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Chapter 10
Plant Assets, Natural Resources,
and Intangibles
QUESTIONS
1. A plant asset is tangible; it is used in the production or sale of other assets or services;
and it has a useful life longer than one accounting period.
4. Often the lump-sum or basket purchase includes assets with different lives that must be
depreciated separately. Sometimes the purchase may include land, which is never
depreciated.
5. The Accumulated Depreciation—Machinery account is a contra asset account with a
credit balance that cannot be used to buy anything. The balance of the Accumulated
6. The Modified Accelerated Cost Recovery System is not generally acceptable for financial
7. The materiality constraint justifies charging low-cost plant asset purchases to expense
because such amounts are unlikely to impact the decisions of financial statement users.
8. Ordinary repairs are made to keep a plant asset in normal, good operating condition, and
9. A company might sell or exchange an asset when it reaches the end of its useful life, or
10. The process of allocating the cost of natural resources to expense over the periods
11. No, depletion expense should be calculated on the units that are extracted (similar to the
units-of-production basis) and sold.
12. An intangible asset: (1) has no physical existence; (2) derives value from the unique
13. Intangible assets are generally recorded at their cost and amortized over their predicted
useful life. (However, some costs are not included, such as the research and
14. A company has goodwill when its value exceeds the value of its individual assets and
15. No; this type of goodwill would not be amortized. Instead, the FASB (SFAS 142) requires
that goodwill be annually tested for impairment. If the book value of goodwill does not
16. Total asset turnover is calculated by dividing net sales by average total assets.
17. The word “net” means that Polaris is reporting its property and equipment after
deducting accumulated depreciation to date.
18. Arctic Cat lists “Machinery, equipment and tooling” and “Land, building and
19. KTM titles its plant assets “Tangible fixed assets.” The book value of its Tangible fixed
assets is 84,256 EUR thousands.
QUICK STUDIES
Quick Study 10-1 (10 minutes)
1. The main difference between plant assets and current assets is that
2. The main difference between plant assets and inventory is that
3. The main difference between plant assets and long-term investments is
Quick Study 10-2 (10 minutes)
expenditure necessary to get the asset in place and ready for its intended use.
Quick Study 10-3 (10 minutes)
Straight-line:
Quick Study 10-4 (10 minutes)
($65,800 - $2,000) / 200 concerts = $ 319 depreciation per concert
Quick Study 10-5 (10 minutes)
$65,800
Cost
- 15,950
Accumulated depreciation (first year)
49,850
Book value at point of revision
- 2,000
Salvage value
47,850
Remaining depreciable cost
÷ 2
Years of life remaining
$23,925
Depreciation per year for years 2 and 3
Quick Study 10-6 (10 minutes)
Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%
First year:
$830,000 x 25% = $207,500
Second year:
Third year:
Quick Study 10-7 (10 minutes)
Impairment Loss .............................................................
1,250
Accumulated Depreciation—Equipment ..............
1,250
To record impairment of equipment.
Quick Study 10-8 (10 minutes)
1. (a) Capital expenditure
2.
(a) Equipment................................................................
40,000
Cash ................................................................
40,000
To record an extraordinary repair.
(b)* Maintenance Expense ............................................
200
Cash ................................................................
200
To record ordinary maintenance of a truck.
(c)* Maintenance Expense ............................................
175
Cash ................................................................
175
To record ordinary maintenance for air conditioner.
(d) Building ....................................................................
225,000
Cash ................................................................
225,000
To record addition of a new wing.
*Although NOT required, entries are shown for transactions b and c for completeness
Quick Study 10-9 (15 minutes)
Book value of old equipment = $76,800 - $40,800 = $36,000
1.
Cash ................................................................................
47,000
Accumulated depreciation ............................................
40,800
Equipment ......................................................................
76,800
Gain on sale of equipment* ...........................................
11,000
To record the sale of equipment.
*(Gain = $47,000 - $36,000)
2.
Cash ................................................................................
36,000
Accumulated depreciation ............................................
40,800
Equipment ......................................................................
76,800
To record the sale of equipment.
3.
Cash ................................................................................
31,000
Accumulated depreciation ............................................
