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Chapter 2 discusses the accounting for plant assets, emphasizing their characteristics, cost recording under the historical cost principle, and various types of assets including land, buildings, and equipment. It further details the methods of accounting for costs, including ordinary repairs versus capital expenditures, and outlines depreciation methods such as straight-line, units-of-activity, and declining-balance methods. Additionally, the chapter covers component depreciation and revaluation of assets under IFRS, with examples illustrating the different accounting treatments.

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Chapter 2 Plant Assets, Natural Resources, and Intangible Assets Kalkidan S.
Learning Objective 1 Explain the Accounting for Plant Asset Expenditures 2 Kalkidan S.
Plant Asset Expenditures IAS 16-Plant assets are resources that have ‱ physical substance (a definite size and shape), ‱ are used in the operations of a business, ‱ are not intended for sale to customers, ‱ are expected to provide service to the company for a number of years, except for land. Referred to as property, plant, and equipment; plant and equipment; and fixed assets. 3 Kalkidan S.
The Cost of Plant Assets (1 of 10) Historical Cost Principle ‱ Requires that companies record plant assets at cost ‱ Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use 4 Kalkidan S.
The Cost of Plant Assets (2 of 10) Land All necessary costs incurred in making land ready for its intended use increase (debit) the Land account. Costs typically include: 1. cash purchase price 2. closing costs such as title and attorney’s fees 3. real estate brokers’ commissions 4. accrued property taxes and other liens on land assumed by purchaser 5 Kalkidan S.
The Cost of Plant Assets (3 of 10) Illustration: Lew Ltd. acquires real estate at a cash cost of HK$2,000,000. The property contains an old warehouse that is razed at a net cost of HK$60,000 (HK$75,000 in costs less HK$15,000 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, HK$10,000, and the real estate broker’s commission, HK$80,000. Determine the amount to be reported as the cost of the land. 6 Kalkidan S.
Land Cash price of property (HK$2,000,000) HK$2,000,000 Net removal cost of warehouse (HK$60,000) 60,000 Attorney's fees (HK$10,000) 10,000 Real estate broker’s commission (HK$80,000) 80,000 Cost of Land HK$2,150,000 The Cost of Plant Assets (4 of 10) Required: Determine amount to be reported as the cost of the land. Kalkidan S. 7 Cash 2,150,000 Land 2,150,000 Lew makes the following entry:
The Cost of Plant Assets (5 of 10) Land Improvements Structural additions with limited lives that are made to land. Cost includes all expenditures necessary to make the improvements ready for their intended use. ‱ Examples: driveways, parking lots, fences, landscaping, and underground sprinklers ‱ Limited useful lives ‱ Expense (depreciate) cost of land improvements over their useful lives 8 Kalkidan S.
The Cost of Plant Assets (6 of 10) 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 9 Kalkidan S.
The Cost of Plant Assets (7 of 10) Buildings Includes all costs related directly to purchase or construction. Construction costs: ‱ Contract price ‱ Payments for architects’ fees ‱ Building permits ‱ Excavation costs 10 Kalkidan S.
The Cost of Plant Assets (8 of 10) Equipment Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include: ‱ Cash purchase price ‱ Sales taxes ‱ Freight charges ‱ Insurance during transit paid by purchaser ‱ Assembling, installing, and testing 11 Kalkidan S.
Blank Truck Cash price HK$420,000 Sales taxes 13,200 Painting and lettering 5,000 Blank Blank Cost of Delivery Truck HK$438,200 The Cost of Plant Assets (9 of 10) Illustration: Lenard Huang Group purchases a delivery truck at a cash price of HK$420,000. Related expenditures consist of sales taxes HK$13,200, painting and lettering HK$5,000, motor vehicle license HK$800, and a three-year accident insurance policy HK$16,000. Compute the cost of the delivery truck. 12 Kalkidan S.
The Cost of Plant Assets (10 of 10) 13 Kalkidan S. Equipment 438,200 Cash 455,000 License Expense 800 Prepaid Insurance 16,000 Illustration: Lenard Huang Group purchases a delivery truck at a cash price of HK$420,000. Related expenditures consist of sales taxes HK$13,200, painting and lettering HK$5,000, motor vehicle license HK$800, and a three-year accident insurance policy HK$16,000. Prepare the journal entry to record these costs.
14 Kalkidan S. Ordinary Repairs are expenditures to maintain the operating efficiency and productive life of the unit. ‱ Debit to Maintenance and Repairs Expense ‱ Referred to as revenue expenditures Additions and Improvements are costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset. ‱ Debit plant asset affected ‱ Referred to as capital expenditures Expenditures During Useful Life
15 Kalkidan S. Assume that Jing Feng Heating and Cooling purchases a delivery truck for „150,000 cash, plus sales taxes of „9,000 and delivery costs of „5,000. The buyer also pays „2,000 for painting and lettering, „6,000 for an annual insurance policy, and „800 for a motor vehicle license. Explain how each of these costs would be accounted for. Solution ‱ The first four payments („150,000, „9,000, „5,000, and „2,000) are included in the cost of the truck („166,000) ‱ The payments for insurance and the license are operating costs and therefore are expensed DO IT! 1: Cost of Plant Assets
Learning Objective 2 Apply Depreciation Methods to Plant Assets 16 Kalkidan S.
Depreciation Methods Depreciation Process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner. ‱ Process of cost allocation, not asset valuation ‱ Applies to land improvements, buildings, and equipment, not land ‱ Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life 17 Kalkidan S.
Factors in Computing Depreciation Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the balance sheet as a deduction from plant assets. 18 Kalkidan S.
Depreciation Methods (1 of 2) Management selects the method it believes 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. 19 Kalkidan S.
Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2020. Cost €13,000 Expected salvage value € 1,000 Estimated useful life in years 5 Estimated useful life in miles 100,000 Required: Compute depreciation using the following. (a) Straight-Line (b) Units-of-Activity (c) Declining Balance 20 Kalkidan S. Depreciation Methods (2 of 2)
‱ Expense is same amount for each year ‱ Depreciable cost = Cost less residual value 21 Kalkidan S. Straight-Line Method (1 of 3) Cost - Residual Value = Depreciable Cost €13,000 - €1,000 = €12,000 Depreciable Cost Ă· Useful Life (in years) = Annual Depreciation Expense €12,000 Ă· 5 = €2,400
Straight-Line Method (2 of 3) Computations End of Year Year Depreciable Cost x Rate = Annual Expense Accumulated Depreciation Book Value 2020 $12,000 x 20% = € 2,400 € 2,400 €10,600* 2021 12,000 x 20 = 2,400 4,800 8,200 2022 12,000 x 20 = 2,400 7,200 5,800 2023 12,000 x 20 = 2,400 9,600 3,400 2024 12,000 x 20 = 2,400 12,000 1,000 €12,000 Journal Entry 2020 Depreciation Expense 2,400 Accumulated Depreciation 2,400 *€13,000 − €2,400 22 Kalkidan S.
Straight-Line Method (3 of 3) Assume the delivery truck was purchased on April 1, 2020. Computations End of Year Year Depreciable Cost x Rate = Annual Expense x Partial Year = Depreciation Expense Accum. Deprec. 2020 €12,000 x 20% = € 2,400 x 9/12 = € 1,800 €1,800 2021 12,000 x 20 = 2,400 x = 2,400 4,200 2022 12,000 x 20 = 2,400 x = 2,400 6,600 2023 12,000 x 20 = 2,400 x = 2,400 9,000 2024 12,000 x 20 = 2,400 x = 2,400 11,400 2025 12,000 x 20 = 2,400 x 3/12 = 600 12,000 €12,000 23 Kalkidan S.
