10-1
CHAPTER 10
PLANT ASSETS,
NATURAL
RESOURCES, AND
INTANGIBLE
ASSETS
Accounting Principles, Eighth Edition
Chapter
10-2
Study
Study Objectives
Objectives
1. Describe how the cost principle applies to plant assets.
2. Explain the concept of depreciation.
3. Compute periodic depreciation using different methods.
4. Describe the procedure for revising periodic depreciation.
5. Distinguish between revenue and capital expenditures, and
explain the entries for each.
6. Explain how to account for the disposal of a plant asset.
7. Compute periodic depletion of natural resources.
8. Explain the basic issues related to accounting for intangible
assets.
9. Indicate how plant assets, natural resources, and intangible
assets are reported.
Chapter
10-3
Plant
Plant Assets,
Assets, Natural
Natural Resources,
Resources,
and
and Intangible
Intangible Assets
Assets
Statement
Natural Intangible
Plant Assets Presentation
Resources Assets
and Analysis
Chapter
10-5
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Land
Includes all costs to acquire land and ready it for use.
Costs typically include:
(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.
Chapter
10-6 LO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
E10-3 On March 1, 2008, Penner Company acquired real
estate on which it planned to construct a small office
building. The company paid $80,000 in cash. An old
warehouse on the property was razed at a cost of $8,600;
the salvaged materials were sold for $1,700. Additional
expenditures before construction began included $1,100
attorney’s fee for work concerning the land purchase, $5,000
real estate broker’s fee, $7,800 architect’s fee, and $14,000
to put in driveways and a parking lot.
Instructions
Determine amount to be reported as the cost of the land.
For each cost not used, indicate the account debited.
Chapter
10-7 LO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Land Improvements
Includes all expenditures necessary to make the
improvements ready for their intended use.
Examples are driveways, parking lots, fences,
landscaping, and underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land
improvements over their useful lives.
Chapter
10-8 LO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Buildings
Includes all costs related directly to purchase or
construction.
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.
Chapter
10-9 LO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
E10-3 Determine amount to be reported as the cost of the
land. Land
Chapter
10-12 LO 2 Explain the concept of depreciation.
Depreciation
Depreciation
Factors in Computing Depreciation
Illustration 10-6
Chapter
10-13 LO 2 Explain the concept of depreciation.
Depreciation
Depreciation
Depreciation Methods
Objective is to select the method that best
measures an asset’s contribution to revenue over its
useful life. Examples include:
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
Illustration 10-8
Use of depreciation
methods in 600 large
U.S. companies
Chapter
10-14 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation
Exercise (Depreciation Computations—Three Methods)
Parish Corporation purchased a new machine for its assembly
process on January 2, 2008. 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) Declining Balance.
Chapter
10-15 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation
Straight-Line
Chapter
10-16 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation
Exercise (Straight-Line Method)
D epreciable A nnual A c cum .
Y ear Cost Y ears Ex pense D eprec.
2008 $ 105, 000 / 5 = $ 21, 000 $ 21,000
2009 105, 000 / 5 = 21, 000 42,000
2010 105, 000 / 5 = 21, 000 63,000
2011 105, 000 / 5 = 21, 000 84,000
2012 105, 000 / 5 = 21, 000 105,000
$ 105,000
Units-of-Activity
Chapter
10-18 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation
Exercise (Units-of-Activity Method)
($105,000 / 1,000 hours = $105 per hour)
H ours Rate per A n nual A c c um .
Year U sed H our Ex pense Deprec .
20 08 20 0 x $ 105 = $ 21,000 $ 21,0 00
20 09 15 0 x 105 = 15,750 36,7 50
20 10 25 0 x 105 = 26,250 63,0 00
20 11 30 0 x 105 = 31,500 94,5 00
20 12 10 0 x 105 = 10,500 10 5,000
1,000 $ 105,000
2008 Journal
Entry
Depreciation expense 21,000
Chapter Accumulated depreciation 21,000
10-19
LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation
Declining-Balance
Decreasing annual depreciation expense over the
asset’s useful life.
Declining-balance rate is double the straight-line
rate.
Rate applied to book value (cost less accumulated
depreciation.