40,800
Loss on sale of equipment*..............................................
5,000
Equipment................................................................
76,800
To record the sale of equipment.
*(Loss = $31,000 - $36,000)
Quick Study 10-10 (10 minutes)
1.
Ore Mine ..........................................................................
1,800,000
Cash .........................................................................
1,800,000
To record cost of ore mine.
2.
Depletion per unit = = $1.60 per ton
Depletion Expense—Ore Mine ......................................
288,000
Accumulated Depletion—Ore Mine .......................
288,000
To record depletion of ore mine (180,000 x $1.60).
Quick Study 10-11 (10 minutes)
Note: e) Building is reported under plant assets.
Quick Study 10-12 (10 minutes)
1.
Jan. 4
Leasehold Improvements ...............................................
105,000
Cash ..........................................................................
105,000
To record leasehold improvements.
2.
Dec. 31
Amortization Expense–Leasehold Improvements ............
13,125
Accumulated Amortization—Leasehold
Improvements .........................................................
13,125
To record amortization of leasehold over
the remaining life of the lease.*
* Amortization = $105,000 / 8-year-lease-term = $13,125 per year.
$1,800,000 - $200,000
1,000,000 tons
Quick Study 10-13 (10 minutes)
Total asset turnover = = 0.80 times
($ thousands)
Quick Study 10-14A (10 minutes)
Book value of old machine = $42,400 - $18,400 = $24,000
1.
Machinery (new) ........................................................
52,000
Accumulated Depreciation–Machinery (old) ..........
18,400
Loss on Exchange of Assets* ..................................
2,000
Machinery (old) .................................................
42,400
Cash ...................................................................
30,000
To record asset exchange assuming commercial
substance. *$52,000 – ($24,000 + $30,000) = $(2,000)
2.
Machinery (new)* .......................................................
46,000
Accumulated Depreciation–Machinery (old) ..........
18,400
Machinery (old) .................................................
42,400
Cash ...................................................................
22,000
To record asset exchange assuming lack of
commercial substance.
*Book value of old asset + cash given = $24,000 + $22,000
Quick Study 10-15 (10 minutes)
a. Accounting for plant assets involving cost determination,
depreciation, additional expenditures, and disposals of plant assets
b. U.S. GAAP prohibits companies to record increases in the value of
plant assets subsequent to acquisition. However, IFRS permits
$14,800
($15,869 + $17,819) / 2
EXERCISES
Exercise 10-1 (15 minutes)
Invoice price of machine .........................................................
$ 12,500
Less discount (.02 x $12,500) .................................................
(250)
Net purchase price................................................................
12,250
Freight charges (transportation-in) ................................
360
Mounting and power connections ................................
895
Assembly ..................................................................................
475
Materials used in adjusting .....................................................
40
Total cost to be recorded ........................................................
$ 14,020
Note: The $180 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.
Exercise 10-2 (15 minutes)
Cost of land
Purchase price for land ...........................................................
$ 280,000
Purchase price for old building ................................
110,000
Demolition costs for old building ................................
33,500
Costs to fill and level lot .........................................................
47,000
Total cost of land ................................................................
$ 470,500
Cost of new building and land improvements
Cost of new building ...............................................................
$1,452,200
Cost of land improvements ....................................................
87,800
Total construction costs .........................................................
$1,540,000
Journal entry
Land ................................................................................
470,500
Land Improvements .......................................................
87,800
Building ..........................................................................
1,452,200
Cash ..........................................................................
2,010,500
To record costs of plant assets.
Exercise 10-3 (20 minutes)
Purchase price ...........................................................
$375,280
Closing costs .............................................................
20,100
Total cost of acquisition ...........................................
$395,380
Allocation of total cost
Appraised
Value
Percent
of Total
Applying %
to Cost
Apportioned
Cost
Land ..............................
$157,040
40%
$395,380 x .40
$158,152
Land improvements ......
58,890
15
$395,380 x .15
59,307
Building .........................
176,670
45
$395,380 x .45
177,921
Totals ............................
$392,600
100%
$395,380
Journal entry
Land ..........................................................................
158,152
Land Improvements ................................................
