10 Plant Assets, Natural Resources,

and Intangible Assets

Learning Objectives
1 Explain the accounting for plant asset expenditures.

2 Apply depreciation methods to plant assets.

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

Describe how to account for natural resources and

4 intangible assets.
Discuss how plant assets, natural resources, and intangible
5 assets are reported and analyzed.
10-1
LEARNING Explain the accounting for plant asset
1
OBJECTIVE expenditures.

Plant assets are resources that have

 physical substance (a definite size and shape),

 are used in the operations of a business,

 are not intended for sale to customers,

 are expected to be of use to the company for a number of

years.

Referred to as property, plant, and equipment; plant and equipment;

and fixed assets.

10-2 LO 1
 Plant Assets

Plant assets are critical to a company’s success

Illustration 10-1

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 Determining the Cost of Plant Assets

Historical Cost Principle requires that companies record

plant assets at cost.

Cost consists of all expenditures necessary to acquire an

asset and make it ready for its intended use.

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 Determining the Cost of Plant Assets

LAND
All necessary costs incurred in making the land ready for its
intended use increase (debit) the Land account.

Costs typically include:

1. cash purchase price,

2. closing costs such as title and attorney’s fees,

3. real estate brokers’ commissions, and

4. accrued property taxes and other liens on the land

assumed by the purchaser.

10-5 LO 1
 Determining the Cost of Plant Assets

Illustration: Hayes Company acquires real estate at a cash cost

of $100,000. The property contains an old warehouse that is
razed at a net cost of $6,000 ($7,500 in costs less $1,500
proceeds from salvaged materials). Additional expenditures are
the attorney’s fee, $1,000, and the real estate broker’s
commission, $8,000.

Required: Determine the amount to be reported as the cost of

the land.

10-6 LO 1
 Determining the Cost of Plant Assets

Required: Determine amount to be reported as the cost of the

land.
Land
Cash price of property ($100,000) $100,000
Net removal cost of warehouse ($7,500-$1,500) 6,000
Attorney's fees ($1,000) 1,000
Real estate broker’s commission ($8,000) 8,000
Cost of Land $115,000
Illustration 10-2
Computation of cost of land

10-7 LO 1
 Determining the Cost of Plant Assets

LAND IMPROVEMENTS
Structural additions made to land. Cost includes all
expenditures necessary to make the improvements ready for
their intended use.

 Examples: driveways, parking lots, fences, landscaping,

and underground sprinklers.

 Limited useful lives.

 Expense (depreciate) the cost of land improvements over

their useful lives.

10-8 LO 1
 Determining the Cost of Plant Assets

BUILDINGS
Includes all costs related directly to purchase or construction.

Purchase costs:
 Purchase price, closing costs (attorney’s fees, title
insurance, etc.) and real estate broker’s commission.
 Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
 Contract price plus payments for architects’ fees, building
permits, and excavation costs.
10-9 LO 1
 Determining the Cost of Plant Assets

EQUIPMENT
Include all costs incurred in acquiring the equipment and
preparing it for use.

Costs typically include:

 Cash purchase price.
 Sales taxes.
 Freight charges.
 Insurance during transit paid by the purchaser.
 Expenditures required in assembling, installing, and testing
the unit.
10-10 LO 1
 Determining the Cost of Plant Assets

Illustration: Lenard Company purchases a delivery truck at a

cash price of $22,000. Related expenditures are sales taxes
$1,320, painting and lettering $500, motor vehicle license $80,
and a three-year accident insurance policy $1,600. Compute the
cost of the delivery truck.
Truck
Cash price $22,000
Sales taxes 1,320
Painting and lettering 500

Illustration 10-4
Computation of cost of
delivery truck Cost of Delivery Truck $23,820

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 Determining the Cost of Plant Assets

Illustration: Lenard Company purchases a delivery truck at a

cash price of $22,000. Related expenditures are sales taxes
$1,320, painting and lettering $500, motor vehicle license $80,
and a three-year accident insurance policy $1,600. Prepare the
journal entry to record these costs.

Equipment 23,820
License Expense 80
Prepaid Insurance 1,600
Cash 25,500

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 Expenditures During Useful Life

Ordinary Repairs are expenditures to maintain the operating

efficiency and productive life of the unit.
 Debit to Maintenance and Repair Expense.
 Referred to as revenue expenditures.

