ch02_Plant_Assets,_Natural_Resources,_and_Intangible_Assets_1 (2).pdf

I need Accounting Integration

1. Chapter 2
Plant Assets, Natural Resources,
and Intangible Assets
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2. Learning Objective 1
Explain the Accounting for Plant Asset
Expenditures
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3. Plant Asset Expenditures
IAS16-Plantassetsareresourcesthathave
•physicalsubstance(adefinitesizeandshape),
•areusedintheoperationsofabusiness,
•arenotintendedforsaletocustomers,
•areexpectedtoprovideservicetothecompanyfora
numberofyears,exceptforland.
Referredtoasproperty,plant,andequipment;plant
andequipment;andfixedassets.
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4. The Cost of Plant Assets (1 of 10)
HistoricalCostPrinciple
•Requiresthatcompaniesrecordplantassetsatcost
•Costconsistsofallexpendituresnecessaryto
acquireanassetandmakeitreadyforitsintended
use
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5. The Cost of Plant Assets (2 of 10)
Land
Allnecessarycostsincurredinmakinglandreadyforits
intendeduseincrease(debit)theLandaccount.
Coststypicallyinclude:
1.cashpurchaseprice
2.closingcostssuchastitleandattorney’sfees
3.realestatebrokers’commissions
4.accruedpropertytaxesandotherliensonland
assumedbypurchaser
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6. The Cost of Plant Assets (3 of 10)
Illustration:LewLtd.acquiresrealestateatacashcostof
HK$2,000,000.Thepropertycontainsanoldwarehousethatis
razedatanetcostofHK$60,000(HK$75,000incostsless
HK$15,000proceedsfromsalvagedmaterials).Additional
expendituresaretheattorney’sfee,HK$10,000,andthereal
estatebroker’scommission,HK$80,000.Determinethe
amounttobereportedasthecostoftheland.
6Kalkidan S.

7. Land
Cash price of property (HK$2,000,000)HK$2,000,000
Net removal cost of warehouse (HK$60,000)60,000
Attorney's fees (HK$10,000)10,000
Real estate broker’s commission (HK$80,000)80,000
Cost of LandHK$2,150,000
The Cost of Plant Assets (4 of 10)
Required: Determine amount to be reported as the cost of
the land.
Kalkidan S.7
Cash 2,150,000
Land2,150,000
Lew makes the following entry:

8. The Cost of Plant Assets (5 of 10)
LandImprovements
Structuraladditionswithlimitedlivesthataremadeto
land.Costincludesallexpendituresnecessarytomake
theimprovementsreadyfortheirintendeduse.
•Examples:driveways,parkinglots,fences,
landscaping,andundergroundsprinklers
•Limitedusefullives
•Expense(depreciate)costoflandimprovementsover
theirusefullives
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9. The Cost of Plant Assets (6 of 10)
Buildings
Includesallcostsrelateddirectlytopurchaseor
construction.
Purchasecosts:
•Purchaseprice,closingcosts(attorney’sfees,title
insurance,etc.)andrealestatebroker’scommission
•Remodelingandreplacingorrepairingtheroof,
floors,electricalwiring,andplumbing
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10. The Cost of Plant Assets (7 of 10)
Buildings
Includesallcostsrelateddirectlytopurchaseor
construction.
Constructioncosts:
•Contractprice
•Paymentsforarchitects’fees
•Buildingpermits
•Excavationcosts
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11. The Cost of Plant Assets (8 of 10)
Equipment
Includeallcostsincurredinacquiringtheequipmentand
preparingitforuse.
Coststypicallyinclude:
•Cashpurchaseprice
•Salestaxes
•Freightcharges
•Insuranceduringtransitpaidbypurchaser
•Assembling,installing,andtesting
11Kalkidan S.

12. Blank Truck
Cash priceHK$420,000
Sales taxes13,200
Painting and lettering5,000
Blank Blank
Cost of Delivery TruckHK$438,200
The Cost of Plant Assets (9 of 10)
Illustration:LenardHuangGrouppurchasesadeliverytruckat
acashpriceofHK$420,000.Relatedexpendituresconsistof
salestaxesHK$13,200,paintingandletteringHK$5,000,
motorvehiclelicenseHK$800,andathree-yearaccident
insurancepolicyHK$16,000.Computethecostofthedelivery
truck.
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13. The Cost of Plant Assets (10 of 10)
13Kalkidan S.
Equipment438,200
Cash 455,000
License Expense800
Prepaid Insurance16,000
Illustration:LenardHuangGrouppurchasesadeliverytruckat
acashpriceofHK$420,000.Relatedexpendituresconsistof
salestaxesHK$13,200,paintingandletteringHK$5,000,
motorvehiclelicenseHK$800,andathree-yearaccident
insurancepolicyHK$16,000.Preparethejournalentryto
recordthesecosts.

