Chapter 10-1

PLANT ASSETS, PLANT ASSETS, NATURAL NATURAL

RESOURCES, AND RESOURCES, AND INTANGIBLE INTANGIBLE

ASSETSASSETSAccounting Principles, Eighth Edition

CHAPTERCHAPTER 1010CHAPTERCHAPTER 1010

Chapter 10-2

“Used in operations” and not for resale.

Long-term in nature and usually depreciated.

Possess physical substance.

Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools).

Major characteristics include:

Section 1 –Section 1 – Plant Assets Plant AssetsSection 1 –Section 1 – Plant Assets Plant Assets

Referred to as property, plant, and equipment; plant and equipment; and fixed assets.

Chapter 10-3

Includes all costs to acquire land and ready it for use.

Costs typically include:

Land

Determining the Cost of Plant Determining the Cost of Plant AssetsAssetsDetermining the Cost of Plant Determining the Cost of Plant AssetsAssets

(1) the purchase price;

(2) closing costs, such as title and attorney’s fees;

(3) real estate brokers’ commissions;

(4) costs of grading, filling, draining, and clearing;

(5) assumption of any liens, mortgages, or encumbrances on the property.LO 1 Describe how the cost principle applies to plant assets.LO 1 Describe how the cost principle applies to plant assets.

Chapter 10-4

Includes all costs related directly to purchase or construction.

Buildings

Purchase costs:

Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission.

Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing.

Construction costs:

Contract price plus payments for architects’ fees, building permits, and excavation costs.

Determining the Cost of Plant Determining the Cost of Plant AssetsAssetsDetermining the Cost of Plant Determining the Cost of Plant AssetsAssets

LO 1 Describe how the cost principle applies to plant assets.LO 1 Describe how the cost principle applies to plant assets.

Chapter 10-5

Process of cost allocation, not asset valuation.

Applies to land improvements, buildings, and equipment, not land.

Depreciation is the process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

DepreciationDepreciationDepreciationDepreciation

LO 2 Explain the concept of depreciation.LO 2 Explain the concept of depreciation.

Chapter 10-6

Factors in Computing Depreciation

Cost

DepreciationDepreciationDepreciationDepreciation

LO 2 Explain the concept of depreciation.LO 2 Explain the concept of depreciation.

Useful Life Salvage Value

Illustration 10-6

Chapter 10-7

Objective is to select the method that best measures an asset’s contribution to revenue over its useful life. Examples include:

Depreciation Methods

(1) Straight-line method.

(2) Units-of-Activity method.

(3) Declining-balance method.

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Illustration 10-8 Use of depreciation methods in 600 large U.S. companies

Chapter 10-8

Exercise (Depreciation Computations—Three Methods)

Parish Corporation purchased a new machine for its assembly process on January 2, 2007. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Year-end is December 31.Instructions: Compute the depreciation expense under the following methods.

(a) Straight-Line.

(b) Units-of-Activity.

(c) Double-Declining Balance.

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Chapter 10-9

Expense is same amount for each year.

Straight-Line

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Depreciable cost is cost of the asset less its salvage value.

Straight-line method predominates in practice.

Chapter 10-10

Depreciable Annual Accum.Year Base Years Expense Deprec.

2007 105,000$ / 5 = 21,000$ 21,000$

2008 105,000 / 5 = 21,000 42,000

2009 105,000 / 5 = 21,000 63,000

2010 105,000 / 5 = 21,000 84,000

2011 105,000 / 5 = 21,000 105,000

105,000$

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Journal entry 2007

Depreciation expense 21,000

Accumulated depreciation21,000

Exercise (Straight-Line Method)

Chapter 10-11

Expense varies based on units of activity.

Units-of-Activity

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Depreciable cost is cost less salvage value.

Companies estimate total units of activity to calculate depreciation cost per unit.

Chapter 10-12

Hours Rate per Annual Accum.Year Used Hour Expense Deprec.

2007 200 x $105 = 21,000$ 21,000$

2008 150 x 105 = 15,750 36,750

2009 250 x 105 = 26,250 63,000

2010 300 x 105 = 31,500 94,500

2011 100 x 105 = 10,500 105,000

1,000 105,000$

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Exercise (Units-of-Activity Method)

($105,000 / 1,000 hours = $105 per hour)

Chapter 10-13

Decreasing annual depreciation expense over the asset’s useful life.