Additions and Improvements are 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.

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 ANATOMY OF A FRAUD

Bernie Ebers was the founder and CEO of the phone company WorldCom. The
company engaged in a series of increasingly large, debt-financed acquisitions of other
companies. These acquisitions made the company grow quickly, which made the stock price
increase dramatically. However, because the acquired companies all had different accounting
systems, WorldCom’s financial records were a mess. When WorldCom’s performance started
to flatten out, Bernie coerced WorldCom’s accountants to engage in a number of fraudulent
activities to make net income look better than it really was and thus prop up the stock price.
One of these frauds involved treating $7 billion of line costs as capital expenditures. The line
costs, which were rental fees paid to other phone companies to use their phone lines, had
always been properly expensed in previous years. Capitalization delayed expense recognition
to future periods and thus boosted current-period profits.

Total take: $7 billion

THE MISSING CONTROLS
Documentation procedures. The company’s accounting system was a disorganized collection
of non-integrated systems, which resulted from a series of corporate acquisitions. Top
management took advantage of this disorganization to conceal its fraudulent activities.
Independent internal verification. A fraud of this size should have been detected by a routine
comparison of the actual physical assets with the list of physical assets shown in the accounting
records.

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10-15 LO 1
 DO IT! 1 Cost of Plant Assets

Assume that Drummond Heating and Cooling Co. purchases a

delivery truck for $15,000 cash, plus sales taxes of $900 and
delivery costs of $500. The buyer also pays $200 for painting
and lettering, $600 for an annual insurance policy, and $80 for
a motor vehicle license. Explain how each of these costs would
be accounted for.
Solution

 The first four payments ($15,000, $900, $500, and $200)

are include in the cost of the truck ($16,600).
 The payments for insurance and the license are operating
costs and therefore are expensed.

10-16 LO 1
 LEARNING
OBJECTIVE
2 Apply depreciation methods to plant assets.

Depreciation
Process of allocating to expense the cost of a plant asset over
its useful (service) life in a rational and systematic manner.

 Process of cost allocation, not asset valuation.

 Applies to land improvements, buildings, and equipment,

not land.

 Depreciable because the revenue-producing ability of

asset will decline over the asset’s useful life.

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 Factors in Computing Depreciation

Illustration 10-6
Three factors in computing
Helpful Hint
depreciation
Depreciation expense is reported on
the income statement. Accumulated
depreciation is reported on the balance
Alternative Terminology
sheet as a deduction from plant assets.
Another term sometimes used for
salvage value is residual value.

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 Depreciation Methods

Management selects the method it believes best measures

an asset’s contribution to revenue over its useful life.

Examples include:
1. Straight-line method
2. Units-of-activity method
3. Declining-balance method

Illustration 10-8
Use of depreciation methods
in major U.S. companies

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 Depreciation Methods

Illustration: Barb’s Florists purchased a small delivery truck on

January 1, 2017.
Illustration 10-7
Delivery truck data
Cost $13,000
Expected salvage value $1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000

Required: Compute depreciation using the following.

(a) Straight-Line (b) Units-of-Activity (c) Declining Balance

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 Depreciation Methods

STRAIGHT-LINE METHOD
 Expense is same amount for each year.
 Depreciable cost = Cost less salvage value.

Illustration 10-9
Formula for straight-line
method

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 Depreciation Methods

Illustration: (Straight-Line)
Illustration 10-10
Annual
Depreciable Depreciation Accumulated Book
Year Cost x Rate = Expense Depreciation Value
2017 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600 *
2018 12,000 20 2,400 4,800 8,200
2019 12,000 20 2,400 7,200 5,800
2020 12,000 20 2,400 9,600 3,400
2021 12,000 20 2,400 12,000 1,000

2017 Depreciation expense 2,400

Journal Accumulated depreciation 2,400
Entry

10-22 * Book value = Cost - Accumulated depreciation = ($13,000 - $2,400). LO 2

 Depreciation Methods Partial
Year
Illustration: (Straight-Line)
Assume the delivery truck was purchased on April 1, 2017.
Annual Current
Depreciable Depreciation Partial Year Accumulated
Year Cost Rate Expense Year Expense Depreciation
2017 $ 12,000 x 20% = $ 2,400 x 9/12 = $ 1,800 $ 1,800
2018 12,000 x 20% = 2,400 2,400 4,200
2019 12,000 x 20% = 2,400 2,400 6,600
2020 12,000 x 20% = 2,400 2,400 9,000
2021 12,000 x 20% = 2,400 2,400 11,400
2022 12,000 x 20% = 2,400 x 3/12 = 600 12,000
$ 12,000
Journal entry:
2017 Depreciation expense 1,800
Accumulated depreciation 1,800
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 DO IT! 2 Straight-Line Depreciation

