Post on 16-Jul-2015
Slide 9-1
Slide 9-2
Chapter 9
Plant Assets, Plant Assets,
Natural Resources, andNatural Resources, and
Intangible AssetsIntangible AssetsFinancial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide 9-3
1. Describe how the cost principle applies to plant assets.
2. Explain the concept of depreciation.
3. Compute periodic depreciation using different methods.
4. Describe the procedure for revising periodic depreciation.
5. Distinguish between revenue and capital expenditures, and explain the entries for each.
6. Explain how to account for the disposal of a plant asset.
7. Compute periodic depletion of extractable natural resources.
8. Explain the basic issues related to accounting for intangible assets.
9. Indicate how plant assets, natural resources, and intangible assets are reported.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Slide 9-4
Plant AssetsPlant AssetsPlant AssetsPlant Assets
Determining the Determining the cost of plant cost of plant assetsassets
DepreciationDepreciation
Revaluation of Revaluation of plant assets plant assets
Expenditures Expenditures during useful lifeduring useful life
Plant asset Plant asset disposalsdisposals
Natural Natural
ResourcesResources
Natural Natural
ResourcesResourcesIntangible Intangible
AssetsAssets
Intangible Intangible
AssetsAssets
Statement Statement
Presentation and Presentation and
AnalysisAnalysis
Statement Statement
Presentation and Presentation and
AnalysisAnalysis
PresentationPresentation
AnalysisAnalysis
Accounting for Accounting for intangiblesintangibles
Types of Types of intangiblesintangibles
Research and Research and development development costscosts
Plant Assets, Natural Resources, and Intangible Plant Assets, Natural Resources, and Intangible AssetsAssets
Plant Assets, Natural Resources, and Intangible Plant Assets, Natural Resources, and Intangible AssetsAssets
Accounting for Accounting for extractable extractable natural resourcesnatural resources
Financial Financial statement statement presentationpresentation
Slide 9-5
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.
Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools).
Major characteristics include:
Section 1Section 1 – Plant Assets – Plant AssetsSection 1Section 1 – Plant Assets – Plant Assets
Referred to as property, plant, and equipment; plant and equipment; and fixed assets.
Slide 9-6
Section 1Section 1 – Plant Assets – Plant AssetsSection 1Section 1 – Plant Assets – Plant Assets
Illustration 9-1Percentages of plant assetsin relation to total assets
Slide 9-7
Includes all costs to acquire land and ready it for use.
Costs typically include:
Land
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
(1) 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.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide 9-8
Illustration: Illustration: Assume that Hayes Manufacturing Company
acquires real estate at a cash cost of $100,000. The property
contains an old warehouse that is razed at a net cost of $6,000
($7,500 in costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and the
real estate broker’s commission, $8,000. The cost of the land is
$115,000, computed as follows.
Required: Required: Determine amount to be reported as the cost of the
land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide 9-9
LandLand
Required: Required: Determine amount to be reported as the cost of the land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Cash price of property of $100,000
Net removal cost of warehouse of $6,000
Attorney's fees of $1,000 1,000
6,000
$100,000
$115,000Cost of Land
Real estate broker’s commission of $8,000 8,000
Land 115,000
Cash 115,000
Journal Entry
Slide 9-10
All expenditures necessary to make the improvements ready for their intended use.
Land Improvements
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
Driveways, parking lots, fences, landscaping, and
underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements
over their useful lives.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide 9-11
All costs related directly to purchase or construction.
Buildings
Purchase costs:
Purchase price, closing costs 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.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide 9-12
All costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
Equipment
purchase price,
sales taxes,
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide 9-13
Illustration: Illustration: Assume Merten Company purchases factory machinery at a cash price of $50,000. Related expenditures are for sales taxes $3,000, insurance during shipping $500, and installation and testing $1,000. Determine amount to be reported as the cost of the machinery.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
MachineryMachinery
Cash price
Sales taxes
Insurance during shipping 500
3,000
$50,000
$54,500Cost of Machinery
Installation and testing 1,000
Slide 9-14
Answer on notes page
Slide 9-15
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.
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.
