Accounting Principles

Thirteenth Edition
Weygandt Kimmel Kieso

Chapter 10
Plant Assets, Natural Resources,
and Intangible Assets
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
 Chapter 10
Plant Assets, Natural Resources,
and Intangible Assets
Chapter Outline
Learning Objectives
LO 1 Explain the accounting for plant asset
expenditures.
LO 2 Apply depreciation methods to plant assets.
LO 3 Explain how to account for the disposal of plant
assets.
LO 4 Describe how to account for natural resources and
intangible assets.
LO 5 Discuss how plant assets, natural resources, and
intangible assets are reported and analyzed.
Copyright ©2019 John Wiley & Son, Inc. 3
 Plant Asset 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.

LO 1 Copyright ©2019 John Wiley & Son, Inc. 4

 Plant Asset Expenditures
Plant assets are critical to a company’s success.

ILLUSTRATION 10.1
Percentages of plant assets in relation to total assets

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 Plant Asset Expenditures
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 land
assumed by purchaser.
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 Determining the Cost of Plant Assets
Illustration: Lew Ltd. acquires real estate at a cash cost of
HK$2,000,000. The property contains an old warehouse that is
razed at a net cost of HK$60,000 (HK$75,000 in costs less
HK$15,000 proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, HK$10,000, and the real
estate broker’s commission, HK$80,000. Determine the amount to be
reported as the cost of the land.

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 Determining the Cost of Plant Assets
Illustration: Determine the amount to be reported as the cost of the land.
Land
Cash price of property HK$2,000,000
2000000
60000
Net removal cost of warehouse (HK$75,000 - HK$15,000) 60,000
10000
Attorney’s fee 10,000
80000
Real estate broker’s commission 80,000
Cost of land HK$2,150,000
21500006

Lew makes the following entry:

Land 2,150,000
Cash 2,150,000
LO 1 Copyright ©2019 John Wiley & Son, Inc. 9
 Determining the Cost of Plant Assets
Land Improvements
Structural additions with limited lives that are 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) cost of land improvements over
their useful lives
LO 1 Copyright ©2019 John Wiley & Son, Inc. 10
 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

LO 1 Copyright ©2019 John Wiley & Son, Inc. 11

 Determining the Cost of Plant Assets
Buildings
Includes all costs related directly to purchase or
construction.
Construction costs:
• Contract price
• Payments for architects’ fees
• Building permits
• Excavation costs

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 Determining the Cost of Plant Assets
Equipment
Includes 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 purchaser
• Assembling, installing, and testing
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 Determining the Cost of Plant Assets
Illustration: Huang Group purchases a delivery truck at a cash
price of HK$420,000. Related expenditures consist of sales taxes
HK$13,200, painting and lettering HK$5,000, motor vehicle
license HK$800, and a three-year accident insurance policy
HK$16,000. Compute the cost of the delivery truck.
Equipment
Cash price HK$420,000
Sales taxes 13,200
Painting and lettering 5,000

Cost of delivery truck HK$438,200

LO 1 Copyright ©2019 John Wiley & Son, Inc. 14
 Determining the Cost of Plant Assets
• Illustration: Huang Group purchases a delivery truck at a cash
price of HK$420,000. Related expenditures consist of sales taxes
HK$13,200, painting and lettering HK$5,000, motor vehicle
license HK$800, and a three-year accident insurance policy
HK$16,000. Prepare the journal entry to record these costs.
Equipment 438,200
License Expense 800
Prepaid Insurance 16,000
Cash 455,000

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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 Repairs 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 plant asset affected
• Referred to as capital expenditures
LO 1 Copyright ©2019 John Wiley & Son, Inc. 16
 ANATOMY OF A FRAUD

Bernie Ebers was the founder and CEO of the phone company WorldCom (USA). 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 share 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 share 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. The fraud should have been detected by a comparison of actual
physical assets with the list of physical assets shown in the accounting records.

