Chapter 09 – Plant and Intangible Assets
Financial and Managerial Accounting, 17e 9-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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.
Chapter 09 – Plant and Intangible Assets
8. Explain the cash effects of transactions involving plant assets.
Brief topical outline
A Plant assets as a “stream of future services”
B Major categories of plant assets
1 Tangible plant assets
2 Intangible assets
3 Natural resources
C Accountable events in the lives of plant assets
D Acquisition of plant assets
1 Determining cost: an example
2 Some special considerations
a Land
b Land improvements
c Buildings
d Equipment
e Allocation of a lump-sum purchase – see Your Turn (page 390)
3 Capital expenditures and revenue expenditures
E Depreciation
1 Allocating the cost of plant and equipment over the years of use
a Depreciation is not a process of valuation
b Book value
2 Causes of depreciation
a Physical deterioration
b Obsolescence
3 Methods of computing depreciation
a The straight-line method
1 Depreciation for fractional periods
b The declining-balance method
1 Double-declining-balance
2 150% declining-balance
4 Which depreciation methods do most businesses use?
a The difference in depreciation methods: are they “real”?
5 Financial statement disclosures
a Estimates of useful life and residual value
b The principle of consistency
c Revision of estimated useful lives
6 The impairment of plant assets – see Case in Point (page 399)
7 Other depreciation methods
a The units-of-output method
b MACRS
c Sum-of-the-years-digits
d Decelerated depreciation methods
Chapter 09 – Plant and Intangible Assets
Financial and Managerial Accounting, 17e 9-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
e Depreciation methods in use: a survey
F Disposal of plant and equipment
1 Gains and losses on disposals of plant and equipment
a Disposal at a price above book value
b Disposal at a price below book value
2 Trading in used assets for new ones
3 International Financial Reporting Standards
G Intangible assets
1 Characteristics
2 Operating expenses versus intangible assets
3 Amortization
4 Goodwill
a Estimating goodwill
b Recording goodwill in the accounts- see Case in Point (page 406)
5 Patents
6 Trademarks and trade names
7 Franchises
8 Copyrights
9 Other intangibles and deferred charges
10 Research and development (R & D) costs
H Financial analysis and decision making – see Your Turn (page 407)
I Natural resources
1 Accounting for natural resources
a Depreciation of buildings and equipment closely related to natural
resources
2 Depreciation, amortization, and depletion‒a common goal
J Plant transactions and the statement of cash flows
1 Noncash investing activities – see Ethics, Fraud & Corporate Governance
(page 410)
K Concluding 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
Critical
Thinking
Cases
1
A – E
1, 2, 3
1, 2, 3, 6
1, 2, 3
2
F – G
4, 5, 6,
5, 6, 7
5, 6
3
3
H -K
7, 9, 10
9, 10
8, 9, 11
Chapter 09 – Plant and Intangible Assets
Comments and observations
Teaching objectives for Chapter 9
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.
Chapter 09 – Plant and Intangible Assets
Financial and Managerial Accounting, 17e 9-5
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.”
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.
Chapter 09 – Plant and Intangible Assets
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 find regarding depletion.
Chapter 09 – Plant and Intangible Assets
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.
1 Refer to above data. In its financial 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. d Some other amount.
2 Refer to above data. In its financial 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. d Some other amount.
3 Sayville 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.
4 Cage Corporation purchases Presley Company’s entire business for $2,700,000. The fair
market value of Presley’s net identifiable assets is $2,400,000.
a Presley should record goodwill of $300,000.
b Cage paid $300,000 for goodwill generated by Presley.
c Cage should charge the $300,000 excess paid for Presley Company directly to
expense.
d Presley should record amortization over a period not to exceed 40 years.
5 Throughout the current year, Calverton Company treated sales taxes paid on purchases of
plant assets as revenue expenditures. As a result, the current year’s:
a Net income is overstated.
b Revenue is overstated.
c Depreciation expense is understated.
d None of the above; payments of sales taxes should be treated as revenue
expenditures.