DepreciationDepreciationDepreciationDepreciation
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Slide 9-16
Factors in Computing Depreciation
Cost
DepreciationDepreciationDepreciationDepreciation
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Useful Life Residual Value
Illustration 9-6
Slide 9-17
Objective is to select the method that best measures an
asset’s contribution to revenue over its useful life.
Examples include:
Depreciation Methods
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
DepreciationDepreciationDepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide 9-18
Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2011.
Required: Compute depreciation using the following.
(a) Straight-Line (b) Units-of-Activity (c) Declining Balance.
DepreciationDepreciationDepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-7
Slide 9-19
Straight-Line
DepreciationDepreciationDepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Expense is same amount for each year.
Depreciable cost - cost of the asset less its residual
value. Illustration 9-8
Slide 9-20
Depreciable Annual Accum. Book
Year Cost x Rate = Expense Deprec. Value
DepreciationDepreciationDepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration: (Straight-Line Method)
2011 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600
2012 12,000 20 2,400 4,800 8,200
2013 12,000 20 2,400 7,200 5,800
2014 12,000 20 2,400 9,600 3,400
2015 12,000 20 2,400 12,000 1,000
2011 Journal Entry
Depreciation expense 2,400
Accumulated depreciation 2,400
Illustration 9-9
Slide 9-21
Companies estimate total units of activity to calculate depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is cost less residual value.
Units-of-Activity
DepreciationDepreciationDepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-10
Slide 9-22
Units Annual
of Cost / Depreciation Accumulated Book
Year Activity x Unit = Expense Depreciation Value
DepreciationDepreciationDepreciationDepreciation
Illustration: (Units-of-Activity Method)
2011 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2012 30,000 0.12 3,600 5,400 7,600
2013 20,000 0.12 2,400 7,800 5,200
2014 25,000 0.12 3,000 10,800 2,200
2015 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation 1,800
2011 Journal Entry
Illustration 9-11
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide 9-23
Decreasing annual depreciation expense over the asset’s
useful life.
Declining-balance rate is double the straight-line rate.
Rate applied to book value.
Declining-Balance
DepreciationDepreciationDepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-12
Slide 9-24
Declining Annual
Beginning Balance Deprec. Accum. Book
Year Book value x Rate = Expense Deprec. Value
DepreciationDepreciationDepreciationDepreciation
Illustration: (Declining-Balance Method)
2011 13,000 40% $ 5,200 $ 5,200 $ 7,800
2012 7,800 40 3,120 8,320 4,680
2013 4,680 40 1,872 10,192 2,808
2014 2,808 40 1,123 11,315 1,685
2015 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200
Accumulated depreciation 5,200
2011 Journal Entry
Illustration 9-13
Slide 9-25 SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Comparison of Methods
DepreciationDepreciationDepreciationDepreciation
Illustration 9-14
Illustration 9-15
Slide 9-26
Depreciation is a process of:
a. valuation.
b. cost allocation.
c. cash accumulation.
d. appraisal.
Review Question
DepreciationDepreciationDepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide 9-27
The following four slides are included to illustrate the
calculation of partial-year depreciation expense.
The amounts are consistent with the previous slides
illustrating the calculation of depreciation expense.
Depreciation for Partial YearDepreciation for Partial YearDepreciation for Partial YearDepreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide 9-28
Illustration: Barb’s Florists purchased a small delivery truck on October 1, 2011.
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial YearDepreciation for Partial YearDepreciation for Partial YearDepreciation for Partial Year
Required: Compute depreciation using the following.
(a) Straight-Line (b) Units-of-Activity (c) Declining Balance.