LO 1 Copyright ©2019 John Wiley & Son, Inc. 17

 DO IT! 1 Cost of Plant Assets
Assume that Jing Feng Heating and Cooling purchases a
delivery truck for ¥150,000 cash, plus sales taxes of ¥9,000
and delivery costs of ¥5,000. The buyer also pays ¥2,000 for
painting and lettering, ¥6,000 for an annual insurance policy,
and ¥800 for a motor vehicle license. Explain how each of
these costs would be accounted for.
Solution
• The first four payments (¥150,000, ¥9,000, ¥5,000, and
¥2,000) are included in the cost of the truck (¥166,000)
• The payments for insurance and the license are operating
costs and therefore are expensed
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 Depreciation Methods
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 Helpful Hint

Three factors in computing depreciation
Depreciation expense is reported on the
income statement. Accumulated
Alternative Terminology depreciation is reported on the statement
Another term sometimes used for of financial position as a deduction from
salvage value is residual value. plant assets.

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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

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 Depreciation Methods
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 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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 Straight-Line Method
• Expense is same amount for each year
• Depreciable cost = Cost less residual value ILLUSTRATION 10.8
Formula for straight-line
method

Residual Depreciable
Cost - Value = Cost
€13,000 - €1,000 = €12,000

Annual
Depreciable Useful Life Depreciation
Cost ÷ (in years) = Expense
€12,000 ÷ 5 = €2,400

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 Straight-Line Method
Illustration for Barb’s Florists ILLUSTRATION 10.9
Straight-line depreciation
schedule

Computation Annual End of Year

Depreciable Depreciation Depreciation Accumulated Book
x =
Year Cost Rate Expense Depreciation Value
2020 €12,000 20% €2,400 € 2,400 €10,600
2021 12,000 20 2,400 4,800 8,200
2022 12,000 20 2,400 7,200 5,800
2023 12,000 20 2,400 9,600 3,400
2024 12,000 20 2,400 12,000 1,000
2020 Depreciation Expense 2,400
Journal Accumulated Depreciation 2,400
Entry

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 Straight-Line Method Partial Year

Assume the delivery truck was purchased on April 1, 2020.

Annual Current
Depreciable Depreciation Partial Year Accumulated
Year Cost x Rate = Expense x Year = Expense Depreciation
2020 €12,000 x 20% = €2,400 x 9/12 = € 1,800 € 1,800
2021 12,000 20 2,400 2,400 4,200
2022 12,000 20 2,400 2,400 6,600
2023 12,000 20 2,400 2,400 9,000
2024 12,000 20 2,400 2,400 11,400
2025 12,000 x 20 = 2,400 x 3/12 = 600 12,000
€12,000

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 DO IT! 2a Straight-Line Depreciation
On January 1, 2020, Iron Mountain Ski 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 make at December 31, 2020, 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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 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 residual value
• Often referred to as units-of-production method

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 Units-of-Activity Method
Depreciable Total Units Depreciable
Cost ÷ of Activity = Cost per Unit
€12,000 ÷ 100,000 miles = €0.12

Units of Annual
Depreciable Activity during Depreciation
Cost per Unit x the Year = Expense
€0.12 x 15,000 miles = €1,800
ILLUSTRATION 10.10
Formula for units-of-activity method

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 Units-of-Activity Method
Illustration for Barb’s Florists ILLUSTRATION 10.11
Units-of-activity depreciation schedule

Computation Annual End of Year

Units of Depreciation Depreciation Accumulated Book
x =
Year Activity Cost/Unit Expense Depreciation Value
2020 15,000 €0.12 €1,800 € 1,800 €11,200
2021 30,000 0.12 3,600 5,400 7,600
2022 20,000 0.12 2,400 7,800 5,200
2023 25,000 0.12 3,000 10,800 2,200
2024 10,000 0.12 1,200 12,000 1,000
2020 Depreciation Expense 1,800
Journal
Entry Accumulated Depreciation 1,800

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 Declining-Balance Method
• Accelerated method
• Decreasing annual depreciation expense over asset’s
useful life
• Twice straight-line rate with Double-Declining-
Balance
• Rate applied to book value

