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ACCOUNTING FOR MANAGER

Accounting for Plant Assets,


Intangible Assets, and
Related Expenses

By Raheel Bhagar

Plant Assets
Asset Account on
the Balance Sheet

Related Expense Account


on the Income Statement

Plant Assets
Land none
Buildings, Machinery and Equipment,
Furniture and Fixtures,
and Land Improvements Depreciation
Natural Resources..
Depletion
Intangibles.. Amortization

Objective 1
Measure the
cost
of a plant
asset.

Cost Principle
An
An asset
asset must
must be
be carried
carried on
on the
the
balance
balance sheet
sheet at
at the
the amount
amount paid
paid for
for it.
it.
The
The cost
cost of
of an
an asset
asset equals
equals the
the sum
sum of
of
all
all of
of the
the costs
costs incurred
incurred to
to bring
bring the
the asset
asset
to
to its
its intended
intended purpose,
purpose, net
net of
of discounts
discounts

Land and Land


Improvements
Purchase
Purchase price
price of
of land
land
$500,000
$500,000
Add
Add related
related costs:
costs:
Back
Back property
property taxes
taxes $40,000
$40,000
Transfer
8,000
Transfer taxes
taxes
8,000
Removal
5,000
Removal of
of buildings
buildings
5,000
Survey
1,000
Survey fees
fees
1,000
54,000
54,000
Total
Total cost
cost of
of land
land

Buildings Construction
Architectural
Architectural fees
fees
Building
Building permits
permits
Contractors
Contractors charges
charges
Materials
Materials
Labor
Labor
Overhead
Overhead

Buildings Purchasing
Purchase
Purchase price
price
Brokerage
Brokerage commissions
commissions
Sales
Sales and
and other
other taxes
taxes
Repairing
Repairing or
or renovating
renovating building
building
for
for its
its intended
intended purpose
purpose

Machinery and Equipment


Purchase
Purchase price
price less
less discounts
discounts
Transportation
Transportation charges
charges
Insurance
Insurance in
in transit
transit
Sales
Sales and
and other
other taxes
taxes
Purchase
Purchase commissions
commissions
Installation
Installation cost
cost
Expenditures
Expenditures to
to test
test asset
asset
before
before itit isis placed
placed in
in service
service

Distinction Between Capital and


Revenue Expenditures
Does
Does the
the expenditure
expenditure increase
increase capacity
capacity
or
or efficiency
efficiency or
or extend
extend useful
useful life?
life?

YES

NO

Capital
Capital Expenditure
Expenditure
Debit
Debit Plant
Plant Assets
Assets
accounts
accounts

Revenue
Revenue Expenditure
Expenditure
Debit
Debit Repairs
Repairs and
and
Maintenance
Maintenance account
account

Measuring the Depreciation


of Plant Assets
Cost or basis
Estimated residual value
Estimated useful life

Objective 2

Account for
depreciation.

Depreciation Methods
Straight-Line (SL)
Units-of-Production (UOP)
Double-Declining-Balance (DDB)

Depreciation Methods
Example
Donishia and Richard Catering, Inc.,
purchased a delivery van on January
1, 200x, for $22,000.
The company expects the van to
have a trade-in value of $2,000 at
the end of its useful life.
The van has an estimated service
life of 100,000 miles or 4 years.

Straight-Line Method
Example
(Cost
(Cost Residual
Residual value)
value) years
years of
of useful
useful life
life
($22,000
($22,000 2,000)
2,000) 44 == $20,000
$20,000 44 == $5,000
$5,000
Year
Year 11 Depreciation:
Depreciation:
Year
Year 22 Depreciation:
Depreciation:
Year
Year 33 Depreciation:
Depreciation:
Year
Year 44 Depreciation:
Depreciation:
Total
Total Depreciation:
Depreciation:

$$ 5,000
5,000
5,000
5,000
5,000
5,000
5,000
5,000
$20,000
$20,000

Units-of-Production
Method Example
($22,000
($22,000 2,000)
2,000) 100,000
100,000 == $.20/mile
$.20/mile
Year
30,000
Year 1:
1:
30,000 miles
miles == $$ 6,000
6,000
Year
27,000
5,400
Year 2:
2:
27,000 miles
miles ==
5,400
Year
23,000
4,600
Year 3:
3:
23,000 miles
miles ==
4,600
Year
20,000
4,000
Year 4:
4:
20,000 miles
miles ==
4,000
Total:
Total: 100,000
100,000 miles
miles == $20,000
$20,000
(Actual
(Actual mileage
mileage in
in year
year 44 was
was 22,000)
22,000)

Double-Declining-Balance Method
Example
Straight-line rate is 100% 4 = 25%
Double-declining-balance = 2 times
the straight-line rate = 50%
What is the book value of the van at
the end of the first year?
$22,000 50% = $11,000
$22,000 $11,000 = $11,000

Double-Declining-Balance Method
Example

Dec.
Dec. 31,
31, 200x
200x
Depreciation
$11,000
Depreciation Expense
Expense
$11,000
Accumulated
Accumulated Depreciation
Depreciation
$11,000
$11,000
To
To record
record depreciation
depreciation expense
expense for
for aa oneoneyear
year period
period

