3,000 andand an
an estimated
estimated useful
useful
life
life of
of 55 years.
years.
Compute
Compute depreciation
depreciation for
for 2007
2007 using
using the
the double-
double-
declining
declining balance
balance method.
method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-24

Declining-Balance
Declining-Balance Method
Method
Total
Total depreciation
depreciation over
over the
the estimated
estimated useful
useful life
life of
of an
an
Compute
Compute
asset
depreciation
depreciation for
for the
the rest
rest of
of the
the
asset is
isthe
thesame
sameusing
usingeither
eitherthe
the straight-line
straight-linemethod
method or or
truck’s
truck’s
the estimated
estimated useful
the declining-balance
declining-balanceuseful life.
method.life.
method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-25

Financial
Financial Statement
Statement Disclosures
Disclosures
Estimates
Estimates of
of Useful
Useful Life
Life and
and Residual
Residual
Value
Value
•• May
May differ
differ from
from company
company to
to
company.
company.
•• The
The reasonableness
reasonableness of of
management’s
management’s estimates
estimates is
is
evaluated
evaluated byby external
external auditors.
auditors.
Principle
Principle of
of Consistency
Consistency
•• Companies
Companies should
should avoid
avoid
switching
switching depreciation
depreciation methods
methods
from
from period
period to
to period.
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-26

Revising
Revising Depreciation
Depreciation Rates
Rates

Predicted
Predicted Predicted
Predicted
salvage
salvagevalue
value useful
usefullife
life

So
So depreciation
depreciation
is
is an
an estimate.
estimate.

Over
Over the
the life
life of
of an
an asset,
asset, new
new information
information
may
may come
come to to light
light that
that indicates
indicates the
the
original
original estimates
estimates need
need toto be
be revised.
revised.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-27

Revising
Revising Depreciation
Depreciation Rates
Rates

On
On January
January 1,1, 2004,
2004, equipment
equipment was was
purchased
purchased that that cost
cost $30,000,
$30,000, hashas aa useful
useful
life
life of
of 10
10 years
years and
and no
no salvage
salvage value.
value.
During
During 2007,
2007, the
the useful
useful life
life was
was revised
revised to
to
88 years
years total
total (5
(5 years
years remaining).
remaining).

Calculate
Calculate depreciation
depreciation expense
expense for
for the
the year
year
ended
ended December
December 31, 31, 2007,
2007, using
using the
the
straight-line
straight-line method.
method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-28

Revising
Revising Depreciation
Depreciation Rates
Rates
When
Whenour
our estimates
estimateschange,
change,
depreciation
depreciationis:
is:
Book value at Salvage value at
date of change – date of change

Remaining useful life at date of change

Asset
Asset cost
cost $$ 30,000
30,000
Accumulated
Accumulated depreciation,
depreciation, 12/31/2006
12/31/2006
($3,000
($3,000 per
per year
year ×× 33 years)
years) 9,000
9,000
Remaining
Remaining bookbook value
value $$ 21,000
21,000
Divide
Divide by
by remaining
remaining life
life ÷÷ 55
Revised
Revised annual
annual depreciation
depreciation $$ 4,200
4,200
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-29

Impairment
Impairment of
of Plant
Plant Assets
Assets

IfIf the
the cost
cost of
of an
an asset
asset
cannot
cannot be be recovered
recovered
through
through future
future use
use oror
sale,
sale, thethe asset
asset should
should
be
be written
written down
down toto its
its
net
net realizable
realizable value.
value.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-30

Learning
Learning Objective
Objective

To account for
disposals of plant
assets.

LO4
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-31

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

Journalize
Journalize disposal
disposal by:
by:

Recording
Recording cash
cash Recording
Recording aa
received
received (debit).
(debit). gain
gain (credit)
(credit)
or
or loss
loss (debit).
(debit).

Removing
Removing accumulated
accumulated Removing
Removing thethe
depreciation
depreciation (debit).
(debit). asset
asset cost
cost (credit).
(credit).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-32

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

IfIf Cash
Cash >> BV,
BV, record
record aa gain
gain (credit).
(credit).
IfIf Cash
Cash << BV,
BV, record
record aa loss
loss (debit).
(debit).
IfIf Cash
Cash == BV,
BV, no
no gain
gain or
or loss.
loss.

Recording
Recording cash
cash Recording
Recording aa
received
received (debit).
(debit). gain
gain (credit)
(credit)
or
or loss
loss (debit).
(debit).

Removing
Removing accumulated
accumulated Removing
Removing thethe
depreciation
depreciation (debit).
(debit). asset
asset cost
cost (credit).
(credit).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-33

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

On
On September
September 30,30, 2007,
2007, Evans
Evans Company
Company sells
sells aa
machine
machine that
that originally
originally cost
cost $100,000
$100,000 for
for
$60,000
$60,000 cash.
cash. The
The machine
machine was was placed
placed in
in
service
service on
on January
January 1,1, 2002.
2002. ItIt has
has been
been
depreciated
depreciated using
using the
the straight-line
straight-line method
method with
with
an
an estimated
estimated salvage
salvage value
value ofof $20,000
$20,000 and
and an
an
estimated
estimated useful
useful life
life of
of 10
10 years.
years.