Year Cost - Residual Value Ă· Rate = Annual Expense 2020 €50,000 - €2,000 Ă· 10% = €4,800 Do It! 2a: Straight-Line Depreciation On January 1, 2020, Iron Mountain Ski Corporation purchased a new snow-grooming machine for €50,000. The machine is estimated to have a 10-year life with a €2,000 residual value. What journal entry would Iron Mountain Ski Corporation make at December 31, 2020, if it uses the straight-line method of depreciation? Depreciation Expense 4,800 Accumulated Depreciation 4,800 Kalkidan S. 24
Units-of-Activity Method (1 of 2) ‱ Companies estimate total units of activity to calculate depreciation cost per unit ‱ Expense varies based on units of activity ‱ Depreciable cost is cost less salvage value ‱ Often referred to as units-of-production method Depreciable Cost Ă· Total Units of Activity = Depreciable Cost per Unit €12,000 Ă· 100,000 miles = €0.12 25 Kalkidan S.
Units-of-Activity Method (2 of 2) Computations End of Year Year Units of Activity x Rate = Annual Expense Accumulated Depreciation Book Value 2020 15,000 x €.012 = € 1,800 € 1,800 €11,200* 2021 30,000 x .012 = 3,600 5,400 7,600 2022 20,000 x .012 = 2,400 7,800 5,200 2023 25,000 x .012 = 3,000 10,800 2,200 2024 10,000 x .012 = 1,200 12,000 1,000 Journal Entry 2020 Depreciation Expense 1,800 Accumulated Depreciation 1,800 *€13,000 − €1,800 26 Kalkidan S.
Declining-Balance Method (1 of 3) ‱ Accelerated method ‱ Decreasing annual depreciation expense over asset’s useful life ‱ Double declining-balance rate is double the straight- line rate ‱ Rate applied to book value 27 Kalkidan S.
Declining-Balance Method (2 of 3) Computations End of Year Year Beginning Book Value x Rate = Annual Expense Accumulated Depreciation Book Value 2020 €13,000 x 40% = € 5,200 € 5,200 €7,800 2021 7,800 x 40 = 3,120 8,320 4,680 2022 4,680 x 40 = 1,872 10,192 2,808 2023 2,808 x 40 = 1,123 11,315 1,685 2024 1,685 x 40 = 685 12,000 1,000 (b) (a) (a) €13,000 − €5,200 (b) €1,685 x 40% = €674, expense adjusted to €685 to result in residual value of €1,000. 28 Kalkidan S.
Declining-Balance Method (3 of 3) Assume the delivery truck was purchased on April 1, 2020. Computations End of Year Year Beginning Book Value x Rate = Annual Expense x Partial Year = Depreciation Expense Accum. Deprec. 2020 €13,000 x 40% = € 5,200 x 9/12 = € 3,900 €3,900 2021 9,100 x 40 = 3,640 x = 3,640 7,540 2022 5,460 x 40 = 2,184 x = 2,184 9,724 2023 3,276 x 40 = 1,310 x = 1,310 11,034 2024 1,966 x 40 = 786 x = 786 11,820 2025 1,180 x 40 = 472 x = 180 12,000 (a) (a) Expense adjusted to €180 to result in residual value of €1,000. Kalkidan S. 29
Annual depreciation expense varies, but total depreciation expense is the same (€12,000) for the five-year period. Comparison of Methods (1 of 2) Year Straight- Line Declining- Balance Units-of- Activity 2020 € 2,400 € 5,200 € 1,800 2021 2,400 3,120 3,600 2022 2,400 1,872 2,400 2023 2,400 1,123 3,000 2024 2,400 685 1,200 €12,000 €12,000 €12,000 30 Kalkidan S.
Comparison of Methods (2 of 2) 31 Kalkidan S.
Component Depreciation (1 of 2) ‱ IFRS requires component depreciation for plant assets ‱ Any significant parts of a plant asset that have significantly different estimated useful lives should be separately depreciated 32 Kalkidan S.
Component Depreciation (2 of 2) Illustration: Lexure Construction builds an office building for HK$4,000,000, not including the cost of the land. If the HK$4,000,000 is allocated over the 40-year useful life of the building, Lexure reports HK$100,000 (HK$4,000,000 Ă· 40) of depreciation per year, assuming straight-line depreciation and no residual value. However, assume that HK$320,000 of the cost of the building relates to a heating, ventilation, and air conditioning (HVAC) system and HK$600,000 relates to flooring. Because the HVAC system has a depreciable life of five years and the flooring has a depreciable life of 10 years, Lexure must use component depreciation. It must reclassify HK$320,000 of the cost of the building to the HVAC system and HK$600,000 to the cost of flooring. 33 Kalkidan S.
Component Depreciation (2 of 2) Assuming that Lexure uses straight-line depreciation, the following shows the computation of component depreciation for the first year of the office building. 34 Kalkidan S. Building cost adjusted (HK$4,000,000 − HK$320,000 − HK$600,000) HK$3,080,000 Building cost depreciation per year (HK$3,080,000 Ă· 40) HK$ 77,000 Personal HVAC system depreciation (HK$320,000 Ă· 5) 64,000 Flooring depreciation (HK$600,000 Ă· 10) 60,000 Total component depreciation in first year HK$ 201,000
Tax laws do not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. Many companies use straight-line in their financial statements to maximize net income. They also use an accelerated depreciation method on their tax returns to minimize their income taxes. 35 Kalkidan S. Depreciation and Income Taxes
Revaluation of Plant Assets (1 of 5) ‱ IFRS allows companies to revalue plant assets to fair value at the reporting date ‱ 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 36 Kalkidan S.
Revaluation of Plant Assets (2 of 5) Gain Situation Illustration: Pernice Ltd. applies revaluation to equipment purchased on January 1, 2020, for HK$1,000,000. The equipment has a useful life of five years and no residual value. On December 31, 2020, Pernice makes the following journal entry to record depreciation expense, assuming straight-line depreciation. Kalkidan S. 37 Accumulated Depreciation—Equipment 200,000 Depreciation Expense 200,000
Revaluation of Plant Assets (3 of 5) At the end of 2020, independent appraisers determine that the asset has a fair value of HK$850,000. To report the equipment at its fair value of HK$850,000 on December 31, 2020, Pernice eliminates the Accumulated Depreciation— Equipment account, reduces Equipment to its fair value of HK$850,000, and records Revaluation Surplus of HK$50,000. The entry to record the revaluation is as follows. Kalkidan S. 38 Equipment 150,000 Accumulated Depreciation—Equipment 200,000 Revaluation Surplus 50,000
Revaluation of Plant Assets (4 of 5) Pernice reports ‱ Depreciation expense of HK$200,000 in the income statement ‱ HK$50,000 in other comprehensive income ‱ HK$850,000 is the new basis of the asset Assuming no change in the total useful life, depreciation in 2021 will be HK$212,500 (HK$850,000 Ă· 4). Kalkidan S. 39
Revaluation of Plant Assets (5 of 4) Loss Situation Illustration: Pernice’s equipment has a carrying amount of HK$800,000 (HK$1,000,000 − HK$200,000). However, at the end of 2020, independent appraisers determine that the asset has a fair value of HK$775,000, which results in an impairment loss of HK$25,000 (HK$800,000 − HK$775,000). The entry to record the equipment and report the impairment loss is as follows. Kalkidan S. 40 Impairment Loss 25,000 Accumulated Depreciation—Equipment 200,000 Equipment 225,000
‱ Accounted for in period of change and future periods (Change in Estimate) ‱ No change in depreciation reported for prior years ‱ Not considered an error ‱ Use a step-by-step approach: 1. determine new depreciable cost 2. divide by remaining useful life 41 Kalkidan S. Revising Periodic Depreciation (1 of 4)
Revising Periodic Depreciation (2 of 4) Illustration: Barb’s Florists decides on January 1, 2023, to extend the useful life of the truck by one year (a total life of six years) and increase its residual value to €2,200. The company has used the straight-line method to depreciate the asset to date. Depreciation for the first 3 years is as follows. 42 Kalkidan S. Equipment cost €13,000 Residual value − 1,000 Depreciable base 12,000 Useful life (original) Ă· 5 years Annual depreciation € 2,400 × 3 years = €7,200
Net book value at date of change in estimate (after 3 years). Revising Periodic Depreciation (3 of 4) Plant Assets: Equipment €13,000 Accumulated depreciation 7,200 Net book value € 5,800 43 Kalkidan S.
