H. Plant Asset Disposals.
1. Disposal by retirement: the plant asset is scrapped or discarded
a. Eliminate the book value of the plant asset at the date of disposal by
debiting Accumulated Depreciation and crediting the asset account
for its cost.
b. Debit Cash to record any cash proceeds from scrap or salvage value.
c. Record the loss.
2. Disposal by sale: the plant asset is sold to another party.
a. Eliminate the book value of the plant asset at the date of sale by deb-
iting Accumulated Depreciation and crediting the asset account for
its cost.
b. Debit Cash to record the cash proceeds from the sale.
c. Compute gain or loss.
I. Natural Resources.
1. Natural resources consist of standing timber and underground deposits of
oil, gas, and minerals.
2. Natural resources have two distinguishing characteristics.
a. They are physically extracted in operations (mining, cutting,
pumping).
b. They are replaceable only by an act of nature.
J. Accounting for Intangible Assets.
1. The accounting for intangible assets and plant assets is much the same.
a. Companies record intangible assets at cost.
2. There are several differences between accounting for intangible assets and
accounting for plant assets.
a. The term used to describe the allocation of the cost of an intangible
asset to expense is amortization, rather than depreciation.
3. Patents are an exclusive right issued by the U.S. Patent Office that enables
the recipient to manufacture, sell, or otherwise control an invention for a
period of 20 years from the date of the grant.
a. The initial cost of a patent is the cash or cash equivalent price paid
to acquire the patent.
4. The federal government grants copyrights which give the owner the exclusive
right to reproduce and sell an artistic or published work.
a. Copyrights extend for the life of the creator plus 70 years.
b. The cost of a copyright is the cost of acquiring and defending it.
5. A trademark or trade name is a word, phrase, jingle, or symbol that identifies
a particular enterprise or product.
a. The creator or original user may obtain exclusive legal right to a trade–
mark or trade name by registering it with the U.S. Patent Office, provid–
b. If a company purchases the trademark or trade name, its cost is the
purchase price. If a company develops and maintains the trademark or
trade name, any costs related to these activities are expensed as
incurred.
6. A franchise is a contractual arrangement between a franchisor and a fran-
chisee that grants the franchisee the right to sell certain products,
perform specific services, or use certain trademarks or trade names,
usually within a designated geographic area.
a. When a company can identify costs with the purchase of a franchise or
license, it should recognize an intangible asset.
7. Goodwill represents the value of all favorable attributes that relate to a
company. These include exceptional management, desirable location, good
customer relations, skilled employees, high-quality products, and harmonious
relations with labor unions.
a. Goodwill cannot be sold individually in the marketplace; it can be
identified only with the business as a whole.
b. Companies record goodwill only when an entire business is
purchased.
K. Statement Presentation and Analysis.
1. Usually companies combine plant assets and natural resources under
“Property, plant, and equipment,” and show intangibles separately.
2. Companies disclose either in the balance sheet or the notes the balances of
the major classes of assets, such as land, buildings, and equipment, and
accumulated depreciation by major classes or in total.
*L. Exchange of Plant Assets.
1. Usually companies record a gain or loss on the exchange of plant assets
since most exchanges have commercial substance. An exchange has
commercial substance if the future cash flows change as a result of the
exchange.
2. Losses on the exchange of plant assets are recognized by debiting Loss
on Disposal of Plant Assets.
3. Gains on exchange of plant assets are recognized by crediting Gain on
Disposal of Plant Assets.
a. The cost of the new asset received is equal to the fair value of the
old asset exchanged plus cash paid.
A Look at IFRS
IFRS follows most of the same principles as GAAP in the accounting for property,
plant, and equipment. There are, however, some significant differences in the
implementation. IFRS allows the use of revaluation of property, plant, and
equipment, and it also requires the use of component depreciation. In addition,
there are some significant differences in the accounting for both intangible assets
and impairments.
KEY POINTS
The following are the key similarities and differences between GAAP and IFRS
as related to the recording process for long-lived assets.
• The definition for plant assets for both IFRS and GAAP is essentially the
same.
