Chapter 9 Plant Assets, Intangible Assets

Accounting 2 ACCT 1110

Chapter 9 -- Plant Assets, Intangible Assets, Natural Resources & Related Expenses

Plant Assets: Characteristics: Tangible Used Over and Over Wear out gradually (except land which does not wear out) Examples: Buildings, Equipment, Vehicles, Land

Accounting Issues: What to Include in Cost of Plant Assets

General Rule: Everything necessary to get the Assets into condition and position to use. Include interest on borrowed money during the construction period.

Subsequent costs that increase life or productivity of an Asset are added to the Asset Cost this is called capitalizing the costs. (Capitalizing means the cost is initially treated as an asset)

Subsequent costs that only maintain or restore an asset to its original life are Recorded as expenses - these costs are called revenue expenditures. (Revenue expenditure means the cost is identified immediately as an expense). The most common expense categories for revenue expenditures are repairs and maintenance.

Interest during Construction: When an asset is constructed over a period of several months or years, the cost of the self-constructed asset includes interest the company could have avoided if it had not undergone the construction of the asset. (This information is not in the text)

Lump Sum Purchases (Paying a Single Amount for a Group of Assets)

1. Identify the estimated value of each item. 2. Allocate the Cost based on the relative Value of the Assets acquired

Example: A Company pays $180,000 for Land Building and Equipment. It is estimated by an appraiser that the Land is worth $16,000, The building is worth $150,000, and the Equipment is worth $34,000. How much cost should be allocated to each Asset? -2-

Allocation of Lump Sum Purchase General Journal Page 1

Date Account Title Ref Debit Credit Equipment Building Land Cash

How to Compute and Record Depreciation

Important Terms: Life - How long will the asset be useful to the present owner Residual value (also called salvage value)(also called scrap value) Estimated value of Fixed Asset at end of the life. Book Value Cost - Accumulated Depreciation

Sample Journal Entry for Recording Depreciation Expense (Covered in ACC 1100) General Journal Page 2

Date Account Title Ref Debit Credit Depreciation Expense - Equipment $x,xxx Accumulated Depreciation - Equipment $x,xxx

Methods Of Calculating Depreciation:

1. Straight Line Depreciation Expense is

= (SL Rate) x (Cost - Salvage Value) Or =(Cost - Residual Value) divided by life -3-

2. Double Declining Balance Depreciation Expense is

= 2 x (Straight Line Rate) x (Beginning of year Book Value)

3. Units of Production or Output Depreciation Expense is

= Usage Rate x Usage

Usage Rate = (Cost - Salvage) / (Total Units of Output during the assets life)

4. MACRS (used only for income taxes)

= legislated rate x Cost

5. Other Depreciation Issues:

A) Prorating for years of partial ownership B) Changes in life or salvage value C) Tax advantages of accelerated methods

Disposal of Plant Assets:

General Rule: The fair value of an asset received in an exchange is considered to be its cost. Gain or loss on the exchange is recognized.

Exception: When the fair value of the asset being acquired is not know, The cost of an asset received in an exchange is considered to be the book value of the asset traded in plus the additional cash paid (boot). This means no gain or loss is recognized.

Sample Journal Entry for Recording sale of equipment for cash General Journal Page 3

Date Account Title Ref Debit Credit Cash (Received) $x,xxx Accumulated Depreciation (on Equipment Sold) $x,xxx Equipment (Cost of Equipment Sold) $x,xxx Cash or Notes Payable (If Applicable) $x,xxx Gain On Disposition (OR Loss which $x,xxx would be a debit) -4-

Sample Journal Entry for Recording Exchange of equipment General Journal Page 4

Date Account Title Ref Debit Credit Equipment (Book Value of old equipment plus $x,xxx the additional cash paid) Accumulated Depreciation (on Equipment Sold) $x,xxx Equipment (Cost of Equipment traded in) $x,xxx Cash or Notes Payable (If Applicable) $x,xxx

Sample Journal Entry for Recording Exchange of equipment with Loss General Journal Page 4

Date Account Title Ref Debit Credit Loss on Exchange of Equipment $x,xxx Equipment (Market Value of new equipment) $x,xxx Accumulated Depreciation (on Equipment Sold) $x,xxx Equipment (Cost of Equipment Sold) $x,xxx Cash or Notes Payable (If Applicable) $x,xxx -5-

Intangible Assets:

Characteristics: 1. Goodwill and Legal Rights are called intangible assets. 2. Intangible Assets with a limited life are amortized (written off) to expense. 3. The useful life of an intangible asset is frequently shorter than the legal life. 4. Goodwill and other intangible assets with an indefinite life are not amortized. 5. Amortization is calculated in the same way as straight line depreciation.

Sample Journal Entry for Recording Amortization Expense General Journal Page 4 Journal Entries (Either is acceptable) Date Account Title Ref Debit Credit Amortization Expense - Patents $x,xxx Patents $x,xxx OR Amortization Expense - Patents $x,xxx Accumulated Amortization - Patents $x,xxx

Natural Resource Assets

Characteristics: 1. Land with Natural Resources on it (Oil, Gold, Silver, Forests, Gypsum) 2. Removing natural resources from the land creates an expense. 3. When Natural Resources Assets are allocated to expense it is called depletion. 4. Depletion is calculated in the same way as units of output depreciation.

Sample Journal Entry for Recording Depletion Expense General Journal Page 4 Journal Entries (Either is acceptable) Date Account Title Ref Debit Credit Depletion Expense - Oil Property $x,xxx Oil Property $x,xxx OR Depletion Expense - Oil Property $x,xxx Accumulated Depletion - Oil Property $x,xxx