Chapter 09—Plant and Intangible Assets
Financial and Managerial Accounting, 18e 9-1
9 PLANT AND INTANGIBLE ASSETS
Chapter Summary
The material on plant assets is organized into sections for tangible assets, intangible
assets, and natural resources.
For all three categories of plant assets the chapter focuses on three accountable events:
(1) acquisition, (2) allocation of the acquisition cost to expense over the asset’s lifetime, and (3)
sale or disposal. In determining the cost of a plant asset, careful attention is paid to distinguishing
between capital and revenue expenditures. Special considerations surrounding the acquisition of
land, existing structures, and land improvements are briefly discussed, as is the allocation of
lump-sum purchases.
A considerable amount of attention is paid to depreciation. Before discussing various
methods of calculating periodic depreciation, a conceptual introduction explains that
depreciation is simply the process of allocating a recorded cost and does not represent an
accounting effort to establish the market value of a plant asset. At this point in the course, the
student is already aware of the calculation of straight-line depreciation and the adjusting entry to
record the expense. Accounting for residual values and dealing with fractional periods completes
the discussion from prior chapters. Accelerated depreciation is introduced using the declining
balance method for illustration.
Accounting for the disposal of plant assets requires a journal entry to remove both the
original recorded cost of the asset and the accumulated depreciation. The chapter deals with sales
for cash, trade-ins, and scrapping worthless equipment. The calculation of gain or loss is
illustrated only for financial statement purposes. Trade-in transactions are treated only briefly at
an introductory level.
A wide variety of intangible assets including trademarks, patents, copyrights, and
franchises are discussed, but only goodwill is treated in detail. The difficulty of objectively
estimating goodwill is explained as the reason that this asset is only recorded when purchased.
The brief discussion of natural resources parallels that for equipment. We emphasize that
depletion is first recorded as inventory and charged to expense as the material is sold.
Learning Objectives
1. Determine the cost of plant assets.
2. Distinguish between capital expenditures and revenue expenditures.
3. Compute depreciation by the straight-line and declining-balance methods.
4. Account for depreciation using methods other than straight-line or declining-balance.
5. Account for the disposal of plant assets.
6. Explain the nature of intangible assets, including goodwill.
7. Account for the depletion of natural resources.
Chapter 09—Plant and Intangible Assets
9-2 Instructor’s Resource Manual
8. Explain the cash effects of transactions involving plant assets.
Brief Topical Outline
A. Plant assets as a “stream of future services”
B. Major categories of plant assets
C. Accountable events in the lives of plant assets
D. Acquisition of plant assets
1. Determining cost: an example
2. Some special considerations
a. Land
b. Land improvements
c. Buildings
d. Equipment
e. Allocation of a lump-sum purchase—see Your Turn (page 394)
3. Capital expenditures and revenue expenditures
E. Depreciation
1. Allocating the cost of plant and equipment over the years of use
a. Depreciation is not a process of valuation
b. Book value
2. Causes of depreciation
a. Physical deterioration
b. Obsolescence
3. Methods of computing depreciation
a. Data for our illustrations
4. The straight-line method
a. Depreciation for fractional periods
5. The declining-balance method
a. Double-declining-balance
b. 150 percent declining-balance
6. Which depreciation methods do most businesses use?
a. The differences in depreciation methods: are they “real”?
7. Financial statement disclosures
a. Estimates of useful life and residual value
b. The principle of consistency
c. Revision of estimated useful lives
8. The impairment of plant assets – see Case in Point (page 403)
F. Other depreciation methods
1. The units-of-output method
2. MACRS
3. Sum-of-the-years’ digits
4. Decelerated depreciation methods
5. Depreciation methods in use: a survey
G. Disposal of plant and equipment
1. Gains and losses on the disposal of plant and equipment
Chapter 09—Plant and Intangible Assets
Financial and Managerial Accounting, 18e 9-3
a. Disposal at a price above book value
b. Disposal at a price below book value
2. Trading in used assets for new ones
3. International financial reporting standards
H. Intangible assets
1. Characteristics
2. Operating expenses versus intangible assets
3. Amortization
4. Goodwill
a. Estimating goodwill
b. Recording goodwill in the accounts—see International Case in Point (page
410)
5. Patents
6. Trademarks and trade names
7. Franchises
8. Copyrights
9. Other intangibles and deferred charges
10. Research and development (R&D) costs—see Pathways Connection (page 411)
and Your Turn (page 412)
I. Natural resources
1. Accounting for natural resources
a. Depreciation of buildings and equipment closely related to natural
resources
2. Depreciation, amortization, and depletion—a common goal
J. Plant transactions and the statement of cash flows
1. Noncash investing activities—see Ethics, Fraud, & Corporate Governance
(page 414)
K. Concluding remarks
Topical Coverage and Suggested Assignments
Class
Meetings
on Chapter
Topical
Outline
Coverage
Discussion
Questions*
Brief
Exercises*
Exercises*
Problems*
Critical
Thinking
Cases*
1
A – E
1, 2, 3
1, 2, 3, 6
1, 2, 3
1
2
F – G
4, 5, 6,
5, 6, 7
5, 6
2, 3
3
3
H – K
7, 9, 10
9, 10
8, 9, 11
5, 6
*Homework assignment (to be completed prior to class)
Chapter 09—Plant and Intangible Assets
9-4 Instructor’s Resource Manual
Comments and Observations
Teaching Objectives for Chapter 9
This chapter covers accounting for plant assets, including acquisition, depreciation, and disposal.