Illustration 9-7
Slide 9-29
CurrentDepreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2011 12,000$ x 20% = 2,400$ x 3/12 = 600$ 600$
2012 12,000 x 20% = 2,400 2,400 3,000
2013 12,000 x 20% = 2,400 2,400 5,400
2014 12,000 x 20% = 2,400 2,400 7,800
2015 12,000 x 20% = 2,400 2,400 10,200
2016 12,000 x 20% = 2,400 x 9/12 = 1,800 12,000
12,000$
Journal entry:
2011 Depreciation expense 600
Accumultated depreciation 600
Depreciation for Partial YearDepreciation for Partial YearDepreciation for Partial YearDepreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration: (Straight-line Method)
Slide 9-30
Hours Cost / Annual Accum. Book
Year Used x Unit = Expense Deprec. Value
Illustration: (Units-of-Activity Method)
2011 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2012 30,000 0.12 3,600 5,400 7,600
2013 20,000 0.12 2,400 7,800 5,200
2014 25,000 0.12 3,000 10,800 2,200
2015 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation 1,800
2011 Journal Entry
Illustration 9-12
Depreciation for Partial YearDepreciation for Partial YearDepreciation for Partial YearDepreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide 9-31
Illustration: (Declining-Balance Method)
Declining CurrentBeginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2011 13,000$ x 40% = 5,200$ x 3/12 = 1,300$ 1,300$
2012 11,700 x 40% = 4,680 4,680 5,980
2013 7,020 x 40% = 2,808 2,808 8,788
2014 4,212 x 40% = 1,685 1,685 10,473
2015 2,527 x 40% = 1,011 1,011 11,484
2016 1,516 x 40% = 607 Plug 516 12,000
12,000$
Journal entry:
2011 Depreciation expense 1,300
Accumultated depreciation 1,300
Depreciation for Partial YearDepreciation for Partial YearDepreciation for Partial YearDepreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide 9-32
Tax laws often do not require the taxpayer to use the
same depreciation method on the tax return that is used
in preparing financial statements.
Many corporations use straight-line in their financial
statements to maximize net income. At the same time,
they use an accelerated-depreciation method on their
tax returns to minimize their income taxes.
Depreciation and Income Taxes
DepreciationDepreciationDepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide 9-33
Revising Periodic Depreciation
Accounted for in the period of change and future
periods (Change in Estimate).
Not handled retrospectively.
Not considered error.
DepreciationDepreciationDepreciationDepreciation
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Slide 9-34
Illustration:Illustration: Assume that Barb’s Florists decides on January 1, Assume that Barb’s Florists decides on January 1,
2014, to extend the useful life of the truck one year because of 2014, to extend the useful life of the truck one year because of
its excellent condition. The company has used the straight-line its excellent condition. The company has used the straight-line
method to depreciate the asset to date, and book value is method to depreciate the asset to date, and book value is
$5,800 ($13,000 - $7,200).$5,800 ($13,000 - $7,200).
Questions:Questions:
1.1. What is the journal entry to correct What is the journal entry to correct
the prior years’ depreciation?the prior years’ depreciation?
2.2. Calculate the depreciation expense Calculate the depreciation expense
for 2014.for 2014.
No Entry No Entry RequiredRequired
DepreciationDepreciationDepreciationDepreciation
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Slide 9-35
DepreciationDepreciationDepreciationDepreciation
Depreciation expense 1,600
Accumulated depreciation 1,600
Journal entry for 2014
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Book value, 1/1/14 Book value, 1/1/14 $5,800$5,800
Residual valueResidual value
Depreciable costDepreciable cost
Useful life (revised) /Useful life (revised) /
Annual depreciationAnnual depreciation
First, First, establish establish
Book Value Book Value at the date of at the date of
change in change in estimate.estimate.
First, First, establish establish
Book Value Book Value at the date of at the date of
change in change in estimate.estimate.
- 1,000- 1,000
4,8004,800
3 years3 years
$ 1,600$ 1,600
Illustration 9-17
Slide 9-36
When there is a change in estimated depreciation:
a. previous depreciation should be corrected.
b. current and future years’ depreciation should be
revised.
c. only future years’ depreciation should be revised.
d. None of the above.
Review Question
DepreciationDepreciationDepreciationDepreciation
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Slide 9-37
IFRS allows revaluation of plant assets to fair value
If revaluation is used, it must be applied to all assets in
a class of assets.
Assets that are experiencing rapid price changes must
be revalued on an annual basis, otherwise less
frequent revaluation is acceptable.
Revaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Slide 9-38
Illustration: Illustration: Pernice Company applies revaluation to plant assets with a carrying value of $1,000,000, a useful life of 5 years, and no residual value. Pernice makes the following journal entries in year 1, assuming straight-line depreciation.
Depreciation expense 200,000
Accumulated depreciation 200,000
Revaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
After this entry, Pernice’s plant assets have a carrying amount of $800,000 ($1,000,000 - $200,000).
Slide 9-39
Illustration: Illustration: At the end of year 1, independent appraisers determine that the asset has a fair value of $850,000. To report the plant assets at fair value, Pernice makes the following entry.
Accumulated depreciation 200,000
Plant assets 150,000
Revaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Revaluation surplus is an example of an item reported as other comprehensive income, as discussed in Chapter 5.
Revaluation surplus 50,000
Slide 9-40
Pernice now reports the following information in its statement of financial position at the end of year 1.
Revaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
$850,000 is the new basis of the asset. Pernice reports depreciation expense of $200,000 in the income statement and $50,000 in other comprehensive income. Depreciation in year 2 will be $212,500 ($850,000 / 4).
Illustration 9-18
Slide 9-41
Ordinary Repairs - expenditures to maintain the operating
efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Expenditures During Useful LifeExpenditures During Useful LifeExpenditures During Useful LifeExpenditures During Useful Life
SO 5 Distinguish between revenue and capital expenditures, SO 5 Distinguish between revenue and capital expenditures, and explain the entries for each.and explain the entries for each.
Additions and Improvements - costs incurred to increase
the operating efficiency, productive capacity, or useful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
Slide 9-42
Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).
Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Illustration 9-19
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
Slide 9-43
Illustration: Illustration: Assume that Hobart Enterprises retiresits computer printers, which cost $32,000. The accumulated depreciation on these printers is $32,000. The journal entry to record this retirement is:
Plant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 32,000
Printing equipment 32,000
Question: What happens if a fully depreciated plant asset is still useful to the company?
Retirement of Plant Assets
Slide 9-44
Illustration: Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulateddepreciation of $14,000. The journal entry is:
Plant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 14,000
Loss on disposal 4,000
Companies report a loss on disposal in the “Other income and expense” section of the income statement.
Delivery equipment 18,000
Slide 9-45
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.
Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Slide 9-46
Illustration: Assume that on July 1, 2011, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As of January 1, 2011, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2011 is $8,000. Prepare the journal entry to record depreciation expense up to the date of sale.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - Sale
Depreciation expense 8,000
Accumulated depreciation 8,000
Gain on Disposal
Slide 9-47
Illustration: Wright records the sale as follows.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - Sale
Cash 16,000
Accumulated depreciation 49,000
Illustration 9-20Computation of gain ondisposal
Office equipment 60,000
Gain on disposal 5,000
July 1
Slide 9-48
Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - Sale
Loss on Disposal
Cash 9,000
Accumulated depreciation 49,000
Office equipment 60,000
Loss on disposal 5,000
July 1
Illustration 9-21Computation of loss on disposal
Slide 9-49
Natural resources consist of standing timber and resources extracted from the ground, such as oil, gas, and minerals.
Standing timber is considered a biological asset under IFRS.
In the years before they are harvested, the recorded
value of biological assets is adjusted to fair value each period.
Section 2Section 2 – Natural Resources – Natural ResourcesSection 2Section 2 – Natural Resources – Natural Resources
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
Slide 9-50
Depletion is to natural resources as depreciation is to plant
assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units extracted.
IFRS defines extractive industries as those businesses involved in finding and removing natural resources located in or near the earth’s crust.
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.
Section 2Section 2 – Natural Resources – Natural ResourcesSection 2Section 2 – Natural Resources – Natural Resources
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
Slide 9-51
Illustration: Assume that Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, Lane extracts and sells 800,000 tons of coal. Lane computes the depletion expense as follows:
Section 2Section 2 – Natural Resources – Natural ResourcesSection 2Section 2 – Natural Resources – Natural Resources
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 x 800,000 = $400,000 depletion expense
Depletion expense 400,000
Accumulated depletion 400,000
Journal entry:
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
Slide 9-52
Financial Statement PresentationFinancial Statement PresentationFinancial Statement PresentationFinancial Statement Presentation
Illustration 9-23Statement presentation of accumulated depletion
Extracted resources that have not been sold are reported as inventory in the current assets section.
