Plant Assets, Natural Resources, and Intangible Assets (Accounting Principles) PDF

CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS Accounting Principles, Eighth Edition Chapter 10-1  Section Section11––Plant PlantAssets Assets Plant assets...

CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS Accounting Principles, Eighth Edition Chapter 10-1  Section Section11––Plant PlantAssets Assets Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools). Major characteristics include: “Used in operations” and not for resale. Long-term in nature and usually depreciated. Possess physical substance. Referred to as property, plant, and equipment; plant and equipment; and fixed assets. Chapter 10-2  Determining Determiningthe theCost Costof ofPlant PlantAssets Assets Land Includes all costs to acquire land and ready it for use. Costs typically include: (1) the purchase price; (2) closing costs, such as title and attorney’s fees; (3) real estate brokers’ commissions; (4) costs of grading, filling, draining, and clearing; (5) assumption of any liens, mortgages, or encumbrances on the property. Chapter 10-3 LO 1 Describe how the cost principle applies to plant assets.  Determining Determiningthe theCost Costof ofPlant PlantAssets Assets 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. Construction costs: Contract price plus payments for architects’ fees, building permits, and excavation costs. Chapter 10-4 LO 1 Describe how the cost principle applies to plant assets.  Depreciation Depreciation Depreciation is the process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Process of cost allocation, not asset valuation. Applies to land improvements, buildings, and equipment, not land. Chapter 10-5 LO 2 Explain the concept of depreciation.  Depreciation Depreciation Factors in Computing Depreciation Illustration 10-6 Cost Useful Life Salvage Value Chapter 10-6 LO 2 Explain the concept of depreciation.  Depreciation Depreciation Depreciation Methods Objective is to select the method that 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. Illustration 10-8 Use of depreciation methods in 600 large U.S. companies Chapter 10-7 LO 3 Compute periodic depreciation using different methods.  Depreciation Depreciation Exercise (Depreciation Computations—Three Methods) Parish Corporation purchased a new machine for its assembly process on January 2, 2007. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Year-end is December 31. Instructions: Compute the depreciation expense under the following methods. (a) Straight-Line. (b) Units-of-Activity. (c) Double-Declining Balance. Chapter 10-8 LO 3 Compute periodic depreciation using different methods.  Depreciation Depreciation Straight-Line Expense is same amount for each year. Depreciable cost is cost of the asset less its salvage value. Straight-line method predominates in practice. Chapter 10-9 LO 3 Compute periodic depreciation using different methods.  Depreciation Depreciation Exercise (Straight-Line Method) De p r e c ia b le Annua l Ac c um. Ye a r Ba s e Ye a r s Ex p e ns e De p r e c. 2007 $ 105, 000 / 5 = $ 21, 000 $ 21, 000 2008 105, 000 / 5 = 21, 000 42, 000 2009 105, 000 / 5 = 21, 000 63, 000 2010 105, 000 / 5 = 21, 000 84, 000 2011 105, 000 / 5 = 21, 000 105, 000 $ 105, 000 Journal entry 2007 Depreciation expense 21,000 Accumulated depreciation Chapter 21,000 10-10 LO 3 Compute periodic depreciation using different methods.  Depreciation Depreciation Units-of-Activity Expense varies based on units of activity. Depreciable cost is cost less salvage value. Companies estimate total units of activity to calculate depreciation cost per unit. Chapter 10-11 LO 3 Compute periodic depreciation using different methods.  