Chapter 9 Plant Assets Natural Resources and Tangible Assets I Plant Assets are resources that have 3 characterisitcs they have a physical substance used in the operations of business and are not intended for sale A Determining the Cost Consists of all expenditures necessary to acquire the asset and make it ready for the intended use 1 Land i Cash Purchase price ii Closing costs and Attorny fees iii Real Estate Broker Comission iv Accured Properry Taxes and other liens 2 Land Improvements Structural additions made to the land i Have own account ii Debit normal balance 3 Buildings are facilites used in operations i Normal debit balance ii Debits all necessary expenditures 4 Equipment assets used in operations i Normal denit balance ii Debit cash purchase price sales tax freight charges and insurance during transit paid by the purchaser B Depreciation asset over its useful service life in a rational and systematic way is the process of allocating to expense the cost of a plane 1 Factors in Computing Depreciaition i Cost ii Useful Life estimate of the expected productive life iii Salvage Value estimate of the assets value at the end of the useful life 2 Depreciation Methods i Straight Line depreciation for each year of the assets useful life companies expense the same amount of Cost Salvage Value Depreciable Cost Useful Life years Annual Depreciation Exp ii Units of Activity useful life is expressed in terms of the total units of production or use expected from the asset rather than a time period Depreciable Cost Total units of Activity Depreciation Cost per Unit Units of Activity during that year Annual Depreciation Expense iii Declining Balance produces a decreasing annual depreciation expense over the assets useful life Book Value at Beginning of Year Declining Balance Rate Annual Depreciation Exp iv v in the end it doesn t matter what method is picked b c total values are equal after asset has fully depreciated revisions are made to depreciation methods when the company realizes that it does not match the useful life of asset It simply makes changes for this period and future periods only C Expenditures during useful life 1 Ordinary Repairs efficency and productive life of the unit are expenditures to maintain the operating i Debited to Maintance expense revenue expenditures 2 Additions and Improvements operating efficency productive capacity or useful life od the plant are costs incurred to increase the i debit to Capital expenditures 3 Materiality Principal if an item would not make a difference in decision making the companyu does not have to follow GAAP i Small items trash cans that instead of depreciating every year can just write off expense incurred immediately D Plant Asset Disposal 1 Retirement of plant asset asset is scraped or disgarded 2 Sale of Plant Asset i ii i ii If asset is depreciated fully and still in use then no additional entry is made If asset is retired before asset is fully depreciated then a loss is debited If asset is sold at above book value then a gain of disposal is incurred If asset is sold at below book value then a loss of disposal is incurred II Natural Resources consists of standing timber and underground deposits of resources 3 Exchange A Characteritics B Acquisistion Costs use 1 physically extracted minning cutting or pumping 2 replaced only by nature 1 price needed to acquire the resource and prepare it for intended 2 already fuctioning mine then just price of property the systematic use of the natural resources depletion Natural C Depleciation Resources as is Deprecition plant assets 1 use unit of activity method Total Cost minus Salvage Value Total Estimated Units Depletion cost per Unit Depleciation Cost per Unit of Units Extracted Annual Depletion Expense III Intangible Assets are rights privilages and competitive advantages tht result from the ownership of long lived assets that do not posses physical substance A Assets that have a limited life are Amoritized B Amortization useful life similar to depreciation cost of allocating the cost of a tangible assetover the assets 1 Total cost of asset is amotitized for the useful life of the patent is the price of asset divided by years C Indefinite assets are NOT amoritized D Types of Intangible assets 1 Patent is an exclusive rights that enables the recipient to manufacture sell or otherwise control an invention for a period of 20 years a Non renewable but new patents can be issued for b improvements Initial cost of patent is the cash or cashe equivalent price to acquire patent c Costs to defend patent in court are added to the price 2 Copyright of patent gives the owner the exclusive right to reproduce and sell an artistic or published work for the life of creator plus 70 years a Cost of patent is the cost ot patent plus money to defend it legally 3 Trademarks and Trade Names that identifies a particular enterprise or product is a word phrase jingle or symbol a can be renewed and therefore are indefinite life b Not amoritized 4 Franchise and License a Franchise b License is a contractual arrangement b n a franchisor and a franchisee represents the value of all favorable attributes that relate to a company management desirable location quality products good location rights to use an asset 5 GoodWill a Companies only record good will when an entire business is sold It is equal to the price of the business over the book value E Research Development copyrights new processes and new products are expenditures that may lead to patents 1 only recorded when incurred whether a success or a failure 2
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