CHAPTER 9
PLANT ASSETS, NATURAL RESOURCES,
AND INTANGIBLE ASSETS
LEARNING OBJECTIVES
1. EXPLAIN THE ACCOUNTING FOR PLANT ASSET
EXPENDITURES.
2. APPLY DEPRECIATION METHODS TO PLANT
ASSETS.
3. EXPLAIN HOW TO ACCOUNT FOR THE DISPOSAL
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
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,
4. Land improvements are structural additions made to land, such as driveways, 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.
5. The cost of buildings includes all necessary costs related to the purchase or construction of a
building:
a. When a building is purchased, such costs include the purchase price, closing costs, and real
estate broker’s commission.
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.
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
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
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
13. Taxpayers must use on their tax returns either the straight-line method or a special accelerated
depreciation method called the Modified Accelerated Cost Recovery System (MACRS).
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
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
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
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
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:
a. Total Cost minus Salvage Value ÷ Total Estimated Units = Depletion Cost per Unit.
b. Depletion Cost per Unit X Number of Units Extracted and Sold = Depletion Expense.
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
government grants, acquisition of another business, and private monopolistic arrangements.
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.
Copyrights
30. Copyrights are granted by the federal government, giving the owner the exclusive right to
reproduce and sell an artistic or published work. Copyrights extend for the life of the creator plus
70 years.
Trademark or Trade name
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
34. Goodwill is not amortized because it is considered to have an indefinite life.
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
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.
Compare the Accounting for Long-lived Assets Under GAAP and IFRS
*39. (L. O. 7) The following are the key similarities and differences between GAAP and IFRS as
related to the recording process for long-lived assets.
a. Similarities
(1) The definition for plant assets is the same for GAAP and IFRS.
(2) Both GAAP and IFRS define cost as consisting of all expenditures incurred to acquired
the asset and make it ready for its intended use.
(8) Initial costs to acquire natural resources is essentially the same under GAAP and IFRS.
(9) The definition of intangible assets is essentially the same under GAAP and IFRS.
(10) The accounting for exchanges of nonmonetary assets is the same between GAAP and
IFRS. GAAP now recognizes gains on exchanges of nonmonetary assets that have
commercial substance.
b. Differences
(1) IFRS uses the term residual value rather than salvage value.
LECTURE OUTLINE
A. Plant Assets.
1. Plant assets, also called property, plant, and equipment, or plant and equip-
2. Because plant assets play a key role in ongoing operations, companies:
3. Many companies have substantial investments in plant assets.
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.
b. Land improvements are structural additions made to land such as
driveways, 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
improvements have limited useful lives and their maintenance and
replacement are the responsibility of the company.
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?
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.
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
cost (cost less salvage value) divided by useful life. The straight-
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
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.
H. Plant Asset Disposals.
1. Disposal by retirement: the plant asset is scrapped or discarded
c. Record the loss.
(1) If a company retires a plant asset before it is fully depreciated,
and no cash is received, a loss is recorded by debiting Loss on
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.
I. Natural Resources.
2. Natural resources have two distinguishing characteristics.
3. The acquisition cost of a natural resource is the price needed to acquire
the resource and prepare it for its intended use.
4. The allocation of the cost of natural resources to expense in a rational
and systematic manner over the resource’s useful life is called
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.
c. Intangible assets with a limited life are normally amortized on a straight-
line basis. An indefinite-life intangible asset should not be amortized.
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.
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.
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-
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
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.
8. Research and development costs are expenditures that may lead to
patents, copyrights, new processes, and new products. These costs are
K. Statement Presentation and Analysis.
1. Usually companies combine plant assets and natural resources under
“Property, plant, and equipment,” and show intangibles separately.
*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 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
KEY POINTS
SIMILARITIES
• 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
• 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.
DIFFERENCES
• IFRS uses the term residual value, rather than salvage value, to refer to
an owner’s estimate of an asset’s value at the end of its useful life for that
owner.
• 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
Multiple Choice