Depreciation Depreciation Exercise (Units-of-Activity Method) ($105,000 / 1,000 hours = $105 per hour) Hour s Ra t e p e r A nnua l A c c um. Ye a r Us e d Hour Ex p e ns e De p r e c. 2007 200 x $ 105 = $ 21, 000 $ 21, 000 2008 150 x 105 = 15, 750 36, 750 2009 250 x 105 = 26, 250 63, 000 2010 300 x 105 = 31, 500 94, 500 2011 100 x 105 = 10, 500 105, 000 1, 000 $ 105, 000 Chapter 10-12 LO 3 Compute periodic depreciation using different methods.  Depreciation Depreciation Declining-Balance Method Decreasing annual depreciation expense over the asset’s useful life. Rate applied to book value (cost less accumulated depreciation). Chapter 10-13 LO 3 Compute periodic depreciation using different methods.  Depreciation Depreciation Exercise (Declining Balance Method) Ne t Ra t e p e r A nnua l A c c um. Ye a r Book va lue Ye a r Ex p e ns e De p r e c. 2007 $ 117, 900 x 40% = $ 47, 160 $ 47, 160 2008 70, 740 x 40% = 28, 296 75, 456 2009 42, 444 x 40% = 16, 978 92, 434 2010 25, 466 x 40% = 10, 186 102, 620 2011 15, 280 x 40% = 2, 380 105, 000 $ 105, 000 Chapter 10-14 LO 3 Compute periodic depreciation using different methods.  Illustration 10-16 Depreciation Depreciation Comparison of Depreciation Methods Annual Expense Ye ar SL DB A c t ivit y 2003 21, 000 47, 160 21, 000 2004 21, 000 28, 296 15, 750 2005 21, 000 16, 978 26, 250 2006 21, 000 10, 186 31, 500 2007 21, 000 2, 380 10, 500 105, 000 105, 000 105, 000 Chapter 10-15 LO 3 Compute periodic depreciation using different methods.  Plant PlantAsset AssetDisposals Disposals Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix). Illustration 10-18 Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account. Chapter 10-16 LO 6 Explain how to account for the disposal of a plant asset.  Plant PlantAsset AssetDisposals Disposals--Retirement Retirement BE10-9 Prepare journal entries to record the following. (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), except that accumulated depreciation for Gomez Company is $39,000, instead of $41,000. (a) Accumulated depreciation 41,000 Equipment 41,000 Chapter 10-17 LO 6 Explain how to account for the disposal of a plant asset.  Plant PlantAsset AssetDisposals Disposals--Retirement Retirement BE10-9 Prepare journal entries to record the following. (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), except that accumulated depreciation for Gomez Company is $39,000, instead of $41,000. (b) Accumulated depreciation 39,000 Equipment Loss on disposal 41,000 2,000 Chapter 10-18 LO 6 Explain how to account for the disposal of a plant asset.  Plant PlantAsset AssetDisposals Disposals Sale of Plant Assets 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. Chapter 10-19 LO 6 Explain how to account for the disposal of a plant asset.  Plant PlantAsset AssetDisposals Disposals--Sale Sale BE10-10 Chan Company sells office equipment on September 30, 2008, for $20,000 cash. The office equipment originally cost $72,000 and as of January 1, 2008, had accumulated depreciation of $42,000. Prepare the journal entries to (a) record the sale of the equipment. Chapter 10-20 LO 6 Explain how to account for the disposal of a plant asset.  Plant PlantAsset AssetDisposals Disposals--Sale Sale BE10-10 Prepare the journal entries to (a) record the sale of the equipment. (a) Cash 20,000 Accumulated depreciation 42,000 Office equipment 72,000 Loss on disposal 10,000 Chapter 10-21 LO 6 Explain how to account for the disposal of a plant asset.  Section Section22––Natural NaturalResources Resources Cost - price needed to acquire the resource and prepare it for its intended use. Depletion - allocation of the cost to expense in a rational and systematic manner over the resource’s useful life. Depletion is to natural resources as depreciation is to plant assets. Companies generally use units-of-activity method. Chapter 10-22 LO 7 Compute periodic depletion of natural resources.  Section Section33––Intangible IntangibleAssets Assets Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance. Normally classified as long-term asset. Common types of intangibles: Patents Trademarks or trade names Copyrights Goodwill Franchises or licenses Chapter 10-23