Accounting Principles

Fourteenth Edition
Weygandt Kimmel Mitchell

Chapter 10
Plant Assets, Natural Resources, and
Intangible Assets
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Copyright ©2021 John Wiley & Sons, Inc.

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 ©2021 John Wiley & Sons, Inc. 2
Plant Asset Expenditures
LEARNING OBJECTIVE 1
Explain the accounting for 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 ©2021 John Wiley & Sons, Inc. 3
Plant Asset Expenditures
Percentages of Plant Assets in Relation to Total
Assets
Plant assets are critical to a company’s success.

ILLUSTRATION 10.1

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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.

LO 1 Copyright ©2021 John Wiley & Sons, Inc. 5

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.

LO 1 Copyright ©2021 John Wiley & Sons, Inc. 6

Determining the Cost of Land
Example
Illustration: Hayes Company acquires real estate at a cash
cost of $100,000. The property contains an old warehouse
that is razed at a net cost of $6,000 ($7,500 in demolition
costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000,
and the real estate broker’s commission, $8,000.
Determine the amount to be reported as the cost of the
land and prepare the journal entry to record the
acquisition of the land.

LO 1 Copyright ©2021 John Wiley & Sons, Inc. 7

Determining the Cost of Land
Solution
Land
Cash price of property $100,000
Net removal cost of warehouse ($7,500 − $1,500) 6,000
Attorney’s fee 1,000
Real estate broker’s commission 8,000
Cost of land $115,000

ILLUSTRATION 10.2
Hayes makes the following entry:
Land 115,000
Cash 115,000

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Determining the Cost of Land
Improvements
Land improvements are structural additions 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 ©2021 John Wiley & Sons, Inc. 9

Cost of Buildings
Purchase Costs
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 to make the building
ready for its intended use.

LO 1 Copyright ©2021 John Wiley & Sons, Inc. 10

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

LO 1 Copyright ©2021 John Wiley & Sons, Inc. 11

Determining the Cost of 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 Equipment
Example
Illustration: Lenard Company purchases a delivery truck at a cash
price of $22,000. Related expenditures are sales taxes $1,320,
painting and lettering $500, motor vehicle license $80, and a
three-year accident insurance policy $1,600. The cost of the
delivery truck is $23,820.
Delivery Truck
Cash price $22,000
Sales taxes 1,320
Painting and lettering 500
Cost of delivery truck $23,820

ILLUSTRATION 10.3
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Journal Entry to Record Cost of
Equipment
Lenard Company treats the cost of a motor vehicle license
as an expense and the cost of an insurance policy as a
prepaid asset. Lenard records the purchase of the truck
and related expenditures as follows.
Equipment 23,820
License Expense 80
Prepaid Insurance 1,600
Cash 25,500

LO 1 Copyright ©2021 John Wiley & Sons, Inc. 14

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 ©2021 John Wiley & Sons, Inc. 15
Anatomy of a Fraud
WorldCom
Bernie Ebers was the founder and CEO of the phone company WorldCom. 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 stock 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 stock 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. A fraud of this size should have been detected by a routine
comparison of the actual physical assets with the list of physical assets shown in the accounting records.

LO 1 Copyright ©2021 John Wiley & Sons, Inc. 16

DO IT! 1: Cost of Plant Assets
Assume that Drummond Heating and Cooling Co. purchases a
delivery truck for $15,000 cash, plus sales taxes of $900 and
delivery costs of $500. The buyer also pays $200 for painting
and lettering, $600 for an annual insurance policy, and $80 for
a motor vehicle license. Explain how each of these costs
would be accounted for.
Solution
• The first four payments ($15,000, $900, $500, and $200)
are included in the cost of the truck ($16,600).
• The payments for insurance and the license are operating
costs and therefore are expensed.
LO 1 Copyright ©2021 John Wiley & Sons, Inc. 17
Depreciation Methods
LEARNING OBJECTIVE 2
Apply depreciation methods to plant assets.

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

LO 2 Copyright ©2021 John Wiley & Sons, Inc. 18

Three Factors in Computing Depreciation

ILLUSTRATION 10.6
HELPFUL HINT
Depreciation expense is reported on the
income statement. Accumulated
ALTERNATIVE TERMINOLOGY
depreciation is reported on the balance
Other Terms sometimes used for
sheet as a deduction from plant assets.
salvage value are residual value and
scrap value.