Revising Periodic Depreciation (4 of 4) Calculation of depreciation expense for 2023, year 4. Net book value after year 3 €5,800 Residual value (revised) − 2,200 Depreciable base 3,600 Remaining life Ă· 3 years Revised Annual depreciation €1,200 44 Kalkidan S. Journal entry for 2023 and future years. Depreciation Expense 1,200 Accumulated Depreciation 1,200
Do It! 2b: Revised Depreciation (1 of 3) Chambers Corporation purchased a piece of equipment for ÂŁ36,000. It estimated a 6-year life and ÂŁ6,000 salvage value. Thus, straight-line depreciation was ÂŁ5,000 per year [(ÂŁ36,000 − ÂŁ6,000) Ă· 6]. At the end of year three (before the depreciation adjustment), it estimated the new total life to be 10 years and the new salvage value to be ÂŁ2,000. Compute the revised depreciation. 45 Kalkidan S.
Calculation of depreciation expense for first 2 years. Equipment cost ÂŁ36,000 Salvage value − 6,000 Depreciable base 30,000 Useful life (original) Ă· 6 years Annual depreciation ÂŁ 5,000 × 2 years = ÂŁ10,000 Net book value at date of change in estimate (after 2 years). Plant Assets: Equipment ÂŁ36,000 Accumulated depreciation 10,000 Net book value ÂŁ26,000 46 Kalkidan S. Do It! 2b: Revised Depreciation (2 of 3)
Calculation of revised depreciation expense for remaining years. Net book value after year 2 ÂŁ26,000 Salvage value (revised) − 2,000 Depreciable base 24,000 Remaining life Ă· 8 years Annual depreciation ÂŁ 3,000 47 Kalkidan S. Journal entry for remaining years. Depreciation Expense 3,000 Accumulated Depreciation 3,000 Do It! 2b: Revised Depreciation (3 of 3)
Learning Objective 3 Explain How to Account for the Disposal of Plant Assets 48 Kalkidan S.
Companies dispose of plant assets in three ways — 1. Retirement: Equipment is scrapped or discarded 2. Sale: Equipment is sold to another party 3. Exchange: Equipment is traded for new equipment Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account. 49 Kalkidan S. Plant Asset Disposals
Retirement of Plant Assets (1 of 3) ‱ No cash is received ‱ Decrease (debit) Accumulated Depreciation for full amount of depreciation taken over life of asset ‱ Decrease (credit) asset account for original cost of asset 50 Kalkidan S.
Illustration: Hobart Publishing retires its computer printers, which cost €32,000. The accumulated depreciation on these printers is €32,000. Prepare the entry to record this retirement. 51 Kalkidan S. Retirement of Plant Assets (2 of 3) Question: What happens if a fully depreciated plant asset is still useful to the company? Equipment 32,000 Accumulated Depreciation—Equipment 32,000
Illustration: Sunset Company discards delivery equipment that cost €18,000 and has accumulated depreciation of €14,000. The journal entry is? 52 Kalkidan S. Retirement of Plant Assets (3 of 3) Companies report a loss on disposal in the “Other income and expense” section of the income statement. Loss on Disposal of Plant Assets 4,000 Accumulated Depreciation—Equipment 14,000 Equipment 18,000
Sale of Plant Assets (1 of 4) 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 53 Kalkidan S.
Sale of Plant Assets (2 of 4) Illustration: On July 1, 2020, Wright Interiors sells office furniture for €16,000 cash. The office furniture originally cost €60,000. As of January 1, 2020, it had accumulated depreciation of €41,000. Depreciation for the first six months of 2020 is €8,000. Prepare the journal entry to record depreciation expense up to the date of sale. 54 Kalkidan S. Depreciation Expense 8,000 Accumulated Depreciation—Equipment 8,000
Sale of Plant Assets (3 of 4) Cost of office furniture €60,000 Less: Accumulated depreciation (€41, 000 + €8,000) 49,000 Book value at date of disposal 11,000 Proceeds from sale 16,000 Gain on disposal of plant asset € 5,000 Wright records the sale as follows on July 1. Cash 16,000 Accumulated Depreciation—Equipment 49,000 Equipment 60,000 Gain on Disposal of Plant Assets 5,000 55 Kalkidan S.
Sale of Plant Assets (4 of 4) Illustration: Assume that instead of selling the office furniture for €16,000, Wright sells it for €9,000. Cost of office furniture €60,000 Less: Accumulated depreciation (€41, 000 + €8,000) 49,000 Book value at date of disposal 11,000 Proceeds from sale 9,000 Loss on disposal of plant asset € 2,000 Cash 9,000 Accumulated Depreciation—Equipment 49,000 Loss on Disposal of Plant Assets 2,000 Equipment 60,000 Kalkidan S. 56
Do It! 3: Plant Asset Disposal (1 of 2) Overland Trucking has decided to sell an old truck that cost £30,000 and which has accumulated depreciation of £16,000. (a) What entry would Overland Trucking make to record the sale of the truck for £17,000 cash? 57 Kalkidan S. Cash 17,000 Equipment 30,000 Gain on Disposal of Plant Assets 3,000 Accumulated Depreciation—Equipment 16,000
Do It! 3: Plant Asset Disposal (2 of 2) Overland Trucking has decided to sell an old truck that cost £30,000 and which has accumulated depreciation of £16,000. (b) What entry would Overland Trucking make to record the sale of the truck for £10,000 cash? 58 Kalkidan S. Accumulated Depreciation—Equipment 16,000 Equipment 30,000 Loss on Disposal of Plant Assets 4,000 Cash 10,000
59 Kalkidan S. ‱ Ordinarily, companies record a gain or loss on exchange of plant assets ‱ Most exchanges have commercial substance ‱ Commercial substance if future cash flows change as a result of exchange Exchange of Plant Assets
60 Kalkidan S. Illustration: Roland NV exchanged old trucks (cost €64,000 less €22,000 accumulated depreciation) plus cash of €17,000 for a new semi-truck. The old trucks had a fair market value of €26,000. Loss Treatment Cost of used trucks €64,000 Less: Accumulated depreciation 22,000 Book value 42,000 Fair market value of used trucks 26,000 Loss on disposal of plant assets €16,000 Fair market value of used trucks €26,000 Cash paid 17,000 Cost of new truck €43,000
61 Kalkidan S. Illustration: Roland NV exchanged old trucks (cost €64,000 less €22,000 accumulated depreciation) plus cash of €17,000 for a new semi-truck. The old trucks had a fair market value of €26,000. Prepare the entry to record the exchange of assets by Roland. Loss Treatment Equipment (new) 43,000 Equipment (old) 64,000 Cash 17,000 Accumulated Depreciation—Equipment 22,000 Loss on Disposal of Plant Assets 16,000
62 Kalkidan S. Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also paid €3,000. Gain Treatment Cost of old equipment €40,000 Less: Accumulated depreciation 28,000 Book value 12,000 Fair market value of old equipment 19,000 Gain on disposal of plant assets € 7,000 Fair market value of old equipment €19,000 Cash paid 3,000 Cost of new equipment €22,000
63 Kalkidan S. Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also paid €3,000. Gain Treatment Equipment (new) 22,000 Gain on Disposal of Plant Assets 7,000 Cash 3,000 Accumulated Depreciation—Equipment 28,000 Equipment (old) 40,000
Learning Objective 4 Describe How to Account for Natural Resources and Intangible Assets 64 Kalkidan S.
