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Chapter 09 - Plant and Intangible Assets
9 PLANT AND INTANGIBLE ASSETS
Chapter Summary
The material on plant assets is organized into sections for tangible assets, intangible assets,
and natural resources.
For all three categories of plant assets the chapter focuses on three accountable events: (1)
acquisition, (2) allocation of the acquisition cost to expense over the asset’s lifetime, and (3) sale
or disposal. In determining the cost of a plant asset, careful attention is paid to distinguishing
between capital and revenue expenditures. Special considerations surrounding the acquisition of
land, existing structures, and land improvements are briefly discussed, as is the allocation of lump-
sum purchases.
A considerable amount of attention is paid to depreciation. Before discussing various
methods of calculating periodic depreciation, a conceptual introduction explains that depreciation
is simply the process of allocating a recorded cost and does not represent an accounting effort to
establish the market value of a plant asset. At this point in the course, the student is already aware
of the calculation of straight-line depreciation and the adjusting entry to record the expense.
Accounting for residual values and dealing with fractional periods completes the discussion from
prior chapters. Accelerated depreciation is introduced using the declining balance method for
illustration.
Accounting for the disposal of plant assets requires a journal entry to remove both the
original recorded cost of the asset and the accumulated depreciation. The chapter deals with sales
for cash, trade-ins, and scrapping worthless equipment. The calculation of gain or loss is
illustrated only for financial statement purposes. Trade-in transactions are treated only briefly at
an introductory level.
A wide variety of intangible assets including trademarks, patents, copyrights, and
franchises is discussed, but only goodwill is treated in detail. The difficulty of objectively
estimating goodwill is explained as the reason that this asset is only recorded when purchased.
The brief discussion of natural resources parallels that for equipment. We emphasize that
depletion is first recorded as inventory and charged to expense as the material is sold.
Learning Objectives
1. Determine the cost of plant assets.
2. Distinguish between capital expenditures and revenue expenditures.
3. Compute depreciation by the straight-line and declining-balance methods.
4. Account for depreciation using methods other than straight-line or declining-
balance.
5. Account for the disposal of plant assets.
6. Explain the nature of intangible assets, including goodwill.
7. Account for the depletion of natural resources.
Financial Accounting, 16e 9- 1
Chapter 09 - Plant and Intangible Assets
8. Explain the cash e"ects of transactions involving plant assets.
Brief topical outline
APlant assets as a "stream of future services"
BMajor categories of plant assets
1Tangible plant assets
2Intangible assets
3Natural resources
CAccountable events in the lives of plant assets
DAcquisition of plant assets
1Determining cost: an example
2Some special considerations
aLand
bLand improvements
cBuildings
dEquipment
eAllocation of a lump-sum purchase - see Your Turn (page 390)
3Capital expenditures and revenue expenditures
EDepreciation
1Allocating the cost of plant and equipment over the years of use
aDepreciation is not a process of valuation
bBook value
2Causes of depreciation
aPhysical deterioration
bObsolescence
3Methods of computing depreciation
aThe straight-line method
1Depreciation for fractional periods
bThe declining-balance method
1Double-declining-balance
2150% declining-balance
4Which depreciation methods do most businesses use?
aThe difference in depreciation methods: are they “real”?