Depreciation Methods
Comparison

Use of Depreciation
Methods

Depreciation for Partial


Years
Assume that Donishia and Richard
Catering, Inc., owned the van for 3
months.
How much is the vans depreciation?
Straight-line
Straight-line method:
method:
$5,000
$5,000 3/12
3/12 == $1,250
$1,250
Double-declining-balance
Double-declining-balance method:
method:
$11,000
$11,000 3/12
3/12 == $2,750
$2,750

Revising Depreciation Rates


Revised SL depreciation
=
Cost Accumulated depreciation

New residual value

Remaining useful life

Objective 4
Account for the
disposal
of a plant asset.

Disposing of Plant Assets


selling
exchanging
discarding (scrapping it)
Gain/loss is reported on the income
statement...
and closed to Income Summary.

Disposing by Discarding
Example
On September 1, Joe, manager of
Joes Landscaping, is contemplating
the disposal of an old piece of
equipment:
Equipment cost:
$36,000
Residual value:
$ 6,000
Accumulated depreciation:$20,000
Estimated useful life at acquisition:
10 years

Disposing by Discarding
Example
Assume the equipment is discarded
on November 30.
What is the accumulated
depreciation on November 30?
($36,000
($36,000 $6,000)
$6,000) 10
10 == $3,000
$3,000
$3,000
$3,000 12
12 == $250
$250
$250
$250 33 == $750
$750
$20,000
$20,000 ++ $750
$750 == $20,750
$20,750

Disposing by Discarding
Example
November
November 30,
30, 20xx
20xx
Accumulated
Accumulated Depreciation
Depreciation
20,750
20,750
Loss
15,250
Loss on
on disposal
disposal
15,250
Equipment
Equipment
36,000
36,000
To
To record
record discarding
discarding of
of equipment
equipment

Selling a Plant Asset


Example
Assume the equipment is sold for
$10,000.
What is the gain or loss?
Nov. 30, 20xx
Cash
10,000
Accumulated Depreciation 20,750
Loss on Sale of Equipment 5,250
Equipment

Selling a Plant Asset


Example
Equipment is sold for $20,000.
What is the gain or loss?
Nov. 30, 20xx
Cash
20,000 Accumulated
Depreciation 20,750
Gain on
Sale of Equipment
4,750
Equipment
36,000
To record sale of equipment for

Exchanging Plant Assets


Assume equipment with a cost of
$36,000 and a book value of $15,250
is exchanged for new, similar
equipment having a cost of $42,000.
Cash payment is $24,000.
What is the cost of the new asset?
$24,000 + $15,250 = $39,250

Exchanging Plant Assets


Equipment
$39,250
Equipment (new)
(new)
$39,250
Accumulated
Accumulated Depreciation
Depreciation (old)
(old) $20,750
$20,750
Equipment
$36,000
Equipment (old)
(old)
$36,000
Cash
$24,000
Cash
$24,000

Objective 5
Account for natural
resource
assets and depletion.

Accounting for Natural


Resources
Natural
Natural gas
gas and
and oil
oil
Precious
Precious metals
metals and
and gems
gems
Timber,
Timber, coal,
coal, and
and iron
iron ore
ore
Cost
Cost Residual
Residual value)
value) Estimated
Estimated units
units
of
of natural
natural resources
resources == Depletion
Depletion per
per unit
unit

Objective 6
Account for
intangible
assets and
amortization.

Intangible Assets
Not
Not physical
physical in
in nature
nature
Patents
Copyrights
Trademarks
Franchises
Leaseholds
Goodwill

Intangible Assets: Patents


Patents are federal government
grants.
They give the holder the right to
produce and sell an invention.
Suppose a company pays $170,000
to acquire a patent on January 1.
The company believes that its
expected useful life is 5 years.
What are the entries?

Intangible Assets: Patents


Jan. 1
Patents
Cash
To acquire a patent

170,000

Dec. 31
Amortization Expense
34,000
Patents
To amortize the cost of a patent

170,000

34,000

Intangible Assets:
Copyrights

Literary compositions (novels)


Musical compositions
Films (movies)
Software
Other works of art

Intangible Assets:
Trademarks

Trademarks,
Trademarks, Trade
Trade Names,
Names,
or
or Brand
Brand Names
Names are
are assets
assets that
that represent
represent
distinctive
distinctive identifications
identifications of
of aa product
product or
or service.
service.

Intangible Assets:
Franchises
Franchises are privileges granted by
private business or government to
sell a product or service.

Intangible Assets: Goodwill


Goodwill Example
Purchase
Purchase price
price paid
paid for
for
Mexana
Mexana Company
Company
Assets
Assets at
at market
market value
value
Less
Less Mexanas
Mexanas liabilities
liabilities
Market
Market value
value of
of
Mexanas
Mexanas net
net assets
assets
Goodwill
Goodwill

99 million
million
11 million
million

$10
$10 million
million

88 million
million
$$ 22 million
million