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
Slide 9-53
Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance.
Section 3Section 3 – Intangible Assets – Intangible AssetsSection 3Section 3 – Intangible Assets – Intangible Assets
Patents
Copyrights
Franchises or licenses
Intangible assets are categorized as having either a limited life or an indefinite life.
Common types of intangibles:
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Trademarks and trade names
Goodwill
IFRS permits revaluation of intangible assets to fair value, except for goodwill.
Slide 9-54
Patents
Exclusive right to manufacture, sell, or otherwise control
an invention for a specified number of years from the
date of the grant.
Legal life in many countries is 20 years.
Capitalize costs of purchasing a patent and amortize
over its legal life or its useful life, whichever is shorter.
Legal fees incurred successfully defending a patent are
capitalized to Patent account.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide 9-55
Intangible assets are typically amortized on a straight-line basis.
Illustration: Assume that National Labs purchases a patent at a cost of $60,000. National estimates the useful life of the patent to be eight years. National records the annual amortization as follows.
Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Amortization expense 7,500
Patent 7,500
Slide 9-56
Copyrights
Give the owner the exclusive right to reproduce and sell an artistic or published work.
plays, literary works, musical works, pictures, photographs, and video and audiovisual material.
Granted for the life of the creator plus a specified number of years, which can vary by country but is commonly 70 years.
Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide 9-57
Trademarks and Trade Names
Word, phrase, jingle, or symbol that identifies a particular enterprise or product.
Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca-Cola, and Jetta.
Registration provides a specified number of years of protection, which can vary by country, but is commonly 20 years.
Capitalize acquisition costs.
Renewed indefinitely, no amortization.
Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide 9-58
Franchises and Licenses
Contractual arrangement between a franchisor and a
franchisee.
BP (GBR), Taco Bell (USA), or Rent-A-Wreck (USA)
are franchises.
Franchise (or license) with a limited life should be
amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at cost
and not amortized.
Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide 9-59
Goodwill
Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of ...
purchase price overover the fair value of the identifiable net assets acquired.
Internally created goodwill should not be capitalized.
Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide 9-60
Answer on notes page
Slide 9-61
Research and Development CostsResearch and Development CostsResearch and Development CostsResearch and Development Costs
Frequently results in something that a company patents or copyrights such as:
new product,
process,
idea,
formula,
composition, or
literary work.
Costs in the research phase are always expensed as incurred.
Costs in the development phase are expensed until specific criteria are met, primarily that technological feasibility is achieved.
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide 9-62
Presentation
Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis
SO 9 Indicate how plant assets, natural resources, SO 9 Indicate how plant assets, natural resources, and intangible assets are reported.and intangible assets are reported.
Illustration 9-24
Slide 9-63
Analysis
Each dollar invested in assets produced in sales. If a
company is using its assets efficiently, each investment in
assets will create a high amount of sales.
Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis
SO 9 Indicate how plant assets, natural resources, SO 9 Indicate how plant assets, natural resources, and intangible assets are reported.and intangible assets are reported.
Illustration 9-25
Slide 9-64
As in IFRS, under GAAP, the costs associated with research
and development are segregated into the two components.
Costs in the research phase are always expensed under
both IFRS and GAAP. Under GAAP, however, costs in the
development phase are also always expensed. As shown in
this chapter, under IFRS, development costs can be
capitalized once technological feasibility is achieved.
IFRS permits revaluation of intangible assets (except for
goodwill). GAAP prohibits revaluations of intangible assets.
GAAP does not require component depreciation.
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences Plant Assets, Natural Resources, and Intangible Assets
Slide 9-65
GAAP does not permit the use of revaluation accounting for
property, plant, and equipment, which is allowed under
IFRS.
Under both GAAP and IFRS, changes in the depreciation
method used and changes in useful life are handled in
current and future periods. Prior periods are not affected.
GAAP recently conformed to IFRS in the accounting for
changes in depreciation methods.
