Chapter 10-1 Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Chapter 10-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Describe how the cost principle applies to plant assets Explain the concept of depreciation Compute periodic depreciation using different methods Describe the procedure for revising periodic depreciation Distinguish between revenue and capital expenditures, and explain the entries for each Explain how to account for the disposal of a plant asset Compute periodic depletion of natural resources Explain the basic issues related to accounting for intangible assets Indicate how plant assets, natural resources, and intangible assets are reported Chapter 10-3 Plant Plant Assets, Assets, Natural Natural Resources, Resources, and and Intangible Intangible Assets Assets Plant Assets Determining the cost of plant assets Depreciation Expenditures during useful life Plant asset disposals Chapter 10-4 Natural Resources Depletion Intangible Assets Accounting for intangibles Research and development costs Statement Presentation and Analysis Presentation Analysis Section Section 11 –– Plant Plant Assets Assets Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools) Major characteristics include: “Used in operations” and not for resale Long-term in nature and usually depreciated Possess physical substance Referred to as property, plant, and equipment; plant and equipment; and fixed assets Chapter 10-5 Determining Determining the the Cost Cost of of Plant Plant Assets Assets Land Includes all costs to acquire land and ready it for use Costs typically include: (1) the purchase price; (2) closing costs, such as title and attorney’s fees; (3) real estate brokers’ commissions; (4) costs of grading, filling, draining, and clearing; (5) assumption of any liens, mortgages, or encumbrances on the property Chapter 10-6 SO Describe how the cost principle applies to plant assets Determining Determining the the Cost Cost of of Plant Plant Assets Assets Illustration: Assume that Hayes Manufacturing 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 The cost of the land is $115,000, computed as follows Required: Determine amount to be reported as the cost of the land Chapter 10-7 SO Describe how the cost principle applies to plant assets Determining Determining the the Cost Cost of of Plant Plant Assets Assets Required: Determine amount to be reported as the cost of the land Land Cash price of property of $100,000 $100,000 Old warehouse razed at a cost of $6,000 6,000 Attorney's fees of $1,000 1,000 Real estate broker’s commission of $8,000 8,000 Cost of Land Chapter 10-8 $115,000 SO Describe how the cost principle applies to plant assets Determining Determining the the Cost Cost of of Plant Plant Assets Assets Land Improvements Includes all expenditures necessary to make the improvements ready for their intended use Examples are driveways, parking lots, fences, landscaping, and underground sprinklers Limited useful lives Expense (depreciate) the cost of land improvements over their useful lives Chapter 10-9 SO Describe how the cost principle applies to plant assets Determining Determining the the Cost Cost of of Plant Plant Assets 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: Chapter 10-10 Contract price plus payments for architects’ fees, building permits, and excavation costs SO Describe how the cost principle applies to plant assets Accounting Accounting for for Intangible Intangible Assets Assets Illustration: Assume that National Labs purchases a patent at a cost of $60,000 National estimates the useful life of the patent to be eight years National records the annual amortization as follows Amortization expense Patent Chapter 10-49 7,500 7,500 SO Explain the basic issues related to accounting for intangible assets Accounting Accounting for for Intangible Intangible Assets Assets Copyrights Give the owner the exclusive right to reproduce and sell an artistic or published work plays, literary works, musical works, pictures, photographs, and video and audiovisual material Copyright is granted for the life of the creator plus 70 years Capitalize acquisition costs Amortized to expense over useful life Chapter 10-50 SO Explain the basic issues related to accounting for intangible assets Accounting Accounting for for Intangible Intangible Assets Assets Trademarks and Trade Names Word, phrase, jingle, or symbol that identifies a particular enterprise or product Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca-Cola, and Jeep Trademark or trade name has legal protection for indefinite number of 20 year renewal periods Capitalize acquisition costs No amortization Chapter 10-51 SO Explain the basic issues related to accounting for intangible assets