Chapter 7: Plant Assets, Natural Resources and Intangibles 1

Long-Lived Assets:
Two categories of long-lived assets:
• Plant Assets
• Intangible Assets
Plant Assets:
Plant assets refer to a company’s property, plant and equipment.
• Land
• Buildings
• Equipment
• Furniture and fixtures
Intangible Assets:
Intangible assets are economic resources that benefit the company, but lack physical substance
• Copyrights
• Trademarks
• Patents
• Franchises
Accounting for Long-Lived Assets:
Accounting issues:
• Account for the acquisition cost.
• Expense the asset’s cost over time.
• Determine the treatment of future expenditures on the original assets.
• Account for the disposal of the assets.
Acquisition Cost:
Long-lived assets are initially recorded at their acquisition cost
• Called the historical cost
• Includes cash and/or cash equivalent given up to acquire the assets and get it ready for its
intended use
Purchase price components:
Gross invoice price $10,000
Less: Cash discount (1/10,n/30) 100
Sales Tax 500 $10,400
Related Expenditures:
Add:
Freight Charges 200
Installation Costs 500
Testing of installed Machine 300 1,000
Acquisition Cost of Equipment $11,400

Package Purchases:
• Assets purchased as a group need to be allocated since different assets may have different
useful lives, depreciation methods, and reporting requirements
• The allocation is done based on relative market value or appraisal values
Chapter 7: Plant Assets, Natural Resources and Intangibles 2

Asset Estimated Percent of Total Allocation of Equipment

Market Value Purchase Price Useful Life
Land $60,000 30% $57,000 Indefinite
Building $120,000 60% $114,000 30 Years
Equipment $20,000 10% $19,000 8 Years
Totals $200,000 100% $190,000
Expenditures Related to Land:
• All costs necessary to bring the land into condition for use should be capitalized. This
includes:
o Property taxes on purchase
o Insurance on purchase
o Legal fees on purchase
o Fees to remove old buildings
o Special assessments
• Net recoveries from selling removed items reduce capitalized cost
• Limited life items of land improvements such as driveways and fences should be
accounted for as separate items
• Leasehold improvements are accounted for separately
Depreciation:
• Other than land, a plant asset cost must be allocated to the periods of the plant asset use
• The period of depreciation is the asset’s useful life, which may differ from its physical
life
• The company must also estimate the asset’s salvage value, which represents the asset’s
value at the end of its useful life
Distinguish a Capital Expenditure from an Immediate Expense:
• Capital expenditure increase the asset’s capacity or extends its useful life
• Capitalized means the cost is added to an asset account rather than being expensed
immediately
Depreciation Is Not for Valuation:
• Depreciation is a systematic allocation for matching expenses to revenue recognition
• Depreciation is not intended to align the book value of an asset to its market value
• Necessary as plant assets wear out, grow obsolete, and lose value over time
• Allocates cost against revenue it helps earn each period
• Depreciation expense is reported on the income statement
• Land is not depreciated
Calculating Depreciation Expense:
Many different methods are allowed for calculating depreciation.
Some common methods
• Straight-line
• Declining balance
• Units-of-production
Chapter 7: Plant Assets, Natural Resources and Intangibles 3

Straight-Line Method:
Assume equipment costs $5,000, with a three-year useful life, and a $500 salvage value
Annual Depreciation = (Acquisition Cost – Salvage Value)
Estimated Useful Life
($5,000 - $500)= $1,5000 per year
3 years
To record depreciation expense for the year:
Depreciation Expense $1,500
Accumulated Depreciation $1,500