Also included in the chapter are accounting for intangible assets and brief coverage of natural
resources. Our objectives in presenting this material are to:
1. Describe plant assets as a “stream of services” to be received by the business entity.
2. Distinguish between capital expenditures and revenue expenditures.
3. Explain and illustrate depreciation as a technique for allocating costs.
4. Explain and illustrate the mechanics of the depreciation methods discussed in the chapter.
5. Explain and illustrate accounting for disposals of plant assets.
6. Explain the nature of intangible assets.
7. Discuss techniques for estimating the value of the goodwill possessed by a successful
business.
8. Explain and illustrate depletion; relate depreciation, amortization, and depletion to the
matching principle.
Chapter 09—Plant and Intangible Assets
Financial and Managerial Accounting, 18e 9-5
General Comments
Some students have difficulty in identifying the types of expenditures included in the cost
of an asset, and in distinguishing between capital expenditures and revenue expenditures. We
recommend an in-class review of Discussion Questions 4 and 5 and of Exercise 2 to clarify these
points. The most important topic in this chapter is depreciation. Perhaps the greatest challenge in
explaining depreciation is to dispel the idea that depreciation represents a decline in market
value. Students are familiar with the term depreciation as it relates to the market value of an
automobile. The diagram on page 395 is designed to stress the idea that depreciation is a cost
allocation process, not a valuation process.
We recommend discussing in class the extent to which depreciation is based upon
judgments (estimates), and the roles of management and auditors in making and evaluating these
judgments. The one form of depreciation calculation that requires no judgment or estimates is
that required for income tax purposes under MACRS. We stress that different depreciation
methods are typically used for financial reporting purposes and for income tax purposes.
Exercise 5 and Case 3 emphasize these points. Problem 3 is a comprehensive review of the
differences among depreciation methods.
In discussing intangible assets, we place greater emphasis upon the limitations of
financial reporting than upon simple mechanics such as amortization over 40 years. Informed
users of financial statements should recognize that a business may have intangible assets of
immense economic value which do not even appear on the balance sheet, either because they
were developed internally or because they have long since been amortized. Examples include the
Coca-Cola trademark and the brand names “Kleenex” and “Scotch Tape.”
Caution: In discussing such issues as differences between recorded values and economic values,
we consider it important not to downplay the relevance and usefulness of financial statements.
Actually, financial statements and the related disclosures provide an informed reader with many
clues as to resources that may have economic values significantly different from the recorded
amounts. Many accounting numbers should not be taken at face value; the informed decision
makers should look to the accounting policies and facts that underlie the numbers.
We view accounting for natural resources and depletion as optional topics in the
introductory accounting course. Basically, these topics consist of applying units-of-output
depreciation within a specific industry setting. If the topic is discussed in class, we would stress
the difficulty in estimating the original quantity of the natural resource at the site. These
estimates are made by professional geologists and other specialists with expertise in fields other
than accounting.
Chapter 09—Plant and Intangible Assets
9-6 Instructor’s Resource Manual
Supplemental Exercises
Group Exercise
from the MACRS table for 5-year property using the half-year convention. Prepare a
presentation for the class demonstrating how the percentage allowances for depreciation in this
table were determined.
Internet Exercise
Chapter 09—Plant and Intangible Assets
Financial and Managerial Accounting, 18e 9-7
CHAPTER 9 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question in the space provided.
Use the following data for questions 1 and 2.
On March 12, 2016, Shoreham, Inc. acquired melting equipment for $45,600. The estimated life of the
equipment is 6 years, with an estimated residual value of $2,400.
1. Refer to above data. In its financial statements, Shoreham uses straight-line depreciation with the
half-year convention. The book value of the equipment at December 31, 2017, will be:
a $26,600. b $42,000. c $34,800. d Some other amount.
2. Refer to above data. In its financial statements, Shoreham uses double-declining-balance
depreciation with half-year convention. The book value of the equipment at December 31, 2017,
will be:
a $20,267. b $12,667. c $25,333. d Some other amount.
3. Sayville Dairy sold a delivery truck for cash of $8,680. The original cost of the truck was $33,600,
and a loss of $5,320 was recognized on the sale. The accumulated depreciation at the date of sale
must have been:
a $24,920. b $14,560. c $3,360. d $19,600.
4. Cage Corporation purchases Presley Company’s entire business for $2,700,000. The fair market
value of Presley’s net identifiable assets is $2,400,000.
a Presley should record goodwill of $300,000.
b Cage paid $300,000 for goodwill generated by Presley.
c Cage should charge the $300,000 excess paid for Presley Company directly to expense.
d Presley should record amortization over a period not to exceed 40 years.
