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CHAPTER 9
PLANT ASSETS, NATURAL RESOURCES,
AND INTANGIBLE ASSETS
LEARNING OBJECTIVES
1. DESCRIBE HOW THE HISTORICAL COST PRINCIPLE
APPLIES TO PLANT ASSETS.
2. EXPLAIN THE CONCEPT OF DEPRECIATION AND
HOW TO COMPUTE IT.
3. DISTINGUISH BETWEEN REVENUE AND CAPITAL
EXPENDITURES, AND EXPLAIN THE ENTRIES FOR
EACH.
4. EXPLAIN HOW TO ACCOUNT FOR THE DISPOSAL
OF A PLANT ASSET.
5. COMPUTE PERIODIC DEPLETION OF NATURAL
RESOURCES.
6. EXPLAIN THE BASIC ISSUES RELATED TO ACCOUNT-
ING FOR INTANGIBLE ASSETS.
7. INDICATE HOW PLANT ASSETS, NATURAL RE-
SOURCES, AND INTANGIBLE ASSETS ARE REPORTED.
*8. EXPLAIN HOW TO ACCOUNT FOR THE EXCHANGE
OF PLANT ASSETS.
CHAPTER REVIEW
Plant Assets
1. (L.O. 1) Plant assets are resources that have a physical substance (a definite size and shape),
Cost of Plant Assets
2. Plant assets are recorded at cost in accordance with the historical cost principle. Cost consists
3. The cost of land includes the cash purchase price, closing costs such as title and attorney’s fees,
debited to the Land Account.
4. Land improvements are structural additions made to land, such as driveways, parking lots,
5. The cost of buildings includes all necessary costs related to the purchase or construction of a
building:
estate broker’s commission.
b. Costs to make the building ready for its intended use include expenditures for remodeling and
6. The cost of equipment consists of the cash purchase price, sales taxes, freight charges, and
expensed as incurred.
Depreciation
7. (L.O. 2) Depreciation is the process of allocating to expense the cost of a plant asset over its
in accordance with the expense recognition principle.
b. During an asset’s life, its usefulness may decline because of wear and tear or obsolescence.
of the asset.
8. Three factors that affect the computation of depreciation are (1) cost, (2) useful life, and (3) salvage
value.
9. Three methods of recognizing depreciation are (a) straight-line, (b) units-of-activity, and (c) declining-
balance.
Straight-Line Method
Depreciable Cost ÷ Useful Life (in years) = Depreciation Expense
service life. Annual depreciation is $2,500 [($11,000 – $1,000 ÷ 4)].
c. The straight-line method predominates in practice.
d. This method is simple to apply and it matches expenses and revenues appropriately when
Units-of-Activity Method
11. Under the units-of-activity method, service life is expressed in terms of the total units of produc-
tion or expected use from the asset, rather than time.
(1) Depreciable Cost ÷ Total Units of Activity = Depreciable Cost per Unit
b. To illustrate the computation, assume that Benson Company expects to drive the truck
purchased in (10b) above for 100,000 miles and that 30,000 miles are driven in the first year.
Depreciation for the first year is $3,000.
(1) $10,000 ÷ 100,000 = $.10 per mile.
(2) $.10 X 30,000 = $3,000.
Declining-Balance Method
12. The declining-balance method produces a decreasing annual depreciation expense over the
useful life of the asset.
Book Value at Beginning of Year X Declining-Balance Rate = Depreciation Expense
50%).
c. Under this method, the depreciation rate remains constant from year to year, but the book
value to which the rate is applied declines each year.
13. Taxpayers must use on their tax returns either the straight-line method or a special accelerated
Revising Periodic Depreciation
14. If wear and tear or obsolescence indicate that annual depreciation is inadequate or
b. To determine the new annual depreciation expense, the depreciable cost at the time of the
Expenditures During Useful Life
15. (L.O. 3) Ordinary repairs are expenditures to maintain the operating efficiency and expected
16. Additions and improvements are costs incurred to increase the operating efficiency, productive
17. Capital expenditures increase the company’s investment in productive facilities. These expendi-
tures include additions and improvements.
Plant Asset Disposals
19. At the time of disposal, it is necessary to determine the book value of the plant asset.
a. If the disposal occurs during the year, depreciation for the fraction of the year to the date of
disposal must be recorded.
asset.
Retirement of Plant Assets
20. In accounting for a disposal by retirement,
to the plant asset account.
b. if the asset is retired before it is fully depreciated and no scrap or salvage value is received,
a loss on disposal of plant assets occurs.
the income statement.
Sale of Plant Assets
21. In a disposal by sale, the book value of the asset is compared with the proceeds received from
the sale.
income statement.