Chapter
10-20 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation
Exercise (Declining-Balance Method)
D eclining
Beginning Balance A nnual A c c um .
Y ear Book value R ate Ex pense D eprec .
2008 $ 117,900 x 40% = $ 47,160 $ 47,160
2009 70, 740 x 40% = 28,296 75,456
2010 42, 444 x 40% = 16,978 92,434
2011 25, 466 x 40% = 10,186 102,620
2012 15, 280 x 40% = 2, 380 105,000
$ 105,000
Plug
Y ear SL DB A ctivity
2008 21, 000 47, 160 21,000
Comparison
2009 of000
21, Depreciation
28, 296 15,750
2010
Methods 21, 000 16, 978 26,250
2011 21, 000 10, 186 31,500
2012 21, 000 2, 380 10,500
105,000 105,000 105,000
Chapter
10-22 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation for
for Partial
Partial Year
Year
Chapter
10-23 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation for
for Partial
Partial Year
Year
Exercise (Depreciation Computations—Three Methods)
Parish Corporation purchased a new machine for its assembly
process on October 1, 2008. 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. During 2008, the machine was used
30 hours. Year-end is December 31.
Instructions: Compute the depreciation expense under the
following methods.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining-Balance.
Chapter
10-24 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation for
for Partial
Partial Year
Year
Exercise (Straight-line Method)
Current
D epreciable A nnual Partial Y ear A ccum .
Y ear Base Y ears Ex pense Y ear Ex pense D eprec.
2008 $ 105, 000 / 5 = $ 21,000 x 3/ 12 = $ 5, 250 $ 5, 250
2009 105, 000 / 5 = 21,000 21, 000 26, 250
2010 105, 000 / 5 = 21,000 21, 000 47, 250
2011 105, 000 / 5 = 21,000 21, 000 68, 250
2012 105, 000 / 5 = 21,000 21, 000 89, 250
2013 105, 000 / 5 = 21,000 x 9/ 12 = 15, 750 105, 000
$ 105, 000
J ournal ent ry :
Chapter
10-25 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation for
for Partial
Partial Year
Year
Exercise (Units-of-Activity Method)
($1 0 5 ,0 0 0 / 1 ,0 0 0 hours = $1 0 5 pe r hour)
(Given) Current
H ours R ate per A nnual Y ear A ccum .
Y ear U sed H ours Expense Expense D eprec.
2008 30 x $105 = $ 3,150 $ 3,150 $ 3,150
2009 150 x 105 = 15,750 15,750 18,900
2010 250 x 105 = 26,250 26,250 45,150
2011 300 x 105 = 31,500 31,500 76,650
2012 100 x 105 = 10,500 10,500 87,150
2013 170 x 105 = 17,850 $ 17,850 105,000
1,000 $ 105,000 $ 105,000
J ournal entry:
2008 D epreciation expense 3,150
A ccum ultated depreciation 3,150
Chapter
10-26 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation for
for Partial
Partial Year
Year
Exercise (Declining-Balance Method)
D eclining Current
D epreciab le Balance A nnual Partial Y ear A c cum .
Y ear Base R ate Expense Y ear Ex pense D eprec.
2008 $ 117,900 x 40% = $ 47,160 x 3/12 = $ 11,790 $ 11,790
2009 106,110 x 40% = 42,444 42,444 54,234
2010 63,666 x 40% = 25,466 25,466 79,700
2011 38,200 x 40% = 15,280 15,280 94,980
2012 22,920 x 40% = 9, 168 9,168 104,148
2013 13,752 x 40% = 852 Plug 852 105,000
$ 105,000
J ournal ent ry:
Chapter
10-27 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation
Depreciation and Income Taxes
IRS does not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.
Chapter
10-28 LO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation
Chapter
10-29 LO 4 Describe the procedure for revising periodic depreciation.
Depreciation
Depreciation
Arcadia HS purchased equipment for $510,000 which
was estimated to have a useful life of 10 years with a
salvage value of $10,000 at the end of that time.
Depreciation has been recorded for 7 years on a
straight-line basis. In 2008 (year 8), it is determined
that the total estimated life should be 15 years with a
salvage value of $5,000 at the end of that time.
