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CHAPTER 10
PLANT ASSETS, NATURAL RESOURCES,
AND INTANGIBLE ASSETS
LEARNING OBJECTIVES
1. EXPLAIN THE ACCOUNTING FOR PLANT ASSET
EXPENDITURES.
2. APPLY DEPRECIATION METHODS TO PLANET
ASSETS.
CHAPTER REVIEW
Plant Assets
1. (L.O. 1) Plant assets are resources that have a physical substance (a definite size and shape),
are used in the operations of a business and are not intended for sale to customers. They are also
called property, plant, and equipment; plant and equipment; or fixed assets.
Cost of Plant Assets
2. Plant assets are recorded at cost in accordance with the historical cost principle. Cost consists
of all expenditures necessary to (1) acquire the asset, and (2) make it ready for its intended use.
3. The cost of land includes the cash purchase price, closing costs such as title and attorney’s fees,
real estate broker’s commission, and accrued property taxes and other liens on the land assumed
by the purchaser. All necessary costs incurred in making land ready for its intended use are
debited to the Land Account.
Depreciation
7. (L.O. 2) Depreciation is the process of allocating to expense the cost of a plant asset over its
useful (service) life in a rational and systematic manner.
a. The cost allocation is designed to provide for the proper matching of expenses with revenues
in accordance with the expense recognition principle.
b. During an asset’s life, its usefulness may decline because of wear and tear or obsolescence.
c. Recognition of depreciation does not result in the accumulation of cash for the replacement
of the asset.
9. Three methods of recognizing depreciation are (a) straight-line, (b) units-of-activity, and (c) declining-
balance.
a. Each method is acceptable under generally accepted accounting principles.
b. Management selects the method it believes to be appropriate.
c. Once a method is chosen, it should be applied consistently.
Straight-Line Method
10. Under the straight-line method depreciation is the same for each year of the asset’s useful life.
a. The formula for computing annual depreciation expense is:
Depreciable Cost ÷ Useful Life (in years) = Depreciation Expense
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.
a. The formulas for computing depreciation expense are:
(1) Depreciable Cost ÷ Total Units of Activity = Depreciable Cost per Unit
(2) Depreciable Cost per Unit X Units of Activity During the Year = Depreciation Expense
Declining-Balance Method
12. The declining-balance method produces a decreasing annual depreciation expense over the
useful life of the asset.
a. The formula for computing depreciation expense is:
Book Value at Beginning of Year X Declining-Balance Rate = Depreciation Expense
Revising Periodic Depreciation
14. If wear and tear or obsolescence indicate that annual depreciation is inadequate or
excessive, a change in the periodic amount should be made.
Expenditures During Useful Life
15. Ordinary repairs are expenditures to maintain the operating efficiency and expected productive
life of the plant asset. They are debited to Maintenance and Repairs Expense as incurred and are
often referred to as revenue expenditures.
Plant Asset Disposals
18. (L.O. 3) Plant assets may be disposed of by (a) retirement, (b) sale, or (c) exchange.
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.
Retirement of Plant Assets
20. In accounting for a disposal by retirement,
a. if the asset is fully depreciated, the entry is a debit to Accumulated Depreciation and a credit
to the plant asset account.
b. if the asset is retired before it is fully depreciated and no scrap or salvage value is received,
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.
a. If the proceeds of the sale exceed the book value, a gain on disposal of plant assets
occurs which is reported in the Other revenues and gains section of the income statement.
Natural Resources
22. (L.O. 4) Natural resources consist of standing timber and underground deposits of oil, gas, and
minerals. These assets are frequently called wasting assets.
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
method is generally used to compute depletion because periodic depletion is generally a function
of the units extracted during the year. The formulas for computing depletion expense are:
Intangible Assets
26. Intangible assets are rights, privileges, and competitive advantages that result from the
ownership of assets that do not possess physical substance. Intangibles may arise from
27. In general, accounting for intangible assets parallels the accounting for plant assets. Intangible
assets are (a) recorded at cost, (b) cost is written off over useful life in a rational and systematic
28. Differences between the accounting for intangible assets and the accounting for plant assets
include:
a. The systematic write-off of an intangible asset is referred to as amortization.
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.
Copyrights
30. Copyrights are granted by the federal government, giving the owner the exclusive right to
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
Goodwill
33. Goodwill is the value of all favorable attributes that relate to a business enterprise such as excep-
tional management, skilled employees, high-quality products, fair pricing policies, and harmonious
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.
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
36. (L.O. 5) In the balance sheet, plant assets and natural resources are usually combined under
Property, Plant, and Equipment and intangibles are shown separately under Intangible Assets.
Exchanges of Plant Assets
*37. (L.O. 6) Companies usually record a gain or loss on the exchange of plant assets because most
exchanges have commercial substance. An exchange has commercial substance if the future
cash flows change as a result of the exchange.
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
shape), are used in the operations of a business, and are not intended for
sale to customers.
2. Because plant assets play a key role in ongoing operations, companies:
a. Keep plant assets in good operating condition.
B. Determining the Cost of Plant Assets.
1. The historical cost principle requires that companies record plant assets
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.
b. Land improvements are structural additions made to land such as drive-
ways, parking lots, fences, landscaping, and underground sprinklers.
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
ACCOUNTING ACROSS THE ORGANIZATION
Leasing is a big business for U.S. companies. As an excellent example of the
magnitude of leasing, leased planes account for nearly 40% of the U.S. fleet of
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
C. Depreciation.
1. Depreciation is the process of allocating to expense the cost of a plant
asset over its useful (service) life in a rational and systematic manner.
2. Cost allocation enables companies to properly match expenses with reve-
nues in accordance with the expense recognition principle.
D. Factors in Computing Depreciation/Depreciation Methods.
1. The computation of depreciation expense is based on three factors:
a. Cost.
b. Useful life is an estimate of the expected productive life of the asset for
its owner. Useful life may be expressed in terms of time, units of
2. There are three depreciation methods.
a. Under the straight-line method, companies expense the same
amount of depreciation for each year of the asset’s useful life. The
formula for computing annual depreciation expense is depreciable
throughout the service life.
b. Under the units-of-activity method, useful life is expressed in terms
of the total units of production or use expected from the asset. Annual
depreciation expense is computed by multiplying depreciable cost
per unit by the units of activity during the year. This method is not nearly
E. Depreciation and Income Taxes.
1. The Internal Revenue Service (IRS) does not require taxpayers to use
the same depreciation method on the tax return that is used in preparing
financial statements.
F. Revising Periodic Depreciation.
1. If wear and tear or obsolescence indicate that annual depreciation estimates
are inadequate or excessive, the company should change the amount of
depreciation expense.
G. Expenditures During Useful Life.
1. Companies incur revenue expenditures to maintain the operating efficiency
and productive life of the asset. These expenditures are fairly small amounts
that occur frequently and are debited to Maintenance and Repairs
Expense as incurred.