65 Kalkidan S. IFRS 6-Natural resources consist of standing timber and underground deposits of oil, gas, and minerals. Distinguishing characteristics: ‱ Physically extracted in operations ‱ Replaceable only by an act of nature Cost is the price needed to acquire the resource and prepare it for its intended use. Natural Resources and Intangible Assets
66 Kalkidan S. The allocation of the cost to expense in a rational and systematic manner over the resource’s useful life. ‱ Companies generally use units-of-activity method ‱ Depletion generally is a function of the units extracted Depletion (1 of 3) Total Cost - Residual Value = Depletion Cost per Unit Total Estimated Units Available
Total Cost - Residual Value = Depletion Cost per Unit Total Estimated Units Available HK$50,000,000 = HK$5.00 per ton 10,000,000 67 Kalkidan S. Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million tons of coal and no residual value. Compute the depletion cost per unit. Depletion (2 of 3)
68 Kalkidan S. Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million tons of coal and no residual value. In the first year, Lane extracts and sells 250,000 tons of coal. Lane computes the depletion as follows: HK$50,000,000 Ă· 10,000,000 = HK$5.00 depletion cost per ton HK$5.00 x 250,000 = HK$1,250,000 annual depletion Journal entry: Depletion (3 of 3) Accumulated Depletion 1,250,000 Inventory (coal) 1,250,000
Intangible Assets IAS 37-Rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance. Limited life or an indefinite life. Common types of intangibles: ‱ Patents ‱ Trademarks ‱ Copyrights ‱ Trade names ‱ Franchises and Licenses ‱ Goodwill 69 Kalkidan S.
Accounting for Intangible Assets (1 of 8) Limited-Life Intangibles: ‱ Amortize to expense ‱ Credit asset account or accumulated amortization Indefinite-Life Intangibles: ‱ No foreseeable limit on time asset is expected to provide cash flow ‱ No amortization 70 Kalkidan S.
71 Kalkidan S. Patents ‱ Amortize to expense ‱ Exclusive right to manufacture, sell, or otherwise control an invention for 20 years from date of grant ‱ Capitalize costs of purchasing a patent and amortize over 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 Patents account Accounting for Intangible Assets (2 of 8)
Accounting for Intangible Assets (4 of 8) Illustration: National Labs purchases a patent at a cost of NT$720,000. National estimates the useful life to be eight years. Prepare the journal entry to record the annual amortization for the year ended December 31. 72 Kalkidan S. Cost NT$720,000 Useful life Ă· 8 Amortization NT$ 90,000 Dec. 31 Amortization Expense 90,000 Patents 90,000
Accounting for Intangible Assets (5 of 8) Copyrights ‱ Gives owner exclusive right to reproduce and sell an artistic or published work ‱ Granted for life of creator plus 70 years ‱ Capitalize costs of acquiring and defending ‱ Amortized to expense over useful life 73 Kalkidan S.
Accounting for Intangible Assets (6 of 8) Trademarks and Trade Names ‱ Word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product § Big Mac, Coca-Cola, and Jetta ‱ Legal protection for indefinite number of 20 year renewal periods ‱ Capitalize acquisition costs ‱ No amortization 74 Kalkidan S.
75 Kalkidan S. Franchises ‱ Contractual arrangement between a franchisor and a franchisee § CPC, Subway, and Europcar are franchises ‱ Franchise (or license) with a limited life should be amortized to expense over its useful life ‱ If life is indefinite, cost is not amortized Accounting for Intangible Assets (7 of 8)
76 Kalkidan S. 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 excess of purchase price over fair value of net assets acquired ‱ Not amortized Accounting for Intangible Assets (8 of 8)
77 Kalkidan S. Expenditures that may lead to ‱ patents ‱ copyrights ‱ new processes ‱ new products All R & D costs are expensed when incurred Not intangible assets Research and Development Costs
Do It! 4: Classification Concepts (1 of 3) Match the term most directly associated with each statement. Copyrights Depletion Intangible assets Franchises Research costs 1. The allocation of the cost of a natural resource in a rational and systematic manner. Depletion 2. Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance. Intangible assets 78 Kalkidan S.
Do It! 4: Classification Concepts (2 of 3) Match the term most directly associated with each statement. Copyrights Depletion Intangible assets Franchises Research costs 3. An exclusive right granted by the government to reproduce and sell an artistic or published work. Copyrights 4. A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area. Franchises 79 Kalkidan S.
Do It! 4: Classification Concepts (3 of 3) Match the term most directly associated with each statement. Copyrights Depletion Intangible assets Franchises Research costs 5. Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred. Research costs 80 Kalkidan S.
Learning Objective 5 Discuss How Plant Assets, Natural Resources, and Intangible Assets are Reported 81 Kalkidan S.
82 Kalkidan S. Presentation ‱ Usually, companies combine plant assets and natural resources under “Property, plant, and equipment” in the statement of financial position. ‱ Intangible assets are shown separately Statement Presentation
83 Kalkidan S. Artex Enterprises Statement of Financial Position (partial) (in billions) Property, plant, and equipment Gold mine „ 530 Less: Accumulated depletion 210 „ 320 Land 600 Buildings 7,600 Less: Accumulated depreciation—buildings 500 7,100 Equipment 3,870 Less: Accumulated depreciation— equipment 620 3,250 Total property, plant, and equipment „11,270 Intangible assets Patents 440 Trademarks 180 Goodwill 900 1,520 Total assets „12,790 Statement Presentation
End of Chapter ? 84 Kalkidan S.

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ch02_Plant_Assets,_Natural_Resources,_and_Intangible_Assets_1 (2).pdf

  • 1. Chapter 2 Plant Assets, Natural Resources, and Intangible Assets Kalkidan S.
  • 2. Learning Objective 1 Explain the Accounting for Plant Asset Expenditures 2 Kalkidan S.
