Chapter 10 Powerpoints ACC 120

Chapter 10: Plant Assets, Natural Resources, and Intangible Assets

Overview

• Focuses on accounting principles related to:

  • Plant assets

  • Natural resources

  • Intangible assets

Learning Objectives

• LO 1: Explain the accounting for plant asset expenditures.

• LO 2: Apply depreciation methods to plant assets.

• LO 3: Explain how to account for the disposal of plant assets.

• LO 4: Describe how to account for natural resources and intangible assets.

• LO 5: Discuss how plant assets, natural resources, and intangible assets are reported and analyzed.

Section 1: Plant Assets

Definition and Importance

• Plant assets have:

  • Physical substance (size and shape)

  • Utilized in operations

  • Not for sale to customers

  • Expected to provide utility for several years.

• Known as:

  • Property, plant, and equipment

  • Fixed assets

Expenditures for Plant Assets

• Historical Cost Principle: Record at cost which includes all necessary expenditures to acquire the asset and prepare it for use.

• Costs associated with land:

  • Purchase price

  • Closing costs

  • Commissions

  • Property taxes

Examples of Costs for Acquiring Land

• Illustration: Hayes Company’s acquisition details:

  • Cash price: $100,000

  • Net cost to raze warehouse: $6,000

  • Attorney’s fee: $1,000

  • Real estate broker’s commission: $8,000

  • Total cost of land: $115,000

Land Improvements

• Include expenditures such as:

  • Driveways, parking lots, fencing, landscaping

  • Subject to depreciation over their useful lives.

Buildings and Equipment

• Buildings: Costs include purchase price, closing costs, remodeling, and construction-related expenses.

• Equipment: Costs to include cash purchase price, taxes, freight, insurance, installation, and testing.

Section 2: Depreciation of Plant Assets

Understanding Depreciation

• Process of allocating the cost of a plant asset over its useful life; applies to land improvements, buildings, and equipment, not land.

• Expense Recognition: Impacts income statement as depreciation expense, with accumulated depreciation reducing asset value on the balance sheet.

Methods of Depreciation

• Straight-Line Method: Equal expense each year.

  • Formula: Depreciable Cost / Useful Life

• Units-of-Activity Method: Expense based on asset activity.

  • Formula: Depreciable Cost per Unit x Units of Activity.

• Declining-Balance Method: Accelerated method applying a percentage rate to the book value.

Changes in Depreciation Estimates

• Adjustments accounted for in the period changed and future periods (not retroactive).

Section 3: Disposal of Plant Assets

Methods of Disposal

1. Retirement: Asset scrapped.

2. Sale: Asset sold.

3. Exchange: Asset traded.

Accounting for Disposals

• Record up to the date of disposal, eliminate asset account by:

  1. Debiting accumulated depreciation

  2. Crediting asset account

• Compare proceeds from sale with book value to determine gain or loss.

Section 4: Natural Resources and Intangible Assets

Characteristics of Natural Resources

• Physically extracted, replaceable only by natural processes.

• Accounting: Costs allocated to expense using units-of-activity method, known as depletion.

Intangible Assets

• Non-physical assets providing future benefits (e.g., patents, copyrights, goodwill).

• Limited-life intangibles amortized, indefinite-life intangibles not amortized.

• Goodwill: Recorded when a business is purchased, not amortized.

Section 5: Presentation and Analysis

Financial Statement Presentation

• Plant assets and natural resources listed under property, plant, and equipment.

• Intangible assets presented separately.

Asset Turnover

• Measure efficiency of asset use (e.g., Procter and Gamble's sales analysis).

Key Points on IFRS vs. GAAP

• Similarities include treatment of plant assets, depreciation methods, disposals, and definitions.

• Differences noted in residual value definitions, revaluation processes, intangible asset treatment, and component depreciation requirements.

Future Considerations

• Ongoing projects may allow expanded recognition of internally generated intangible assets.