Accounting Chapter 9: Plant and Intangible Assets
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Questions and Answers

What are the four most common expenditures related to the purchase of land?

  • Cash purchase price, closing costs, real estate broker's commissions, and accrued property taxes (correct)
  • Real estate broker's commissions, closing costs, land appraisal fees, and inspection fees.
  • Cash purchase price, closing costs, insurance premiums, and landscaping costs
  • Legal fees, surveying fees, closing costs, and cash purchase price

Plant assets are resources that have physical substance but are not intended to be sold to customers.

True (A)

Plant assets are generally used by companies to generate revenue.

True (A)

Depreciation is a system of allocating the cost of an asset to the income statement over its useful lifetime in a rational and systematic manner.

<p>True (A)</p> Signup and view all the answers

Which of these is not a factor in computing depreciation expense?

<p>Annual interest rate on the mortgage taken to finance the asset's purchase (D)</p> Signup and view all the answers

Which depreciation method spreads depreciation expense evenly over the asset's useful life?

<p>Straight-line Method (C)</p> Signup and view all the answers

Which depreciation method results in a higher depreciation expense in the early years of an asset's life?

<p>Declining-balance Method (D)</p> Signup and view all the answers

A change in the estimated useful life of an asset is referred to as a ______ of estimate.

<p>change</p> Signup and view all the answers

Which of these is not a common way for a company to dispose of plant assets?

<p>Donate (B)</p> Signup and view all the answers

When a company retires a plant asset, they typically receive cash for it.

<p>False (B)</p> Signup and view all the answers

When a company sells a plant asset for more than its book value, they will recognize a loss.

<p>False (B)</p> Signup and view all the answers

Natural resources include standing timber, oil, gas, and mineral deposits, that are physically extracted to generate revenue.

<p>True (A)</p> Signup and view all the answers

Depletion is the systematic process of using the natural resources to generate revenue.

<p>False (B)</p> Signup and view all the answers

Intangible assets are generally acquired through purchases, and have physical substance.

<p>False (B)</p> Signup and view all the answers

Goodwill is considered an intangible asset and is often recorded when one business acquires another.

<p>True (A)</p> Signup and view all the answers

Copyrights have an indefinite life.

<p>False (B)</p> Signup and view all the answers

Research and Development costs are often capitalized as intangible assets.

<p>False (B)</p> Signup and view all the answers

What is the accounting treatment for intangible assets with a limited life?

<p>Amortized to expense over the asset's useful life (C)</p> Signup and view all the answers

When accounting for plant assets, natural resources, and intangible assets in a statement of financial position, companies will typically combine plant assets and natural resources under 'Property, plant, and equipment'.

<p>True (A)</p> Signup and view all the answers

Asset turnover is a ratio that measures the relationship between a company's assets and their sales.

<p>True (A)</p> Signup and view all the answers

What is the purpose of an impairment test?

<p>Impairment tests are conducted to assess whether the carrying amount of an asset exceeds its recoverable amount. If the carrying amount is higher than the recoverable amount, an impairment loss is recognized to adjust the asset's value on the balance sheet, reflecting its diminished worth.</p> Signup and view all the answers

Under GAAP, an item of property, plant, and equipment with multiple parts is typically depreciated over the useful life of the total asset, not individually based on the specific parts.

<p>True (A)</p> Signup and view all the answers

GAAP uses the term 'salvage value' instead of 'residual value' to refer to an asset's value at the end of its useful life.

<p>True (A)</p> Signup and view all the answers

IFRS allows a company to revalue plant assets to market value.

<p>True (A)</p> Signup and view all the answers

In cases of an exchange of non-monetary assets, both GAAP and IFRS have converged and require gains on exchanges to be recognized if the transaction has commercial substance.

<p>True (A)</p> Signup and view all the answers

Flashcards

Plant Assets

Resources that are used in a business's operations, have a physical form, are not intended for sale, and are expected to be used for multiple years. Land is an exception.

Depreciation

The process of allocating the cost of a plant asset to expense over its useful life. It's about distributing the cost, not valuing the asset.