  • 3. Plant Asset Expenditures IAS 16-Plant assets are resources that have ‱ physical substance (a definite size and shape), ‱ are used in the operations of a business, ‱ are not intended for sale to customers, ‱ are expected to provide service to the company for a number of years, except for land. Referred to as property, plant, and equipment; plant and equipment; and fixed assets. 3 Kalkidan S.
  • 4. The Cost of Plant Assets (1 of 10) Historical Cost Principle ‱ Requires that companies record plant assets at cost ‱ Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use 4 Kalkidan S.
  • 5. The Cost of Plant Assets (2 of 10) Land All necessary costs incurred in making land ready for its intended use increase (debit) the Land account. Costs typically include: 1. cash purchase price 2. closing costs such as title and attorney’s fees 3. real estate brokers’ commissions 4. accrued property taxes and other liens on land assumed by purchaser 5 Kalkidan S.
  • 6. The Cost of Plant Assets (3 of 10) Illustration: Lew Ltd. acquires real estate at a cash cost of HK$2,000,000. The property contains an old warehouse that is razed at a net cost of HK$60,000 (HK$75,000 in costs less HK$15,000 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, HK$10,000, and the real estate broker’s commission, HK$80,000. Determine the amount to be reported as the cost of the land. 6 Kalkidan S.
  • 7. Land Cash price of property (HK$2,000,000) HK$2,000,000 Net removal cost of warehouse (HK$60,000) 60,000 Attorney's fees (HK$10,000) 10,000 Real estate broker’s commission (HK$80,000) 80,000 Cost of Land HK$2,150,000 The Cost of Plant Assets (4 of 10) Required: Determine amount to be reported as the cost of the land. Kalkidan S. 7 Cash 2,150,000 Land 2,150,000 Lew makes the following entry:
  • 8. The Cost of Plant Assets (5 of 10) Land Improvements Structural additions with limited lives that are made to land. Cost includes all expenditures necessary to make the improvements ready for their intended use. ‱ Examples: driveways, parking lots, fences, landscaping, and underground sprinklers ‱ Limited useful lives ‱ Expense (depreciate) cost of land improvements over their useful lives 8 Kalkidan S.
  • 9. The Cost of Plant Assets (6 of 10) 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 9 Kalkidan S.
  • 10. The Cost of Plant Assets (7 of 10) Buildings Includes all costs related directly to purchase or construction. Construction costs: ‱ Contract price ‱ Payments for architects’ fees ‱ Building permits ‱ Excavation costs 10 Kalkidan S.
  • 11. The Cost of Plant Assets (8 of 10) Equipment Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include: ‱ Cash purchase price ‱ Sales taxes ‱ Freight charges ‱ Insurance during transit paid by purchaser ‱ Assembling, installing, and testing 11 Kalkidan S.
  • 12. Blank Truck Cash price HK$420,000 Sales taxes 13,200 Painting and lettering 5,000 Blank Blank Cost of Delivery Truck HK$438,200 The Cost of Plant Assets (9 of 10) Illustration: Lenard Huang Group purchases a delivery truck at a cash price of HK$420,000. Related expenditures consist of sales taxes HK$13,200, painting and lettering HK$5,000, motor vehicle license HK$800, and a three-year accident insurance policy HK$16,000. Compute the cost of the delivery truck. 12 Kalkidan S.
  • 13. The Cost of Plant Assets (10 of 10) 13 Kalkidan S. Equipment 438,200 Cash 455,000 License Expense 800 Prepaid Insurance 16,000 Illustration: Lenard Huang Group purchases a delivery truck at a cash price of HK$420,000. Related expenditures consist of sales taxes HK$13,200, painting and lettering HK$5,000, motor vehicle license HK$800, and a three-year accident insurance policy HK$16,000. Prepare the journal entry to record these costs.
  • 14. 14 Kalkidan S. Ordinary Repairs are expenditures to maintain the operating efficiency and productive life of the unit. ‱ Debit to Maintenance and Repairs Expense ‱ Referred to as revenue expenditures Additions and Improvements are costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset. ‱ Debit plant asset affected ‱ Referred to as capital expenditures Expenditures During Useful Life
  • 15. 15 Kalkidan S. Assume that Jing Feng Heating and Cooling purchases a delivery truck for „150,000 cash, plus sales taxes of „9,000 and delivery costs of „5,000. The buyer also pays „2,000 for painting and lettering, „6,000 for an annual insurance policy, and „800 for a motor vehicle license. Explain how each of these costs would be accounted for. Solution ‱ The first four payments („150,000, „9,000, „5,000, and „2,000) are included in the cost of the truck („166,000) ‱ The payments for insurance and the license are operating costs and therefore are expensed DO IT! 1: Cost of Plant Assets
  • 16. Learning Objective 2 Apply Depreciation Methods to Plant Assets 16 Kalkidan S.
  • 17. Depreciation Methods Depreciation Process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner. ‱ Process of cost allocation, not asset valuation ‱ Applies to land improvements, buildings, and equipment, not land ‱ Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life 17 Kalkidan S.
  • 18. Factors in Computing Depreciation Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the balance sheet as a deduction from plant assets. 18 Kalkidan S.
  • 19. Depreciation Methods (1 of 2) Management selects the method it believes 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. 19 Kalkidan S.
  • 20. Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2020. Cost €13,000 Expected salvage value € 1,000 Estimated useful life in years 5 Estimated useful life in miles 100,000 Required: Compute depreciation using the following. (a) Straight-Line (b) Units-of-Activity (c) Declining Balance 20 Kalkidan S. Depreciation Methods (2 of 2)
  • 21. ‱ Expense is same amount for each year ‱ Depreciable cost = Cost less residual value 21 Kalkidan S. Straight-Line Method (1 of 3) Cost - Residual Value = Depreciable Cost €13,000 - €1,000 = €12,000 Depreciable Cost Ă· Useful Life (in years) = Annual Depreciation Expense €12,000 Ă· 5 = €2,400
  • 22. Straight-Line Method (2 of 3) Computations End of Year Year Depreciable Cost x Rate = Annual Expense Accumulated Depreciation Book Value 2020 $12,000 x 20% = € 2,400 € 2,400 €10,600* 2021 12,000 x 20 = 2,400 4,800 8,200 2022 12,000 x 20 = 2,400 7,200 5,800 2023 12,000 x 20 = 2,400 9,600 3,400 2024 12,000 x 20 = 2,400 12,000 1,000 €12,000 Journal Entry 2020 Depreciation Expense 2,400 Accumulated Depreciation 2,400 *€13,000 − €2,400 22 Kalkidan S.
  • 23. Straight-Line Method (3 of 3) Assume the delivery truck was purchased on April 1, 2020. Computations End of Year Year Depreciable Cost x Rate = Annual Expense x Partial Year = Depreciation Expense Accum. Deprec. 2020 €12,000 x 20% = € 2,400 x 9/12 = € 1,800 €1,800 2021 12,000 x 20 = 2,400 x = 2,400 4,200 2022 12,000 x 20 = 2,400 x = 2,400 6,600 2023 12,000 x 20 = 2,400 x = 2,400 9,000 2024 12,000 x 20 = 2,400 x = 2,400 11,400 2025 12,000 x 20 = 2,400 x 3/12 = 600 12,000 €12,000 23 Kalkidan S.