Let’s
Let’s answer
answer the
the following
following questions.
questions.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-34

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

The
The amount
amount of
of depreciation
depreciation
recorded
recorded onon September
September 30,30, 2007,
2007,
to
to bring
bring depreciation
depreciation up
up to
to date
date is:
is:

a.
a. $8,000.
$8,000. Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000
b.
b. $6,000.
$6,000.
c.
c. $4,000.
$4,000. Depreciation to Sept. 30:
d. $2,000. 9/12 × $8,000 = $6,000
d. $2,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-35

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

After
After updating
updating the
the depreciation,
depreciation, the
the
machine’s
machine’s book
book value
value on
on
September
September 30,
30, 2007,
2007, is:
is:

a.
a. $54,000.
$54,000. Cost
Cost $$ 100,000
100,000
Accumulated
Accumulated Depreciation:
Depreciation:
b.
b. $46,000.
$46,000. (5
(5 yrs.
yrs. ×× $8,000)
$8,000) ++ $6,000
$6,000 == 46,000
46,000
c.
c. $40,000.
$40,000. Book
Book Value
Value $$ 54,000
54,000

d.
d. $60,000.
$60,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-36

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

The
The machine’s
machine’s sale
sale resulted
resulted in:
in:

a.
a. aa gain
gain of
of $6,000.
$6,000.
b.
b. aa gain
gain of
of $4,000.
$4,000.
c.
c. aa loss
loss of
of $6,000.
$6,000.
d.
d. aa loss
loss of
of $4,000.
$4,000. Cost $ 100,000
Accum. Depr. 46,000
Book value $ 54,000
Cash received 60,000
Gain $ 6,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-37

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the sale.
sale.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-38

Trading
Trading in
in Used
Used Assets
Assets for
for New
New
Ones
Ones

On
On May
May 30, 30, 2007,
2007, Essex
Essex Company
Company
exchanges
exchanges aa used used airplane
airplane and
and $35,000
$35,000
cash
cash for
for aa new
new airplane.
airplane. The
The old
old airplane
airplane
originally
originally cost
cost $40,000,
$40,000, had
had up-to-date
up-to-date
accumulated
accumulated depreciation
depreciation of
of $30,000,
$30,000, and
and
aa fair
fair value
value of
of $4,000.
$4,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-39

Trading
Trading in
in Used
Used Assets
Assets for
for New
New
Ones
Ones

The
The exchange
exchange resulted
resulted in
in a:
a:

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

d.
d. gain
gain of
of $4,000.
$4,000.
Prepare a journal entry
to record the exchange.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-40

Trading
Trading in
in Used
Used Assets
Assets for
for New
New
Ones
Ones

Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the trade.
trade.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 9-41

Learning
Learning Objective
Objective

To explain the nature

of intangible assets,
including goodwill.

LO5
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
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Intangible
Intangible Assets
Assets

Noncurrent
Noncurrent assets
assets Often
Often provide
provide
without
without physical
physical exclusive
exclusive rights
rights
substance.
substance. or
or privileges.
privileges.

Characteristics
Characteristics

Useful
Useful life
life is
is Usually
Usually acquired
acquired
often
often difficult
difficult for
for operational
operational
to
to determine.
determine. use.
use.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
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Intangible
Intangible Assets
Assets

Record at current
cash equivalent
 Patents
cost, including  Copyrights
purchase price,  Leaseholds
legal fees, and  Leasehold
filing fees.
Improvements
 Goodwill
 Trademarks and
Trade Names

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Amortization
Amortization
•• Amortization
Amortization is is the
the systematic
systematic write-off
write-off to
to
expense
expense of of the
the cost
cost ofof intangible
intangible assets
assets
over
over their
their useful
useful life
life or
or legal
legal life,
life,
whichever
whichever is is shorter.
shorter.
•• Use
Use the
the straight-line
straight-line method
method to
to amortize
amortize
most
most intangible
intangible assets.
assets.

Date Description Debit Credit

Amortization Expense $$$$$
Intangible Asset $$$$$

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Goodwill
Goodwill

Occurs
Occurs when
when one
one Only
Only purchased
purchased
company
company buys
buys goodwill
goodwill is
is an
an
another
another company.
company. intangible
intangible asset.
asset.

The
The amount
amount by
by which
which the
the
purchase
purchase price
price exceeds
exceeds the
the fair
fair
market
market value
value of
of net
net assets
assets acquired.
acquired.

Goodwill
Goodwill is
is NOT
NOT amortized.
amortized. ItIt is
is tested
tested
annually
annually to
to determine
determine ifif there
there has
has been
been
an
an impairment
impairment loss.
loss.
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Patents
Patents
Exclusive
Exclusive right
right granted
granted
by
by federal
federal government
government toto sell
sell or
or
manufacture
manufacture anan invention.
invention.