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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

ILLUSTRATION 10.8
LO 2 Copyright ©2021 John Wiley & Sons, Inc. 20
Depreciation Methods
Example
Illustration: Barb’s Florists purchased a small delivery truck on
January 1, 2022.
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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Formula for Straight-Line Method
• Expense is same amount for each year
• Depreciable cost = Cost less salvage value

ILLUSTRATION 10.9
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Straight-Line Depreciation Schedule

ILLUSTRATION 10.10

2022 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, 2022.

LO 2 Copyright ©2021 John Wiley & Sons, Inc. 24

DO IT! 2a: Straight-Line Depreciation
On January 1, 2022, 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 salvage value.
What journal entry would Iron Mountain Ski Corporation
make at December 31, 2022, if it uses the straight-line
method of depreciation and adjusts its accounts annually?
Solution
Depreciation Expense 4,800
Accumulated Depreciation 4,800
($50,000 - $2,000) ÷ 10 = $4,800
LO 2 Copyright ©2021 John Wiley & Sons, Inc. 25
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 salvage value
• Often referred to as units-of-production method

LO 2 Copyright ©2021 John Wiley & Sons, Inc. 26

Formula for Units-of-Activity Method

ILLUSTRATION 10.11

LO 2 Copyright ©2021 John Wiley & Sons, Inc. 27

Units-of-Activity Depreciation Schedule

ILLUSTRATION 10.12

2022 Depreciation Expense 1,800

Journal
Entry Accumulated Depreciation 1,800

LO 2 Copyright ©2021 John Wiley & Sons, Inc. 28

Formula for 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 at beginning of each year
• Ignore salvage value in determining the amount to which the
declining-balance rate is applied

ILLUSTRATION 10.13
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Double-Declining-Balance Depreciation
Schedule

ILLUSTRATION 10.14

2022 Depreciation Expense 5,200

Journal
Entry Accumulated Depreciation 5,200

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Declining-Balance Method Partial Year
Assume the delivery truck was purchased on April 1, 2022.

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Comparison of Depreciation Methods
and Patterns of Depreciation Expense
Year Straight-Line Units-of-Activity Declining-Balance
2022 $ 2,400 $ 1,800 $ 5,200
2023 2,400 3,600 3,120
2024 2,400 2,400 1,872
2025 2,400 3,000 1,123
2026 2,400 1,200 685
$12,000 $12,000 $12,000

ILLUSTRATION 10.15

ILLUSTRATION 10.16
LO 2 Copyright ©2021 John Wiley & Sons, Inc. 32
Depreciation and Income Taxes
IRS does not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.
Taxpayers must use the straight-line method or a special
accelerated-depreciation method called the Modified
Accelerated Cost Recovery System (MACRS).
MACRS is NOT acceptable under GAAP.

LO 2 Copyright ©2021 John Wiley & Sons, Inc. 33

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

LO 2 Copyright ©2021 John Wiley & Sons, Inc. 34

Revising Depreciation
Example
• Barb’s Florists decides at the end of 2025 (prior to the year-end
adjustment entries) to extend the useful life of the truck by one year (a
total life of six years) and increase its salvage value by $2,200.
• The company has used the straight-line method to depreciate the
asset to date.
• Depreciation per year was $2,400 [($13,000 − $1,000) ÷ 5].
• Accumulated depreciation after three years (2022–2024) is $7,200
($2,400 x 3), and the book value is $5,800 ($13,000 − $7,200).
• The computation of depreciation for 2025, 2026, and 2027, is shown
on the next slide.
Calculate the depreciation expense for 2025 and future years.
LO 2 Copyright ©2021 John Wiley & Sons, Inc. 35
Revising Depreciation Computation
Book value, 1/1/25 $ 5,800
Less: New salvage value 2,200
Depreciable cost $ 3,600
New remaining useful life 3 years (2025–2027)
Revised annual depreciation ($3,600 ÷ 3) $ 1,200

ILLUSTRATION 10.18

Journal entry for 2025 and future years

Depreciation Expense 1,200
Accumulated Depreciation 1,200

LO 2 Copyright ©2021 John Wiley & Sons, Inc. 36

Plant Asset Disposals

LEARNING OBJECTIVE 3

Explain how to account for the disposal of plant assets.

Companies dispose of plant assets in three ways:

1. Sale: Equipment is sold to another party
2. Retirement: Equipment is scrapped or discarded
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.