  • 24. Year Cost - Residual Value Ă· Rate = Annual Expense 2020 €50,000 - €2,000 Ă· 10% = €4,800 Do It! 2a: Straight-Line Depreciation On January 1, 2020, Iron Mountain Ski Corporation purchased a new snow-grooming machine for €50,000. The machine is estimated to have a 10-year life with a €2,000 residual value. What journal entry would Iron Mountain Ski Corporation make at December 31, 2020, if it uses the straight-line method of depreciation? Depreciation Expense 4,800 Accumulated Depreciation 4,800 Kalkidan S. 24
  • 25. Units-of-Activity Method (1 of 2) ‱ Companies estimate total units of activity to calculate depreciation cost per unit ‱ Expense varies based on units of activity ‱ Depreciable cost is cost less salvage value ‱ Often referred to as units-of-production method Depreciable Cost Ă· Total Units of Activity = Depreciable Cost per Unit €12,000 Ă· 100,000 miles = €0.12 25 Kalkidan S.
  • 26. Units-of-Activity Method (2 of 2) Computations End of Year Year Units of Activity x Rate = Annual Expense Accumulated Depreciation Book Value 2020 15,000 x €.012 = € 1,800 € 1,800 €11,200* 2021 30,000 x .012 = 3,600 5,400 7,600 2022 20,000 x .012 = 2,400 7,800 5,200 2023 25,000 x .012 = 3,000 10,800 2,200 2024 10,000 x .012 = 1,200 12,000 1,000 Journal Entry 2020 Depreciation Expense 1,800 Accumulated Depreciation 1,800 *€13,000 − €1,800 26 Kalkidan S.
  • 27. Declining-Balance Method (1 of 3) ‱ Accelerated method ‱ Decreasing annual depreciation expense over asset’s useful life ‱ Double declining-balance rate is double the straight- line rate ‱ Rate applied to book value 27 Kalkidan S.
  • 28. Declining-Balance Method (2 of 3) Computations End of Year Year Beginning Book Value x Rate = Annual Expense Accumulated Depreciation Book Value 2020 €13,000 x 40% = € 5,200 € 5,200 €7,800 2021 7,800 x 40 = 3,120 8,320 4,680 2022 4,680 x 40 = 1,872 10,192 2,808 2023 2,808 x 40 = 1,123 11,315 1,685 2024 1,685 x 40 = 685 12,000 1,000 (b) (a) (a) €13,000 − €5,200 (b) €1,685 x 40% = €674, expense adjusted to €685 to result in residual value of €1,000. 28 Kalkidan S.
  • 29. Declining-Balance Method (3 of 3) Assume the delivery truck was purchased on April 1, 2020. Computations End of Year Year Beginning Book Value x Rate = Annual Expense x Partial Year = Depreciation Expense Accum. Deprec. 2020 €13,000 x 40% = € 5,200 x 9/12 = € 3,900 €3,900 2021 9,100 x 40 = 3,640 x = 3,640 7,540 2022 5,460 x 40 = 2,184 x = 2,184 9,724 2023 3,276 x 40 = 1,310 x = 1,310 11,034 2024 1,966 x 40 = 786 x = 786 11,820 2025 1,180 x 40 = 472 x = 180 12,000 (a) (a) Expense adjusted to €180 to result in residual value of €1,000. Kalkidan S. 29
  • 30. Annual depreciation expense varies, but total depreciation expense is the same (€12,000) for the five-year period. Comparison of Methods (1 of 2) Year Straight- Line Declining- Balance Units-of- Activity 2020 € 2,400 € 5,200 € 1,800 2021 2,400 3,120 3,600 2022 2,400 1,872 2,400 2023 2,400 1,123 3,000 2024 2,400 685 1,200 €12,000 €12,000 €12,000 30 Kalkidan S.
  • 31. Comparison of Methods (2 of 2) 31 Kalkidan S.
  • 32. Component Depreciation (1 of 2) ‱ IFRS requires component depreciation for plant assets ‱ Any significant parts of a plant asset that have significantly different estimated useful lives should be separately depreciated 32 Kalkidan S.
  • 33. Component Depreciation (2 of 2) Illustration: Lexure Construction builds an office building for HK$4,000,000, not including the cost of the land. If the HK$4,000,000 is allocated over the 40-year useful life of the building, Lexure reports HK$100,000 (HK$4,000,000 Ă· 40) of depreciation per year, assuming straight-line depreciation and no residual value. However, assume that HK$320,000 of the cost of the building relates to a heating, ventilation, and air conditioning (HVAC) system and HK$600,000 relates to flooring. Because the HVAC system has a depreciable life of five years and the flooring has a depreciable life of 10 years, Lexure must use component depreciation. It must reclassify HK$320,000 of the cost of the building to the HVAC system and HK$600,000 to the cost of flooring. 33 Kalkidan S.
  • 34. Component Depreciation (2 of 2) Assuming that Lexure uses straight-line depreciation, the following shows the computation of component depreciation for the first year of the office building. 34 Kalkidan S. Building cost adjusted (HK$4,000,000 − HK$320,000 − HK$600,000) HK$3,080,000 Building cost depreciation per year (HK$3,080,000 Ă· 40) HK$ 77,000 Personal HVAC system depreciation (HK$320,000 Ă· 5) 64,000 Flooring depreciation (HK$600,000 Ă· 10) 60,000 Total component depreciation in first year HK$ 201,000
  • 35. Tax laws do not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. Many companies use straight-line in their financial statements to maximize net income. They also use an accelerated depreciation method on their tax returns to minimize their income taxes. 35 Kalkidan S. Depreciation and Income Taxes
  • 36. Revaluation of Plant Assets (1 of 5) ‱ IFRS allows companies to revalue plant assets to fair value at the reporting date ‱ 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 36 Kalkidan S.
  • 37. Revaluation of Plant Assets (2 of 5) Gain Situation Illustration: Pernice Ltd. applies revaluation to equipment purchased on January 1, 2020, for HK$1,000,000. The equipment has a useful life of five years and no residual value. On December 31, 2020, Pernice makes the following journal entry to record depreciation expense, assuming straight-line depreciation. Kalkidan S. 37 Accumulated Depreciation—Equipment 200,000 Depreciation Expense 200,000
  • 38. Revaluation of Plant Assets (3 of 5) At the end of 2020, independent appraisers determine that the asset has a fair value of HK$850,000. To report the equipment at its fair value of HK$850,000 on December 31, 2020, Pernice eliminates the Accumulated Depreciation— Equipment account, reduces Equipment to its fair value of HK$850,000, and records Revaluation Surplus of HK$50,000. The entry to record the revaluation is as follows. Kalkidan S. 38 Equipment 150,000 Accumulated Depreciation—Equipment 200,000 Revaluation Surplus 50,000
  • 39. Revaluation of Plant Assets (4 of 5) Pernice reports ‱ Depreciation expense of HK$200,000 in the income statement ‱ HK$50,000 in other comprehensive income ‱ HK$850,000 is the new basis of the asset Assuming no change in the total useful life, depreciation in 2021 will be HK$212,500 (HK$850,000 Ă· 4). Kalkidan S. 39
  • 40. Revaluation of Plant Assets (5 of 4) Loss Situation Illustration: Pernice’s equipment has a carrying amount of HK$800,000 (HK$1,000,000 − HK$200,000). However, at the end of 2020, independent appraisers determine that the asset has a fair value of HK$775,000, which results in an impairment loss of HK$25,000 (HK$800,000 − HK$775,000). The entry to record the equipment and report the impairment loss is as follows. Kalkidan S. 40 Impairment Loss 25,000 Accumulated Depreciation—Equipment 200,000 Equipment 225,000
  • 41. ‱ Accounted for in period of change and future periods (Change in Estimate) ‱ No change in depreciation reported for prior years ‱ Not considered an error ‱ Use a step-by-step approach: 1. determine new depreciable cost 2. divide by remaining useful life 41 Kalkidan S. Revising Periodic Depreciation (1 of 4)
  • 42. Revising Periodic Depreciation (2 of 4) Illustration: Barb’s Florists decides on January 1, 2023, to extend the useful life of the truck by one year (a total life of six years) and increase its residual value to €2,200. The company has used the straight-line method to depreciate the asset to date. Depreciation for the first 3 years is as follows. 42 Kalkidan S. Equipment cost €13,000 Residual value − 1,000 Depreciable base 12,000 Useful life (original) Ă· 5 years Annual depreciation € 2,400 × 3 years = €7,200
  • 43. Net book value at date of change in estimate (after 3 years). Revising Periodic Depreciation (3 of 4) Plant Assets: Equipment €13,000 Accumulated depreciation 7,200 Net book value € 5,800 43 Kalkidan S.
