Chapter 9 Accounting, Plant Assets, Natural rescourses, Intangible assets

Plant Assets

Property, Plant and Equipment, Fixed Tangible assets

Historical Cost Principle

Requires that companies record plant assets at cost (costs to make the asset work)

Revenue Expenditures

Expenditures to MAINTAIN operation and productive life (repairs, maintenance, etc.)

Capital Expenditures

Costs to INCREASE the operating efficiency or useful like of a plant asset 

Depreciation

Process of allocating the cost of a plant asset over its life. Land IMPROVEMENTS, buildings, and equipment.

Useful Life

Estimate of the expected life based on need for repair, service life, and vulnerability

Salvage Value

Estimate of the assets value at the end of its useful life

Depreciation Methods

Management selects what method to measure an assets depreciation. Straight-Line, Units-of-activity, Declining-Balance

Straight-Line Method

Equal depreciation expense every year.
Best for assets with consistent use over time (buildings, furniture)
(Cost - Salvage Value) / Useful Life

Units-of-Production Method

Depreciation based on usage rather than time. 
Best for assets with fluctuating usage levels (factory machine, vehicles)

[(Cost - Salvage Value) / Total Estimated Production] x Actual Production

Declining Balance (Double-Declining Balance)

Higher Depreciation in early years, lower later.

Best for assets that lose value faster initially (technology, vehicles)

(Book Value at Beginning of Year) x (2/Useful Life)

Tax Payers must use…

…Straight-Line Method or MACRS

Disposing of plant assets

Sale, Retirement, or exchange

When selling a plant asset, if the proceeds EXCEED the book value…

…a gain on disposal occurs, if not then a loss

Natural Recourses

Recourses that are replaceable only by nature

Depletion

The allocation of the cost to expense over a natural recourse’s life

Depletion cost per unit EQ

(Total Cost - Salvage Value) / Total estimated units available

Intangible Assets

Rights, privileges and competitive advantages that result from ownership of long-lived assets that dint possess physical substance (patents, copyright, goodwill)

Amortization

Process of gradually allocating the cost of an INTANGIBLE ASSET over its useful life, ensuring that expenses are matched with the revenue they generate

Patents

Exclusive rights to control an invention for a period of 20 years

Journal entry a patent by dividing the cost of the patent over its 20-year life or useful life, whichever is shorter

Copyrights

Exclusive right to reproduce and sell an artistic or published work
Amortized expense over useful life

Trademarks and Trade names

Words, phrases, or symbols that identify a particular enterprise or product

No amortizatio

Franchises

Contractual agreement between a franchisor and franchisee
Franchise with a limited life = amortized to expense over useful life

Goodwill

Includes exceptional management, desirable location, good customer relations, high-quality products, etc

Only recorded when entire business is purchased

Recorded as the cost / value of net assets

Not amortized

Research and Development Costs (R&D)

Costs incurred by a company that often lead to new patents or new products. These costs must be expensed as incurred