Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10-1
CHAPTER 10
PLANT ASSETS, NATURAL RESOURCES, AND
INTANGIBLES
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Explain the cost principle for
1, 2, 3, 4, 6,
10-1, 10-2,
10-1, 10-2,
10-1, 10-3,
10-3
C2. Explain depreciation for partial
years and changes in estimates
10-5, 10-7
10-11, 10-12
10-13, 10-25
10-4, 10-5
and capital expenditures, and
account for them.
Analytical objectives:
C3. Distinguish between revenue
8
10-8, 10-15
10-14, 10-15
10-4
A1. Compute total asset turnover
and apply it to analyze a
company’s use of assets.
16
10-13
10-22
SP
10-1, 10-2,
10-4, 10-7,
10-9
Procedural objectives:
P1 Compute and record
depreciation using straight-line,
units-of-production, and
declining-balance methods.
5, 11, 17,
18, 19
10-3, 10-4,
10-6
10-4, 10-5,
10-6, 10-7,
10-8, 10-9,
10-10, 10-18,
10-25
10-1, 10-2,
10-3, 10-5,
10-6, SP,
ES
10-6
through discarding, or selling an
asset.
10-24, 10-25
P2. Account for asset disposal
9
10-9
10-16, 10-17,
10-5, 10-6
P3. Account for natural resource
assets and their depletion.
10
10-10, 10-11
10-18
10-7
10-8
P4. Account for intangible assets.
12, 13, 14,
15
10-11, 10-12
10-19, 10-20
10-8
10-5, 10-8
computing the cost of plant
assets.
7, 20, 21
10-15
10-3, 10-21
10-4, 10-6
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10-2
Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and
Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows
instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
The Serial Problem for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
Synopsis of Chapter Revisions
NEW opener—Westland Distillery and entrepreneurial assignment.
Updated data in Exhibit 10.1.
Revised images for Exhibit 10.2.
Added table to explain Additional Expenditures including examples and entries.
New simple introduction to operating and capital leases.
Added paragraph on R&D expenditures.
Updated “In Control” fraud box with new KPMG data.
Sustainability section on how Westland Distillery relies on accounting for its success.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10-3
Chapter Outline
Notes
I. Plant Assets—Tangible assets used in a company’s operations that
have a useful life of more than one accounting period. Consistent with
cost principle, recorded at cost. Cost includes all normal and
reasonable expenditures necessary to get the asset in place and ready
for its intended use. Must be normal, reasonable and necessary for its
intended use.
A. Machinery and Equipment
Costs include all normal and necessary expenditures to purchase
them and prepare them for their intended use (purchase price,
taxes, transportation charges, insurance while in transit, and the
installing, assembling and testing of machinery and equipment).
B. Buildings
1. If purchased, cost usually includes its purchase price,
brokerage fees, taxes, title fees, attorney costs, and all
2. If constructed for own use, cost includes materials and labor
plus a reasonable amount of indirect overhead cost (heat,
lighting, power, and depreciation on machinery used to
construct the asset). Cost also includes design fees, building
permits, and insurance during construction.
C. Land Improvements
Costs that increase the usefulness of the land.
1. Examples: parking lot surfaces, driveways, fences, and
lighting systems (all have limited useful lives).
3. Costs are allocated to the periods they benefit (depreciated)
for streets, sewers, etc. Also includes cost of removal of any
existing structures (less proceeds from sale of salvaged material).
Land cost is not allocated to expense if it has an indefinite life.
D. Land
Cost includes purchase price, real estate commissions, title
insurance, legal fees, accrued property taxes, legal fees, title
insurance fees, accrued property taxes, surveying, clearing,
landscaping, and local government assessments (current or future)
E. Lump-Sum Purchase
A group of plant assets purchased with a single transaction for a
lump-sum price. Individual asset cost is determined by allocating
the cost of the purchase among the different types of assets
acquired based on their relative market values.
expenditures to make it ready for its intended use (any
necessary repairs or renovations such as wiring, lighting,
flooring and wall coverings).
