Slide

9-1
 Chapter 9
Plant Assets,
Natural Resources, and
Intangible Assets
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
9-2
 Revaluation
Revaluation of
of Plant
Plant Assets
Assets

IFRS allows revaluation of plant assets to fair value

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.

Slide
9-3
SO 4 Describe the procedure for revising periodic depreciation.
 Revaluation
Revaluation of
of Plant
Plant Assets
Assets
Illustration: Pernice Company applies revaluation to plant
assets with a carrying value of $1,000,000, a useful life of 5
years, and no residual value. Pernice makes the following
journal entries in year 1, assuming straight-line depreciation.

Depreciation expense 200,000

Accumulated depreciation
200,000
After this entry, Pernice’s plant assets have a carrying amount
of $800,000 ($1,000,000 - $200,000).

Slide
9-4
SO 4 Describe the procedure for revising periodic depreciation.
 Revaluation
Revaluation of
of Plant
Plant Assets
Assets
Illustration: At the end of year 1, independent appraisers
determine that the asset has a fair value of $850,000. To report
the plant assets at fair value, Pernice makes the following entry.

Accumulated depreciation 200,000

Plant assets
150,000
Revaluation surplus
50,000

Revaluation surplus is an example of an item reported as other

comprehensive income, as discussed in Chapter 5.

Slide
9-5
SO 4 Describe the procedure for revising periodic depreciation.
 Revaluation
Revaluation of
of Plant
Plant Assets
Assets
Pernice now reports the following information in its statement of
financial position at the end of year 1.
Illustration 9-18

$850,000 is the new basis of the asset. Pernice reports depreciation

expense of $200,000 in the income statement and $50,000 in other
comprehensive income. Depreciation in year 2 will be $212,500
($850,000 / 4).
Slide
9-6
SO 4 Describe the procedure for revising periodic depreciation.
 Expenditures
Expenditures During
During Useful
Useful Life
Life

Ordinary Repairs - expenditures to maintain the operating

efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.

Additions and Improvements - 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.

Slide SO 5 Distinguish between revenue and capital expenditures,

9-7 and explain the entries for each.
 Plant
Plant Asset
Asset Disposals
Disposals
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Illustration 9-19

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Slide
9-8
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement

Retirement of Plant Assets

Illustration: Assume that Hobart Enterprises retires
its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry to
record this retirement is:

Accumulated depreciation 32,000

Printing equipment
32,000
Question: What happens if a fully depreciated plant asset is still useful
to the company?

Slide
9-9
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement
Illustration: Assume that 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 4,000
Delivery equipment
18,000

Companies report a loss on disposal in the “Other income and

expense” section of the income statement.

Slide
9-10
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals

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.

Slide
9-11
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Gain on Disposal
Illustration: Assume that on July 1, 2011, Wright Company
sells office furniture for $16,000 cash. The office furniture
originally cost $60,000. As of January 1, 2011, it had
accumulated depreciation of $41,000. Depreciation for the first
six months of 2011 is $8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.

Depreciation expense 8,000

Accumulated depreciation
8,000

Slide
9-12
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Illustration 9-20
Computation of gain on
disposal

Illustration: Wright records the sale as follows.

July 1 Cash 16,000

Accumulated depreciation 49,000
Office equipment
Gain on disposal 60,000
5,000
Slide
9-13
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Loss on Disposal Illustration 9-21

Computation of loss on disposal

Illustration: Assume
that instead of selling
the office furniture for
$16,000, Wright sells it
for $9,000.

July 1 Cash 9,000

Accumulated depreciation 49,000
Office equipment
Loss on disposal 60,000
5,000
Slide
9-14
SO 6 Explain how to account for the disposal of a plant asset.
 Section 22 –– Natural
Section Natural Resources
Resources

Natural resources consist of standing timber and

resources extracted from the ground, such as oil, gas,
and minerals.
Standing timber is considered a biological asset under
IFRS.
In the years before they are harvested, the recorded
value of biological assets is adjusted to fair value each
period.