Cost
Cost is
is purchase
purchase Amortize
Amortize costcost
price
price plus
plus legal
legal over
over the
the shorter
shorter of
of
cost
cost to
to defend.
defend. useful
useful life
life or
or 20
20 years.
years.

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Trademarks
Trademarks and
and Trade
Trade Names
Names
A
A symbol,
symbol, design,
design, oror logo
logo
associated
associated with
with aa business.
business.

Purchased
Internally trademarks
developed are recorded
trademarks at cost, and
have no amortized over
recorded shorter of legal
asset cost. or economic life.

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Franchises
Franchises
Legally
Legally protected
protected right
right to
to sell
sell products
products or
or
provide
provide services
services purchased
purchased by by franchisee
franchisee
from
from franchisor.
franchisor.

Purchase
Purchase price
price is
is intangible
intangible asset
asset
which
which is
is amortized
amortized over
over the
the shorter
shorter of
of
the
the protected
protected right
right or
or useful
useful life.
life.
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 9-49

Copyrights
Copyrights
Exclusive
Exclusive right
right granted
granted by
by the
the
federal
federal government
government to to protect
protect
artistic
artistic or
or intellectual
intellectual properties.
properties.

Legal
Legal life
life is
is Amortize
Amortize cost
cost
life
life of
of creator
creator over
over period
period
plus
plus 7070 years.
years. benefited.
benefited.

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Research
Research and
and Development
Development Costs
Costs
All
All expenditures
expenditures classified
classified as
as research
research and
and
development
development should
should be
be charged
charged to
to
expense
expense when
when incurred.
incurred.

All of these R&D costs

will really reduce our
net income this year!

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 9-51

Learning
Learning Objective
Objective

To account for the

depletion of natural
resources.

LO6
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Natural
Natural Resources
Resources

Total
Total cost,
cost, Extracted
Extracted from
from
including
including the
the natural
natural
exploration
exploration and
and environment
environment
development,
development, and
and reported
reported
is
is charged
charged to
to at
at cost
cost less
less
depletion
depletion expense
expense accumulated
accumulated
over
over periods
periods depletion.
depletion.
benefited.
benefited.

Examples:
Examples: oil,
oil, coal,
coal, gold
gold
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
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Depletion
Depletion of
of Natural
Natural Resources
Resources

Depletion is calculated using the

units-of-production method.

Unit depletion rate is calculated as follows:

Cost – Residual Value

Total Units of Natural
Resource

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Depletion
Depletion of
of Natural
Natural Resources
Resources

Total depletion cost for a period is:

Unit Depletion Number of Units
Rate × Extracted in Period

Cost
Costof
of
Total goods
goodssold
sold
Total Inventory
depletion Inventory
depletion for
cost forsale
sale
cost Unsold
Unsold
Inventory
Inventory
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
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Depletion
Depletion of
of Natural
Natural Resources
Resources

Specialized
Specialized plant
plant assets
assets may
may bebe required
required to
to
extract
extract the
the natural
natural resource.
resource.

These
These assets
assets should
should bebe depreciated
depreciated overover their
their
normal
normal useful
useful lives
lives or
or over
over the
the life
life of
of the
the
natural
natural resource,
resource, whichever
whichever isis shorter.
shorter.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 9-56

Learning
Learning Objective
Objective

To explain the cash

effect of transactions
involving plant
assets.

LO7
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Plant
Plant Transactions
Transactions and
and the
the
Statement
Statement of
of Cash
Cash Flows
Flows

Cash payments for plant assets represent a cash

outflow for investing activities on the statement of
cash flows. A disposal of a plant asset for cash
results in a cash inflow to the company.

Depreciation is a
non-cash charge to
income and has no
effect on cash flows.

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Learning
Learning Objective
Objective

To account for
depreciation using
methods other than
straight-line or
declining-balance.

LO8
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Other
Other Depreciation
Depreciation Methods
Methods
Units-of-Output Method

Cost – Residual Value Depreciation cost

=
Estimated Units of Output per unit of output

MACRS
Modified Accelerated Cost Recovery System

The depreciation system used on federal

income tax returns. It is an accelerated method.

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Other
Other Depreciation
Depreciation Methods
Methods
Sum-of-the-Years’ Digits Method
In general, depreciation calculated under this
accelerated method falls between the double-
declining amount and 150-percent-declining
method. It is not used by many companies
because the computations are complex.

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Depreciation
Depreciation Methods
Methods in
in Use:
Use:
A
A Survey
Survey

A
Asurvey
surveyof
of600
600Publicly
PubliclyOwned
OwnedCorporations
Corporations

Straight-line
Straight-line 579
579

Declining-balance
Declining-balance 22
22

Sum-of-the-years'-digits 55
Sum-of-the-years'-digits

Accelerated
Acceleratedmethods
methods(not
(notspecified)
specified) 44
44

Units-of-output
Units-of-output 32
32

Other 99
Other

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End
End of
of Chapter
Chapter 99

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008