Plant and Intangible Assets

• Plant and intangible assets are major investments for many businesses
• A business' future often relies on plant and intangible assets

Plant Assets as a "Stream of Future Services"

• Plant assets are future services, considered long-term prepaid expenses
• Ownership of a delivery truck provides transportation services
• The cost of a truck is put in an asset account, representing an advance transportation purchase
• Buildings are an advance purchase of housing services
• As years pass, the services are utilized
• The plant asset's cost is transferred to depreciation expense
• Depreciation expense reflects the cost of utilizing the asset to generate revenue

Major Categories of Plant Assets

• Plant and equipment are often classified into groups
• Tangible plant assets refer to an asset's physical characteristics

Tangible Plant Assets

• These include land, buildings, and machinery
• They are separated into two classifications
• Property subject to depreciation, with limited useful life, includes buildings and office equipment
• Land is not subject to depreciation because of its unlimited existence

Intangible Assets

• Intangible assets describe assets that lack physical characteristics, are noncurrent, and operate in the business
• Examples of intangible assets are patents, copyrights, trademarks, franchises, and goodwill
• Current assets like accounts receivable or prepaid rent are also lacking in physical substance
• Accounts receivable and prepaid rent are not included in the intangible classification

Natural Resources

• Natural Resources are sites used to extract resources like oil, minerals, or timber
• Natural resources are not classified as land
• This plant asset type is gradually converted to inventory as the natural resource is extracted

Accountable Events in Plant Assets

• Acquisition
• Allocation of acquisition cost to expense (depreciation)
• Sale or Disposal

Acquisition of Plant Assets

• Plant asset costs include necessary expenditures to get asset to desired location
• Plant asset costs include sales taxes, delivery costs, and installation costs
• Only reasonable and necessary costs are included
• Damage repair during unloading is an expense of the current period and is not added

Determining Cost: An Example

• A factory orders a machine for $10,000, payable in 48 monthly installments of $250
• Payments include $2,000 interest
• Sales taxes are $600, freight charges are $1,350, and installation & set-up costs are $500
• The machine's cost is $12,450
• Interest charges are recognized as interest expense over 48 months

Special Considerations

• Incidental costs are incurred when land is purchased
• Additional costs include real estate broker commissions, escrow fees and legal fees
• Additional costs also includ title insurance fees, delinquent taxes and fees for surveying, draining, clearing, and grading
• Sometimes, land purchased as a building site will also include an old building
• The entire purchase price is charged to the Land account, along with costs of tearing down the unusable building
• Land Improvements have a limited life and should be recorded in a separate account

Buildings

• Old buildings are sometimes purchased with the intention of repairing them
• Repairs made under those circumstances are charged to the Buildings account
• Ordinary repairs are considered maintenance expense when incurred following placement of the building
• When Equipment is purchased, all sales taxes, delivery costs, and and getting it in good running order become part of the cost
• After equipment has been placed in operation, maintenance costs are treated as expenses

Allocation of a Lump-Sum Purchase

• Several plant asset types may be purchased simultaneously
• Control accounts are maintained for each plant asset type

Capital Expenditures and Revenue Expenditures

• Capital expenditures purchase or expand plant assets
• Capital expenditures are recorded in asset accounts
• Capitalize means charging an expenditure to an asset account rather than an expense account
• Revenue expenditures are for ordinary repairs, maintenance, fuel, and other necessary items
• Revenue expenditures are required due to plant and equipment ownership
• Revenue expenditures are recorded in expense accounts
• An expense account is charged based on benefits from the expenditure in the current period
• Expenses deducted from the period's revenue are for net income determination
• Charging an expenditure directly to expense account is “expensing”

Depreciation

• Depreciation is the allocation of a tangible plant asset's expense
• It includes periods in which services are received from the asset
• It offsets revenue with costs of goods/services consumed for revenue generation
• Cost of a delivery truck is added to an asset account as its services will benefit multiple periods As transportation services are provided, the truck's cost is removed and becomes an expense

Depreciation is Not Valuation

• Depreciation is cost allocation, not asset valuation
• Accounting records do not reflect the current market values of plant assets
• Depreciation expense continues without considering temporary market value increases
• Accountants recognize that the building will only give useful services for a limited number of years It is appropriate the cost of the building should be allocated to expense systematically

Book Value

• Plant assets are shown on the balance sheet at their book values or carrying values
• A plant asset's book value is its cost minus accumulated depreciation
• Accumulated depreciation is a contra-asset account, representing the asset's allocated expense portion
• Book value represents the portion of the asset's cost remaining to be allocated

Causes of Depreciation

• The need to allocate plant asset costs over multiple accounting periods includes physical deterioration and obsolescence
• Physical Deterioration comes from use and exposure to various climatic factors
• No matter how effective repairs are every machine must eventually be discarded
• Obsolescence is the process of becoming outdated
• Airplanes may become obsolete even if in excellent condition due to superior designs

Methods of Computing Depreciation

• Companies utilize several depreciation methods to determine depreciation
• GAAP requires a depreciation method result in a rational/systematic cost allocation
• Straight-line is most commonly used for financial reporting
• Straight-line allocates an equal depreciation expense portion to each useful life period
• Larger depreciation amounts are recognized in early asset life, and smaller amounts later

Data for Illustrations

• The illustration method of depreciation bases from the data The data and estimated S&G Wholesale Grocery acquiring delivery truck needed for computation

Straight-Line Method

• An equal asset portion is recognized as depreciation
• Annual depreciation expense is calculated by subtracting estimated residual value from the cost
• Cost includes dividing remaining depreciable cost by the years determined to be asset's useful life
• The schedule summarizes the effect of straight-line depreciation over the entire asset life.

Depreciation Schedules: Highlighted Features

• ”Book Value” is the amount of the depreciable cost of the asset
• Not yet been recognized as depreciation expense at a point in time
• Book value at end of third year after depreciation, is $8,000

The cost minus the residual value

• Residual value recovered in cash
• In practice, residual values may be ignored because it not significant in amount. Assets, aircraft, construction equipment, have material number
• Portion of an asset’s depreciable cost in called depreciation rate.
• Delivery truck is 5 years to the depreciation expense will be percentage of the depreciable amount assets is called

Depreciation for Fractional Periods

• Computing depreciation expense for the nearest month
• Precison Bases Estimated life of many years Depreciation is just an approximate way to get to number one value.

Half-Year Convention, convention is in use

• Date the asset purchased Simply recognize one half- years- years depreciable amount to be. Expense, the year convention enables to treat similar assets

Declining- Balance Methods

• Most widely used accelerated method for income taxes or financial statements
• The fixed percentages accelerated depreciation rate a year is equal to the specified current book

Percent Declining- Balance

Taxed

Which Depreciation method of businesses use

• Results early in the set a corporate competitors
• Higher tax deductions as income statements

Methods of computing depreciating

• Lower balance and measure conservative

Financial Statements Disclosure

• Is located in note accompanied to methods
• And should know about plant assets
• Estimates values Another company

Revision of Estimates

• Revision happens every year The procedure for schedule
• It has impact in future The financial does not reflect the total cost and annual cost

The Impairment of Plant Assets

• Company expects to reasonably receive amounts of the sale Impairment losses should be adjusted quickly as need be

Other depreciating

Units-of- Output

• Based on passage of used units of output can be estimated with accuracy

MACRS

• Cost Recovery system to used. and balance for some taxpayers

Decelerated Methods