2. Financial Accounting, IFRS Edition
Chapter 9
Plant Assets,
Natural Resources, and
Intangible Assets
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso

3. Revaluation of Plant Assets
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.
SO 4 Describe the procedure for revising periodic depreciation.

4. Revaluation of Plant Assets
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
After this entry, Pernice’s plant assets have a carrying amount of $800,000 ($1,000,000 - $200,000).
SO 4 Describe the procedure for revising periodic depreciation.

5. Revaluation of Plant Assets
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 surplus 50,000
Revaluation surplus is an example of an item reported as other comprehensive income, as discussed in Chapter 5.
SO 4 Describe the procedure for revising periodic depreciation.

6. Revaluation of Plant Assets
Pernice now reports the following information in its statement of financial position at the end of year 1.
Illustration 9-18
$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).
SO 4 Describe the procedure for revising periodic depreciation.

7. Expenditures During Useful Life
Ordinary Repairs - expenditures to maintain the operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
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.
SO 5 Distinguish between revenue and capital expenditures, and explain the entries for each.

8. Plant Asset Disposals
Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).
Illustration 9-19
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
SO 6 Explain how to account for the disposal of a plant asset.

9. Plant Asset Disposals - Retirement
Retirement of Plant Assets
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:
Accumulated depreciation 32,000
Printing equipment 32,000
Question: What happens if a fully depreciated plant asset is still useful to the company?
SO 6 Explain how to account for the disposal of a plant asset.

10. Plant Asset Disposals - Retirement
Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulated
depreciation of $14,000. The journal entry is:
Accumulated depreciation 14,000
Loss on disposal 4,000
Delivery equipment 18,000
Companies report a loss on disposal in the “Other income and expense” section of the income statement.
SO 6 Explain how to account for the disposal of a plant asset.

11. Plant Asset 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.
SO 6 Explain how to account for the disposal of a plant asset.

12. Plant Asset Disposals - Sale
Gain on Disposal
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.
Depreciation expense 8,000
Accumulated depreciation 8,000
SO 6 Explain how to account for the disposal of a plant asset.

13. Plant Asset Disposals - Sale
Illustration 9-20
Computation of gain on
disposal
Illustration: Wright records the sale as follows.
July 1
Cash 16,000
Accumulated depreciation 49,000
Office equipment 60,000
Gain on disposal 5,000
SO 6 Explain how to account for the disposal of a plant asset.

14. Plant Asset Disposals - Sale
Loss on Disposal
Illustration 9-21
Computation of loss on disposal
Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000.
July 1
Cash 9,000
Accumulated depreciation 49,000
Office equipment 60,000
Loss on disposal 5,000
SO 6 Explain how to account for the disposal of a plant asset.

15. Section 2 – Natural Resources
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.
SO 7 Compute periodic depletion of extractable natural resources.

16. Section 2 – Natural Resources
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.
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.
SO 7 Compute periodic depletion of extractable natural resources.

17. Section 2 – Natural Resources
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:
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 x 800,000 = $400,000 depletion expense
Journal entry:
Depletion expense 400,000
Accumulated depletion 400,000
SO 7 Compute periodic depletion of extractable natural resources.

18. Financial Statement Presentation
Illustration 9-23
Statement 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.

19. Section 3 – Intangible Assets
Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance.
Intangible assets are categorized as having either a limited life or an indefinite life.
Common types of intangibles:
Patents
Copyrights
Franchises or licenses
Trademarks and trade names
Goodwill
IFRS permits revaluation of intangible assets to fair value, except for goodwill.
SO 8 Explain the basic issues related to accounting for intangible assets.

20. Types of Intangible Assets
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.
SO 8 Explain the basic issues related to accounting for intangible assets.

21. Accounting for Intangible Assets
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.
Amortization expense 7,500
Patent 7,500
SO 8 Explain the basic issues related to accounting for intangible assets.

22. Accounting for Intangible Assets
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.
SO 8 Explain the basic issues related to accounting for intangible assets.

23. Accounting for Intangible Assets
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.
SO 8 Explain the basic issues related to accounting for intangible assets.

24. Accounting for Intangible Assets
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.
SO 8 Explain the basic issues related to accounting for intangible assets.

25. Accounting for Intangible Assets
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 over the fair value of the identifiable net assets acquired.
Internally created goodwill should not be capitalized.
SO 8 Explain the basic issues related to accounting for intangible assets.

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