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Chapter 9

Plant Assets,

Natural Resources, and

Intangible Assets

Financial Accounting, IFRS Edition

Weygandt Kimmel Kieso

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IFRS allows revaluation of plant assets to fair value

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.

Revaluation of Plant Assets

SO 4 Describe the procedure for revising periodic depreciation.

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Illustration: Pernice Company applies revaluation to plant

assets with a carrying value of $1,000,000, a useful life of 5

years, and no residual value. Pernice makes the following

journal entries in year 1, assuming straight-line depreciation.

Depreciation expense 200,000

Accumulated depreciation 200,000



After this entry, Pernice’s plant assets have a carrying amount

of $800,000 ($1,000,000 - $200,000).

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Illustration: At the end of year 1, independent appraisers

determine that the asset has a fair value of $850,000. To report

the plant assets at fair value, Pernice makes the following entry.


Plant assets 150,000



Revaluation surplus is an example of an item reported as other

comprehensive income, as discussed in Chapter 5.

Revaluation surplus 50,000

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Pernice now reports the following information in its statement of

financial position at the end of year 1.



$850,000 is the new basis of the asset. Pernice reports depreciation

expense of $200,000 in the income statement and $50,000 in other

comprehensive income. Depreciation in year 2 will be $212,500

($850,000 / 4).

Illustration 9-18

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Ordinary Repairs - expenditures to maintain the operating

efficiency and productive life of the unit.

Debit - Repair (or Maintenance) Expense.

Referred to as revenue expenditures.

Expenditures During Useful Life

SO 5 Distinguish between revenue and capital expenditures,

and explain the entries for each.

Additions and Improvements - costs incurred to increase

the operating efficiency, productive capacity, or useful life of a

plant asset.

Debit - the plant asset affected.

Referred to as capital expenditures.

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Companies dispose of plant assets in three ways —

Retirement, Sale, or Exchange (appendix).

Plant Asset Disposals

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

Illustration 9-19

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and

(2) crediting the asset account.

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Illustration: Assume that Hobart Enterprises retires

its computer printers, which cost $32,000. The accumulated

depreciation on these printers is $32,000. The journal entry to

record this retirement is:

Plant Asset Disposals - Retirement



Printing equipment 32,000

Question: What happens if a fully depreciated plant asset is still useful

to the company?

Retirement of Plant Assets

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Illustration: Assume that Sunset Company discards delivery

equipment that cost $18,000 and has accumulated

depreciation of $14,000. The journal entry is:

Plant Asset Disposals - Retirement



Loss on disposal 4,000

Companies report a loss on disposal in the “Other income and

expense” section of the income statement.

Delivery equipment 18,000

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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 Disposals


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Illustration: Assume that on July 1, 2011, Wright Company sells

office furniture for $16,000 cash. The office furniture originally

cost $60,000. As of January 1, 2011, it had accumulated

depreciation of $41,000. Depreciation for the first six months of

2011 is $8,000. Prepare the journal entry to record depreciation

expense up to the date of sale.


Plant Asset Disposals - Sale

Depreciation expense 8,000


Gain on Disposal

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Illustration: Wright records the sale as follows.



Cash 16,000


Illustration 9-20

Computation of gain on

disposal

Office equipment 60,000

Gain on disposal 5,000

July 1

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Illustration: Assume

that instead of selling

the office furniture for

$16,000, Wright sells it

for $9,000.



Loss on Disposal

Cash 9,000


Office equipment 60,000

Loss on disposal 5,000

July 1

Illustration 9-21

Computation of loss on disposal

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Natural resources consist of standing timber and

resources extracted from the ground, such as oil, gas,

and minerals.

Standing timber is considered a biological asset under

IFRS.

In the years before they are harvested, the recorded

value of biological assets is adjusted to fair value each

period.

Section 2 – Natural Resources

SO 7 Compute periodic depletion of extractable natural resources.

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Depletion is to natural resources as depreciation is to plant

assets.

Companies generally use units-of-activity method.

Depletion generally is a function of the units extracted.

IFRS defines extractive industries as those businesses

involved in finding and removing natural resources located in

or near the earth’s crust.

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.



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Illustration: Assume that Lane Coal Company invests $5

million in a mine estimated to have 10 million tons of coal and no

salvage value. In the first year, Lane extracts and sells 800,000

tons of coal. Lane computes the depletion expense as follows:


$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton

$.50 x 800,000 = $400,000 depletion expense

Depletion expense 400,000

Accumulated depletion 400,000

Journal entry:


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Financial Statement Presentation

Illustration 9-23

Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported as

inventory in the current assets section.


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Intangible assets are rights, privileges, and competitive

advantages that do not possess physical substance.

Section 3 – Intangible Assets

Patents

Copyrights

Franchises or licenses

Intangible assets are categorized as having either a

limited life or an indefinite life.

Common types of intangibles:

SO 8 Explain the basic issues related to accounting for intangible assets.

Trademarks and trade

names

Goodwill

IFRS permits revaluation of intangible assets to fair value, except for goodwill.

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Patents

Exclusive right to manufacture, sell, or otherwise control

an invention for a specified number of years from the

date of the grant.

Legal life in many countries is 20 years.

Capitalize costs of purchasing a patent and amortize

over its legal life or its useful life, whichever is shorter.

Legal fees incurred successfully defending a patent are

capitalized to Patent account.

Types of Intangible Assets


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Intangible assets are typically amortized on a straight-line

basis.

Illustration: Assume that National Labs purchases a patent at

a cost of $60,000. National estimates the useful life of the

patent to be eight years. National records the annual

amortization as follows.

Accounting for Intangible Assets


Amortization expense 7,500

Patent 7,500

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Copyrights

Give the owner the exclusive right to reproduce and sell

an artistic or published work.

plays, literary works, musical works, pictures,

photographs, and video and audiovisual material.

Granted for the life of the creator plus a specified number

of years, which can vary by country but is commonly 70

years.

Capitalize costs of acquiring and defending it.

Amortized to expense over useful life.



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Trademarks and Trade Names

Word, phrase, jingle, or symbol that identifies a particular

enterprise or product.

Wheaties, Game Boy, Frappuccino, Kleenex, Windows,

Coca-Cola, and Jetta.

Registration provides a specified number of years of

protection, which can vary by country, but is commonly 20

years.

Capitalize acquisition costs.

Renewed indefinitely, no amortization.



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Franchises and Licenses

Contractual arrangement between a franchisor and a

franchisee.

BP (GBR), Taco Bell (USA), or Rent-A-Wreck (USA)

are franchises.

Franchise (or license) with a limited life should be

amortized to expense over the life of the franchise.

Franchise with an indefinite life should be carried at cost

and not amortized.



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Goodwill

Includes exceptional management, desirable location, good

customer relations, skilled employees, high-quality products,

etc.

Only recorded when an entire business is purchased.

Goodwill is recorded as the excess of ...

purchase price over the fair value of the identifiable net

assets acquired.

Internally created goodwill should not be capitalized.



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