On January 1, 2017, Iron Mountain Ski Corporation purchased a

new snow-grooming machine for $50,000. The machine is
estimated to have a 10-year life with a $2,000 salvage value.
What journal entry would Iron Mountain Ski Corporation make at
December 31, 2017, if it uses the straight-line method of
depreciation?

Solution

Depreciation expense 4,800

Accumulated depreciation 4,800

($50,000 - $2,000) ÷ 10 = $4,800

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 Depreciation Methods

UNITS-OF-ACTIVITY METHOD
 Companies estimate total units of activity to calculate
depreciation cost per unit.

 Expense varies based on units of activity.

 Depreciable cost is cost less salvage value.

Alternative Terminology
Another term often used
is the units-of-production
method.

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 Depreciation Methods

UNITS-OF-ACTIVITY METHOD

Illustration 10-11
Formula for units-of-activity method

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 Depreciation Methods

Illustration: (Units-of-Activity)
Illustration 10-12
Cost Annual
Miles per Depreciation Accumulated Book
Year Driven x Unit = Expense Depreciation Value

2017 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200

2018 30,000 0.12 3,600 5,400 7,600
2019 20,000 0.12 2,400 7,800 5,200
2020 25,000 0.12 3,000 10,800 2,200
2021 10,000 0.12 1,200 12,000 1,000

2017 Depreciation expense 1,800

Journal Accumulated depreciation 1,800
Entry
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 Depreciation Methods

DECLINING-BALANCE METHOD
 Accelerated method.

 Decreasing annual depreciation expense over the asset’s

useful life.

 Twice the straight-line rate with Double-Declining-Balance.

 Rate applied to book value.

Illustration 10-13

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 Depreciation Methods
Illustration: (Declining-Balance)
Illustration 10-14
Declining Annual
Beginning Balance Depreciation Accumulated Book
Year Book value x Rate = Expense Depreciation Value

2017 $13,000 40% $ 5,200 $ 5,200 $ 7,800

2018 7,800 40 3,120 8,320 4,680
2019 4,680 40 1,872 10,192 2,808
2020 2,808 40 1,123 11,315 1,685
2021 1,685 40 685* 12,000 1,000

2017 Depreciation expense 5,200

Journal Accumulated depreciation 5,200
Entry

10-29 * Computation of $674 ($1,685 x 40%) is adjusted to $685. LO 2

 Depreciation Methods Partial
Year
Illustration: (Declining-Balance)
Declining Annual Current
Beginning Balance Depreciation Partial Year Accumulated
Year Book Value Rate Expense Year Expense Depreciation
2017 $ 13,000 x 40% = $ 5,200 x 9/12 = $ 3,900 $ 3,900
2018 9,100 x 40% = 3,640 3,640 7,540
2019 5,460 x 40% = 2,184 2,184 9,724
2020 3,276 x 40% = 1,310 1,310 11,034
2021 1,966 x 40% = 786 786 11,820
2022 1,180 x 40% = 472 Plug 180 12,000
$ 12,000
Journal entry:

2017 Depreciation expense 3,900

Accumulated depreciation 3,900

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 Depreciation Methods
Illustration 10-15

COMPARISON
OF METHODS

Illustration 10-16

Helpful Hint
Under any method,
depreciation stops
when the asset’s book
value equals expected
salvage value.

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 Depreciation and Income Taxes

IRS does not require taxpayer to use the same depreciation

method on the tax return that is used in preparing financial
statements.

Taxpayers must use the straight-line method or a special

accelerated-depreciation method called the Modified Accelerated
Cost Recovery System (MACRS).

MACRS is NOT acceptable under GAAP.

10-32 LO 2
 Revising Periodic Depreciation

 Accounted for in the period of change and future

periods (Change in Estimate).

 No change in depreciation reported for prior years.

 Not considered an error.

Helpful Hint
Use a step-by-step
approach: (1) determine
new depreciable cost;
(2) divide by remaining
useful life.