Questions:
What is the journal entry to correct No Entry
the prior years’ depreciation? Required
Calculate the depreciation expense
for 2008.
Chapter
10-30 LO 4 Describe the procedure for revising periodic depreciation.
Depreciation
Depreciation After 7 years
Chapter
10-32 LO 4 Describe the procedure for revising periodic depreciation.
Expenditures
Expenditures During
During Useful
Useful Life
Life
Chapter
10-35 LO 6 Explain how to account for the disposal of a plant asset.
Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement
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.
Chapter
10-36 LO 6 Explain how to account for the disposal of a plant asset.
Plant
Plant Asset
Asset Disposals
Disposals
Chapter
10-37 LO 6 Explain how to account for the disposal of a plant asset.
Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale
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.
Depreciation for the first 9 months of 2008 is $5,250.
Prepare the journal entries to (a) update depreciation to
September 30, 2008, and (b) record the sale of the
equipment.
Chapter
10-38 LO 6 Explain how to account for the disposal of a plant asset.
Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale
BE10-10 Prepare the journal entries to (a) update
depreciation to September 30, 2008, and (b) record the
sale of the equipment.
Chapter
10-39 LO 6 Explain how to account for the disposal of a plant asset.
Section
Section 22 –– Natural
Natural Resources
Resources
Chapter
10-40
Section
Section 22 –– Natural
Natural Resources
Resources
Cost - price needed to acquire the resource and
prepare it for its intended use.
Chapter
10-41 LO 7 Compute periodic depletion of natural resources.
Section
Section 22 –– Natural
Natural Resources
Resources
BE10-11 Olpe Mining Co. purchased for $7 million a
mine that is estimated to have 35 million tons of ore and
no salvage value. In the first year, 6 million tons of ore
are extracted and sold. (a) Prepare the journal entry
to record depletion expense for the first year. (b)
Show how this mine is reported on the balance sheet at
the end of the first year.
Chapter
10-42 LO 7 Compute periodic depletion of natural resources.
Section
Section 22 –– Natural
Natural Resources
Resources
BE10-11 (a) Prepare the journal entry to record
depletion expense for the first year. (b) Show how
this mine is reported on the balance sheet at the end of
the first year.
Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible
asset ready for its intended use.
Chapter
10-45 LO 8 Explain the basic issues related to accounting for intangible assets.
Accounting
Accounting for
for Intangible
Intangible Assets
Assets
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Chapter
10-46 LO 8 Explain the basic issues related to accounting for intangible assets.
Accounting
Accounting for
for Intangible
Intangible Assets
Assets
Patents
Exclusive right to manufacture, sell, or otherwise
control an invention for a period of 20 years from the
date of the grant.
Capitalize costs of purchasing a patent and amortize
over its 20-year life or its useful life, whichever is
shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent
are capitalized to Patent account.
Chapter
10-47 LO 8 Explain the basic issues related to accounting for intangible assets.
Accounting
Accounting for
for Intangible
Intangible Assets
Assets
BE10-11 Galena Company purchases a patent for
$120,000 on January 2, 2008. Its estimated useful life is
10 years. (a) Prepare the journal entry to record patent
expense for the first year. (b) Show how this patent is
reported on the balance sheet at the end of the first
year.
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.
Copyright is granted for the life of the creator plus
70 years.
Capitalize acquisition costs.
Amortized to expense over useful life.
Chapter
10-49 LO 8 Explain the basic issues related to accounting for intangible assets.
Accounting
Accounting for
for Intangible
Intangible Assets
Assets
Chapter
10-50 LO 8 Explain the basic issues related to accounting for intangible assets.
Accounting
Accounting for
for Intangible
Intangible Assets
Assets
Chapter
10-51 LO 8 Explain the basic issues related to accounting for intangible assets.
Accounting
Accounting for
for Intangible
Intangible Assets
Assets
Goodwill
Includes exceptional management, desirable location,
good customer relations, skilled employees, high-quality
products, etc.
Chapter
10-52 LO 8 Explain the basic issues related to accounting for intangible assets.
Research
Research and
and Development
Development Costs
Costs
Chapter
10-53 LO 8 Explain the basic issues related to accounting for intangible assets.
Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Presentation Illustration 10-24
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Chapter
10-61