  • 44. Revising Periodic Depreciation (4 of 4) Calculation of depreciation expense for 2023, year 4. Net book value after year 3 €5,800 Residual value (revised) − 2,200 Depreciable base 3,600 Remaining life Ă· 3 years Revised Annual depreciation €1,200 44 Kalkidan S. Journal entry for 2023 and future years. Depreciation Expense 1,200 Accumulated Depreciation 1,200
  • 45. Do It! 2b: Revised Depreciation (1 of 3) Chambers Corporation purchased a piece of equipment for ÂŁ36,000. It estimated a 6-year life and ÂŁ6,000 salvage value. Thus, straight-line depreciation was ÂŁ5,000 per year [(ÂŁ36,000 − ÂŁ6,000) Ă· 6]. At the end of year three (before the depreciation adjustment), it estimated the new total life to be 10 years and the new salvage value to be ÂŁ2,000. Compute the revised depreciation. 45 Kalkidan S.
  • 46. Calculation of depreciation expense for first 2 years. Equipment cost ÂŁ36,000 Salvage value − 6,000 Depreciable base 30,000 Useful life (original) Ă· 6 years Annual depreciation ÂŁ 5,000 × 2 years = ÂŁ10,000 Net book value at date of change in estimate (after 2 years). Plant Assets: Equipment ÂŁ36,000 Accumulated depreciation 10,000 Net book value ÂŁ26,000 46 Kalkidan S. Do It! 2b: Revised Depreciation (2 of 3)
  • 47. Calculation of revised depreciation expense for remaining years. Net book value after year 2 ÂŁ26,000 Salvage value (revised) − 2,000 Depreciable base 24,000 Remaining life Ă· 8 years Annual depreciation ÂŁ 3,000 47 Kalkidan S. Journal entry for remaining years. Depreciation Expense 3,000 Accumulated Depreciation 3,000 Do It! 2b: Revised Depreciation (3 of 3)
  • 48. Learning Objective 3 Explain How to Account for the Disposal of Plant Assets 48 Kalkidan S.
  • 49. Companies dispose of plant assets in three ways — 1. Retirement: Equipment is scrapped or discarded 2. Sale: Equipment is sold to another party 3. Exchange: Equipment is traded for new equipment Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account. 49 Kalkidan S. Plant Asset Disposals
  • 50. Retirement of Plant Assets (1 of 3) ‱ No cash is received ‱ Decrease (debit) Accumulated Depreciation for full amount of depreciation taken over life of asset ‱ Decrease (credit) asset account for original cost of asset 50 Kalkidan S.
  • 51. Illustration: Hobart Publishing retires its computer printers, which cost €32,000. The accumulated depreciation on these printers is €32,000. Prepare the entry to record this retirement. 51 Kalkidan S. Retirement of Plant Assets (2 of 3) Question: What happens if a fully depreciated plant asset is still useful to the company? Equipment 32,000 Accumulated Depreciation—Equipment 32,000
  • 52. Illustration: Sunset Company discards delivery equipment that cost €18,000 and has accumulated depreciation of €14,000. The journal entry is? 52 Kalkidan S. Retirement of Plant Assets (3 of 3) Companies report a loss on disposal in the “Other income and expense” section of the income statement. Loss on Disposal of Plant Assets 4,000 Accumulated Depreciation—Equipment 14,000 Equipment 18,000
  • 53. Sale of Plant Assets (1 of 4) 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 53 Kalkidan S.
  • 54. Sale of Plant Assets (2 of 4) Illustration: On July 1, 2020, Wright Interiors sells office furniture for €16,000 cash. The office furniture originally cost €60,000. As of January 1, 2020, it had accumulated depreciation of €41,000. Depreciation for the first six months of 2020 is €8,000. Prepare the journal entry to record depreciation expense up to the date of sale. 54 Kalkidan S. Depreciation Expense 8,000 Accumulated Depreciation—Equipment 8,000
  • 55. Sale of Plant Assets (3 of 4) Cost of office furniture €60,000 Less: Accumulated depreciation (€41, 000 + €8,000) 49,000 Book value at date of disposal 11,000 Proceeds from sale 16,000 Gain on disposal of plant asset € 5,000 Wright records the sale as follows on July 1. Cash 16,000 Accumulated Depreciation—Equipment 49,000 Equipment 60,000 Gain on Disposal of Plant Assets 5,000 55 Kalkidan S.
  • 56. Sale of Plant Assets (4 of 4) Illustration: Assume that instead of selling the office furniture for €16,000, Wright sells it for €9,000. Cost of office furniture €60,000 Less: Accumulated depreciation (€41, 000 + €8,000) 49,000 Book value at date of disposal 11,000 Proceeds from sale 9,000 Loss on disposal of plant asset € 2,000 Cash 9,000 Accumulated Depreciation—Equipment 49,000 Loss on Disposal of Plant Assets 2,000 Equipment 60,000 Kalkidan S. 56
  • 57. Do It! 3: Plant Asset Disposal (1 of 2) Overland Trucking has decided to sell an old truck that cost ÂŁ30,000 and which has accumulated depreciation of ÂŁ16,000. (a) What entry would Overland Trucking make to record the sale of the truck for ÂŁ17,000 cash? 57 Kalkidan S. Cash 17,000 Equipment 30,000 Gain on Disposal of Plant Assets 3,000 Accumulated Depreciation—Equipment 16,000
  • 58. Do It! 3: Plant Asset Disposal (2 of 2) Overland Trucking has decided to sell an old truck that cost ÂŁ30,000 and which has accumulated depreciation of ÂŁ16,000. (b) What entry would Overland Trucking make to record the sale of the truck for ÂŁ10,000 cash? 58 Kalkidan S. Accumulated Depreciation—Equipment 16,000 Equipment 30,000 Loss on Disposal of Plant Assets 4,000 Cash 10,000
  • 59. 59 Kalkidan S. ‱ Ordinarily, companies record a gain or loss on exchange of plant assets ‱ Most exchanges have commercial substance ‱ Commercial substance if future cash flows change as a result of exchange Exchange of Plant Assets
  • 60. 60 Kalkidan S. Illustration: Roland NV exchanged old trucks (cost €64,000 less €22,000 accumulated depreciation) plus cash of €17,000 for a new semi-truck. The old trucks had a fair market value of €26,000. Loss Treatment Cost of used trucks €64,000 Less: Accumulated depreciation 22,000 Book value 42,000 Fair market value of used trucks 26,000 Loss on disposal of plant assets €16,000 Fair market value of used trucks €26,000 Cash paid 17,000 Cost of new truck €43,000
  • 61. 61 Kalkidan S. Illustration: Roland NV exchanged old trucks (cost €64,000 less €22,000 accumulated depreciation) plus cash of €17,000 for a new semi-truck. The old trucks had a fair market value of €26,000. Prepare the entry to record the exchange of assets by Roland. Loss Treatment Equipment (new) 43,000 Equipment (old) 64,000 Cash 17,000 Accumulated Depreciation—Equipment 22,000 Loss on Disposal of Plant Assets 16,000
  • 62. 62 Kalkidan S. Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also paid €3,000. Gain Treatment Cost of old equipment €40,000 Less: Accumulated depreciation 28,000 Book value 12,000 Fair market value of old equipment 19,000 Gain on disposal of plant assets € 7,000 Fair market value of old equipment €19,000 Cash paid 3,000 Cost of new equipment €22,000
  • 63. 63 Kalkidan S. Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also paid €3,000. Gain Treatment Equipment (new) 22,000 Gain on Disposal of Plant Assets 7,000 Cash 3,000 Accumulated Depreciation—Equipment 28,000 Equipment (old) 40,000
  • 64. Learning Objective 4 Describe How to Account for Natural Resources and Intangible Assets 64 Kalkidan S.