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 Revising Periodic Depreciation

Illustration: Arcadia HS, purchased equipment for $510,000

which was estimated to have a useful life of 10 years with a
salvage value of $10,000 at the end of that time. Depreciation
has been recorded for 7 years on a straight-line basis. In 2015
(year 8), it is determined that the total estimated life should be
15 years with a salvage value of $5,000 at the end of that time.

Questions:
 What is the journal entry to correct the
No Entry
prior years’ depreciation? Required
 Calculate the depreciation expense for
2015.

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 Revising Depreciation After 7 years

Equipment cost $510,000 First, establish NBV

Salvage value - 10,000 at date of change in
Depreciable base 500,000 estimate.
Useful life (original) ÷ 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2014)

Plant Assets:
Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

10-35 LO 2
 Revising Depreciation After 7 years

Net book value $160,000 Depreciation

Salvage value (new) - 5,000 Expense calculation
Depreciable base 155,000 for 2015.
Useful life remaining 8 years
Annual depreciation $ 19,375

Journal entry for 2015 and future years.

Depreciation Expense 19,375

Accumulated Depreciation 19,375

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 LEARNING Explain how to account for the disposal of
3
OBJECTIVE plant assets.

Companies dispose of plant assets in three ways —Retirement,

Sale, or Exchange (appendix). Illustration 10-18
Methods of plant
asset disposal

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and

(2) crediting the asset account.

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 Retirement of Plant Assets

 No cash is received.

 Decrease (credit) the asset account for the original

cost in the asset.

 Decrease (debit) Accumulated Depreciation for the full

amount of depreciation taken over the life of the asset.

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 Retirement of Plant Assets

Illustration: Hobart Enterprises retires its computer printers,

which cost $32,000. The accumulated depreciation on these
printers is $32,000. Prepare the entry to record this retirement.

Accumulated Depreciation 32,000

Equipment 32,000

Question: What happens if a fully depreciated plant asset is

still useful to the company?
Company continues to use the asset with no additional
depreciation being recorded as the asset is fully depreciated.
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 Retirement of Plant Assets

Illustration: 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 of Plant Assets 4,000
Equipment 18,000

Companies report a loss on disposal in the “Other expenses

and losses” section of the income statement.

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 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.

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 Sale of Plant Assets

GAIN ON SALE
Illustration: On July 1, 2017, Wright Company sells office
furniture for $16,000 cash. The office furniture originally cost
$60,000. As of January 1, 2017, it had accumulated
depreciation of $41,000. Depreciation for the first six months of
2017 is $8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.

July 1 Depreciation Expense 8,000

Accumulated Depreciation 8,000

10-42 LO 3
 GAIN ON SALE Illustration 10-19
Computation of gain
on disposal

Illustration: Wright records the sale as follows.

July 1 Cash 16,000

Accumulated Depreciation 49,000
Equipment 60,000
Gain on Disposal of Plant Assets 5,000

10-43 LO 3
 LOSS ON SALE

Illustration: Assume that instead of selling the office furniture for

$16,000, Wright sells it for $9,000.
Illustration 10-20
Computation of
loss on disposal

July 1 Cash 9,000

Accumulated Depreciation 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000
10-44 LO 3
 DO IT! 3 Plant Asset Disposal

Overland Trucking has an old truck that cost $30,000, and it has
accumulated depreciation of $16,000 on this truck. Overland has
decided to sell the truck. (a) What entry would Overland Trucking
make to record the sale of the truck for $17,000 cash?

Solution

Cash 17,000
Accumulated Depreciation—Equipment 16,000
Equipment 30,000
Gain on Disposal of Plant Assets 3,000
[$17,000 - ($30,000 - $16,000)]

10-45 LO 3
 DO IT! 3 Plant Asset Disposal

Overland Trucking has an old truck that cost $30,000, and it has
accumulated depreciation of $16,000 on this truck. Overland has
decided to sell the truck. (b) What entry would Overland Trucking
make to record the sale of the truck for $10,000 cash?

Solution

Cash 10,000
Accumulated Depreciation—Equipment 16,000
Loss on Disposal of Plant Assets 4,000
Equipment 30,000
[$10,000 - ($30,000 - $16,000)]

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 LEARNING Describe how to account for natural
4
OBJECTIVE resources and intangible assets.