5Financial statement disclosures
aEstimates of useful life and residual value
bThe principle of consistency
cRevision of estimated useful lives
6The impairment of plant assets - see Case in Point (page 399)
7Other depreciation methods
aThe units-of-output method
b MACRS
c Sum-of-the-years-digits
dDecelerated depreciation methods
eDepreciation methods in use: a survey
FDisposal of plant and equipment
1Gains and losses on disposals of plant and equipment
Chapter 09 - Plant and Intangible Assets
aDisposal at a price above book value
bDisposal at a price below book value
2Trading in used assets for new ones
3International Financial Reporting Standards
GIntangible assets
1Characteristics
2Operating expenses versus intangible assets
3Amortization
4Goodwill
aEstimating goodwill
bRecording goodwill in the accounts- see Case in Point (page 406)
5Patents
6 Trademarks and trade names
7 Franchises
8 Copyrights
9Other intangibles and deferred charges
10 Research and development (R & D) costs
HFinancial analysis and decision making – see Your Turn (page 407)
INatural resources
1Accounting for natural resources
aDepreciation of buildings and equipment closely related to natural
resources
2Depreciation, amortization, and depletion a common goal‒
JPlant transactions and the statement of cash flows
1Noncash investing activities – see Ethics, Fraud & Corporate Governance
(page 410)
KConcluding remarks
Topical coverage and suggested assignment
Homework Assignment
(To Be Completed Prior to Class)
Class
Meetings
on Chapter
Topical
Outline
Coverage
Discussion
Questions
Brief
Exercises Exercises Problems
Critical
Thinking
Cases
1 A - E 1, 2, 3 1, 2, 3, 6 1, 2, 3 1
2 F - G 4, 5, 6, 5, 6, 7 5, 6 2, 3 3
3 H -K 7, 9, 10 9, 10 8, 9, 11 5, 6
Comments and observations
Teaching objectives for Chapter 9
Chapter 09 - Plant and Intangible Assets
This chapter covers accounting for plant assets, including acquisition, depreciation, and disposal.
Also included in the chapter are accounting for intangible assets and brief coverage of natural
resources. Our objectives in presenting this material are to:
1 Describe plant assets as a "stream of services" to be received by the business entity.
2 Distinguish between capital expenditures and revenue expenditures.
3 Explain and illustrate depreciation as a technique for allocating costs.
4 Explain and illustrate the mechanics of the depreciation methods discussed in the
chapter.
5 Explain and illustrate accounting for disposals of plant assets.
6 Explain the nature of intangible assets.
7 Discuss techniques for estimating the value of the goodwill possessed by a successful
business.
8 Explain and illustrate depletion; relate depreciation, amortization, and depletion to the
matching principle.
General comments
Some students have difficulty in identifying the types of expenditures included in the cost of an
asset, and in distinguishing between capital expenditures and revenue expenditures. We
recommend an in-class review of Discussion Questions 4 and 5 and of Exercise 2 to clarify these
points.
The most important topic in this chapter is depreciation. Perhaps the greatest challenge in
explaining depreciation is to dispel the idea that depreciation represents a decline in market value.
Students are familiar with the term depreciation as it relates to the market value of an automobile.
The diagram on page 391 is designed to stress the idea that depreciation is a cost allocation
process, not a valuation process.
We recommend discussing in class the extent to which depreciation is based upon
judgments (estimates), and the roles of management and auditors in making and evaluating these
judgments. The one form of depreciation calculation that requires no judgment or estimates is
that required for income tax purposes under MACRS. We stress that different depreciation
methods are typically used for financial reporting purposes and for income tax purposes. Exercise
5 and Case 3 emphasize these points. Problem 3 is a comprehensive review of the differences
among depreciation methods.
In discussing intangible assets, we place greater emphasis upon the limitations of financial
reporting than upon simple mechanics such as amortization over 40 years. Informed users of
financial statements should recognize that a business may have intangible assets of immense
economic value which do not even appear on the balance sheet, either because they were
developed internally or because they have long since been amortized. Examples include the Coca-
Cola trademark and the brand names "Kleenex" and "Scotch Tape."
Chapter 09 - Plant and Intangible Assets
On the other hand, the presence of an intangible on the balance sheet merely means that a
cost was incurred, not that an asset necessarily exists. This is especially true of goodwill, an
"asset" for which many companies greatly overpaid in the 1980s wave of corporate takeovers.