Residual Value/Salvage Value

The value of a plant asset at the end of its useful life. It's the estimated amount the company could sell the asset for.

Useful Life

The amount of time an asset is expected to be used by a company. It's not necessarily the asset's physical lifespan.

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Cost of Plant Assets

All the expenses incurred to acquire an asset and make it ready for its intended use. This includes purchase price, sales tax, transportation, and installation.

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Straight-Line Depreciation

A method of depreciation that allocates the same amount of depreciation expense each year. It's simple and straightforward.

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Units-of-Activity Depreciation

A method of depreciation that allocates depreciation expense based on the actual usage of an asset. It's more accurate for assets that wear out based on usage.

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Declining-Balance Depreciation

A method of depreciation that allocates a higher depreciation expense in the early years of an asset's life, and less in later years. It's based on the idea that assets are more productive in their early years.

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Revising Periodic Depreciation

Adjusting depreciation expense when there's a change in the estimated useful life or residual value of a plant asset. It happens when the company's initial estimates are no longer accurate.

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Depletion

The process of allocating the cost of a natural resource to expense over its useful life. It's similar to depreciation but specific to natural resources.

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Natural Resources

Assets that have a physical form and can be extracted from the earth. They are finite and replenishable only by natural processes.

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Intangible Assets

Assets that have no physical form but are valuable to the company. Examples include patents, copyrights, trademarks, and goodwill.

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Patent

An exclusive right granted by the government to an inventor, giving them the right to manufacture, sell, and control their invention for a limited time.

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Copyright

An exclusive right granted by the government to the creator of an original work, such as a song or a book.

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Trademark

A symbol or phrase used to identify a particular company or product. It helps consumers distinguish between competing products.

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Goodwill

The excess of the purchase price of a business over the fair value of its identifiable net assets. It represents the value of the acquired company's intangible assets and overall brand reputation.

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Amortization

The process of allocating the cost of an intangible asset to expense over its useful life. It's similar to depreciation but for intangible assets.

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Research and Development Costs (R&D)

Costs incurred by a company that may lead to new patents, processes, or products. They are generally expensed as incurred, even if they may result in future benefits.

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Asset Turnover Ratio

The amount of sales generated by each dollar invested in assets. It's a measure of how efficiently a company uses its assets to generate revenue.

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Exchange with Commercial Substance

An exchange of plant assets where the future cash flows of the company are expected to change significantly as a result of the exchange. It typically triggers the recognition of gains or losses.

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Exchange Without Commercial Substance

An exchange of plant assets that does not significantly alter the future cash flows of the company. Gains are usually not recognized, and losses are recognized.

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Component Depreciation

A method of accounting for plant assets where significant parts of an asset with different useful lives are depreciated separately. IFRS requires this approach.

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Composite Depreciation

A method of accounting for plant assets where the entire asset is depreciated over the useful life of the entire asset, regardless of its components. GAAP allows this.

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Impairment Loss

A decrease in the value of an asset, below its carrying amount, that is recognized when the asset's recoverable amount is less than its carrying amount. It usually results from changes in market conditions, obsolescence, or impairment.

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Revaluation

A method of accounting for plant assets where the asset is revalued to its fair market value at the end of each reporting period. IFRS allows this method.

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Historical Cost Principle

A method of accounting for plant assets where the asset is recorded at its historical cost, not its fair market value. GAAP generally follows this principle.

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Amortization Over Useful Life

A method of accounting for plant assets where the asset is amortized over its useful life, but no amortization is recorded for assets with an indefinite useful life. This is a common practice under both IFRS and US GAAP.

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No Amortization for Indefinite Life

A method of accounting for plant assets where the asset is not amortized and its value remains on the books indefinitely. This is a common practice for intangible assets like trademarks.

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Study Notes

Chapter 9: Plant Assets, Natural Resources, and Intangible Assets

  • This chapter covers the accounting for plant assets, natural resources, and intangible assets.
  • Learning Objectives (LO)
    • LO 1: Explain the accounting for plant asset expenditures.
    • LO 2: Apply depreciation methods to plant assets.
    • LO 3: Explain how to account for the disposal of plant assets.
    • LO 4: Describe how to account for natural resources and intangible assets.
    • LO 5: Discuss how plant assets, natural resources, and intangible assets are reported and analyzed.

