Chapter 9
Plant Assets, Natural Resources, and Intangibles
Review Questions
1. Define property, plant, and equipment. Provide some examples.
Property, plant, and equipment are long-lived, tangible assets used in the operation of a
2. Plant assets are recorded at historical cost. What does the historical cost of a plant asset
include?
3. How do land improvements differ from land?
Land improvements are depreciable improvements to land, such as fencing, sprinklers,
paving, signs, and lighting. Land is not depreciated.
4. What does the word capitalize mean?
5. What is a lump-sum purchase, and how is it accounted for?
6. What is the difference between a capital expenditure and a revenue expenditure? Give an
example of each.
A capital expenditure is debited to an asset account because it increases the asset’s capacity
7. What is depreciation? Define useful life, residual value, and depreciable cost.
Depreciation is the allocation of a plant asset’s cost to expense over its useful life.
8. Which depreciation method ignores residual value until the last year of depreciation? Why?
9. How does a business decide which depreciation method is best to use?
A business should match an asset’s expense against the revenue that the asset produces when
10. What is the depreciation method that is used for tax accounting purposes? How is it different
than the methods that are required by GAAP to be used for financial accounting purposes?
Modified Accelerated Cost Recovery System (MACRS) is a method used for tax purposes.
11. If a business changes the estimated useful life or estimated residual value of a plant asset,
what must the business do in regard to depreciation expense?
When a company makes an accounting change in estimate, generally accepted accounting
12. What financial statement are property, plant, and equipment reported on, and how?
Property, plant and equipment are reported at book value on the balance sheet. Companies
13. How is discarding of a plant asset different from selling a plant asset?
14. How is gain or loss determined when disposing of plant assets? What situation constitutes a
gain? What situation constitutes a loss?
Gain or loss is determined by comparing the cash received and the market value of any other
15. What is a natural resource? What is the process by which businesses spread the allocation of
a natural resource’s cost over its usage?
16. What is an intangible asset? Provide some examples.
Intangible assets are assets that have no physical form. Instead, these assets convey special
17. What is the process by which businesses spread the allocation of an intangible asset’s cost
over its useful life?
18. What is goodwill? Is goodwill amortized? What happens if the value of goodwill has
decreased at the end of the year?
Goodwill is the excess of the cost of an acquired company over the sum of the market values
19. What does the asset turnover ratio measure, and how is it calculated?
The asset turnover ratio measures how efficiently a business uses its average total assets to
generate sales. Net sales / Average total assets.
20A. What does it mean if an exchange of plant assets has commercial substance? Are gains and
losses recorded on the books because of the exchange?
An exchange has commercial substance if the future cash flows change as a result of the
Short Exercises
S9-1 Determining the cost of an asset
Learning Objective 1
Highland Clothing purchased land, paying $96,000 cash and signing a $300,000 note payable. In
addition, Highland paid delinquent property tax of $1,100, title insurance costing $600, and
$4,600 to level the land and remove an unwanted building. Record the journal entry for purchase
of the land.
SOLUTION
S9-2 Making a lump-sum asset purchase
Learning Objective 1
Concord Pet Care Clinic paid $210,000 for a group purchase of land, building, and equipment.
At the time of the acquisition, the land had a market value of $110,000, the building $88,000,
and the equipment $22,000. Journalize the lump-sum purchase of the three assets for a total cost
of $210,000, the amount for which the business signed a note payable.
SOLUTION
S9-3 Computing first-year depreciation and book value
Learning Objective 2
On January 1, 2018, Air Canadians purchased a used airplane for $37,000,000. Air Canadians
expects the plane to remain useful for five years (4,000,000 miles) and to have a residual value
of $5,000,000. The company expects the plane to be flown 1,400,000 miles during the first year.
Requirements
1. Compute Air Canadians’s first-year depreciation expense on the plane using the following
methods:
a. Straight-line
b. Units-of-production
c. Double-declining-balance
2. Show the airplane’s book value at the end of the first year for all three methods.
SOLUTION
S9-4 Computing second-year depreciation and accumulated depreciation
Learning Objective 2
On January 1, 2018, Advanced Airline purchased a used airplane at a cost of $60,500,000.
Advanced Airline expects the plane to remain useful for eight years (5,000,000 miles) and to
have a residual value of $5,500,000. Advanced Airline expects the plane to be flown 1,100,000
miles the first year and 1,200,000 miles the second year.
Requirements
1. Compute second-year (2019) depreciation expense on the plane using the following
methods:
a. Straight-line
b. Units-of-production
c. Double-declining-balance
2. Calculate the balance in Accumulated Depreciation at the end of the second year for all
three methods.
S9-4, cont.
SOLUTION
Requirement 1
Learning Objective 2
On February 28, 2017, Rural Tech Support purchased a copy machine for $53,400. Rural Tech
Support expects the machine to last for six years and have a residual value of $3,000. Compute
depreciation expense on the machine for the year ended December 31, 2017, using the
straight-line method.
SOLUTION
S9-6 Changing the estimated life of an asset
Learning Objective 2
Assume that Smith’s Auto Sales paid $45,000 for equipment with a 15-year life and zero
expected residual value. After using the equipment for six years, the company determines that the
asset will remain useful for only five more years.
Requirements
1. Record depreciation expense on the equipment for Year 7 by the straight-line method.
2. What is accumulated depreciation at the end of Year 7?
S9-6, cont.
SOLUTION
S9-7 Discarding of a fully depreciated asset
Learning Objective 3
On June 15, 2017, Family Furniture discarded equipment that had a cost of $27,000, a
residual value of $0, and was fully depreciated. Journalize the disposal of the equipment.
SOLUTION