14. 14Kalkidan S.
OrdinaryRepairsareexpenditurestomaintainthe
operatingefficiencyandproductivelifeoftheunit.
•DebittoMaintenanceandRepairsExpense
•Referredtoasrevenueexpenditures
AdditionsandImprovementsarecostsincurredto
increasetheoperatingefficiency,productivecapacity,or
usefullifeofaplantasset.
•Debitplantassetaffected
•Referredtoascapitalexpenditures
Expenditures During Useful Life

15. 15Kalkidan S.
AssumethatJingFengHeatingandCoolingpurchasesa
deliverytruckfor¥150,000cash,plussalestaxesof¥9,000
anddeliverycostsof¥5,000.Thebuyeralsopays¥2,000for
paintingandlettering,¥6,000foranannualinsurancepolicy,
and¥800foramotorvehiclelicense.Explainhoweachof
thesecostswouldbeaccountedfor.
Solution
•Thefirstfourpayments(¥150,000,¥9,000,¥5,000,and
¥2,000)areincludedinthecostofthetruck(¥166,000)
•Thepaymentsforinsuranceandthelicenseareoperating
costsandthereforeareexpensed
DO IT! 1: Cost of Plant Assets

16. Learning Objective 2
Apply Depreciation Methods to Plant
Assets
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17. Depreciation Methods
Depreciation
Processofallocatingtoexpensethecostofaplantasset
overitsusefullifeinarationalandsystematicmanner.
•Processofcostallocation,notassetvaluation
•Appliestolandimprovements,buildings,and
equipment,notland
•Depreciable,becausetherevenue-producingability
ofassetwilldeclineovertheasset’susefullife
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18. Factors in Computing Depreciation
Depreciation expense is reported on the income statement. Accumulated
depreciation is reported on the balance sheet as a deduction from plant
assets.
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19. Depreciation Methods(1 of 2)
Managementselectsthemethoditbelievesbest
measuresanasset’scontributiontorevenueoverits
usefullife.
Examplesinclude:
1)Straight-linemethod.
2)Units-of-activitymethod.
3)Declining-balancemethod.
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20. Illustration: Barb’s Florists purchased a small delivery truck on
January 1, 2020.
Cost €13,000
Expected salvage value € 1,000
Estimated useful life in years5
Estimated useful life in miles100,000
Required: Compute depreciation using the following.
(a) Straight-Line (b) Units-of-Activity (c) Declining Balance
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Depreciation Methods(2 of 2)

21. •Expense is same amount for each year
•Depreciable cost = Cost less residual value
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Straight-Line Method (1 of 3)
Cost-
Residual
Value=
Depreciable
Cost
€13,000 -€1,000 =€12,000
Depreciable
Cost÷
Useful Life
(in years)=
Annual
Depreciation
Expense
€12,000 ÷5=€2,400

22. Straight-Line Method (2 of 3)
ComputationsEnd of Year
Year
Depreciable
CostxRate=
Annual
Expense
Accumulated
Depreciation
Book
Value
2020$12,000x20%=€ 2,400€ 2,400€10,600*
202112,000x20=2,4004,8008,200
202212,000x20=2,4007,2005,800
202312,000x20=2,4009,6003,400
202412,000x20=2,40012,0001,000
€12,000Journal Entry
2020Depreciation Expense2,400
Accumulated Depreciation2,400*€13,000 − €2,400
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23. Straight-Line Method (3 of 3)
Assume the delivery truck was purchased on April 1, 2020.
ComputationsEnd of Year
Year
Depreciable
CostxRate=
Annual
Expensex
Partial
Year=
Depreciation
Expense
Accum.
Deprec.
2020€12,000x20%=€ 2,400x9/12=€ 1,800€1,800
202112,000x20=2,400x=2,4004,200
202212,000x20=2,400x=2,4006,600
202312,000x20=2,400x=2,4009,000
202412,000x20=2,400x=2,40011,400
202512,000x20=2,400x3/12=60012,000
€12,000
23Kalkidan S.