Caution: In discussing such issues as differences between recorded values and economic
values, we consider it important not to downplay the relevance and usefulness of financial
statements. Actually, financial statements and the related disclosures provide an informed reader
with many clues as to resources that may have economic values significantly different from the
recorded amounts. Many accounting numbers should not be taken at face value; the informed
decision makers should look to the accounting policies and facts that underlie the numbers.
We view accounting for natural resources and depletion as optional topics in the
introductory accounting course. Basically, these topics consist of applying units-of-output
depreciation within a specific industry setting. If the topic is discussed in class, we would stress
the difficulty in estimating the original quantity of the natural resource at the site. These estimates
are made by professional geologists and other specialists with expertise in fields other than
accounting.
Supplemental Exercises
Group Exercise
Access the Internal Revenue website www.irs.gov and search for MACRS Tables.
Choose one column from the MACRS table for 5-year property using the half-year convention.
Prepare a presentation for the class demonstrating how the percentage allowances for
depreciation in this table were determined.
Internet Exercise
Obtain Exxon Mobil’s most recent annual report from the company
website www.exxonmobil.com. Research the footnotes, balance sheet,
and income statement and describe the information you 3nd regarding
depletion. CHAPTER 9 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question in the space provided.
Use the following data for questions 1 and 2.
On March 12, 2008, Shoreham, Inc. acquired melting equipment for
$45,600. The estimated life of the equipment is 6 years, with an estimated
residual value of $2,400.
1Refer to above data. In its 3nancial statements, Shoreham uses
straight-line depreciation with the half-year convention. The book value
of the equipment at December 31, 2009, will be:
a$26,600. b$42,000. c$34,800. dSome other amount.
Financial Accounting, 16e 9- 5
2Refer to above data. In its 3nancial statements, Shoreham uses
double-declining-balance depreciation with half-year convention. The
book value of the equipment at December 31, 2009, will be:
a$20,267. b$12,667. c$25,333. dSome other amount.
3Sayville Dairy sold a delivery truck for cash of $8,680. The original
cost of the truck was $33,600, and a loss of $5,320 was recognized on
the sale. The accumulated depreciation at the date of sale must have
been:
a$24,920. b$14,560. c$3,360. d$19,600.
4Cage Corporation purchases Presley Company’s entire business for
$2,700,000. The fair market value of Presley’s net identi3able assets is
$2,400,000.
aPresley should record goodwill of $300,000.
bCage paid $300,000 for goodwill generated by Presley.
cCage should charge the $300,000 excess paid for Presley Company
directly to expense.
dPresley should record amortization over a period not to exceed 40
years.
5Throughout the current year, Calverton Company treated sales taxes
paid on purchases of plant assets as revenue expenditures. As a
result, the current year’s:
aNet income is overstated.
bRevenue is overstated.
cDepreciation expense is understated.
dNone of the above; payments of sales taxes should be treated as
revenue expenditures. CHAPTER 9 NAME
#
10-MINUTE QUIZ B SECTION
Indicate the best answer for each question in the space provided.
Use the following data for the four independent questions which
follow:
On May 5, 2009, Lloyd purchased a machine for $84,000. The estimated life
of the machine was 10 years, with an estimated residual value of $10,000.
The service life in terms of “output” is estimated at 8,000 hours of
operation.
1Refer to the above data. Assume Lloyd uses straight-line
depreciation with the half-year convention. Depreciation expense to be
recognized in 2009 (the year of purchase) is:
a$7,400. b$8,400. c$3,700. dSome other amount.
2Refer to the data above. Assume Lloyd uses 200%-declining-
balance depreciation with the half-year convention. Depreciation
expense to be recognized in 2010 (the second year of ownership) is:
a$8,400. b$13,120. c$15,120. dSome other amount.
3Refer to the data above. Assume Lloyd uses 150%-declining-
balance depreciation with the half-year convention. Depreciation
expense to be recognized in 2009 (the year of purchase) is:
a$8,400. b$6,300. c$12,600. dSome other amount.
