9-1

Chapter

9
PLANT AND
INTANGIBLE ASSETS

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9-2

Plant
Plant Assets
Assets
Long-lived
Long-lived assets
assets acquired
acquired for
for use
use in
in
business
business operations.
operations.
Similar to long-term prepaid expenses

The cost of plant assets

is the advance purchase
of services.
McGraw-Hill/Irwin

As years pass, and the

services are used, the
cost is transferred to
depreciation expense.

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9-3

Major
Major Categories
Categories of
of Plant
Plant Assets
Assets
T a n g ib le P la n t
A s s e ts

In ta n g ib le
A s s e ts

N a tu ra l
R e s o u rc e s

L o n g -te rm
a s s e t s h a v in g
p h y s ic a l s u b s t a n c e .

N o n c u rre n t a s s e ts
w it h n o p h y s ic a l
s u b s ta n c e .

S it e s a c q u ir e d fo r
e x t r a c t in g v a lu a b le
re s o u rc e s .

L a n d , b u ild in g s ,
e q u ip m e n t ,
fu r n it u r e , fix t u r e s .

P a t e n t s , c o p y r ig h t s ,
tra d e m a rk s ,
fr a n c h is e s , g o o d w ill.

O il r e s e r v e s ,
t im b e r , o t h e r
m in e r a ls .

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9-4

Accountable
Accountable Events
Events

Acquisition.
Acquisition.

Allocation
Allocation of
of the
the acquisition
acquisition cost
cost

to
to expense
expense over
over the
the assets
assets
useful
useful life
life (depreciation).
(depreciation).

Sale
Sale or
or disposal.
disposal.

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9-5

Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Cost
Cost

Asset
Asset
price
price

Reasonable
Reasonableand
and
necessary
necessarycosts
costs.... ..

......for
forgetting
getting
the
theasset
assetto
tothe
the
desired
desiredlocation.
location.
McGraw-Hill/Irwin

......for
forgetting
getting
the
theasset
asset ready
ready
for
foruse.
use.

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9-6

Determining
Determining Cost
Cost
On
On May
May 4,
4, Heat
Heat Co.,
Co., aa stove
stove maker,
maker, buys
buys aa new
new
machine
machine from
from Supply
Supply Co.
Co. The
The new
new machine
machine
has
has aa price
price of
of $52,000.
$52,000. Sales
Sales tax
tax is
is 8%.
8%.
Heat
Heat Co.
Co. pays
pays $500
$500 shipping
shipping cost
cost to
to get
get the
the
machine
machine to
to its
its plant.
plant. After
After the
the machine
machine
arrives,
arrives, set-up
set-up costs
costs of
of $1,300
$1,300 are
are incurred,
incurred,
along
along with
with $4,000
$4,000 in
in testing
testing costs.
costs.
Compute
Compute the
the cost
cost of
of Heat
Heat Co.s
Co.s new
new machine.
machine.

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9-7

Determining
Determining Cost
Cost

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9-8

Special
Special Considerations
Considerations

Land
Land

Cost
Cost includes
includesreal
realestate
estate
commissions,
commissions,escrow
escrow
fees,
fees,legal
legalfees,
fees,clearing
clearing
and
and grading
grading the
theproperty.
property.

Land
Land
Improvements
Improvements

Improvements
Improvementsto
toland
land
such
suchas
asdriveways,
driveways,
fences,
fences, and
and landscaping
landscaping
are
are recorded
recordedseparately.
separately.

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9-9

Special
Special Considerations
Considerations
Buildings
Buildings

Repairs
Repairsmade
madeprior
prior to
tothe
the
building
building being
beingput
put in
in use
use
are
areconsidered
consideredpart
part of
ofthe
the
buildings
buildingscost.
cost.

Equipment
Equipment

Related
Relatedinterest,
interest,
insurance,
insurance,and
andproperty
property
taxes
taxesare
are treated
treatedas
as
expenses
expensesof
of the
thecurrent
current
period.
period.

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9-10

Special
Special Considerations
Considerations
Allocation
Allocation of
of aa Lump-Sum
Lump-Sum Purchase
Purchase

I think Ill buy the

whole thing; building,
land, and contents.

McGraw-Hill/Irwin

The
Thetotal
totalcost
cost
must
mustbe
be
allocated
allocatedto
to
separate
separate
accounts
accountsfor
for
each
each asset.
asset.

The
Theallocation
allocation
is
isbased
based on
on
the
therelative
relative
Fair
Fair Market
Market
Value
Valueof
of each
each
asset
asset
purchased.
purchased.