Natural resources consist of standing timber and underground

deposits of oil, gas, and minerals.

Distinguishing characteristics:
 Physically extracted in operations.

 Replaceable only by an act of nature.

Cost is the price needed to acquire the resource and prepare it

for its intended use.

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 Depletion

The allocation of the cost to expense in a rational and

systematic manner over the resource’s useful life.
 Companies generally use units-of-activity method.
 Depletion generally is a function of the units extracted.

Illustration 10-21
Formula to compute depletion expense

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 Depletion

Illustration: Lane Coal Company invests $5 million in a mine

estimated to have 1 million tons of coal and no salvage value.

Illustration 10-21
Formula to compute depletion expense

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 Depletion

Illustration: Lane Coal Company invests $5 million in a mine

estimated to have 1 million tons of coal and no salvage value. In
the first year, Lane extracts and sells 250,000 tons of coal. Lane
computes the depletion expense as follows:

$5,000,000 ÷ 1,000,000 = $5.00 depletion cost per ton

$5.00 x 250,000 = $1,250,000 annual depletion expense

Journal entry:
Inventory (coal) 1,250,000
Accumulated Depletion 1,250,000

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 Intangible Assets

Intangible assets are rights, privileges, and competitive

advantages that result from ownership of long-lived assets
that do not possess physical substance.

Limited life or indefinite life.

Common types of intangibles:

 Patents  Trademarks and Trade Names

 Copyrights  Franchises
 Goodwill

10-51 LO 4
 Accounting for Intangible Assets

Limited-Life Intangibles:
Helpful Hint
 Amortize to expense. Amortization is to
intangibles what
depreciation is to plant
 Credit asset account. assets and depletion is to
natural resources.

Indefinite-Life Intangibles:
 No foreseeable limit on time the asset is expected to
provide cash flows.
 No amortization.

10-52 LO 4
 Accounting for Intangible Assets

PATENTS
 Exclusive right to manufacture, sell, or otherwise control
an invention for a period of 20 years from the date of the
grant.

 Capitalize costs of purchasing a patent and amortize over

its 20-year life or its useful life, whichever is shorter.

 Expense any R&D costs in developing a patent.

 Legal fees incurred successfully defending a patent are

capitalized to the Patent account.

10-53 LO 4
 Accounting for Intangible Assets

Illustration: National Labs purchases a patent at a cost of

$60,000. National estimates the useful life of the patent to be
eight years. Prepare the journal entry to record the annual
amortization expense.

Cost $60,000
Useful life ÷ 8
Annual expense $ 7,500

Amortization Expense 7,500

Patents 7,500

10-54 LO 4
 Accounting for Intangible Assets

COPYRIGHTS
 Give the owner the exclusive right to reproduce and sell
an artistic or published work.

 Extend for the life of the creator plus 70 years.

 Cost of the copyright is the cost of acquiring and

defending it.

 Amortized to expense over useful life.

10-55 LO 4
 Accounting for Intangible Assets

TRADEMARKS AND TRADE NAMES

 Word, phrase, jingle, or symbol that identifies a
particular enterprise or product.

► Wheaties, Monopoly, Kleenex, Coca-Cola, Big Mac,

and Jeep.

 Legal protection for indefinite number of 20 year

renewal periods.

 Capitalize acquisition costs.

 No amortization.

10-56 LO 4
 Accounting for Intangible Assets

FRANCHISES
 Contractual arrangement between a franchisor and a
franchisee.

► Shell, Subway, and Rent-A-Wreck are franchises.

 Franchise (or license) with a limited life should be

amortized to expense over its useful life.

 If the life is indefinite, the cost is not amortized.

10-57 LO 4
 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 net assets acquired.

 Not amortized.

10-58 LO 4
 Accounting Across the Organization
We Want to Own Glass
Google, which has trademarked the term “Google Glass,” now wants to
trademark the term “Glass.” Why? Because the simple word Glass has
marketing advantages over the term Google Glass. It is easy to remember
and is more universal. Regulators, however, are balking at Google’s
request. They say that the possible trademark is too similar to other existing
or pending software trademarks that contain the word “glass.” Also,
regulators suggest that the term Glass is merely descriptive and therefore
lacks trademark protection. For example, regulators note that a company
that makes salsa could not trademark the term “Spicy Salsa.” BorderStylo
LLC, which developed a Web-browser extension called Write on Glass, has
fi led a notice of opposition to Google’s request. Google is fighting back and
has sent the trademark examiner a 1,928-page application defense.
Source: Jacob Gershman, “Google Wants to Own ‘Glass’,” Wall Street Journal (April
4, 2014), p. B5.