Accounting Accounting for for Intangible Intangible Assets Assets Franchises and Licenses Contractual arrangement between a franchisor and a franchisee Shell, Taco Bell, or Rent-A-Wreck are franchises Franchise (or license) with a limited life should be amortized to expense over the life of the franchise Franchise with an indefinite life should be carried at cost and not amortized Chapter 10-52 SO Explain the basic issues related to accounting for intangible assets Accounting Accounting for for Intangible Intangible Assets 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 FMV of the identifiable net assets acquired Internally created goodwill should not be capitalized Chapter 10-53 SO Explain the basic issues related to accounting for intangible assets Chapter 10-54 Research Research and and Development Development Costs Costs Frequently results in something that a company patents or copyrights such as: new product, formula, process, composition, or idea, literary work All R & D costs are expensed when incurred Chapter 10-55 SO Explain the basic issues related to accounting for intangible assets Statement Statement Presentation Presentation and and Analysis Analysis Presentation Illustration 10-24 Companies usually include natural resources under “Property, plant, and equipment” and show intangibles separately Chapter 10-56 SO Indicate how plant assets, natural resources, and intangible assets are reported Statement Statement Presentation Presentation and and Analysis Analysis Analysis Illustration 10-25 Each dollar invested in assets produced $0.56 in sales If a company is using its assets efficiently, each dollar of assets will create a high amount of sales Chapter 10-57 SO Indicate how plant assets, natural resources, and intangible assets are reported Exchange Exchange of of Plant Plant Assets Assets Ordinarily, companies record a gain or loss on the exchange of plant assets The rationale for recognizing a gain or loss is that most exchanges have commercial substance An exchange has commercial substance if the future cash flows change as a result of the exchange Chapter 10-58 SO 10 Explain how to account for the exchange of plant assets Exchange Exchange of of Plant Plant Assets Assets Illustration: Roland Co exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck The old trucks had a fair market value of $26,000 Chapter 10-59 Cost of old trucks Less: Accumulated depreciation Book value Fair market value of old trucks Loss on disposal $64,000 22,000 42,000 26,000 $16,000 Fair market value of old trucks Cash paid Cost of new semi-truck $26,000 17,000 $43,000 Illustration 10A-1 & 10A-2 SO 10 Explain how to account for the exchange of plant assets Exchange Exchange of of Plant Plant Assets Assets Illustration: Roland Co exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck The old trucks had a fair market value of $26,000 Prepare the entry to record the exchange of assets by Roland Co Chapter 10-60 Semi-truck 43,000 Accumulated depreciation 22,000 Loss on disposal 16,000 Used trucks 64,000 Cash 17,000 SO 10 Explain how to account for the exchange of plant assets Exchange Exchange of of Plant Plant Assets Assets Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment The old equipment had a fair market value of $19,000 Mark also paid $3,000 Chapter 10-61 Cost of old equipment Less: Accumulated depreciation Book value Fair market value of old equipment Gain on disposal $40,000 28,000 12,000 19,000 $ 7,000 Fair market value of old equipment Cash paid Cost of new equipment $19,000 3,000 $22,000 Illustration 10A-3 & 10A-4 SO 10 Explain how to account for the exchange of plant assets Exchange Exchange of of Plant Plant Assets Assets Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment The old equipment had a fair market value of $19,000 Mark also paid $3,000 Prepare the entry to record the exchange of assets by Mark Express Delivery equipment (new) 22,000 Accumulated depreciation 28,000 Delivery equipment (used) Chapter 10-62 40,000 Gain on disposal 7,000 Cash 3,000 SO 10 Explain how to account for the exchange of plant assets Copyright Copyright “Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 10-63 .. .Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Chapter 10- 2 Accounting Principles, Ninth Edition Study Study Objectives Objectives... asset’s useful life Chapter 10- 14 SO Explain the concept of depreciation Depreciation Depreciation Factors in Computing Depreciation Cost Chapter 10- 15 Useful Life Illustration 10- 6 Salvage Value... Illustration 10- 9 Chapter 10- 18 SO Compute periodic depreciation using different methods Depreciation Depreciation Illustration: (Straight-Line Method) 2 010 $ 12,000 2011 12,000 2012 $ 2,400 $ 2,400 $ 10, 600