Declining-Balance Method

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Rate applied to book value (cost less accumulated depreciation).

Chapter 10-14

Net Rate per Annual Accum.Year Bookvalue Year Expense Deprec.

2007 117,900$ x 40% = 47,160$ 47,160$

2008 70,740 x 40% = 28,296 75,456

2009 42,444 x 40% = 16,978 92,434

2010 25,466 x 40% = 10,186 102,620

2011 15,280 x 40% = 2,380 105,000

105,000$

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Exercise (Declining Balance Method)

Chapter 10-15

Comparison of

Depreciation

Methods

DepreciationDepreciationDepreciationDepreciation

LO 3 Compute periodic depreciation using different methods.LO 3 Compute periodic depreciation using different methods.

Year SL DB Activity

2003 21,000 47,160 21,000

2004 21,000 28,296 15,750

2005 21,000 16,978 26,250

2006 21,000 10,186 31,500

2007 21,000 2,380 10,500

105,000 105,000 105,000

Illustration 10-16

Annual Expense

Chapter 10-16

Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).

Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals

LO 6 Explain how to account for the disposal of a plant LO 6 Explain how to account for the disposal of a plant asset.asset.

Illustration 10-18

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

Chapter 10-17

BE10-9 BE10-9 Prepare journal entries to record the following.

(a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received.

(b) Assume the same information as (a), except that accumulated depreciation for Gomez Company is $39,000, instead of $41,000.

Plant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - Retirement

LO 6 Explain how to account for the disposal of a plant LO 6 Explain how to account for the disposal of a plant asset.asset.

Accumulated depreciation 41,000(a)

Equipment41,000

Chapter 10-18

BE10-9 BE10-9 Prepare journal entries to record the following.

(a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received.

(b) Assume the same information as (a), except that accumulated depreciation for Gomez Company is $39,000, instead of $41,000.

LO 6 Explain how to account for the disposal of a plant LO 6 Explain how to account for the disposal of a plant asset.asset.

Accumulated depreciation 39,000(b)

Equipment41,000Loss on disposal 2,000

Plant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - Retirement

Chapter 10-19

Sale of Plant Assets

Compare the book value of the asset with the proceeds received from the sale.

If proceeds exceed the book value, a gain on disposal occurs.

If proceeds are less than the book value, a loss on disposal occurs.

Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals

LO 6 Explain how to account for the disposal of a plant LO 6 Explain how to account for the disposal of a plant asset.asset.

Chapter 10-20

BE10-10 BE10-10 Chan Company sells office equipment on September 30, 2008, for $20,000 cash. The office equipment originally cost $72,000 and as of January 1, 2008, had accumulated depreciation of $42,000. Prepare the journal entries to (a) record the sale of the equipment.

LO 6 Explain how to account for the disposal of a plant LO 6 Explain how to account for the disposal of a plant asset.asset.

Plant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - Sale

Chapter 10-21

BE10-10 BE10-10 Prepare the journal entries to (a) record the sale of the equipment.

LO 6 Explain how to account for the disposal of a plant LO 6 Explain how to account for the disposal of a plant asset.asset.

Plant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - Sale

Cash 20,000(a)

Accumulated depreciation 42,000

Loss on disposal 10,000

Office equipment72,000

Chapter 10-22

Depletion is to natural resources as depreciation is to plant assets.

Companies generally use units-of-activity method.

Cost - price needed to acquire the resource and prepare it for its intended use.

Depletion - allocation of the cost to expense in a rational and systematic manner over the resource’s useful life.

Section 2 –Section 2 – Natural Resources Natural ResourcesSection 2 –Section 2 – Natural Resources Natural Resources

LO 7 Compute periodic depletion of natural resources.LO 7 Compute periodic depletion of natural resources.

Chapter 10-23

Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance.

Section 3 –Section 3 – Intangible Assets Intangible AssetsSection 3 –Section 3 – Intangible Assets Intangible Assets

Normally classified as long-term asset.

Common types of intangibles:

Patents

Copyrights

Franchises or licenses

Trademarks or trade names

Goodwill