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 Declining-Balance Method
ILLUSTRATION 10.13
Illustration for Barb’s Florists Double-declining-balance
depreciation schedule

Computation Annual End of Year

Book Value Depreciation Depreciation Accumulated Book
x =
Year Beg. of Year Rate Expense Depreciation Value
2020 €13,000 40% €5,200 € 5,200 €7,800
2021 7,800 40 3,120 8,320 4,680
2022 4,680 40 1,872 10,192 2,808
2023 2,808 40 1,123 11,315 1,685
2024 1,685 40 685* 12,000 1,000
* Computation of €674 (€1,685 × 40%) is adjusted to €685 in order for book value
to equal residual value.

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 Declining-Balance Method Partial Year

Assume the delivery truck was purchased on April 1, 2020.

Annual Current
Book Value Depreciation Partial Year Accumulated
Year Beg. of Year x Rate = Expense x Year = Expense Depreciation
2020 €13,000 x 40% = €5,200 x 9/12 = € 3,900 € 3,900
2021 9,100 40 3,640 3,640 7,540
2022 5,460 40 2,184 2,184 9,724
2023 3,276 40 1,310 1,310 11,034
2024 1,966 40 786 786 11,820
2025 1,180 x 40 = 472 Plug 180 12,000
€12,000

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 ILLUSTRATION 10.15

Comparison of
Depreciation
Methods

ILLUSTRATION 10.14

Straight- Units-of- Declining-

Year Line Activity Balance
Helpful Hint
2020 € 2,400 € 1,800 € 5,200 Under any method,
2021 2,400 3,600 3,120 depreciation stops
2022 2,400 2,400 1,872 when the asset’s book
2023 2,400 3,000 1,123 value equals expected
2024 2,400 1,200 685 residual value.
€12,000 €12,000 €12,000

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 Depreciation and Income Taxes
Tax laws do not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.
Many companies use straight-line in their financial
statements to maximize net income.
They also use an accelerated depreciation method on
their tax returns to minimize their income taxes.

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 Revising Periodic Depreciation
• 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

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 Revised Depreciation
Illustration: Chambers Landscaping purchased a piece of
equipment for £36,000. It estimated a 6-year life and £6,000
residual value. Thus, straight-line depreciation was £5,000 per
year [(£36,000 − £6,000) ÷ 6]. At the end of year three (before
the depreciation adjustment), it estimated the new total life
to be 10 years and the new residual value to be £2,000.
Compute the revised depreciation.

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 Revised Depreciation
Original depreciation expense = [(£36,000 − £6,000) ÷ 6] =
£5,000
Accumulated depreciation after 2 years = 2 × £5,000 =
£10,000
Book value = £36,000 − £10,000 = £26,000

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 Revised Depreciation
Book value after 2 years of depreciation £26,000
Less: New residual value 2,000
Depreciable cost £24,000
Remaining useful life (10 − 2) 8 years
Revised annual depreciation (£24,000 ÷ 8) £ 3,000

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 Plant Asset Disposals
Companies dispose of plant assets in three ways —
₫ throw away discard
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.

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 Retirement of Plant Assets
• No cash is received
• Decrease (credit) asset account for original cost in
asset
• Decrease (debit) Accumulated Depreciation for full
amount of depreciation taken over life of asset

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 Retirement of Plant Assets
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.
Accumulated Depreciation—Equipment 32,000
Equipment 32,000

Question: What happens if a fully depreciated plant asset is

still useful to the company?