24. YearCost-
Residual
Value÷Rate=
Annual
Expense
2020€50,000-€2,000÷10%=€4,800
Do It! 2a: Straight-Line Depreciation
On January 1, 2020, 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 residual value. What
journal entry would Iron Mountain Ski Corporation make at
December 31, 2020, if it uses the straight-line method of
depreciation?
Depreciation Expense4,800
Accumulated Depreciation4,800
Kalkidan S.24

25. Units-of-Activity Method (1 of 2)
•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
•Often referred to as units-of-production method
Depreciable
Cost÷
TotalUnits
of Activity=
DepreciableCost
perUnit
€12,000÷100,000 miles=€0.12
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26. Units-of-Activity Method (2 of 2)
ComputationsEnd of Year
Year
Units of
ActivityxRate=
Annual
Expense
Accumulated
Depreciation
Book
Value
202015,000x€.012=€ 1,800€ 1,800€11,200*
202130,000x.012=3,6005,4007,600
202220,000x.012=2,4007,8005,200
202325,000x.012=3,00010,8002,200
202410,000x.012=1,20012,0001,000
Journal Entry
2020Depreciation Expense1,800
Accumulated Depreciation1,800*€13,000 − €1,800
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27. Declining-Balance Method (1 of 3)
•Accelerated method
•Decreasing annual depreciation expense over asset’s
useful life
•Double declining-balance rate is double the straight-
line rate
•Rate applied to book value
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28. Declining-Balance Method (2 of 3)
ComputationsEnd of Year
Year
Beginning
Book ValuexRate=
Annual
Expense
Accumulated
Depreciation
Book
Value
2020€13,000x40%=€ 5,200€ 5,200€7,800
20217,800x40=3,1208,3204,680
20224,680x40=1,87210,1922,808
20232,808x40=1,12311,3151,685
20241,685x40=68512,0001,000(b)
(a)
(a)€13,000 − €5,200
(b)€1,685 x 40% = €674, expense adjusted to €685 to result in residual value of €1,000.
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29. Declining-Balance Method (3 of 3)
Assume the delivery truck was purchased on April 1, 2020.
ComputationsEnd of Year
Year
Beginning
Book ValuexRate=
Annual
Expensex
Partial
Year=
Depreciation
Expense
Accum.
Deprec.
2020€13,000x40%=€ 5,200x9/12=€ 3,900€3,900
20219,100x40=3,640x=3,6407,540
20225,460x40=2,184x=2,1849,724
20233,276x40=1,310x=1,31011,034
20241,966x40=786x=78611,820
20251,180x40=472x=18012,000(a)
(a)Expense adjusted to €180 to result in residual value of €1,000.
Kalkidan S.29

30. Annual depreciation expense varies, but total depreciation
expense is the same (€12,000) for the five-year period.
Comparison of Methods (1 of 2)
Year
Straight-
Line
Declining-
Balance
Units-of-
Activity
2020€ 2,400€ 5,200€ 1,800
20212,4003,1203,600
20222,4001,8722,400
20232,4001,1233,000
20242,4006851,200
€12,000€12,000€12,000
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31. Comparison of Methods (2 of 2)
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32. Component Depreciation (1 of 2)
•IFRSrequirescomponentdepreciationforplant
assets
•Anysignificantpartsofaplantassetthathave
significantlydifferentestimatedusefullivesshould
beseparatelydepreciated
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33. Component Depreciation (2 of 2)
Illustration:LexureConstructionbuildsanofficebuildingfor
HK$4,000,000,notincludingthecostoftheland.Ifthe
HK$4,000,000isallocatedoverthe40-yearusefullifeofthe
building,LexurereportsHK$100,000(HK$4,000,000÷40)of
depreciationperyear,assumingstraight-linedepreciationandno
residualvalue.However,assumethatHK$320,000ofthecostofthe
buildingrelatestoaheating,ventilation,andairconditioning(HVAC)
systemandHK$600,000relatestoflooring.BecausetheHVAC
systemhasadepreciablelifeoffiveyearsandtheflooringhasa
depreciablelifeof10years,Lexuremustusecomponent
depreciation.ItmustreclassifyHK$320,000ofthecostofthe
buildingtotheHVACsystemandHK$600,000tothecostofflooring.
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34. Component Depreciation (2 of 2)
Assuming that Lexure uses straight-line depreciation, the following
shows the computation of component depreciation for the first year
of the office building.
34Kalkidan S.
Building cost adjusted (HK$4,000,000 − HK$320,000 − HK$600,000)HK$3,080,000
Building cost depreciation per year (HK$3,080,000 ÷40)HK$ 77,000
Personal HVAC system depreciation (HK$320,000 ÷5)64,000
Flooring depreciation (HK$600,000 ÷10) 60,000
Total component depreciation in first yearHK$ 201,000

