Slide 1 Chapter 10 Plant Assets Natural Resources and Intangibles Summary 1 Explain the cost principle for computing the cost of plant assets Plant assets are set apart from other tangible assets by two important features use in operations and useful lives longer than one period Plant assets are recorded at cost when purchased Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use The cost of a lump sum purchase is allocated among its individuals 2 Explain depreciation for partial years and changes in estimates Partial year depreciation is often required because assets are bought and sold throughout the year Depreciation is revised when changes in estimates such as salvage value and useful life occur If the useful life of a plant asset changes for instance the remaining cost to be depreciated is spread over the remaining revised useful life of the asset 3 Distinguish between revenue and capital expenditures and account for them Revenue expenditures expire in the current period and are debited to expense accounts and matched with current revenues Ordinary repairs are an example of revenue expenditures Capital expenditures benefit future periods and are debited to asset accounts Example of capital expenditures are extraordinary repairs and betterments 4 Compute total asset turnover and apply it to analyze a company s use of assets Total asset turnover measures a company s ability to use its assets to generate sales It is defined as 2net sales divided by average total assets While all companies desire a high total asset turnover it must be interpreted in comparison with those for prior years and its competitors 5 Compute and record depreciation using the straight line units of production and declining balance methods Depreciation is the process of allocating to expense the cost of a plant asset over the accounting periods that benefit from its use Depreciation does not measure the decline in a plant asset s market value or its physical deterioration Three factors determine depreciation cost salvage value and useful life Salvage value is an estimate of the asset s value at the end of its benefit period Useful service life is the length of time an asset is productively used The straight line method divides cost less salvage value by the asset s useful life to determine depreciation expense per period The units of production method divides cost less salvage value by the estimated number of units the asset will produce over its life to determine depreciation per unit The declining balance method multiplies the asset s beginning of period book value by a factor that is often double the straight line rate 6 Account for asset disposal through discarding or selling an asset When a plant asset is discarded or sold its cost and accumulated depreciation are removed from the accounts Any cash proceeds from discarding or selling an asset are recorded and compared to the asset s book value to determine gain or loss 7 Account for natural resource assets and their depreciation The cost of a natural resource is recorded in a noncurrent asset account Depletion of a natural resource is recorded by allocating its cost to depletion expense using the units of production method Depletion is credited to an Accumulated Depletion account 8 Account for intangible assets An intangible asset is recorded at the cost incurred to purchase it The cost of an intangible asset with a definite useful life is allocated to expense using the straight line method and is called amortization Goodwill and intangible assets with an indefinite useful life are not amortized they are annually tested for impairment Intangible assets include patents copyright leaseholds goodwill and trademarks 9 Account for asset exchanges For an asset exchange with commercial substance a gain or loss is recorded based on the difference between the book value of the asset given up and the market value of the asset received For an asset exchange without commercial substance no gain or loss is recorded and the asset received is recorded based on the book value of the asset given up Slide 2 Plant assets are tangible assets that are actively used in the operations of the entity We fully expect these assets sometimes referred to as property plant and equipment to benefit more than one accounting period Plant assets are set apart from other assets for two important features 1 Plant assets are used in operations 2 Plant assets have useful lives extending over more than one accounting period Slide 3 The four main issues in accounting for plant assets are shown on this screen 1 computing the costs of plant assets 2 allocating the costs of most plant assets less any salvage amounts against revenues for the periods they benefit 3 accounting for expenditures such as repairs and improvements to plant assets and 4 recording the disposal of plant assets Slide 4 The cost of a plant asset includes the purchase price as well as all costs necessary to get the asset in place and ready for its intended use We record the purchase price net of any cash discounts available We will add freight unpacking assembling installing and testing costs to the net invoice price to arrive at the final cost Finance charges are not included in the cost of an asset If we elect to finance the purchase over a period of time the interest cost is charged as an expense when incurred Slide 5 Land is not a depreciable plant asset In addition to the purchase price there are many costs generally incurred in connection with the acquisition Many of these costs are related to obtaining legal title to the land Slide 6 Land improvements are depreciated over their useful life Land improvements include parking lots driveways fences sidewalks landscaping and any outdoor lighting systems While the costs of these improvements increase the usefulness of the land they are charged to a separate Land Improvement account so that their costs can be allocated to the periods they benefit Slide 7 Whether we purchase or construct a building the cost should include the purchase price plus any attorney fees or title fees If we construct the building the cost will include all the necessary construction costs as well as the costs we have just mentioned Slide 8 The costs of machinery and equipment consist of all costs normal and necessary to purchase them and prepare them for their intended use These include the purchase price taxes transportation charges