  • 65. 65 Kalkidan S. IFRS 6-Natural resources consist of standing timber and underground deposits of oil, gas, and minerals. Distinguishing characteristics: ‱ Physically extracted in operations ‱ Replaceable only by an act of nature Cost is the price needed to acquire the resource and prepare it for its intended use. Natural Resources and Intangible Assets
  • 66. 66 Kalkidan S. The allocation of the cost to expense in a rational and systematic manner over the resource’s useful life. ‱ Companies generally use units-of-activity method ‱ Depletion generally is a function of the units extracted Depletion (1 of 3) Total Cost - Residual Value = Depletion Cost per Unit Total Estimated Units Available
  • 67. Total Cost - Residual Value = Depletion Cost per Unit Total Estimated Units Available HK$50,000,000 = HK$5.00 per ton 10,000,000 67 Kalkidan S. Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million tons of coal and no residual value. Compute the depletion cost per unit. Depletion (2 of 3)
  • 68. 68 Kalkidan S. Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million tons of coal and no residual value. In the first year, Lane extracts and sells 250,000 tons of coal. Lane computes the depletion as follows: HK$50,000,000 Ă· 10,000,000 = HK$5.00 depletion cost per ton HK$5.00 x 250,000 = HK$1,250,000 annual depletion Journal entry: Depletion (3 of 3) Accumulated Depletion 1,250,000 Inventory (coal) 1,250,000
  • 69. Intangible Assets IAS 37-Rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance. Limited life or an indefinite life. Common types of intangibles: ‱ Patents ‱ Trademarks ‱ Copyrights ‱ Trade names ‱ Franchises and Licenses ‱ Goodwill 69 Kalkidan S.
  • 70. Accounting for Intangible Assets (1 of 8) Limited-Life Intangibles: ‱ Amortize to expense ‱ Credit asset account or accumulated amortization Indefinite-Life Intangibles: ‱ No foreseeable limit on time asset is expected to provide cash flow ‱ No amortization 70 Kalkidan S.
  • 71. 71 Kalkidan S. Patents ‱ Amortize to expense ‱ Exclusive right to manufacture, sell, or otherwise control an invention for 20 years from date of grant ‱ Capitalize costs of purchasing a patent and amortize over 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 Patents account Accounting for Intangible Assets (2 of 8)
  • 72. Accounting for Intangible Assets (4 of 8) Illustration: National Labs purchases a patent at a cost of NT$720,000. National estimates the useful life to be eight years. Prepare the journal entry to record the annual amortization for the year ended December 31. 72 Kalkidan S. Cost NT$720,000 Useful life Ă· 8 Amortization NT$ 90,000 Dec. 31 Amortization Expense 90,000 Patents 90,000
  • 73. Accounting for Intangible Assets (5 of 8) Copyrights ‱ Gives owner exclusive right to reproduce and sell an artistic or published work ‱ Granted for life of creator plus 70 years ‱ Capitalize costs of acquiring and defending ‱ Amortized to expense over useful life 73 Kalkidan S.
  • 74. Accounting for Intangible Assets (6 of 8) Trademarks and Trade Names ‱ Word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product § Big Mac, Coca-Cola, and Jetta ‱ Legal protection for indefinite number of 20 year renewal periods ‱ Capitalize acquisition costs ‱ No amortization 74 Kalkidan S.
  • 75. 75 Kalkidan S. Franchises ‱ Contractual arrangement between a franchisor and a franchisee § CPC, Subway, and Europcar are franchises ‱ Franchise (or license) with a limited life should be amortized to expense over its useful life ‱ If life is indefinite, cost is not amortized Accounting for Intangible Assets (7 of 8)
  • 76. 76 Kalkidan S. 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 excess of purchase price over fair value of net assets acquired ‱ Not amortized Accounting for Intangible Assets (8 of 8)
  • 77. 77 Kalkidan S. Expenditures that may lead to ‱ patents ‱ copyrights ‱ new processes ‱ new products All R & D costs are expensed when incurred Not intangible assets Research and Development Costs
  • 78. Do It! 4: Classification Concepts (1 of 3) Match the term most directly associated with each statement. Copyrights Depletion Intangible assets Franchises Research costs 1. The allocation of the cost of a natural resource in a rational and systematic manner. Depletion 2. Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance. Intangible assets 78 Kalkidan S.
  • 79. Do It! 4: Classification Concepts (2 of 3) Match the term most directly associated with each statement. Copyrights Depletion Intangible assets Franchises Research costs 3. An exclusive right granted by the government to reproduce and sell an artistic or published work. Copyrights 4. A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area. Franchises 79 Kalkidan S.
  • 80. Do It! 4: Classification Concepts (3 of 3) Match the term most directly associated with each statement. Copyrights Depletion Intangible assets Franchises Research costs 5. Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred. Research costs 80 Kalkidan S.
  • 81. Learning Objective 5 Discuss How Plant Assets, Natural Resources, and Intangible Assets are Reported 81 Kalkidan S.
  • 82. 82 Kalkidan S. Presentation ‱ Usually, companies combine plant assets and natural resources under “Property, plant, and equipment” in the statement of financial position. ‱ Intangible assets are shown separately Statement Presentation
  • 83. 83 Kalkidan S. Artex Enterprises Statement of Financial Position (partial) (in billions) Property, plant, and equipment Gold mine „ 530 Less: Accumulated depletion 210 „ 320 Land 600 Buildings 7,600 Less: Accumulated depreciation—buildings 500 7,100 Equipment 3,870 Less: Accumulated depreciation— equipment 620 3,250 Total property, plant, and equipment „11,270 Intangible assets Patents 440 Trademarks 180 Goodwill 900 1,520 Total assets „12,790 Statement Presentation
  • 84. End of Chapter ? 84 Kalkidan S.