35. Taxlawsdonotrequiretaxpayertousethesame
depreciationmethodonthetaxreturnthatisusedin
preparingfinancialstatements.
Manycompaniesusestraight-lineintheirfinancial
statementstomaximizenetincome.
Theyalsouseanaccelerateddepreciationmethodon
theirtaxreturnstominimizetheirincometaxes.
35Kalkidan S.
Depreciation and Income Taxes

36. Revaluation of Plant Assets (1 of 5)
•IFRSallowscompaniestorevalueplantassetstofair
valueatthereportingdate
•Mustbeappliedtoallassetsinaclassofassets
•Assetsthatareexperiencingrapidpricechangesmust
berevaluedonanannualbasis
36Kalkidan S.

37. Revaluation of Plant Assets (2 of 5)
GainSituation
Illustration:PerniceLtd.appliesrevaluationtoequipment
purchasedonanuary1,2020,forHK$1,000,000.The
equipmenthasausefullifeoffiveyearsandnoresidualvalue.
OnDecember31,2020,Pernicemakesthefollowingjournal
entrytorecorddepreciationexpense,assumingstraight-line
depreciation.
Kalkidan S.37
Accumulated Depreciation—Equipment200,000
Depreciation Expense200,000

38. Revaluation of Plant Assets (3 of 5)
Attheendof2020,independentappraisersdeterminethat
theassethasafairvalueofHK$850,000.Toreportthe
equipmentatitsfairvalueofHK$850,000onDecember31,
2020,PerniceeliminatestheAccumulatedDepreciation—
Equipmentaccount,reducesEquipmenttoitsfairvalueof
HK$850,000,andrecordsRevaluationSurplusofHK$50,000.
Theentrytorecordtherevaluationisasfollows.
Kalkidan S.38
Equipment150,000
Accumulated Depreciation—Equipment200,000
Revaluation Surplus50,000

39. Revaluation of Plant Assets (4 of 5)
Pernicereports
•DepreciationexpenseofHK$200,000intheincome
statement
•HK$50,000inothercomprehensiveincome
•HK$850,000isthenewbasisoftheasset
Assumingnochangeinthetotalusefullife,depreciationin
2021willbeHK$212,500(HK$850,000÷4).
Kalkidan S.39

40. Revaluation of Plant Assets (5 of 4)
LossSituation
Illustration:Pernice’sequipmenthasacarryingamountof
HK$800,000(HK$1,000,000−HK$200,000).However,attheend
of2020,independentappraisersdeterminethattheassethasa
fairvalueofHK$775,000,whichresultsinanimpairmentlossof
HK$25,000(HK$800,000−HK$775,000).Theentrytorecordthe
equipmentandreporttheimpairmentlossisasfollows.
Kalkidan S.40
Impairment Loss25,000
Accumulated Depreciation—Equipment200,000
Equipment225,000

41. •Accounted for in period of change and future periods
(Change in Estimate)
•No change in depreciation reported for prior years
•Not considered an error
•Use a step-by-step approach:
1.determine new depreciable cost
2.divide by remaining useful life
41Kalkidan S.
Revising Periodic Depreciation (1 of 4)

42. Revising Periodic Depreciation (2 of 4)
Illustration:Barb’s Florists decides on January 1, 2023, to
extend the useful life of the truck by one year (a total life of
six years) and increase its residual value to €2,200. The
company has used the straight-line method to depreciate the
asset to date. Depreciation for the first 3 years is as follows.
42Kalkidan S.
Equipment cost €13,000
Residual value− 1,000
Depreciable base12,000
Useful life (original)÷5 years
Annual depreciation€2,400×3 years = €7,200