5. Throughout the current year, Calverton Company treated sales taxes paid on purchases of plant
assets as revenue expenditures. As a result, the current year’s:
a Net income is overstated.
b Revenue is overstated.
c Depreciation expense is understated.
d None of the above; payments of sales taxes should be treated as revenue expenditures.
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9-8 Instructor’s Resource Manual
CHAPTER 9 NAME #
10-MINUTE QUIZ B SECTION
Indicate the best answer for each question in the space provided.
Use the following data for the four independent questions which follow:
On May 5, 2017, Lloyd purchased a machine for $84,000. The estimated life of the machine was 10
years, with an estimated residual value of $10,000. The service life in terms of “output” is estimated at
8,000 hours of operation.
1. Refer to the above data. Assume Lloyd uses straight-line depreciation with the half-year
convention. Depreciation expense to be recognized in 2017 (the year of purchase) is:
a $7,400. b $8,400. c $3,700. d Some other amount.
2. Refer to the data above. Assume Lloyd uses 200%-declining-balance depreciation with the half-
year convention. Depreciation expense to be recognized in 2018 (the second year of ownership) is:
a $8,400. b $13,120. c $15,120. d Some other amount.
3. Refer to the data above. Assume Lloyd uses 150%–declining-balance depreciation with the half-
year convention. Depreciation expense to be recognized in 2017 (the year of purchase) is:
a $8,400. b $6,300. c $12,600. d Some other amount.
4. Refer to the data above. Assume Lloyd uses the units-of-output method and that the machine was in
operation for 1,000 hours in 2017 and 1,800 hours in 2018. The book value of the machine at
December 31, 2018 is:
a $48,100. b $58,100. c $25,900. d Some other amount.
Chapter 09—Plant and Intangible Assets
Financial and Managerial Accounting, 18e 9-9
CHAPTER 9 NAME #
10-MINUTE QUIZ C SECTION
On April 8, 2018, Dreamland Park purchased a ferris wheel for $300,000. The estimated life of the ferris
wheel was 10 years, with an estimated residual value of $60,000. The service life in terms of output is
estimated at 30,000 hours of operation.
Compute the depreciation on this ferris wheel in 2018 and 2019 using the following methods.
2018 2019
a Straight-line (with half-year convention) $________ $________
b 200%-declining-balance (with half-year convention) $________ $________
c 150%-declining-balance (with half-year convention) $________ $________
d Units-of–output method (hours of operation:
(2,600 in 2010 and 6,000 in 2011) $________ $________
e Straight-line (with depreciation calculated to the
nearest whole month) $________ $________
Chapter 09—Plant and Intangible Assets
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CHAPTER 9 NAME #
10-MINUTE QUIZ D SECTION
Louisville Farms, a breeder of racehorses, paid $432,000 cash for a prize-winning stallion on January 1,
2008. The stallion is depreciated on a straight-line basis, with depreciation for partial years rounded to the
nearest month. Estimated useful life was nine years, with no residual value. After owning the animal for
six years and five months, Louisville Farms sold the stallion on May 31, 2017, for cash of $85,000.
Depreciation had last been recorded on December 31, 2016.
a Compute to the nearest full month depreciation for the fractional period from January 1, 2017 to May
31 of 2017. $______________
b Compute the book value of the stallion at May 31, 2017, the date of sale.
$______________
c Compute the gain or loss on the sale of the stallion. $______________ (gain/loss)
d In the space provided below, prepare the journal entry to record the sale of the stallion on May 31,
2017. (Use Breeding Stock as the title of the asset account. Assume that depreciation to date of sale
already has been recorded.)
2017
General Journal
May 31
Computations
Chapter 09—Plant and Intangible Assets
Financial and Managerial Accounting, 18e 9-11
SOLUTIONS TO CHAPTER 9 10-MINUTE QUIZZES
QUIZ A
1 C
QUIZ B
QUIZ C
Year 1 Year 2
a Straight-line $12,000 $24,000
Year 1: [($300,000 – $60,000) × 1/10 × 1/2]
Learning Objective: 3, 4
Chapter 09—Plant and Intangible Assets
9-12 Instructor’s Resource Manual
QUIZ D
2017
General Journal
May 31
Loss on Sale of Breeding Stock
39,000
Cash
85,000
Breeding Stock
To record sale of stallion at price below book value.
Computations
a Depreciation for the five months ended May 31, 2009
Chapter 09—Plant and Intangible Assets
Financial and Managerial Accounting, 18e 9-13
Assignment Guide to Chapter 9
Brief
Exercises
Exercises
Problems
Cases
Net
Item Number
1-10
1-15
1
2
3
4
5
6
7
8
1
2
3
4
5
Time estimate (in minutes)
<15
<15
25
45
50
25
25
20
30
30
20
20
20
30
n/a
Difficulty rating
E
E
E
M
S
M
M
M
M
M
S
S
E
M
M
Learning Objectives:
1
2, 10, 15
1. Determine the cost of plant assets.
1
8
8, 10, 12
9