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What are the four most common expenditures related to the purchase of land?
What are the four most common expenditures related to the purchase of land?
Plant assets are resources that have physical substance but are not intended to be sold to customers.
Plant assets are resources that have physical substance but are not intended to be sold to customers.
True
Plant assets are generally used by companies to generate revenue.
Plant assets are generally used by companies to generate revenue.
True
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.
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.
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Which of these is not a factor in computing depreciation expense?
Which of these is not a factor in computing depreciation expense?
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Which depreciation method spreads depreciation expense evenly over the asset's useful life?
Which depreciation method spreads depreciation expense evenly over the asset's useful life?
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Which depreciation method results in a higher depreciation expense in the early years of an asset's life?
Which depreciation method results in a higher depreciation expense in the early years of an asset's life?
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A change in the estimated useful life of an asset is referred to as a ______ of estimate.
A change in the estimated useful life of an asset is referred to as a ______ of estimate.
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Which of these is not a common way for a company to dispose of plant assets?
Which of these is not a common way for a company to dispose of plant assets?
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When a company retires a plant asset, they typically receive cash for it.
When a company retires a plant asset, they typically receive cash for it.
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When a company sells a plant asset for more than its book value, they will recognize a loss.
When a company sells a plant asset for more than its book value, they will recognize a loss.
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Natural resources include standing timber, oil, gas, and mineral deposits, that are physically extracted to generate revenue.
Natural resources include standing timber, oil, gas, and mineral deposits, that are physically extracted to generate revenue.
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Depletion is the systematic process of using the natural resources to generate revenue.
Depletion is the systematic process of using the natural resources to generate revenue.
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Intangible assets are generally acquired through purchases, and have physical substance.
Intangible assets are generally acquired through purchases, and have physical substance.
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Goodwill is considered an intangible asset and is often recorded when one business acquires another.
Goodwill is considered an intangible asset and is often recorded when one business acquires another.
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Copyrights have an indefinite life.
Copyrights have an indefinite life.
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Research and Development costs are often capitalized as intangible assets.
Research and Development costs are often capitalized as intangible assets.
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What is the accounting treatment for intangible assets with a limited life?
What is the accounting treatment for intangible assets with a limited life?
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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'.
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'.
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Asset turnover is a ratio that measures the relationship between a company's assets and their sales.
Asset turnover is a ratio that measures the relationship between a company's assets and their sales.
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What is the purpose of an impairment test?
What is the purpose of an impairment test?
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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.
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.
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GAAP uses the term 'salvage value' instead of 'residual value' to refer to an asset's value at the end of its useful life.
GAAP uses the term 'salvage value' instead of 'residual value' to refer to an asset's value at the end of its useful life.
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IFRS allows a company to revalue plant assets to market value.
IFRS allows a company to revalue plant assets to market value.
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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.
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.
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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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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.