43. Net book value at date of change in estimate (after 3 years).
Revising Periodic Depreciation (3 of 4)
Plant Assets:
Equipment€13,000
Accumulated depreciation7,200
Net book value€ 5,800
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44. Revising Periodic Depreciation (4 of 4)
Calculation of depreciation expense for 2023, year 4.
Net book value after year 3€5,800
Residual value (revised)− 2,200
Depreciable base3,600
Remaining life÷3 years
Revised Annual depreciation€1,200
44Kalkidan S.
Journal entry for 2023 and future years.
Depreciation Expense1,200
Accumulated Depreciation1,200

45. Do It! 2b: Revised Depreciation (1 of 3)
ChambersCorporationpurchasedapieceofequipmentfor
£36,000.Itestimateda6-yearlifeand£6,000salvagevalue.Thus,
straight-linedepreciationwas£5,000peryear[(£36,000−£6,000)
÷6].Attheendofyearthree(beforethedepreciationadjustment),
itestimatedthenewtotallifetobe10yearsandthenewsalvage
valuetobe£2,000.Computethereviseddepreciation.
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46. Calculation of depreciation expense for first 2 years.
Equipment cost £36,000
Salvage value− 6,000
Depreciable base30,000
Useful life (original)÷6 years
Annual depreciation£ 5,000×2 years = £10,000
Net book value at date of change in estimate (after 2 years).
Plant Assets:
Equipment£36,000
Accumulated depreciation10,000
Net book value£26,000
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Do It! 2b: Revised Depreciation (2 of 3)

47. Calculation of revised depreciation expense for remaining years.
Net book value after year 2£26,000
Salvage value (revised)− 2,000
Depreciable base24,000
Remaining life÷8 years
Annual depreciation£ 3,000
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Journal entry for remaining years.
Depreciation Expense3,000
Accumulated Depreciation3,000
Do It! 2b: Revised Depreciation (3 of 3)

48. Learning Objective 3
Explain How to Account for the
Disposal of Plant Assets
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49. Companies dispose of plant assets in three ways —
1.Retirement: Equipment is scrapped or discarded
2.Sale: Equipment is sold to another party
3.Exchange: Equipment is traded for new equipment
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated
Depreciation, and (2) crediting the asset account.
49Kalkidan S.
Plant Asset Disposals

50. Retirement of Plant Assets (1 of 3)
•No cash is received
•Decrease (debit) Accumulated Depreciationfor full
amount of depreciation taken over life of asset
•Decrease (credit) asset accountfor original cost of
asset
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51. Illustration: Hobart Publishing retires its computer printers,
which cost €32,000. The accumulated depreciation on these
printers is €32,000. Prepare the entry to record this
retirement.
51Kalkidan S.
Retirement of Plant Assets (2 of 3)
Question: What happens if a fully depreciated plant asset is
still useful to the company?
Equipment32,000
Accumulated Depreciation—Equipment32,000

52. Illustration: Sunset Company discards delivery equipment
that cost €18,000 and has accumulated depreciation of
€14,000. The journal entry is?
52Kalkidan S.
Retirement of Plant Assets (3 of 3)
Companies report a loss on disposal in the “Other income and
expense”section of the income statement.
Loss on Disposal of Plant Assets4,000
Accumulated Depreciation—Equipment14,000
Equipment18,000

53. Sale of Plant Assets (1of 4)
Compare the bookvalueof the asset with the proceeds
received from the sale.
•If proceedsexceed the book value, a gainon disposal
occurs
•If proceeds are less thanthe book value, a losson
disposal occurs
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54. Sale of Plant Assets (2 of 4)
Illustration: On July 1, 2020, Wright Interiors sells office
furniture for €16,000 cash. The office furniture originally cost
€60,000. As of January 1, 2020, it had accumulated
depreciation of €41,000. Depreciation for the first six months
of 2020 is €8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.
54Kalkidan S.
Depreciation Expense8,000
Accumulated Depreciation—Equipment8,000

55. Sale of Plant Assets (3 of 4)
Cost of office furniture€60,000
Less: Accumulated depreciation (€41, 000 + €8,000)49,000
Book value at date of disposal11,000
Proceeds from sale16,000
Gain on disposal of plant asset€ 5,000
Wright records the sale as follows on July 1.
Cash 16,000
Accumulated Depreciation—Equipment49,000
Equipment60,000
Gain on Disposal of Plant Assets5,000
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56. Sale of Plant Assets (4 of 4)
Illustration: Assume that instead of selling the office furniture
for €16,000, Wright sells it for €9,000.
Cost of office furniture€60,000
Less: Accumulated depreciation (€41, 000 + €8,000)49,000
Book value at date of disposal11,000
Proceeds from sale9,000
Loss on disposal of plant asset€ 2,000
Cash 9,000
Accumulated Depreciation—Equipment49,000
Loss on Disposal of Plant Assets2,000
Equipment60,000
Kalkidan S.56

