Financial Accounting Chapter 10: Property, Plant, and Equipment and Intangible Assets

Property, Plant, and Equipment

Land, land improvements, buildings, equipment, machinery, furniture, autos, and trucks.

Natural Resources

Oil and gas deposits, timber tracts, and mineral deposits.

Intangible Assets

Patents, copyrights, trademark, franchises, and goodwill.

Property, plant and equipment and intangible assets can be acquired by:

1. Purchase

2. Self-construction

3. Donation

4. Business combination

5. Exchange

6. Lease

Initial Cost of the Asset

Purchase Price + All expenditures necessary to bring the asset to its desired condition and location for use

Initial Cost of Equipment

Purchase price, any sales tax, transportation costs, expenditures for installation and testing, legal fees to establish the title, and any other costs to bring the asset to its condition and location for use.

Cost of Land

Purchase price, attorney fees, real estate agent commission, cost related to title search, any back taxes, linens, mortgages, or other obligations(current portion of property taxes not included). expenditures such as clearing, filling, draining, and even removing old buildings. (proceeds from the sale of salvaged materials after purchase reduce the cost of land).

Land Improvements

Parking lots, driveway, private roads, fences, and sprinkler system. (anything attached to the land)

Cost of Buildings

Purchase price, realtor commissions and legal fees, reconditioning costs (refurbishing, remodeling, or otherwise modifying to suit the needs of the new owner)

Cost of Natural Resources

Including timber tracts, mineral deposits, and oil and gas deposits. Benefits are derived from their physical consumption. 

Intangible Assets

Represents exclusive rights provided by the company. Lack physical substance. Difficult to anticipate the timing and existence of future benefits attributable to many intangible assets.

With intangible assets companies can either:

Purchase from other entities. Develop internally.

Amortized

Finite useful life. (has boundaries)

Not Amortized 

Indefinite useful life. (unknown boundaries)

Goodwill

Represents the unique value of a company as a whole over and above its identifiable tangible and intangible assets.

Goodwill can emerge from a company’s:

Clientele and reputation. Trained employees and management team. Favorable business location.

Cost allocations:

Property, plant, and equipment → depreciation

Intangibles → amortize

natural Resources → depletion

Capitalized Cost of Goodwill:  

Fair value of the consideration given in exchange for the company (acquisition price) - Fair value of the identifiable net assets acquired 

Net assets

assets - liabilities

Lump-Sum Purchases

Acquisition of a group of assets for a single sum.

Valuation of these assets differs when:

1. Each asset is indistinguishable

2. Assets have different characteristics and different useful life. (allocate the lump-sum acquisition price among the separate items)