• Both IFRS and GAAP follow the historical cost principle when accounting
for property, plant, and equipment at date of acquisition. Cost consists of all
expenditures necessary to acquire the asset and make it ready for its
intended use.
• Under both GAAP and IFRS, changes in the depreciation method used and
changes in useful life are handled in current and future periods. Prior
periods are not affected. GAAP recently conformed to international
standards in the accounting for changes in depreciation methods.
• The accounting for subsequent expenditures, such as ordinary repairs and
additions, are essentially the same under IFRS and GAAP.
• The accounting for plant asset disposals is essentially the same under
IFRS and GAAP.
• Initial costs to acquire natural resources are essentially the same under
IFRS and GAAP.
• The definition of intangible assets is essentially the same under IFRS and
GAAP.
• IFRS allows companies to revalue plant assets to fair value at the reporting
date. Companies that choose to use the revaluation framework must follow
revaluation procedures. If revaluation is used, it must be applied to all
assets in a class of assets. Assets that are experiencing rapid price
changes must be revalued on an annual basis, otherwise less frequent
revaluation is acceptable.
• As in GAAP, under IFRS the costs associated with research and
development are segregated into the two components. Costs in the
research phase are always expensed under both IFRS and GAAP. Under
IFRS, however, costs in the development phase are capitalized as
Development Costs once technological feasibility is achieved.
LOOKING TO THE FUTURE
The IASB and FASB have identified a project that would consider expanded
recognition of internally generated intangible assets. IFRS permits more
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. The cost of equipment consists of the cash purchase price plus certain related costs such
as sales taxes and freight charges.
True False
2. Cost to construct a plant includes the contract price, architect’s fees, building fees, excavation
costs but not interest costs incurred to finance the project.
True False
3. The book value of an asset equals its cost less accumulated depreciation.
True False
4. Under the declining-balance method of depreciation, an asset may not be depreciated below
its estimated salvage value.
True False
5. Ordinary repairs are expenditures to increase the operating efficiency, productive capacity,
or expected useful life of a plant asset.
True False
6. The useful life of a copyright is generally shorter than its legal life.
True False
7. Unlike other assets that can be sold individually in the marketplace, goodwill can be identified
only with the business as a whole.
True False
8. The process of allocating the cost of natural resources to expense is called amortization.
True False
*9. Gains on exchanges of plant assets are recorded in the period the exchange occurs.
True False
*10. When plant assets are exchanged, the cost of the new equipment is always equal to the
fair value of the new equipment plus the cash paid.
True False
Multiple Choice
1. The cost of a factory machine includes all of the following costs except
a. invoice price less discount taken.
b. sales tax and insurance during shipping.
c. three-year insurance policy on the machine.
d. testing and installation cost.
2. On January 1, a machine with a useful life of 5 years and a salvage value of $8,000 was
purchased for $160,000. What is the depreciation expense in year 2 under the double
declining-balance method?
a. $38,400
b. $36,480
c. $25,600
d. $24,320
3. An asset that cost $80,000 and has accumulated depreciation of $60,000 is sold for $12,000.
The journal entry would include a
a. debit to Loss on Disposal of Plant Assets of $20,000.
b. debit to Loss on Disposal of Plant Assets of $8,000.
c. credit to Gain on Disposal of Plant Assets of $8,000.
d. credit to Accumulated Depreciation for $60,000.
4. The exclusive right to reproduce and sell an artistic or published work is called a
a. patent.
b. trademark.
c. license.
d. copyright.
*5. A company decides to exchange old equipment with a book value of $81,000 ($150,000
cost less accumulated depreciation of $69,000) plus $129,000 cash for new equipment
(similar asset). The fair value of the old equipment is $90,000. The entry to record the
new equipment would include a debit to
a. Equipment (new) for $210,000.
b. Equipment (old) for $150,000.
c. Loss on Disposal of Plant Assets for $9,000.
d. Equipment (new) for $219,000.
ANSWERS TO QUIZ
True/False
1. True 6. True
2. False 7. True
Multiple Choice
1. c.