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences Plant Assets, Natural Resources, and Intangible Assets
Slide 9-66
IFRS allows reversal of impairment losses when there has
been a change in economic conditions or in the expected
use of the asset. Under GAAP, impairment losses cannot be
reversed for assets to be held and used; the impairment
loss results in a new cost basis for the asset. IFRS and
GAAP are similar in the accounting for impairments of
assets held for disposal.
The accounting for exchanges of non-monetary assets has
recently converged between IFRS and GAAP.
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences Plant Assets, Natural Resources, and Intangible Assets
Slide 9-67
Looking to the FutureLooking to the Future
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
It is too early to say whether a converged conceptual framework
will recommend fair value measurement (and revaluation
accounting) for plant assets and intangibles. However, this is likely
to be one of the more contentious issues, given the long-standing
use of historical cost as a measurement basis in GAAP. The IASB
and FASB have identified a project that would consider expanded
recognition of internally generated intangible assets. IFRS permits
more recognition of intangibles compared to GAAP. Thus, it will be
challenging to develop converged standards for intangible assets,
given the long-standing prohibition on capitalizing internally
generated intangible assets and research and development in
GAAP.
Plant Assets, Natural Resources, and Intangible Assets
Slide 9-68
Ordinarily, companies record a gain or loss on the
exchange of plant assets.
The rationale for recognizing a gain or loss is that
most exchanges have commercial substance.
An exchange has commercial substance if the
future cash flows change as a result of the
exchange.
Exchange of Plant AssetsExchange of Plant AssetsExchange of Plant AssetsExchange of Plant Assets
SO 10 Explain how to account for the exchange of plant assets.SO 10 Explain how to account for the exchange of plant assets.
AppendixAppendix
Slide 9-69
Cost of old trucks $64,000
Less: Accumulated depreciation 22,000
Book value 42,000
Fair value of old trucks 26,000
Loss on disposal $16,000
Fair value of old trucks $26,000
Cash paid 17,000
Cost of new semi-truck $43,000
Illustration: Roland Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck. The old trucks had a fair value of $26,000.
SO 10 Explain how to account for the exchange of plant assets.SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant AssetsExchange of Plant AssetsExchange of Plant AssetsExchange of Plant Assets
Loss Treatment
Slide 9-70
Illustration: Roland Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck. The old trucks had a fair market value of $26,000.
Prepare the entry to record the exchange of assets by Roland Co.
SO 10 Explain how to account for the exchange of plant assets.SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant AssetsExchange of Plant AssetsExchange of Plant AssetsExchange of Plant Assets
Semi-truck 43,000
Accumulated depreciation 22,000
Loss on disposal 16,000
Used trucks 64,000
Cash 17,000
Slide 9-71
Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair value of $19,000. Mark also paid $3,000.
SO 10 Explain how to account for the exchange of plant assets.SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant AssetsExchange of Plant AssetsExchange of Plant AssetsExchange of Plant Assets
Cost of old equipment $40,000
Less: Accumulated depreciation 28,000
Book value 12,000
Fair value of old equipment 19,000
Gain on disposal $ 7,000
Fair value of old equipment $19,000
Cash paid 3,000
Cost of new equipment $22,000
Gain Treatment
Slide 9-72
Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair value of $19,000. Mark also paid $3,000.
Prepare the entry to record the exchange of assets by Mark Express.
SO 10 Explain how to account for the exchange of plant assets.SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant AssetsExchange of Plant AssetsExchange of Plant AssetsExchange of Plant Assets
Delivery equipment (new) 22,000
Accumulated depreciation 28,000
Delivery equipment (used) 40,000
Gain on disposal 7,000
Cash 3,000
Slide 9-73
In exchanges of assets in which the exchange has
commercial substance:
a. neither gains nor losses are recognized immediately.
b. gains, but not losses, are recognized immediately.
c. losses, but not gains, are recognized immediately.
d. both gains and losses are recognized immediately.
Review Question
SO 10 Explain how to account for the exchange of plant assets.SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant AssetsExchange of Plant AssetsExchange of Plant AssetsExchange of Plant Assets
Slide 9-74
“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.”
CopyrightCopyrightCopyrightCopyright