59,307
Building ....................................................................
177,921
Cash ................................................................
395,380
To record costs of lump-sum purchase.
Exercise 10-4 (15 minutes)
Straight-line depreciation: ($154,000 - $25,000) / 4 years = $32,250 per year
Year
Annual Depreciation
Year-End Book Value
2013 ........
$ 32,250
$121,750
2014 ........
32,250
89,500
2015 ........
32,250
57,250
2016 ........
32,250
25,000
Total .......
$129,000
Exercise 10-5 (20 minutes)
Double-declining-balance depreciation
Depreciation rate: 100% / 4 years = 25% x 2 = 50%
Year
Beginning-Year
Book Value
Depreciation
Rate
Annual
Depreciation
Year-End
Book Value
2013 .......
$154,000
50%
$ 77,000
$77,000
2014 .......
77,000
50
38,500
38,500
2015 .......
38,500
50
13,500*
25,000
2016 .......
25,000
--
--
25,000
Total .......
$129,000
* Do not depreciate more than $13,500 in the third year since the
salvage value is not subject to depreciation.
Exercise 10-6 (10 minutes)
Straight-line
Exercise 10-7 (10 minutes)
Units-of-production
Exercise 10-8 (15 minutes)
Double-declining-balance
Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year
Exercise 10-9 (10 minutes)
Straight-line depreciation for 2012
[($280,000 - $40,000) / 5 years] x 9/12 = $36.000
Exercise 10-10 (15 minutes)
Double-declining-balance depreciation for 2012 and 2013:
Rate = (100% / 5 years) x 2 = 40%
Depreciation for 2012 ($280,000 x 40% x 9/12) ...............
$ 84,000
Book value at January 1, 2013 ($280,000 - $84,000) ......
$196,000
Depreciation for 2013 ($196,000 x 40%) ..........................
$ 78,400
Alternate calculation
2012 depreciation ($280,000 x 40% x 9/12) .................................
$ 84,000
2013 depreciation
$280,000 x 40% x 3/12 .............................................................
$ 28,000
($280,000 - $84,000 - $28,000) x 40% x 9/12 ...........................
50,400
Total 2013 depreciation ...............................................................
$ 78,400
Exercise 10-11 (15 minutes)
1.
Original cost of machine .............................................................
$ 23,860
Less two years' accumulated depreciation
[($23,860 - $2,400) / 4 years] x 2 years ................................
(10,730)
Book value at end of second year ..............................................
$ 13,130
2.
Book value at end of second year ..............................................
$ 13,130
Less revised salvage value .........................................................
(2,000)
Remaining depreciable cost .......................................................
$ 11,130
Revised annual depreciation = $11,130 / 3 years = $3,710
Exercise 10-12 (30 minutes)
Straight-line depreciation
Income
before
Depreciation
Depreciation
Expense*
Net
Income
Year 1 ........
$ 88,500
$ 38,960
$ 49,540
Year 2 ........
88,500
38,960
49,540
Year 3 ........
88,500
38,960
49,540
Year 4 ........
88,500
38,960
49,540
Year 5 ........
88,500
38,960
49,540
Totals ........
$442,500
$194,800
$247,700
*($238,400 - $43,600) / 5 years = $38,960
Exercise 10-13 (30 minutes)
Double-declining-balance depreciation
Income
before
Depreciation
Depreciation
Expense*
Net
Income
Year 1 ........
$ 88,500
$ 95,360
$ (6,860)
Year 2 ........
88,500
57,216
31,284
Year 3 ........
88,500
34,330
54,170
Year 4 ........
88,500
7,894
80,606
Year 5 ........
88,500
0
88,500
Totals ........
$442,500
$194,800
$247,700
Supporting calculations for depreciation expense
*Note: (100% / 5 years) x 2 = 40% depreciation rate
Beginning
Book
Value
Annual
Depreciation
(40% of
Book Value)
Accumulated
Depreciation at
the End of the
Year
Ending Book Value
($238,400 Cost Less
Accumulated
Depreciation)
Year 1 ...............
$238,400
$ 95,360
$ 95,360
$143,040
Year 2 ...............