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Capital
Capital Expenditures
Expenditures and
and Revenue
Revenue
Expenditures
Expenditures

9-11

Capital
Capital
Expenditure
Expenditure

Revenue
Revenue
Expenditure
Expenditure

Any
Any material
material expenditure
expenditure
that
that will
will benefit
benefit several
several
accounting
accounting periods.
periods.

Expenditure
Expenditure for
for
ordinary
ordinary repairs
repairs
and
and maintenance
maintenance..

To
To capitalize
capitalize an
an expenditure
expenditure
means
means to
to charge
charge itit to
to an
an
asset
asset account
account..

To
To expense
expense an
an expenditure
expenditure
means
means to
to charge
charge itit to
to an
an
expense
expense account
account..

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9-12

Depreciation
Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.

Cost of
plant
assets

Balance
BalanceSheet
Sheet
Assets:
Assets:
Plant
Plant and
and
equipment
equipment
Income
IncomeStatement
Statement

McGraw-Hill/Irwin

Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation

as the services
are received

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9-13

Depreciation
Depreciation
Book
BookValue
Value

Cost
Cost Accumulated
Accumulated Depreciation
Depreciation

Depreciation
Depreciation

Contra-asset
Contra-asset
Represents
Represents the
the portion
portion of
of an
an assets
assets
cost
cost that
that has
has already
already
been
been allocated
allocated to
to expense.
expense.

Causes
Causesof
ofDepreciation
Depreciation

Physical
Physical deterioration
deterioration
Obsolescence
Obsolescence

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9-14

Straight-Line
Straight-Line Depreciation
Depreciation
Depreciation
Expense per Year

McGraw-Hill/Irwin

Cost - Residual Value

Years of Useful Life

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9-15

Straight-Line
Straight-Line Depreciation
Depreciation
On
On January
January 1,
1, 2007,
2007, Bass
Bass Co.
Co. buys
buys new
new equipment.
equipment.
Bass
Bass pays
pays aa total
total of
of $24,000
$24,000 for
for the
the equipment.
equipment. The
The
equipment
equipment has
has an
an estimated
estimated residual
residual value
value of
of $3,000
$3,000
and
and an
an estimated
estimated useful
useful life
life of
of 55 years.
years.
Compute
Compute depreciation
depreciation for
for 2007
2007 using
using the
the straight-line
straight-line
method.
method.

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9-16

Straight-Line
Straight-Line Depreciation
Depreciation
Bass
Bass Co.
Co. will
will record
record $4,200
$4,200 depreciation
depreciation each
each year
year for
for five
five
years.
years. Total
Total depreciation
depreciation over
over the
the estimated
estimated useful
useful life
life of
of
the
the equipment
equipment is:
is:

Salvage Value
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9-17

Depreciation
Depreciation for
for Fractional
Fractional Periods
Periods
When
When an
an asset
asset is
is acquired
acquired during
during the
the year,
year, depreciation
depreciation
in
in the
the year
year of
of acquisition
acquisition must
must be
be prorated.
prorated.

Half-Year
Half-Year Convention
Convention
In
In the
the year
year of
of
acquisition,
acquisition, record
record six
six
months
months of
of
depreciation.
depreciation.
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9-18

Half-Year
Half-Year Convention
Convention
Using
Using the
the half-year
half-year convention,
convention, calculate
calculate the
the
straight-line
straight-line depreciation
depreciation on
on December
December 31,
31, 2007,
2007,
for
for equipment
equipment purchased
purchased in
in 2007.
2007. The
The
equipment
equipment cost
cost $75,000,
$75,000, has
has aa useful
useful life
life of
of 10
10
years
years and
and an
an estimated
estimated residual
residual value
value of
of $5,000.
$5,000.
Depreciation
Depreciation

==
==

Depreciation
Depreciation ==
McGraw-Hill/Irwin

($75,000
($75,000 -- $5,000)
$5,000) 10
10
$7,000
$7,000 for
for aa full
full year
year
$7,000
$7,000

11

//22 == $3,500
$3,500

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9-19

Declining-Balance
Declining-Balance Method
Method
Depreciation
Depreciation in
in the
the early
early years
years of
of an
an assets
assets estimated
estimated
useful
useful life
life is
is higher
higher than
than in
in later
later years.
years.

The
The double-declining
double-declining balance
balance depreciation
depreciation
rate
rate is
is 200%
200% of
of the
the straight-line
straight-line
depreciation
depreciation rate
rate of
of (1Useful
(1Useful Life).
Life).
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9-20

Declining-Balance
Declining-Balance Method
Method
On
On January
January 1,
1, 2007,
2007, Bass
Bass Co.
Co. buys
buys aa new
new delivery
delivery truck.
truck.
Bass
Bass Co.
Co. pays
pays $24,000
$24,000 for
for the
the truck.
truck. The
The truck
truck has
has an
an
estimated
estimated residual
residual value
value of
of $3,000
$3,000 and
and an
an estimated
estimated useful
useful
life
life of
of 55 years.
years.