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 Research and Development Costs

Expenditures that may lead to

 patents, All R & D costs
are expensed
 copyrights, when incurred.
 new processes, and

 new products. Helpful Hint

Research and development
(R&D) costs are not intangible
assets. But because they may
lead to patents and copyrights,
we discuss them in this section.

10-60 LO 4
 DO IT! 4 Classification Concepts
Illustration: Identify the term most directly associated with each
statement.
1. The allocation of the cost of a natural
resource to expense in a rational and Depletion
systematic manner.
2. Rights, privileges, and competitive
Intangible
advantages that result from the ownership of
Assets
long-lived assets that do not possess
physical substance.
3. An exclusive right granted by the federal
government to reproduce and sell an artistic Copyrights
or published work.

10-61 LO 4
 DO IT! 4 Classification Concepts
Illustration: Identify the term most directly associated with each
statement.
4. A right to sell certain products or services or
to use certain trademarks or trade names Franchise
within a designated geographic area.
5. Costs incurred by a company that often
lead to patents or new products. These Research and
costs must be expensed as incurred. Development
Costs

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 LEARNING Discuss how plant assets, natural resources, and
OBJECTIVE
5 intangible assets are reported and analyzed.

10-63 Illustration 10-22 LO 5

 Presentation

Illustration 10-22

Illustration 10-23
Owens-Illinois’ presentation of
property, plant, and equipment,
and intangible assets

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 Analysis

Illustration: P&G’s net sales for 2013 were $84,167 million. Its
total ending assets were $139,263 million, and beginning assets
were $132,244 million.
Illustration 10-24
Asset turnover formula and computation

Each dollar invested in assets produced $0.62 in sales. If a

company is using its assets efficiently, each dollar of assets will
create a high amount of sales.
10-65 LO 5
 DO IT! 5 Asset Turnover

Paramour Company reported net income of $180,000, net sales of

$420,000, and had total assets of $460,000 on January 1, 2017,
and total assets on December 31, 2017, of $540,000 billion.
Determine Paramour’s asset turnover for 2017.

Solution

The asset turnover for Paramour Company is computed as follows.

Net Sales ÷ Average Total Assets = Asset Turnover

$420,000 ÷ $460,000 + $540,000 = .84

2

10-66 LO 5
 LEARNING APPENDIX 10A: Explain how to account for the
OBJECTIVE
6 exchange of plant assets.

 Ordinarily, companies record a gain or loss on the

exchange of plant assets.

 Most exchanges have commercial substance.

 Commercial substance if the future cash flows change

as a result of the exchange.

10-67 LO 6
 Loss Treatment

Illustration: Roland Company exchanged used trucks (cost

$64,000 less $22,000 accumulated depreciation) plus cash of
$17,000 for a new semi-truck. The used trucks had a fair market
value of $26,000.
Illustration 10A-
1 & 10A-2
Cost of used trucks $64,000
Less: Accumulated depreciation 22,000
Book value 42,000
Fair market value of used trucks 26,000
Loss on disposal of plant assets $16,000

Fair market value of used trucks $26,000

Cash paid 17,000
Cost of new truck $43,000
10-68 LO 6
 Loss Treatment

Illustration: Roland Co. exchanged old trucks (cost $64,000 less

$22,000 accumulated depreciation) plus cash of $17,000 for a new
semi-truck. The old trucks had a fair market value of $26,000.
Prepare the entry to record the exchange of assets by Roland Co.

Equipment (new) 43,000

Accumulated Depreciation (old) 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old) 64,000
Cash 17,000

10-69 LO 6
 Gain Treatment

Illustration: Mark Express Delivery trades its old delivery

equipment (cost $40,000 less $28,000 accumulated depreciation)
for new delivery equipment. The old equipment had a fair market
value of $19,000. Mark also paid $3,000.