Years of Useful Balance of Annual Accumulated Asset’s Book

Life Equipment Depreciation Depreciation Value
Account Expense Account
1 $5,000 $1,500 $1,500 $3,500
2 $5,000 $1,500 $3,000 $2,000
3 $5,000 $1,500 $4,500 $500
Total $4,500
Declining-Balance Method:
• An accelerated depreciation method that calculates depreciation expense as a constant
percentage of an asset’s beginning-of-year book value
• Since book value declines each year as accumulated depreciation increases, annual
depreciation expense declines each year
• There are many versions of declining-balance depreciation
• Assets are not depreciated below their salvage value
Assume equipment costs $5,000, with a three-year useful life, a $500 salvage value, and is
depreciated using a double-declining method
Annual Depreciation = Book value at the beginning of the year * Double-declining balance rate
Year of Acquisition Beginning Beginning Twice Annual
Useful Cost Accumulated Book Straight- Depreciation
Life Depreciation Value Life Expense
Percentage
1 $5,000 $0 $5,000 X 66.67% = $3,334
2 $5,000 $3,334 $1,666 X 66.67% = $1,111
3 $5,000 $4,445 $555 X 66.67% = $55
Total $4,500
Units-of-Production Method:
• Allocate an asset’s cost based on an asset’s use rather than based on time
• Annual depreciation is then computed based on how many units are used
• Units may be miles for a vehicle, hours used, or units produced for a machine
Assume a piece of equipment is estimated to last 9,000 hours. The acquisition cost of the
equipment is $5,000 and the salvage value is estimated to be $500
($5,000 - $500) = $0.50 per hour
9,000 Hours
Chapter 7: Plant Assets, Natural Resources and Intangibles 4

Year Depreciation Annual hours used Annual depreciation

per unit expense
1 0.50 X 2,000 = $1,000
2 0.50 X 4,000 = 2,000
3 0.50 X 500 = 250
4 0.50 X 1,500 = 750
5 0.50 X 1,000 = 500
Total $4,500

Depreciation for Income Taxes:

• A company may use a different method of depreciation for its taxes than it uses for its
financial reporting
• The method used for taxes is a form of accelerated depreciation called modified
accelerated cost recovery system (MACRS)
Impairment Loss:
• If the value of a plant asset suddenly falls so severely that its future cash flows are
estimated to be less than its current book value, the asset is deemed to be impaired and an
impairment loss is then recorded
Assume equipment with a cost of $100,000 and accumulated depreciation of $60,000 is
estimated to have a current fair value of only $10,000
To record impairment loss on equipment:
Impairment loss $30,000
Accumulated depreciation $30,000
Expenditures during the Life of the Plant Asset:
• Two types of expenditures
o Revenue expenditures
o Betterments
• Revenue expenditures are debited to expense
o Maintenance and repairs
• Betterments are debited to the asset (capitalized)
o Extend the useful life of the asset
o Improve the quality or quantity of the asset’s output
o Reduce the asset’s operating costs
Disposals of Plant Assets:
• Disposals can be sales, retirements, or exchanges
• To record a disposal
o Remove asset’s cost
o Remove accumulated depreciation
o Record proceeds
o Record any gain or loss
• Difference between proceeds received and book value removed
Example - Disposals of Plant Assets:
Assume a vehicle with an acquisition cost of $20,000 and accumulated depreciation of $18,000
is sold for $3,500
Chapter 7: Plant Assets, Natural Resources and Intangibles 5

Natural Resources:
• Long-term assets such as iron ore, petroleum (oil), and timber
• Depletion tracks the flow of a natural resource from its raw state through inventory to
cost of goods sold
Intangible Assets:
• Intangible assets consist of the various resources that benefit the company’s operations,
but do not have a physical substance
• Intangible assets acquired from outside firms are recorded at their acquisition cost
• Similar to plant assets and depreciation, intangible assets are amortized over the term of
their expected lives
• Unlike plant assets, there is no accumulated amortization expense, instead the credit goes
straight to the intangible asset
Types of intangible assets:
• Patents: An exclusive privilege granted to an inventor for a period of 20 years
• Copyrights: Protects an owner against unauthorized use of a written work, recorded work,
or artwork for the life of the author plus 70 years
• Franchises: Exclusive rights to operate or sell a specific brand of product in a given
geographic area, and often have indefinite lives
• Trademarks: Right to use certain terms, names, or symbols
 Goodwill: The amount paid by a company for another company above the identifiable net
assets of the acquired company, and perform impairment test
• Two categories:
o Finite lives: Amortization is recorded
o Indefinite lives: Checked annually for impairment