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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—Equipment 14,000
Loss on Disposal of Plant Assets 4,000
Equipment 18,000

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

expense” 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 Asset
Gain on Sale
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.
Depreciation Expense 8,000
Accumulated Depreciation—Equipment 8,000

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 Gain on Sale
Cost of office furniture €60,000
Less: Accumulated depreciation (€41,000 + €8,000) 49,000
Book value at date of disposal 11,000
Proceeds from sale 16,000
Gain on disposal of plant asset € 5,000
Illustration: Wright records the sale as follows.
Cash 16,000
Accumulated Depreciation—Equipment 49,000
Equipment 60,000
Gain on Disposal of Plant Assets 5,000
LO 3 Copyright ©2019 John Wiley & Son, Inc. 45
 Loss on Sale
Cost of office furniture €60,000
Less: Accumulated depreciation (€41,000 + €8,000) 49,000
Book value at date of disposal 11,000
Proceeds from sale 9,000
Loss on disposal of plant asset € 2,000
Illustration: Wright records the sale as follows.
Cash 9,000
Accumulated Depreciation—Equipment 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000
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 DO IT! 3 Plant Asset Disposal
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?
Cash 17,000
Accumulated Depreciation—Equipment 16,000
Equipment 30,000
Gain on Disposal of Plant Assets 3,000

LO 3 Copyright ©2019 John Wiley & Son, Inc. 47

 DO IT! 3 Plant Asset Disposal
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?
Cash 10,000
Accumulated Depreciation—Equipment 16,000
Loss on Disposal of Plant Assets 4,000
Equipment 30,000

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 Determining Natural 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

Total Cost - Residual Value Depletion Cost

=
Total Estimated Units Available per Unit

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 Depletion
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.

Total Cost - Residual Value Depletion Cost

=
Total Estimated Units Available per Unit
HK$50,000,000 = HK$5.00 per ton
10,000,000
ILLUSTRATION 10.22
Computation of depletion cost per unit

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 Depletion
Illustration: Lane Coal Company invests HK$50 million in a mine
estimated to have 10 million tons of coal and no residual value. In
the first year, Lane extracts and sells 250,000 tons of coal. Lane
computes the depletion as follows:
HK$50,000,000 ÷ 10,000,000 = HK$5.00 depletion cost per ton
HK$5.00 x 250,000 = HK$1,250,000 annual depletion
Journal entry:
Inventory (coal) 1,250,000
Accumulated Depletion 1,250,000

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 Intangible Assets
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
nhuong quyen
• Goodwill

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 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

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 Accounting for Intangible Assets
Patents bằng sáng chế

• 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

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 Patents
Illustration: Assume that National Labs purchases a patent at
a cost of NT$720,000. National estimates the useful life of the
patent to be eight years. National calculates the annual
amortization expense as follows.
NT$720,000 cost ÷ 8 years = NT$90,000
National records the annual amortization as follows.
Dec. 31 Amortization Expense 90,000
Patents 90,000

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 Accounting for Intangible Assets
Copyrights
• Gives owner exclusive right to reproduce and sell an
artistic or published work
• Extend for life of creator plus 70 years
• Cost of copyright is cost of acquiring and defending it
• Amortized to expense over useful life

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 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
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 Accounting for Intangible Assets
Franchises giấy nhượng quyền

• Contractual arrangement between a franchisor and a

franchisee
 CPC, Subway, and Europcar are franchises
giấy nhượng quyền có hạn
• Franchise (or license) with a limited life should be
amortized to expense over its useful life
• If life is indefinite, cost is not amortized

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 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 excess of purchase price over
fair value of net assets acquired
• Not amortized

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 Research and Development Costs
Expenditures that may lead to
• patents
• copyrights
• new processes
• new products
All R & D costs are expensed when incurred
Not intangible assets

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 DO IT! 4 Classification Concepts
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 systematic manner.
2. Rights, privileges, and competitive advantages that result
from the ownership of long-lived assets that do not
possess physical substance.
3. An exclusive right granted by a government to reproduce
and sell an artistic or published work.

1. Depletion 2. Intangible assets 3. Copyrights

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 DO IT! 4 Classification Concepts
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 within a designated
geographic area.
5. Costs incurred by a company that often lead to patents or
new products. These costs must be expensed as incurred.