Slide
9-15
SO 7 Compute periodic depletion of extractable natural resources.
 Section 22 –– Natural
Section Natural Resources
Resources
IFRS defines extractive industries as those businesses
involved in finding and removing natural resources located in
or near the earth’s crust.
Cost - price needed to acquire the resource and prepare it for
its intended use.

Depletion - allocation of the cost to expense in a rational and

systematic manner over the resource’s useful life.
Depletion is to natural resources as depreciation is to plant
assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units extracted.
Slide
9-16
SO 7 Compute periodic depletion of extractable natural resources.
 Section 22 –– Natural
Section Natural Resources
Resources
Illustration: Assume that Lane Coal Company invests $5
million in a mine estimated to have 10 million tons of coal and no
salvage value. In the first year, Lane extracts and sells 800,000
tons of coal. Lane computes the depletion expense as follows:

$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton

$.50 x 800,000 = $400,000 depletion expense

Journal entry:
Depletion expense 400,000
Accumulated depletion
400,000
Slide
9-17
SO 7 Compute periodic depletion of extractable natural resources.
 Financial
Financial Statement
Statement Presentation
Presentation

Illustration 9-23
Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported as

inventory in the current assets section.

Slide
9-18
SO 7 Compute periodic depletion of extractable natural resources.
 Section 33 –– Intangible
Section Intangible Assets
Assets

Intangible assets are rights, privileges, and competitive

advantages that do not possess physical substance.

Intangible assets are categorized as having either a

limited life or an indefinite life.
Common types of intangibles:

Patents Trademarks and trade

Copyrights names
Franchises or licenses Goodwill

IFRS permits revaluation of intangible assets to fair value, except for goodwill.
Slide
9-19
SO 8 Explain the basic issues related to accounting for intangible assets.
 Types
Types of
of Intangible
Intangible Assets
Assets

Patents
Exclusive right to manufacture, sell, or otherwise control
an invention for a specified number of years from the
date of the grant.

Legal life in many countries is 20 years.

Capitalize costs of purchasing a patent and amortize

over its legal life or its useful life, whichever is shorter.

Legal fees incurred successfully defending a patent are

capitalized to Patent account.

Slide
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SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Intangible assets are typically amortized on a straight-line

basis.

Illustration: Assume that National Labs purchases a patent at

a cost of $60,000. National estimates the useful life of the
patent to be eight years. National records the annual
amortization as follows.

Amortization expense 7,500

Patent
7,500

Slide
9-21
SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Copyrights
Give the owner the exclusive right to reproduce and sell
an artistic or published work.
 plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.

Granted for the life of the creator plus a specified number

of years, which can vary by country but is commonly 70
years.

Capitalize costs of acquiring and defending it.

Amortized to expense over useful life.

Slide
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SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Trademarks and Trade Names

Word, phrase, jingle, or symbol that identifies a particular
enterprise or product.
 Wheaties, Game Boy, Frappuccino, Kleenex,
Windows, Coca-Cola, and Jetta.

Registration provides a specified number of years of

protection, which can vary by country, but is commonly 20
years.

Capitalize acquisition costs.

Renewed indefinitely, no amortization.

Slide
9-23
SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Franchises and Licenses

Contractual arrangement between a franchisor and a
franchisee.

 BP (GBR), Taco Bell (USA), or Rent-A-Wreck (USA)

are franchises.

Franchise (or license) with a limited life should be

amortized to expense over the life of the franchise.

Franchise with an indefinite life should be carried at cost

and not amortized.

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9-24
SO 8 Explain the basic issues related to accounting for intangible assets.
 Accounting
Accounting for
for Intangible
Intangible Assets
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 identifiable net
assets acquired.

Internally created goodwill should not be capitalized.

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SO 8 Explain the basic issues related to accounting for intangible assets.
 Copyright
Copyright

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