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
II. Depreciation—The process of allocating the cost of a plant asset to
expense in the accounting periods benefiting from its use. Recorded as
a debit to Depreciation Expense and a credit to Accumulated
Depreciation.
A. Factors in Computing Depreciation
1. Cost—described in section I above.
3. Useful life—(service life) length of time the asset is expected
to be productively used in a company’s operations. Factors
4. Relationships:
a. Depreciable cost = Cost – Salvage Value
b. Book Value = Cost – Accumulated Depreciation
B. Depreciation Methods
1. Straight-line method—charges the same amount to expense
for each period of the asset’s useful life. Method used by most
2. Units-of-production method—charges a varying amount of
cost to expense for each period of an asset’s useful life
depending on its usage. Examples of capacity measurements:
3. Declining-balance method—an accelerated depreciation
method which yields larger depreciation expenses during the
early years of an asset’s life and smaller charges in later years.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
4. Depreciation for tax reporting—differences between financial
and tax accounting systems are normal and expected.
a. Many companies use accelerated depreciation in
computing taxable income because it postpones its tax
payments by charging higher depreciation expense in the
early years and lower amounts in the later years.
C. Partial Year Depreciation
When an asset is purchased (or sold) at a time other than the
beginning or end of an accounting period, depreciation is recorded
for part of the year.
D. Change in Estimates for Depreciation
If estimated salvage and/or useful life is revised:
1. Depreciation expense computations are revised by spreading
the remaining cost to be depreciated over the revised useful
2. The revision is referred to as a change in an accounting
estimate and is reflected in current and future financial
statements, not prior statements.
E. Reporting Depreciation
new assets when the presently owned assets must be replaced.
1. Cost of plant assets and accumulated depreciation are reported
on the balance sheet or in its notes.
2. To satisfy the full-disclosure principle, the depreciation
3. Plant assets are reported at their undepreciated costs (book
4. Accumulated depreciation (normal credit balance) on the
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
III. Additional Expenditures—Those made to operate, maintain, repair,
or improve plant assets after their initial purchase. To record these
expenditures one must decide whether to capitalize (increase an asset)
or expense in current period.
A. Ordinary Repairs—expenditures to keep an asset in normal, good
operating condition. They do not materially increase the asset’s life
or productive capabilities.
1. Treated as revenue expenditures (also called income statement
2. Examples: cleaning, repainting, and lubricating.
B. Betterments (Improvements) and Extraordinary Repairs—
expenditures to make a plant asset more efficient or productive;
both are treated as a capital expenditure.
1. Betterments often involves adding a component to an asset
2. Extraordinary repairs or replacements are expenditures that do
extend the asset’s useful life beyond its original estimate.
a. Examples: roofing replacement and major overhauls of
IV. Disposals of Plant Assets—Assets may be discarded, sold, or
exchanged due to wear and tear, obsolescence, inadequacy, or damage
by fire or other accident. General accounting steps in a disposal of a
plant asset:
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
• Record depreciation up to the date of disposal—this also
updates Accumulated Depreciation.
• Remove account balances of the disposed asset—including its
Accumulated Depreciation.
A. Discarding Plant Assets—no longer useful and has no market
value
Follow general accounting steps above.
2. If not fully depreciated, record loss equal to the book value.
B. Selling Plant Assets
Follow general accounting steps above.
V. Natural Resources—Assets that are physically consumed when used.
Examples include timber, mineral deposits, and oil and gas fields.
Often called wasting assets.
proportion to the depletion of the resource (use units-of-production
A. Cost Determination and Depletion
1. Recorded at cost, which includes all expenditures necessary to
acquire the resource and prepare it for its intended use.
3. Depletion expense (debit) per period is based on the units
4. Natural resources are reported on the balance sheet at cost less
accumulated depletion.
B. Plant Assets Tied into Extracting
When the usefulness of these plant assets is directly related to the
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10-8
Chapter Outline
Notes
VI. Intangible Assets—Certain nonphysical assets (used in operations)
that confer on owners long-term rights, privileges, competitive
advantages. Examples in B below.