Illustration
Cost of old equipment $40,000 10A-3 & 10A-4
Less: Accumulated depreciation 28,000
Book value 12,000
Fair market value of old equipment 19,000
Gain on disposal of plant assets $ 7,000

Fair market value of old equipment $19,000

Cash paid 3,000
Cost of new equipment $22,000
10-70 LO 6
 Gain Treatment

Illustration: Mark Express Delivery trades its old delivery

equipment (cost $40,000 less $28,000 accumulated depreciation)
for new delivery equipment. The old equipment had a fair market
value of $19,000. Mark also paid $3,000.
Prepare the entry to record the exchange of assets by Mark
Express.

Equipment (new) 22,000

Accumulated Depreciation (old) 28,000
Equipment (old) 40,000
Gain on Disposal of Plant Assets 7,000
Cash 3,000
10-71 LO 6
 A Look at IFRS

LEARNING Compare the accounting for long-lived assets under

OBJECTIVE
7 GAAP and IFRS.

Key Points
Similarities
 The definition for plant assets for both IFRS and GAAP is essentially
the same.
 Both IFRS and GAAP follow the historical cost principle when
accounting for property, plant, and equipment at date of acquisition.
Cost consists of all expenditures necessary to acquire the asset and
make it ready for its intended use.

10-72 LO 7
 A Look at IFRS

Key Points
Similarities
 Under both IFRS and GAAP, interest costs incurred during
construction are capitalized. Recently, IFRS converged to GAAP
requirements in this area.
 IFRS also views depreciation as an allocation of cost over an asset’s
useful life. IFRS permits the same depreciation methods (e.g.,
straight-line, accelerated, and units-of-activity) as GAAP.
 Under both GAAP and IFRS, changes in the depreciation method
used and changes in useful life are handled in current and future
periods. Prior periods are not affected. GAAP recently conformed to
international standards in the accounting for changes in depreciation
methods.
10-73 LO 7
 A Look at IFRS

Key Points
Similarities
 The accounting for subsequent expenditures (such as ordinary
repairs and additions) are essentially the same under IFRS and
GAAP.
 The accounting for plant asset disposals is essentially the same
under IFRS and GAAP.
 Initial costs to acquire natural resources are essentially the same
under IFRS and GAAP.
 The definition of intangible assets is essentially the same under
IFRS and GAAP.

10-74 LO 7
 A Look at IFRS

Key Points
Similarities
 The accounting for exchanges of nonmonetary assets has recently
converged between IFRS and GAAP. GAAP now requires that gains
on exchanges of nonmonetary assets be recognized if the exchange
has commercial substance. This is the same framework used in
IFRS.
Differences
 IFRS uses the term residual value rather than salvage value to refer
to an owner’s estimate of an asset’s value at the end of its useful life
for that owner.

10-75 LO 7
 A Look at IFRS

Key Points
Differences
 IFRS allows companies to revalue plant assets to fair value at the
reporting date. Companies that choose to use the revaluation
framework must follow revaluation procedures. 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.
 IFRS requires component depreciation. Component depreciation
specifies that any significant parts of a depreciable asset that have
different estimated useful lives should be separately depreciated.
Component depreciation is allowed under GAAP but is seldom used.

10-76 LO 7
 A Look at IFRS

Key Points
Differences
 As in GAAP, under IFRS the costs associated with research and
development are segregated into the two components. Costs in the
research phase are always expensed under both IFRS and GAAP.
Under IFRS, however, costs in the development phase are
capitalized as Development Costs once technological feasibility is
achieved.
 IFRS permits revaluation of intangible assets (except for goodwill).
GAAP prohibits revaluation of intangible assets.

10-77 LO 7
 A Look at IFRS

Looking to the Future

The IASB and FASB have identified a project that would consider
expanded recognition of internally generated intangible assets. IFRS
permits more recognition of intangibles compared to GAAP.

10-78 LO 7
 A Look at IFRS

IFRS Self-Test Questions

Which of the following statements is correct?

a) Both IFRS and GAAP permit revaluation of property, plant,

and equipment and intangible assets (except for goodwill).

b) IFRS permits revaluation of property, plant, and equipment

and intangible assets (except for goodwill).

c) Both IFRS and GAAP permit revaluation of property, plant,

and equipment but not intangible assets.

d) GAAP permits revaluation of property, plant, and equipment

but not intangible assets.

10-79 LO 7
 A Look at IFRS

IFRS Self-Test Questions

Research and development costs are:

a) expensed under GAAP.

b) expensed under IFRS.

c) expensed under both GAAP and IFRS.

d) None of the above.

10-80 LO 7
 Copyright

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