1. Chapter 10-1

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

3. Chapter 10-3 1. 1.Describe how the cost principle applies to plant assets. 2. 2.Explain the concept of depreciation. 3. 3.Compute periodic depreciation using different methods. 4. 4.Explain how to account for the disposal of a plant asset. 5. 5.Indicate how plant assets are reported. Study Objectives

4. 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

5. 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.

6. 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.

7. 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.

8. 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

9. 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.

10. Chapter 10-10 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.

11. Chapter 10-11 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.

12. Chapter 10-12 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

13. Chapter 10-13 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.

14. Chapter 10-14 Factors in Computing Depreciation Cost DepreciationDepreciation SO 2 Explain the concept of depreciation. Useful LifeSalvage Value Illustration 10-6

15. Chapter 10-15 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

16. Chapter 10-16 Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2010. 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

17. Chapter 10-17 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

18. Chapter 10-18 DepreciationDepreciation SO 3 Compute periodic depreciation using different methods. Illustration: (Straight-Line Method) 2010$ 12,00020%$ 2,400 $ 10,600 201112,000202,4004,8008,200 201212,000202,4007,2005,800 201312,000202,4009,6003,400 201412,000202,40012,0001,000 2010 Journal Entry Depreciation expense 2,400 Accumulated depreciation2,400 Illustration 10-10

19. Chapter 10-19 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

20. Chapter 10-20 DepreciationDepreciation Illustration: (Units-of-Activity Method) 201015,000$ 0.12$ 1,800 $ 11,200 201130,0000.123,6005,4007,600 201220,0000.122,4007,8005,200 201325,0000.123,00010,8002,200 201410,0000.121,20012,0001,000 Depreciation expense 1,800 Accumulated depreciation 1,800 2010 Journal Entry Illustration 10-12 SO 3 Compute periodic depreciation using different methods.

21. Chapter 10-21 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

22. Chapter 10-22 DepreciationDepreciation Illustration: (Declining-Balance Method) 201013,00040%$ 5,200 $ 7,800 20127,800403,1208,3204,680 20134,680401,87210,1922,808 20142,808401,12311,3151,685 20151,68540685*12,0001,000 * Computation of $674 ($1,685 x 40%) is adjusted to $685. Depreciation expense 5,200 Accumulated depreciation5,200 2010 Journal Entry Illustration 10-14

23. Chapter 10-23 SO 3 Compute periodic depreciation using different methods. Comparison of Depreciation Methods DepreciationDepreciation Illustration 10-15 Illustration 10-16

24. Chapter 10-24 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.

25. Chapter 10-25 Illustration: Barb’s Florists purchased a small delivery truck on October 1, 2010. 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

26. Chapter 10-26 Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods. Illustration: (Straight-line Method)

27. Chapter 10-27 Illustration: (Units-of-Activity Method) 201015,000$ 0.12$ 1,800 $ 11,200 201130,0000.123,6005,4007,600 201220,0000.122,4007,8005,200 201325,0000.123,00010,8002,200 201410,0000.121,20012,0001,000 Depreciation expense 1,800 Accumulated depreciation 1,800 2010 Journal Entry Illustration 10-12 Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods.

28. Chapter 10-28 Illustration: (Declining-Balance Method) Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods.

29. Chapter 10-29 Companies dispose of plant assets in three ways — Retirement, Sale, or Exchange (appendix). Plant Asset Disposals SO 6 Explain how to account for the disposal of a plant asset. Illustration 10-18 Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

30. Chapter 10-30 Illustration: Illustration: Assume that Hobart Enterprises retires its 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 - Retirement SO 6 Explain how to account for the disposal of a plant asset. Accumulated depreciation32,000 Printing equipment32,000 Question: What happens if a fully depreciated plant asset is still useful to the company?

31. Chapter 10-31 Illustration: Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulated depreciation of $14,000. The journal entry is? Plant Asset Disposals - Retirement SO 6 Explain how to account for the disposal of a plant asset. Accumulated depreciation14,000 Loss on disposal4,000 Companies report a loss on disposal in the “Other expenses and losses” section of the income statement. Delivery equipment18,000

32. Chapter 10-32 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 Disposals SO 6 Explain how to account for the disposal of a plant asset.

33. Chapter 10-33 Illustration: Assume that on July 1, 2010, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As of January 1, 2010, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2010 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. Plant Asset Disposals - Sale Depreciation expense8,000 Accumulated depreciation 8,000

34. Chapter 10-34 Illustration: Wright records the sale as follows. SO 6 Explain how to account for the disposal of a plant asset. Plant Asset Disposals - Sale Cash16,000 Accumulated depreciation 49,000 Illustration 10-19 Computation of gain on disposal Office equipment60,000 Gain on disposal 5,000 July 1

35. Chapter 10-35 “Copyright © 2009 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.” CopyrightCopyright