Chapter 10-1

Chapter 10-2 Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Accounting Principles, Ninth Edition

Chapter Describe how the cost principle applies to plant assets Explain the concept of depreciation Compute periodic depreciation using different methods Explain how to account for the disposal of a plant asset Indicate how plant assets are reported. Study Objectives

Chapter 10-4 Plant Assets Determining the cost of plant assets Depreciation Expenditures during useful life Plant asset disposals Natural Resources Intangible Assets Statement Presentation and Analysis PresentationAnalysis Accounting for intangibles Research and development costs Plant Assets, Natural Resources, and Intangible Assets Depletion

Chapter 10-5 “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 1 – Plant Assets Referred to as property, plant, and equipment; plant and equipment; and fixed assets.

Chapter 10-6 Includes all costs to acquire land and ready it for use. Costs typically include: Land Determining the Cost of Plant Assets (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. SO 1 Describe how the cost principle applies to plant assets.

Chapter 10-7 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 Assets SO 1 Describe how the cost principle applies to plant assets.

Chapter 10-8 Land Required: Required: Determine amount to be reported as the cost of the land. Determining the Cost of Plant Assets SO 1 Describe how the cost principle applies to plant assets. Cash price of property of $100,000 Old warehouse razed at a cost 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

Chapter 10-9 Includes all expenditures necessary to make the improvements ready for their intended use. Land Improvements Determining the Cost of Plant Assets Examples are 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.

Chapter Includes all costs related directly to purchase or construction. Buildings 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. Determining the Cost of Plant Assets SO 1 Describe how the cost principle applies to plant assets.

Chapter Include 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 Assets SO 1 Describe how the cost principle applies to plant assets.

Chapter 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 Assets SO 1 Describe how the cost principle applies to plant assets. Machinery Cash price Sales taxes Insurance during shipping 500 3,000 $50,000 $54,500Cost of Machinery Installation and testing 1,000

Chapter 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. DepreciationDepreciation SO 2 Explain the concept of depreciation.

Chapter Factors in Computing Depreciation Cost DepreciationDepreciation SO 2 Explain the concept of depreciation. Useful LifeSalvage Value Illustration 10-6

Chapter 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. DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration 10-8 Use of depreciation methods in 600 large U.S. companies

Chapter Illustration: Barb’s Florists purchased a small delivery truck on January 1, Required: Compute depreciation using the following. (a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance. DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration 10-7

Chapter Straight-Line DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Expense is same amount for each year. Depreciable cost is cost of the asset less its salvage value. Illustration 10-9

Chapter DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration: (Straight-Line Method) 2010$ 12,00020%$ 2,400 $ 10, ,000202,4004,8008, ,000202,4007,2005, ,000202,4009,6003, ,000202,40012,0001, Journal Entry Depreciation expense 2,400 Accumulated depreciation2,400 Illustration 10-10

Chapter Companies estimate total units of activity to calculate depreciation cost per unit. Expense varies based on units of activity. Depreciable cost is cost less salvage value. Units-of-Activity DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration 10-11

Chapter DepreciationDepreciation Illustration: (Units-of-Activity Method) ,000$ 0.12$ 1,800 $ 11, , ,6005,4007, , ,4007,8005, , ,00010,8002, , ,20012,0001,000 Depreciation expense 1,800 Accumulated depreciation 1, Journal Entry Illustration SO 3 Compute periodic depreciation using different methods.

Chapter 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 DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration 10-13

Chapter DepreciationDepreciation Illustration: (Declining-Balance Method) ,00040%$ 5,200 $ 7, ,800403,1208,3204, ,680401,87210,1922, ,808401,12311,3151, , *12,0001,000 * Computation of $674 ($1,685 x 40%) is adjusted to $685. Depreciation expense 5,200 Accumulated depreciation5, Journal Entry Illustration 10-14

Chapter The following five 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 Year SO 3 Compute periodic depreciation using different methods.

Chapter Illustration: Barb’s Florists purchased a small delivery truck on October 1, Required: Compute depreciation using the following. (a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance. SO 3 Compute periodic depreciation using different methods. Illustration 10-7 Depreciation for Partial Year

Chapter Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods. Illustration: (Straight-line Method)

Chapter Illustration: (Units-of-Activity Method) ,000$ 0.12$ 1,800 $ 11, , ,6005,4007, , ,4007,8005, , ,00010,8002, , ,20012,0001,000 Depreciation expense 1,800 Accumulated depreciation 1, Journal Entry Illustration Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods.

Chapter Illustration: (Declining-Balance Method) Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods.

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