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 37

Methods of Plant Asset Disposal

ILLUSTRATION 10.19

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 38

Sale of Plant Asset

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

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 39

Sale of Plant Asset Example
Gain on Sale
Illustration: On July 1, 2022, Wright Company sells office furniture
for $16,000 cash. The office furniture originally cost $60,000. As of
January 1, 2022, it had accumulated depreciation of $41,000.
Depreciation for the first six months of 2022 is $8,000. Prepare the
journal entry to record depreciation expense up to the date of sale.
July 1 Depreciation Expense 8,000
Accumulated Depreciation—Equipment
8,000

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 40

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.
July 1 Cash 16,000
Accumulated Depreciation—Equipment 49,000
Equipment 60,000
Gain on Disposal of Plant Assets 5,000

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 41

Sale of Plant Asset Example
Loss on Sale
Illustration: On July 1, 2022, Wright Company sells office
furniture for $9,000 cash. The office furniture originally cost
$60,000. As of January 1, 2022, it had accumulated
depreciation of $41,000. Depreciation for the first six months
of 2022 is $8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.
July 1 Depreciation Expense 8,000
Accumulated Depreciation—Equipment
8,000

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 42

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.
July 1 Cash 9,000
Accumulated Depreciation—Equipment 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 43

Retirement of Plant Asset

• 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

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 44

Retirement of Plant Asset
Example
Illustration: Hobart Enterprises 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?

The asset and its accumulated depreciation continue to be reported

on the balance sheet, without further depreciation adjustment, until
the company retires the asset.
LO 3 Copyright ©2021 John Wiley & Sons, Inc. 45
Retirement of Plant Asset
Another Example
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 expenses and

losses” section of the income statement.

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 46

DO IT! 3: Plant Asset Disposal
Part (1)
Overland Trucking has decided to sell an old truck that cost $30,000
and which has accumulated depreciation of $16,000. (1) 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

*[$17,000 − ($30,000 − $16,000)]

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 47

DO IT! 3: Plant Asset Disposal
Part (2)
Overland Trucking has decided to sell an old truck that cost $30,000
and which has accumulated depreciation of $16,000. (2) What
entry would Overland Trucking make if the truck is worthless, so
the company simply retires it?

Accumulated Depreciation—Equipment 16,000

Loss on Disposal of Plant Assets 14,000
Equipment 30,000

LO 3 Copyright ©2021 John Wiley & Sons, Inc. 48

Natural Resources and Intangible Assets

LEARNING OBJECTIVE 4
Describe how to account for 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.

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 49

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

ILLUSTRATION 10.22

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Computation of Depletion Cost per Unit

Illustration: Lane Coal Company invests $5 million in a mine

estimated to have 1 million tons of coal and no salvage value.
Compute the depletion cost per unit.

ILLUSTRATION
10.22
LO 4 Copyright ©2021 John Wiley & Sons, Inc. 51
Depletion Journal Entry

Illustration: Lane Coal Company invests $5 million in a mine

estimated to have 1 million tons of coal and no salvage value.
In the first year, Lane extracts and sells 250,000 tons of coal.
Lane computes the depletion as follows:
$5,000,000 ÷ 1,000,000 = $5.00 depletion cost per ton
$5.00 × 250,000 = $1,250,000 annual depletion
Journal entry:
Inventory (coal) 1,250,000
Accumulated Depletion 1,250,000

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 52

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
• Goodwill

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 53

Accounting for Intangible Assets
Limited-Life intangibles: HELPFUL HINT
• Amortize to expense Amortization is to intangibles what
depreciation is to plant assets and
• Credit asset account depletion is to natural resources.

Indefinite-Life intangibles:
• No foreseeable limit on time the asset is expected to
provide cash flows
• No amortization

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 54

Accounting for Intangible Assets
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 Patent account

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 55

Patent Amortization Journal Entry

Illustration: On June 30, 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 calculates the annual
amortization expense as follows.
$60,000 cost ÷ 8 years = $7,500
National records $3,750 ($7,500 x 6/12) of amortization for
the six-month period ended December 31 as follows.
Dec. 31 Amortization Expense 3,750
Patents 3,750
LO 4 Copyright ©2021 John Wiley & Sons, Inc. 56
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