4. Franchises 5. Research and development costs

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 Statement Presentation and Analysis
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

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 Artex Enterprises ILLUSTRATION 10.23
Statement of Financial Position (partial)
(in billions) another name of balanefce sheet
Property, plant, and equipment
Gold mine ¥ 530
Less: Accumulated depletion 210 320
Land 600
Buildings 7,600
Less: Accumulated depreciation—buildings 500 7,100
Equipment 3,870
Less: Accumulated depreciation—equipment 620 3,250
Total property, plant, and equipment 11,270
Intangible assets
Patents 440
Trademarks 180
Goodwill 900 1,520
Total assets ¥12,790

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 Analysis
Illustration: LG’s net sales for a recent year were ₩58,140
billion. Its total ending assets were ₩35,528 billion, and
beginning assets were ₩34,766 billion. ILLUSTRATION 10.24
Asset turnover formula and computation

Net Sales ÷ Average Total Assets = Asset Turnover

₩35,528 + ₩34,766
₩58,140 ÷ = 1.65 Times
2

Each dollar invested in assets produced ₩1.65 in sales. If a

company is using its assets efficiently, each investment in
assets will create a high amount of sales.
LO 5 Copyright ©2019 John Wiley & Son, Inc. 66
 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, 2020, and total assets on December 31, 2020, of
$540,000 billion. Determine Paramour’s asset turnover for
2020.
Solution

Net Sales ÷ Average Total Assets = Asset Turnover

$460,000 + $540,000
$420,000 ÷ = .84 Times
2

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 Appendix 10A Exchange of Plant Assets
• 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

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 Loss Treatment
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.
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
LO 6 Copyright ©2019 John Wiley & Son, Inc. 69
 Loss Treatment
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.
Equipment (new) 43,000
Accumulated Depreciation—Equipment 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old) 64,000
Cash 17,000

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 Gain Treatment
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.
book value= cost - accumulated depreciation
Cost of old equipment €40,000
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
book value-fair market value
Fair market value of old equipment €19,000
Cash paid 3,000
Cost of new equipment €22,000
neww=fair market valu +cash paid
LO 6 Copyright ©2019 John Wiley & Son, Inc. 71
 Gain Treatment
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.
Equipment (new) 40000-28000 22,000
Accumulated Depreciation—Equipment 28,000
Equipment (old) 40,000
Cash 3,000
Gain on Disposal of Plant Assets 7,000
gain thì trừ
= old equipment - cash

LO 6 Copyright ©2019 John Wiley & Son, Inc. 72

 A Look at U.S. GAAP
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.
• Under both IFRS and GAAP, interest costs incurred during
construction are capitalized. Recently, IFRS converged to GAAP
requirements in this area.

LO 7 Copyright ©2019 John Wiley & Son, Inc. 73

 A Look at U.S. GAAP
Key Points
Similarities
• GAAP also views depreciation as an allocation of cost over an asset’s
useful life. GAAP permits the same depreciation methods (e.g.,
straight-line, accelerated, and units-of activity) as IFRS.
• 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
IFRS in the accounting for changes in depreciation methods.
• The accounting for subsequent expenditures (such as ordinary
repairs and additions) are essentially the same under IFRS and GAAP.

LO 7 Copyright ©2019 John Wiley & Son, Inc. 74

 A Look at U.S. GAAP
Key Points
Similarities
• 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.
• The accounting for exchanges of non-monetary assets has converged
between IFRS and GAAP. GAAP now requires that gains on exchanges
of non-monetary assets be recognized if the exchange has
commercial substance. This is the same framework used in IFRS.

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 A Look at U.S. GAAP
Key Points
Differences
• GAAP uses the term salvage value, rather than residual value, to
refer to an owner’s estimate of an asset’s value at the end of its
useful life for that owner.
• IFRS allows companies to revalue plant assets to fair value at the
reporting date.

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 A Look at U.S. GAAP
Key Points
Differences
• 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.
• As in IFRS, under GAAP 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.

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 A Look at U.S. GAAP
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.

LO 7 Copyright ©2019 John Wiley & Son, Inc. 78

Copyright
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or from the use of the information contained herein.

Copyright ©2019 John Wiley & Son, Inc. 79