Compute
Compute depreciation
depreciation for
for 2007
2007 using
using the
the doubledoubledeclining
declining balance
balance method.
method.

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9-21

Declining-Balance
Declining-Balance Method
Method
Total
depreciation
over
the
estimated
useful
life
of
an
Total
depreciation
over
the
estimated
useful
life
of
an
Compute
depreciation
for
the
rest
of
the
Compute
depreciation
for
the
rest
of
the
asset
asset is
isthe
thesame
sameusing
usingeither
eitherthe
the straight-line
straight-linemethod
method or
or
trucks
estimated
life.
trucks
estimated useful
useful
life.
the
method.
the declining-balance
declining-balance
method.

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9-22

Financial
Financial Statement
Statement Disclosures
Disclosures
Estimates
Estimates of
of Useful
Useful Life
Life and
and Residual
Residual Value
Value

May
May differ
differ from
from company
company to
to
company.
company.
The
The reasonableness
reasonableness of
of
managements
managements estimates
estimates is
is
evaluated
evaluated by
by external
external auditors.
auditors.

Principle
Principle of
of Consistency
Consistency

Companies
Companies should
should avoid
avoid
switching
switching depreciation
depreciation methods
methods
from
from period
period to
to period.
period.

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9-23

Revising
Revising Depreciation
Depreciation Rates
Rates
Predicted
Predicted
salvage
salvage value
value

Predicted
Predicted
useful
usefullife
life

So
So depreciation
depreciation
is
is an
an estimate.
estimate.

Over
Over the
the life
life of
of an
an asset,
asset, new
new information
information
may
may come
come to
to light
light that
that indicates
indicates the
the
original
original estimates
estimates need
need to
to be
be revised.
revised.
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9-24

Revising
Revising Depreciation
Depreciation Rates
Rates
On
On January
January 1,
1, 2004,
2004, equipment
equipment was
was
purchased
purchased that
that cost
cost $30,000,
$30,000, has
has aa useful
useful
life
life of
of 10
10 years
years and
and no
no salvage
salvage value.
value.
During
During 2007,
2007, the
the useful
useful life
life was
was revised
revised to
to
88 years
years total
total (5
(5 years
years remaining).
remaining).
Calculate
Calculate depreciation
depreciation expense
expense for
for the
the year
year
ended
ended December
December 31,
31, 2007,
2007, using
using the
the
straight-line
straight-line method.
method.
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9-25

Revising
Revising Depreciation
Depreciation Rates
Rates
When
Whenour
ourestimates
estimateschange,
change,
depreciation
depreciation is:
is:
Book value at
date of change

Salvage value at
date of change

Remaining useful life at date of change

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9-26

Impairment
Impairment of
of Plant
Plant Assets
Assets

IfIf the
the cost
cost of
of an
an asset
asset
cannot
cannot be
be recovered
recovered
through
through future
future use
use or
or
sale,
sale, the
the asset
asset should
should
be
be written
written down
down to
to its
its
net
net realizable
realizable value.
value.

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9-27

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
Update
Update depreciation
depreciation
to
to the
the date
date of
of disposal.
disposal.
Journalize
Journalize disposal
disposal by:
by:
Recording
Recording cash
cash
received
received (debit).
(debit).
Removing
Removing accumulated
accumulated
depreciation
depreciation (debit).
(debit).
McGraw-Hill/Irwin

Recording
Recording aa
gain
gain (credit)
(credit)
or
or loss
loss (debit).
(debit).
Removing
Removing the
the
asset
asset cost
cost (credit).
(credit).

The McGraw-Hill Companies, Inc.

9-28

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
IfIf Cash
Cash >> BV,
BV, record
record aa gain
gain (credit).
(credit).
IfIf Cash
Cash << BV,
BV, record
record aa loss
loss (debit).
(debit).
IfIf Cash
Cash == BV,
BV, no
no gain
gain or
or loss.
loss.
Recording
Recording cash
cash
received
received (debit).
(debit).
Removing
Removing accumulated
accumulated
depreciation
depreciation (debit).
(debit).
McGraw-Hill/Irwin

Recording
Recording aa
gain
gain (credit)
(credit)
or
or loss
loss (debit).
(debit).
Removing
Removing the
the
asset
asset cost
cost (credit).
(credit).