57. Do It! 3: Plant Asset Disposal (1 of 2)
Overland Trucking has decided to sell an old truck that cost
£30,000 and which has accumulated depreciation of £16,000.
(a) What entry would Overland Trucking make to record the
sale of the truck for £17,000 cash?
57Kalkidan S.
Cash 17,000
Equipment30,000
Gain on Disposal of Plant Assets3,000
Accumulated Depreciation—Equipment16,000

58. Do It! 3: Plant Asset Disposal (2 of 2)
Overland Trucking has decided to sell an old truck that cost
£30,000 and which has accumulated depreciation of £16,000.
(b) What entry would Overland Trucking make to record the
sale of the truck for £10,000 cash?
58Kalkidan S.
Accumulated Depreciation—Equipment16,000
Equipment30,000
Loss on Disposal of Plant Assets4,000
Cash 10,000

59. 59Kalkidan S.
•Ordinarily, companies record a gain or loss on
exchange of plant assets
•Most exchanges have commercial substance
•Commercial substance if future cash flows change as
a result of exchange
Exchange of Plant Assets

60. 60Kalkidan S.
Illustration: Roland NV 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.
Loss Treatment
Cost of used trucks€64,000
Less: Accumulated depreciation22,000
Book value42,000
Fair market value of used trucks26,000
Loss on disposal of plant assets€16,000
Fair market value of used trucks€26,000
Cash paid17,000
Cost of new truck€43,000

61. 61Kalkidan S.
Illustration: Roland NV 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.
Loss Treatment
Equipment (new)43,000
Equipment (old)64,000
Cash 17,000
Accumulated Depreciation—Equipment22,000
Loss on Disposal of Plant Assets16,000

62. 62Kalkidan S.
Illustration: Mark Express 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.
Gain Treatment
Cost of old equipment€40,000
Less: Accumulated depreciation28,000
Book value12,000
Fair market value of old equipment19,000
Gain on disposal of plant assets€ 7,000
Fair market value of old equipment€19,000
Cash paid3,000
Cost of new equipment€22,000

63. 63Kalkidan S.
Illustration: Mark Express 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.
Gain Treatment
Equipment (new)22,000
Gain on Disposal of Plant Assets7,000
Cash 3,000
Accumulated Depreciation—Equipment28,000
Equipment (old)40,000

64. Learning Objective 4
Describe How to Account for Natural
Resources and Intangible Assets
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65. 65Kalkidan S.
IFRS 6-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.
Natural Resources and Intangible Assets

66. 66Kalkidan S.
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
Depletion (1 of 3)
Total Cost -Residual Value=Depletion Cost
per UnitTotal Estimated Units Available

67. Total Cost -Residual Value=Depletion Cost
per UnitTotal Estimated Units Available
HK$50,000,000=HK$5.00 per ton10,000,000
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Illustration: Lane Coal Company invests HK$50 million in a
mine estimated to have 10 million tons of coal and no residual
value. Compute the depletion cost per unit.
Depletion (2 of 3)

68. 68Kalkidan S.
Illustration:LaneCoalCompanyinvestsHK$50millionina
mineestimatedtohave10milliontonsofcoalandnoresidual
value.Inthefirstyear,Laneextractsandsells250,000tonsof
coal.Lanecomputesthedepletionasfollows:
HK$50,000,000÷10,000,000=HK$5.00depletioncostperton
HK$5.00x250,000=HK$1,250,000annualdepletion
Journalentry:
Depletion (3 of 3)
Accumulated Depletion1,250,000
Inventory (coal)1,250,000