143,040
57,216
152,576
85,824
Year 3 ...............
85,824
34,330**
186,906
51,494
Year 4 ...............
51,494
7,894***
194,800
43,600
Year 5 ...............
43,600
0
194,800
43,600
Total ..................
$194,800
** rounded
*** Must not use $20,598; instead take only enough depreciation in Year 4 to
reduce book value to the $43,600 salvage value.
Exercise 10-14 (25 minutes)
1. Annual depreciation = $572,000 / 20 years = $28,600 per year
2. Entry to record the extraordinary repairs
Building ...........................................................................
68,350
Cash ........................................................................
68,350
To record extraordinary repairs.
3.
Cost of building
Before repairs................................................................
$572,000
Add cost of repairs .........................................................
68,350
$640,350
Less accumulated depreciation ................................
429,000
Revised book value of building ................................
$211,350
4.
Revised book value of building (part 3) ...........................
$211,350
New estimate of useful life (20 - 15 + 5) ...........................
10 years
Revised annual depreciation ............................................
$ 21,135
Depreciation Expense ....................................................
21,135
Accumulated Depreciation–Building .......................
21,135
To record depreciation.
Exercise 10-15 (15 minutes)
1.
Equipment .....................................................................
22,000
Cash ........................................................................
22,000
To record betterment.
2.
Repairs Expense ...........................................................
6,250
Cash ........................................................................
6,250
To record ordinary repairs.
3.
Equipment .....................................................................
14,870
Cash ........................................................................
14,870
To record extraordinary repairs.
Exercise 10-16 (20 minutes)
Note: Book value of milling machine = $250,000 - $182,000 = $68,000
1. Disposed at no value
Jan. 3
Loss on Disposal of Milling Machine .........................
68,000
Accumulated Depreciation—Milling Machine ...........
182,000
Milling Machine ........................................................
250,000
To record disposal of milling machine.
2. Sold for $35,000 cash
Jan. 3
Cash ..............................................................................
35,000
Loss on Sale of Milling Machine ................................
33,000
Accumulated Depreciation—Milling Machine ...........
182,000
Milling Machine ........................................................
250,000
To record cash sale of milling machine.
3. Sold for $68,000 cash
Jan. 3
Cash ..............................................................................
68,000
Accumulated Depreciation—Milling Machine ...........
182,000
Milling Machine ........................................................
250,000
To record cash sale of milling machine.
4. Sold for $80,000 cash
Jan. 3
Cash ..............................................................................
80,000
Accumulated Depreciation—Milling Machine ...........
182,000
Gain on Sale of Milling Machine .............................
12,000
Milling Machine ........................................................
250,000
To record cash sale of milling machine.
Exercise 10-17 (25 minutes)
2017
July 1
Depreciation Expense .............................................
7,500
Accumulated Depreciation--Machinery ............
7,500
To record one-half year depreciation.*
*Annual depreciation = $105,000 / 7 years = $15,000
Depreciation for 6 months in 2017 = $15,000 x 6/12 = $7,500
1. Sold for $45,500 cash
July 1
Cash ..............................................................................
45,500
Accumulated Depreciation—Machinery ....................
67,500
Gain on Sale of Machinery ................................
8,000
Machinery ................................................................
105,000
To record sale of machinery.*
2. Destroyed by fire with $25,000 cash insurance settlement
July 1
Cash ..............................................................................
25,000
Loss from Fire ..............................................................
12,500
Accumulated Depreciation—Machinery ....................
67,500
Machinery ................................................................
105,000
To record disposal of machinery from fire.
Exercise 10-18 (10 minutes)
Dec. 31
Depletion Expense—Mineral Deposit ........................
405,528
Accumulated Depletion—Mineral Deposit ............
405,528
To record depletion [$3,721,000/1,525,000 tons =
$2.44 per ton; 166,200 tons x $2.44 = $405,528].
Dec. 31
Depreciation Expense—Machinery ...........................
23,268
Accumulated Depreciation—Machinery ...............
23,268
To record depreciation [$213,500/1,525,000 tons=
$0.14 per ton; 166,200 tons x $0.14 = $23,268].