4Refer to the data above. Assume Lloyd uses the units-of-output
method and that the machine was in operation for 1,000 hours in 2009
and 1,800 hours in 2010. The book value of the machine at
December 31, 2010 is:
a$48,100. b$58,100. c$25,900. dSome other amount.
CHAPTER 9 NAME #
10-MINUTE QUIZ C SECTION
On April 8, 2010, Dreamland Park purchased a ferris wheel for $300,000. The
estimated life of the ferris wheel was 10 years, with an estimated residual value of
$60,000. The service life in terms of output is estimated at 30,000 hours of operation.
Compute the depreciation on this ferris wheel in 2010 and 2011 using the
following methods.
2010 2011
aStraight-line (with half-year convention) $________ $________
b200%-declining-balance (with half-year convention) $________
$________
c150%-declining-balance (with half-year convention) $________
$________
dUnits-of-output method (hours of operation:
(2,600 in 2010 and 6,000 in 2011) $________
$________
eStraight-line (with depreciation calculated to the
nearest whole month) $________
$________
CHAPTER 9 NAME #
Financial Accounting, 16e 9- 7
10-MINUTE QUIZ D SECTION
Louisville Farms, a breeder of racehorses, paid $432,000 cash for a prize-winning
stallion on January 1, 2003. The stallion is depreciated on a straight-line basis, with
depreciation for partial years rounded to the nearest month. Estimated useful life was
nine years, with no residual value. After owning the animal for six years and 3ve
months, Louisville Farms sold the stallion on May 31, 2009, for cash of $85,000.
Depreciation had last been recorded on December 31, 2008.
aCompute to the nearest full month depreciation for the fractional period from
January 1, 2009
to May 31 of 2009. $______________
bCompute the book value of the stallion at May 31, 2009, the date of sale.
$______________
cCompute the gain or loss on the sale of the stallion. $______________ (gain/loss)
dIn the space provided below, prepare the journal entry to record the sale of the
stallion on May 31, 2009. (Use Breeding Stock as the title of the asset account.
Assume that depreciation to date of sale already has been recorded.)
2009 General Journal
May 31
Computations
SOLUTIONS TO CHAPTER 9 10-MINUTE QUIZZES
QUIZ A QUIZ B
QUIZ C
Year 1 Year 2
Chapter 09 - Plant and Intangible Assets
aStraight-line $12,000 $24,000
Year 1: [($300,000 - $60,000) x 1/10 x 1/2]
Year 2: ($240,000 x 1/10)
b200%-declining-balance $30,000
$54,000
Year 1: ($300,000 x 20% x 1/2)
Year 2: ($300,000 - $60,000) x 1/10
QUIZ D
Year 2009 General Journal
May 31 Loss on Sale of Breeding Stock 39,000
Cash 85,000
Accumulated Depreciation, Breeding Stock 308,000
Breeding Stock 432,000
To record sale of stallion at price below
book value.
s
Computations
Financial Accounting, 16e 9- 9
Chapter 09 - Plant and Intangible Assets
($432,000 9) x 6 years................................. $288,000
Chapter 09 - Plant and Intangible Assets
Assignment Guide to Chapter 9
Brief
Exercises
Exercis
es
Problems Cases Net
1-10 1-15
1
2 3 4 5 6 7 8 1 2 3 4 5
Time estimate (in minutes) <15 <15 4
0
40 50 3
0
2
5
4
0
4
0
5
0
2
0
20 2
0
3
0
30
difficulty rating E E M M S M M M M S S S E M M
Learning Objectives:
1 2, 10,
15
√
1. Determine the cost of plant
assets.
2. Distinguish between capital
expenditures and revenue
expenditures.
1 1, 2
3. Compute depreciation by
the straight-line and
declining-balance methods.
2, 3, 4, 5,
6, 7
1, 3, 4,
5, 6, 15
√
natural resources.
8. Explain the cash effect of
transactions involving plant
assets.
9, 12
Financial Accounting, 16e 9- 13