Plant Asset Expenditures

  • Plant assets are physical resources used in a business' operations.
  • They are not intended for sale to customers.
  • They are used for a number of years.
  • Examples include: property, plant, and equipment; plant and equipment; and fixed assets.
  • These assets play a key role in ongoing operations.
    • Wumart (CHN) – 64%
    • Great Wall Motors (CHN) – 61%
    • Cathay Pacific Airlines (HK) – 58%
    • Hitachi (JPN) – 25%
    • SAP (DEU) – 6%

The Cost of Plant Assets

  • The Historical Cost Principle
    • Companies record plant assets at cost.
    • Cost includes all expenditures to acquire and prepare the asset.
  • Land
    • All necessary costs for preparing the land are included (debit).
    • Examples include: purchase price, closing costs, real estate commissions, and accrued taxes.
  • Land Improvements
    • These are structural additions with limited lives, like driveways, parking lots, landscaping.
    • They are expensed over their useful life.
  • Buildings
    • Purchase costs include: purchase price, closing costs, real estate commissions, remodeling, replacing, or repairing the roof, floors, electrical wiring and plumbing.
    • Construction costs include: contract price, architect fees, building permits, and excavation costs.
  • Equipment
    • Costs include purchase price, sales tax, freight charges, and insurance during transit, assembling, installing and testing.

Depreciation Methods

  • Depreciation is the allocation of the cost of a plant asset over its useful life.
  • Depreciation methods include:
    • Straight-line method: Expense is the same amount each year.
    • Units-of-activity method: Expense varies based on units of activity.
    • Declining-balance method: Annual depreciation expense decreases over the asset's useful life.

Component Depreciation

  • Applies to significant parts of a plant asset with different useful lives.
  • It is required by IFRS for plant assets.

Revauation of Plant Assets

  • IFRS allows revaluation of plant assets to fair value at reporting date.
  • This must be applied to all assets in a class.
  • Assets with rapidly changing prices must be revalued annually.

Revising Periodic Depreciation

  • Accounting for changes to depreciation estimates.
  • Changes made in the current or future periods.
  • No change in the depreciation reported for prior years.

Natural Resources

  • Natural resources consist of standing timber and underground deposits of oil, gas and minerals.
  • They are typically extracted from operations.
  • They can only by replaced by natural forces.
  • The resource cost includes the price to acquire the asset and necessary costs to prepare the asset for its intended use.
  • Depletion is the allocation of natural resource cost over its useful life.

Intangible Assets

  • Intangible assets are rights, advantages or privileges that give a company an edge.
  • These assets do not have a physical form.
    • Limited-life: amortized to expense over their useful life.
    • Indefinite-life: not amortized.

Research and Development Costs

  • Usually expensed when incurred.
  • These costs do not lead to intangible assets.

Disposal of Plant Assets

  • Plant assets are disposed in three ways: retirement, sale, or exchange.
  • Depreciation is recorded up to disposal date.
  • Asset is eliminated by decreasing Accumulated Depreciation and the asset account.

Plant Asset Analysis and Presentation

  • Usually, companies combine plant assets and natural resources under the heading "Property, Plant and Equipment" in the financial statements.
  • Intangible assets are shown separately.

Asset Turnover

  • A financial ratio that measures how efficiently a company uses its assets to generate revenue.
  • (Net Sales) / (Average Total Assets).

Exchange of Plant Assets

  • Companies record a gain or loss on exchange of plant assets.
  • Exchange has commercial substance if future cash flows change.

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Financial Accounting IFRS 4th Edition Chapter 9 PDF

Description

This quiz focuses on Chapter 9's exploration of accounting principles related to plant assets, natural resources, and intangible assets. You'll learn about the accounting for expenditures, various depreciation methods, and the disposal of these assets. Test your knowledge on how these assets are reported and analyzed in a business context.

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