A. Cost Determination and Amortization
1. Recorded at cost when purchased. If simply developed by the
business, relative immaterial costs are expensed.
2. Amortization—process of systematically allocating cost of
intangible asset to expense over its estimated useful or
economic life. (If it has an indefinite useful life, it should not
be amortized but is tested annually for impairment—this test is
discussed in advanced course)
a. Useful or economic life may differ from legal life.
3 Gross acquisition cost is disclosed on the balance sheet along
with their accumulated amortization.
B. Types of Intangibles
1. Patent—an exclusive right granted to its owner to produce and
sell a patented item or to use a process for 20 years. Costs of
research and development leading to a new patent are expense
when incurred.
3. Franchises and Licenses—rights that a company or
4. Trademarks and Trade Names—symbols, names, phrases, or
jingles identified with a company, product, or service.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10-9
Chapter Outline
Notes
5. Goodwill—specific meaning in accounting: the amount by
which the value of a company exceeds the value of its
individual assets and liabilities. Implies the company as a
6. Leaseholds—the rights to possess and use leased property
granted by the property’s owner (lessor) to the lessee in a
7. Leasehold improvements—alterations or improvements to
8. Research and Development – expenditures aimed at
discovering new products, new processes, or knowledge.
Costs are expensed when incurred because it is difficult to
predict future benefits.
VII. Decision Analysis—Total Asset Turnover
A. Measure of company’s efficiency using assets to generate sales.
B. Calculated by dividing net sales by average total assets.
VIII. Exchanging Plant Assets
A. Accounting for the exchange depends on whether the transaction
has commercial substance. An exchange has commercial
substance if the company’s future cash flows change as a result of
the exchange of one asset for another asset.
=
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10–10
VISUAL #10-1
FORMULAS FOR DEPRECIATION METHODS
1. STRAIGHT LINE
2. UNITS OF PRODUCTION
(Depreciable)
a) FHC – Estimated salvage Cost per
Predicted units of production Unit
**Cost Per Unit
3. DOUBLE-DECLINING BALANCE
Book Value (beginning of year) x RATE* = Depreciation (for that year)
=
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10–11
Chapter 10 Alternate Demonstration Problem
A new machine costs $120,000, has an estimated useful life of five years
and an estimated salvage value of $15,000 at the end of that time. It is
expected that the machine can produce 210,000 widgets during its useful
life.
The New Times Company purchases this machine on January 1, 2017, and
uses it for exactly three years. During these years the annual production of
widgets has been 80,000, 50,000, and 30,000 units, respectively. On
January 1, 2020, the machine is sold for $45,000.
Required:
1. Calculate the depreciation expense for each of the first three years
using:
2. Prepare the proper journal entry for the sale of the machine under the
three different depreciation methods.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10–12
Chapter 10 Solution: Alternate Demonstration Problem
1a. Straight-line
1b. Units–of-production
1c. Double-declining balance
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
2. The journal entry for the sale of the asset will have the same general
form regardless of the method of depreciation adopted, except that
whether there is a gain or a loss on the sale may change according to
the depreciation method used. The gain or loss on disposal of the asset
is determined by comparing the sale price, in this case $45,000, with the
net book value of the asset at the time of the sale.
Straight-line
10–14
Chapter 10 Alternate Demonstration Problem #2
A new van costs $25,000, has an estimated useful life of five years and an
estimated salvage value of $5,000 at the end of that time. It is expected that
the van will be driven 100,000 miles during its useful or service life.
The Nation Express Company purchases this van on April 1, 2017. During
2017 the van is driven 13,000 miles and during 2018 it was driven 21,000
miles.
Required:
1. Calculate the depreciation expense for 2017 and 2018 using:
a. Straight-line
b. Double-declining-balance
c. Units–of-production
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
10–15
Chapter 10 Solution: Alternate Demonstration Problem #2
Straight Line
per year
x
=
Depreciation expense
x
=
x
x
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
Units of Production
cost – salvage
=
depreciation rate per mile
total miles
x
=
expense
=
(rate)
=
Expense
$ 0.20
x
=
$ 2,600
$ 0.20
x
=
$ 4,200