2024-2 Principles of ACCT CH 10

Principles of Accounting: Plant Assets, Natural Resources, and Intangible Assets

Plant Asset Expenditures

  • Definition: Plant assets are resources that have:

    • Physical substance (definite size and shape)

    • Utilized in company operations

    • Not meant for sale to customers

    • Expected to last several years

  • Other Names: Referred to as property, plant, and equipment (PP&E), plant and equipment, and fixed assets.

Determining the Cost of Plant Assets

  • Historical Cost Principle: Companies must record plant assets at their cost.

  • Cost Composition: Includes all expenditures necessary to acquire and prepare the asset for intended use.

Land Costs

  • All necessary costs incurred to prepare land increase the Land account (debit).

  • Typical costs include:

    1. Cash purchase price

    2. Closing costs (title and attorney’s fees)

    3. Real estate broker’s commissions

    4. Accrued property taxes and liens assumed by the buyer.

  • Demolition Costs: If land contains a building that must be removed, costs for demolition (less proceeds from salvage) are debited to Land account.

Example: Acquiring Land

  • Case Study: Lew Ltd. acquires real estate for HK$2,000,000. Costs include:

    • Demolition (net cost: HK$60,000)

    • Attorney's fee (HK$10,000)

    • Broker’s commission (HK$80,000)

  • Cost Calculation: Total land cost to be reported includes all above expenses minus proceeds from salvage.

Land Improvements

  • Definition: Structural additions to land with limited lives (e.g., driveways, fences).

  • Cost Includes: All expenditures needed to make improvements ready for use.

Accounting for Buildings

  • Expenditures: Companies debit the Building account for all costs associated with purchasing or constructing a building, including:

    • Purchase price and closing costs (attorney fees, title insurance, etc.)

    • Remodeling and repairs (roofing, plumbing, etc.)

  • Construction Costs: Includes contract price and costs for architecture, permits, excavation, etc.

  • Interest Costs: Interest incurred during building construction can be included in the costs as long as it is during the construction period.

Equipment Costs

  • Definition: Equipment encompasses various operational assets (e.g., furniture, machinery).

  • Cost Composition: Costs include cash price, sales tax, freight, installation, and testing expenditures.

  • Exclusions: Recurring expenses that do not provide future benefits (e.g., vehicle licenses, insurance) are not included in equipment costs.

Example: Delivery Truck

  • Cost Calculation: Huang Group purchases a truck for HK$420,000. Costs include:

    • Sales tax (HK$13,200)

    • Painting and lettering (HK$5,000)

    • License (HK$800, excluded)

    • Accident insurance (HK$16,000, excluded).

Expenditures During Useful Life

  • Ordinary Repairs: Cost to maintain the asset, charged immediately as expenses (revenue expenditures).

  • Additions and Improvements: Costs that enhance value or extend life, debited to the affected asset (capital expenditures).

Example: Oil Change and Gear Installation

  • Transaction Entries:

    • €45 for oil change (expense)

    • €580 for gear installation (capital expenditure).

Depreciation

  • Definition: This is the process of allocating an asset’s cost over its useful life.

  • Importance: Matches expenses with revenues for accurate financial reporting.

  • Non-depreciable Asset: Land is not subject to depreciation, while land improvements, buildings, and equipment are.

Factors in Computing Depreciation

  • Depreciation Methods:

    1. Straight-Line Method: Equal depreciation expense over the asset's life.

    2. Units-of-Activity Method: Based on actual usage or production.

    3. Declining-Balance Method: Higher depreciation in early years, calculated on the book value.

  • Depreciable Cost Calculation: Total cost minus residual value.

Example Calculation: Delivery Truck

  • Annual depreciation using different methods: Straight-Line, Units-of-Activity, Declining Balance.

Intangible Assets

  • Definition: Rights and competitive advantages from ownership of assets that do not have physical form.

  • Sources: Can arise from customer relations, patents, and trademarks.

Cost of Intangible Assets

  • Recorded at cost that includes all necessary expenditures to acquire.

  • Limited vs. Indefinite Life: Limited life assets are amortized, while indefinite life assets (like goodwill) are not.

Example: Patent Costs

  • Cost includes purchase price and legal fees related to successful patent defense.

Goodwill

  • Represents non-specific asset value (management quality, customer relations).

  • Recorded only with the purchase of a business, as excess of purchase price over assets' fair value.

Asset Disposal

  • Methods: Retirement, sale, or exchange.

  • Book Value Determination: Calculated as asset cost minus accumulated depreciation as of disposal date.

  • Journal Entry for Retirement: Entries must reflect the asset's condition (e.g., accumulated depreciation matching asset cost).

Analysis and Comparison of Asset Turnover

  • Measures how effectively a company utilizes its assets to generate sales:

    • Asset Turnover Calculation Example: Given net sales and asset values, compare productivity of assets over time.