69. Intangible Assets
IAS37-Rights,privileges,andcompetitiveadvantages
thatresultfromownershipoflong-livedassetsthatdo
notpossessphysicalsubstance.
Limitedlifeoranindefinitelife.
Commontypesofintangibles:
•Patents•Trademarks
•Copyrights•Trade names
•Franchises and Licenses•Goodwill
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70. Accounting for Intangible Assets (1 of 8)
Limited-LifeIntangibles:
•Amortize to expense
•Credit asset account or accumulated amortization
Indefinite-LifeIntangibles:
•No foreseeable limit on time asset is expected to
provide cash flow
•No amortization
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71. 71Kalkidan S.
Patents
•Amortize to expense
•Exclusive right to manufacture, sell, or otherwise
control an invention for 20 years from date of grant
•Capitalize costs of purchasing a patent and amortize
over 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 Patents account
Accounting for Intangible Assets (2 of 8)

72. Accounting for Intangible Assets (4 of 8)
Illustration: National Labs purchases a patent at a cost of
NT$720,000. National estimates the useful life to be eight years.
Prepare the journal entry to record the annual amortization for the
year ended December 31.
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Cost NT$720,000
Useful life÷8
AmortizationNT$ 90,000
Dec. 31Amortization Expense90,000
Patents90,000

73. Accounting for Intangible Assets (5 of 8)
Copyrights
•Gives owner exclusive right to reproduce and sell an
artistic or published work
•Granted for life of creator plus 70 years
•Capitalize costs of acquiring and defending
•Amortized to expense over useful life
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74. Accounting for Intangible Assets (6 of 8)
Trademarks and Trade Names
•Word, phrase, jingle, or symbol that distinguishes or
identifies a particular enterprise or product
§Big Mac, Coca-Cola, and Jetta
•Legal protection for indefinite number of 20 year
renewal periods
•Capitalize acquisition costs
•No amortization
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75. 75Kalkidan S.
Franchises
•Contractual arrangement between a franchisor and a
franchisee
§CPC, Subway, and Europcar are franchises
•Franchise (or license) with a limited life should be
amortized to expense over its useful life
•If life is indefinite, cost is not amortized
Accounting for Intangible Assets (7 of 8)

76. 76Kalkidan S.
Goodwill
•Includesexceptional management, desirable location,
good customer relations, skilled employees, high-
quality products, etc.
•Onlyrecordedwhen an entirebusinessispurchased
•Goodwill is recorded as excess of purchase price over
fair value of net assetsacquired
•Not amortized
Accounting for Intangible Assets (8 of 8)

77. 77Kalkidan S.
Expendituresthat may lead to
•patents
•copyrights
•new processes
•new products
All R & D costs are expensedwhen incurred
Notintangible assets
Research and Development Costs

78. Do It! 4: Classification Concepts (1 of 3)
Match the term most directly associated with each statement.
CopyrightsDepletion
Intangible assetsFranchises
Research costs
1.The allocation of the cost of a natural
resource in a rational and systematic manner.Depletion
2.Rights, privileges, and competitive
advantages that result from the ownership
of long-lived assets that do not possess
physical substance.
Intangible
assets
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79. Do It! 4: Classification Concepts (2 of 3)
Match the term most directly associated with each statement.
CopyrightsDepletion
Intangible assetsFranchises
Research costs
3.An exclusive right granted by the government
to reproduce and sell an artistic or published
work.
Copyrights
4.A right to sell certain products or services or
to use certain trademarks or trade names
within a designated geographic area.
Franchises
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80. Do It! 4: Classification Concepts (3 of 3)
Match the term most directly associated with each statement.
CopyrightsDepletion
Intangible assetsFranchises
Research costs
5.Costs incurred by a company that often
lead to patents or new products. These
costs must be expensed as incurred.
Research
costs
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81. Learning Objective 5
Discuss How Plant Assets, Natural
Resources, and Intangible Assets are
Reported
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82. 82Kalkidan S.
Presentation
•Usually, companies combine plant assets and natural
resources under “Property, plant, and equipment” in
the statement of financial position.
•Intangible assets are shown separately
Statement Presentation

83. 83Kalkidan S.
Artex Enterprises
Statement of Financial Position (partial)
(in billions)
Property, plant, and equipment
Gold mine ¥ 530
Less: Accumulated depletion 210¥ 320
Land 600
Buildings 7,600
Less: Accumulated depreciation—buildings 5007,100
Equipment 3,870
Less: Accumulated depreciation—
equipment 6203,250
Total property, plant, and equipment ¥11,270
Intangible assets
Patents 440
Trademarks 180
Goodwill 9001,520
Total assets ¥12,790
Statement Presentation

84. End of Chapter?
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