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9-29

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
On
On September
September 30,
30, 2007,
2007, Evans
Evans Company
Company sells
sells aa
machine
machine that
that originally
originally cost
cost $100,000
$100,000 for
for
$60,000
$60,000 cash.
cash. The
The machine
machine was
was placed
placed in
in
service
service on
on January
January 1,
1, 2002.
2002. ItIt has
has been
been
depreciated
depreciated using
using the
the straight-line
straight-line method
method with
with
an
an estimated
estimated salvage
salvage value
value of
of $20,000
$20,000 and
and an
an
estimated
estimated useful
useful life
life of
of 10
10 years.
years.
Lets
Lets answer
answer the
the following
following questions.
questions.

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9-30

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
The
The amount
amount of
of depreciation
depreciation
recorded
recorded on
on September
September 30,
30, 2007,
2007,
to
to bring
bring depreciation
depreciation up
up to
to date
date is:
is:
a.
a.
b.
b.
c.
c.
d.
d.

$8,000.
$8,000.
$6,000.
$6,000.
$4,000.
$4,000.
$2,000.
$2,000.

McGraw-Hill/Irwin

Annual Depreciation:
($100,000 - $20,000) 10 Yrs. = $8,000
Depreciation to Sept. 30:
9/12 $8,000 = $6,000

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9-31

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
After
After updating
updating the
the depreciation,
depreciation, the
the
machines
machines book
book value
value on
on
September
September 30,
30, 2007,
2007, is:
is:
a.
a.
b.
b.
c.
c.
d.
d.

$54,000.
$54,000.
$46,000.
$46,000.
$40,000.
$40,000.
$60,000.
$60,000.

McGraw-Hill/Irwin

Cost
Cost
Accumulated
Accumulated Depreciation:
Depreciation:
(5
(5 yrs.
yrs. $8,000)
$8,000) ++ $6,000
$6,000 ==
Book
Book Value
Value

$$ 100,000
100,000
46,000
46,000
$$ 54,000
54,000

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9-32

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
The
The machines
machines sale
sale resulted
resulted in:
in:
a.
a.
b.
b.
c.
c.
d.
d.

aa gain
gain of
of $6,000.
$6,000.
aa gain
gain of
of $4,000.
$4,000.
aa loss
loss of
of $6,000.
$6,000.
aa loss
loss of
of $4,000.
$4,000.

McGraw-Hill/Irwin

Cost
Accum. Depr.
Book value
Cash received
Gain

$
$
$

100,000
46,000
54,000
60,000
6,000

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9-33

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the sale.
sale.

McGraw-Hill/Irwin

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Trading
Trading in
in Used
Used Assets
Assets for
for New
New
Ones
Ones

9-34

On
On May
May 30,
30, 2007,
2007, Essex
Essex Company
Company
exchanges
exchanges aa used
used airplane
airplane and
and $35,000
$35,000
cash
cash for
for aa new
new airplane.
airplane. The
The old
old airplane
airplane
originally
originally cost
cost $40,000,
$40,000, had
had up-to-date
up-to-date
accumulated
accumulated depreciation
depreciation of
of $30,000,
$30,000, and
and
aa fair
fair value
value of
of $4,000.
$4,000.

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Trading
Trading in
in Used
Used Assets
Assets for
for New
New
Ones
Ones

9-35

The
The exchange
exchange resulted
resulted in
in a:
a:
a.
a.
b.
b.
c.
c.
d.
d.

gain
gain of
of $6,000.
$6,000.
loss
loss of
of $6,000.
$6,000.
loss
loss of
of $4,000.
$4,000.
gain
gain of
of $4,000.
$4,000.

Cost
Accum. Depr.

$ 40,000
30,000

Book Value
Fair Value
Loss

$ 10,000
4,000
$ 6,000

Prepare a journal entry

to record the exchange.
McGraw-Hill/Irwin

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Trading
Trading in
in Used
Used Assets
Assets for
for New
New
Ones
Ones

9-36

Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the trade.
trade.

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Plant
Plant Transactions
Transactions and
and the
the
Statement
Statement of
of Cash
Cash Flows
Flows

9-37

Cash payments for plant assets represent a cash

outflow for investing activities on the statement of
cash flows. A disposal of a plant asset for cash
results in a cash inflow to the company.

Depreciation is a
non-cash charge to
income and has no
effect on cash flows.
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9-38

Other
Other Depreciation
Depreciation Methods
Methods
Units-of-Output Method
Cost Residual Value
Depreciation cost
=
Estimated Units of Output
per unit of output

MACRS
Modified Accelerated Cost Recovery System

The depreciation system used on federal

income tax returns. It is an accelerated method.
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Other
Other Depreciation
Depreciation Methods
Methods
Sum-of-the-Years Digits Method
In general, depreciation calculated under this
accelerated method falls between the doubledeclining amount and 150-percent-declining
method. It is not used by many companies
because the computations are complex.

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Depreciation
Depreciation Methods
Methods in
in Use:
Use:
A
A Survey
Survey

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