Natural Resources
22. (L.O. 5) Natural resources consist of standing timber and underground deposits of oil, gas, and
Acquisition Cost
23. The acquisition cost of a natural resource is the price needed to acquire the resource and prepare
it for its intended use.
Depletion
24. Depletion is the systematic write-off of the cost of natural resources. The units-of-activity
b. Depletion Cost per Unit X Number of Units Extracted and Sold = Depletion Expense.
25. To record depletion expense, Depletion Expense is debited and a contra asset account,
Accumulated Depletion, is credited.
sheet.
Intangible Assets
26. (L.O. 6) Intangible assets are rights, privileges, and competitive advantages that result from the
27. In general, accounting for intangible assets parallels the accounting for plant assets. Intangible
not be allocated.
28. Differences between the accounting for intangible assets and the accounting for plant assets
include:
credited.
c. Amortization is typically computed on a straight-line basis.
Patents
29. A patent is an exclusive right issued by the U.S. Patent Office that enables the recipient to
manufacture, sell, or otherwise control his or her invention for a period of twenty years from the
date of grant.
a. The initial cost of a patent is the cash or cash equivalent price paid when the patent is
acquired.
b. When legal costs are incurred in successfully defending the patent, they are added to the
Patents account and amortized over the remaining useful life of the patent.
c. The cost of the patent should be amortized over its legal life (20 years) or useful life,
whichever is shorter.
70 years.
Trademark or Trade name
31. A trademark or trade name is a word, phrase, jingle, or symbol that distinguishes or identifies
a particular enterprise or product.
Franchise
32. A franchise is a contractual arrangement under which the franchisor grants the franchisee the
right to sell certain products, to perform specific services, or to use certain trademarks or trade
names, usually within a designated geographic area. Another type of franchise, commonly
referred to as a license or permit, is entered into between a governmental body and a business
enterprise and permits the enterprise to use public property in performing its services.
Goodwill
relations with labor unions.
a. Goodwill can be identified only with the business as a whole.
b. Goodwill is recorded only when there is an exchange transaction that involves the purchase
of an entire business.
c. When an entire business is purchased, goodwill is the excess of cost over the fair value of
the net assets (assets less liabilities) acquired.
Research and Development
35. Research and development costs are costs that are spent on developing new products and
processes. Such costs are usually recorded as an expense when incurred.
Financial Statement Presentation
Exchanges of Plant Assets
*37. (L.O. 8) Companies usually record a gain or loss on the exchange of plant assets because most
*38. In recording an exchange at a loss (or gain), three steps are required:
a. Eliminate the book value of the asset given up.
b. Record the cost of the asset acquired.
c. Recognize the loss or gain on disposal of plant assets.
LECTURE OUTLINE
A. Plant Assets.
1. Plant assets, also called property, plant, and equipment, or plant and equip-
ment, are resources that have a physical substance (a definite size and
sale to customers.
2. Because plant assets play a key role in ongoing operations, companies:
a. Keep plant assets in good operating condition.
b. Replace worn-out or outdated plant assets.
c. Expand productive resources as needed.
at cost.
2. Cost consists of all expenditures necessary to acquire the asset and make
it ready for its intended use.
3. Once cost is established, the company uses that amount as the basis of
accounting for the plant asset over its useful life.
assets.
a. The cost of land includes (1) the cash purchase price, (2) closing costs
such as title and attorney’s fees, (3) real estate brokers’ commissions,
and (4) accrued property taxes and other liens assumed by the
purchaser.
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 9-9
b. Land improvements are structural additions made to land such as drive-
ways, parking lots, fences, landscaping, and underground sprinklers.
The cost of land improvements includes all expenditures needed to
make the improvements ready for their intended use. These improve-
ments have limited useful lives and their maintenance and replacement
are the responsibility of the company.
c. Costs related to the purchase of a building include the purchase price,
closing costs, and real estate broker’s commission. Costs to make
the building ready for its intended use include expenditures for
d. The cost of equipment includes the cash purchase price, sales taxes,
freight charges, and insurance during transit paid by the purchaser.
It also includes expenditures required in assembling, installing, and
testing the unit. Motor vehicle licenses and accident insurance on
future periods.
ACCOUNTING ACROSS THE ORGANIZATION
commercial airlines.
Why might airline managers choose to lease rather than purchase their planes?
Answer: The reasons for leasing include favorable tax treatment, better financing
options, increased flexibility, reduced risk of obsolescence, and low
airline income.
C. Depreciation.
be quite different from its fair value.
5. Revenue-producing ability of plant assets may decline because of:
a. Wear and tear.
b. Obsolescence, which is the process of becoming out of date before
the asset physically wears out.
cash fund.