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 57

Accounting for Intangible Assets
Trademarks and Trade Names
• Word, phrase, jingle, or symbol that identifies a particular
enterprise or product
o Wheaties, Monopoly, Kleenex, Coca-Cola, Big Mac,
and Jeep
• Legal protection for indefinite number of 20 year renewal
periods
• Capitalize acquisition costs
• No amortization

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 58

Accounting for Intangible Assets
Franchises
• Contractual arrangement between a franchisor and a
franchisee
o Shell, Subway, and Rent-A-Wreck 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

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 59

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

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 60

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

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 61

DO IT! 4: Classification Concepts
Items 1, 2, and 3
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 the federal government to
reproduce and sell an artistic or published work.
1. Depletion 2. Intangible assets 3. Copyrights

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 62

DO IT! 4: Classification Concepts
Items 4 and 5
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

LO 4 Copyright ©2021 John Wiley & Sons, Inc. 63

Statement Presentation and Analysis

LEARNING OBJECTIVE 5
Discuss how plant assets, natural resources, and intangible
assets are reported and analyzed.
Presentation
• Usually, companies combine plant assets and natural
resources under “Property, plant, and equipment” in
the balance sheet
• Intangible assets are shown separately

LO 5 Copyright ©2021 John Wiley & Sons, Inc. 64

Presentation of Property, Plant, and
Equipment, and Intangible Assets

ILLUSTRATION 10.23
LO 5 Copyright ©2021 John Wiley & Sons, Inc. 65
Analysis
Asset Turnover Formula and Computation
Illustration: Proctor & Gamble’s net sales for a recent year
were $67,684 million. Its total ending assets were $115,095
million, and beginning assets were $118,310 million.

ILLUSTRATION 10.24

Each dollar invested in assets produced $0.58 in sales. If a company

is using its assets efficiently, each dollar of assets will create a high
amount of sales.
LO 5 Copyright ©2021 John Wiley & Sons, 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, 2022, and total assets on December 31, 2022, of $540,000
billion. Determine Paramour’s asset turnover for 2022.

LO 5 Copyright ©2021 John Wiley & Sons, Inc. 67

Exchange of Plant Assets

LEARNING OBJECTIVE 6

Explain how to account for the 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

LO 6 Copyright ©2021 John Wiley & Sons, Inc. 68

Loss Treatment
Illustration: Roland Co. exchanged a set of used trucks plus cash for a new semi-
truck. The used trucks have a combined book value of $42,000 (cost $64,000 less
$22,000 accumulated depreciation). Roland’s purchasing agent indicates that the
used trucks have a fair value of $26,000. In addition to the trucks Roland must
play $17,000 for the new semi-truck. Roland computes the cost of the new semi-
truck and the loss on disposal as follows.
Fair value of used trucks $26,000
Cash paid 17,000
Cost of new semi-truck $43,000

ILLUSTRATION 10A.1
Book value of used trucks ($64,000 − $22,000) $42,000
Fair value of used trucks 26,000
Loss on disposal of plant assets $16,000

ILLUSTRATION 10A.2
LO 6 Copyright ©2021 John Wiley & Sons, Inc. 69
Loss Treatment Journal Entry
In recording an exchange with a loss, four steps are required:
• Eliminate the book value of the asset given up.
• Record the cost of the asset acquired.
• Recognize the loss on disposal of plant assets.
• Record cash paid or received.
Equipment (new) 43,000
Accumulated Depreciation—Equipment 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old) 64,000
Cash 17,000

LO 6 Copyright ©2021 John Wiley & Sons, Inc. 70

Gain Treatment
Illustration: Mark Express Delivery decides to exchange its old delivery
equipment plus cash of $3,000 for new delivery equipment. The book value of
the old delivery equipment is $12,000 (cost $40,000 less $28,000 accumulated
depreciation). The fair value of the old equipment is $19,000. The cost of the
new asset is the fair value of the old asset exchanged plus any cash paid (or
other consideration given up). Mark Express Delivery computes the cost of the
new delivery equipment and the gain on disposal as follows.
Fair value of old delivery equipment $19,000
Cash paid 3,000
Cost of new delivery equipment $22,000

ILLUSTRATION 10A.3
Fair value of old delivery equipment $19,000
Book value of old delivery equipment ($40,000 − $28,000) 12,000
Gain on disposal of plant assets $ 7,000

ILLUSTRATION 10A.4
LO 6 Copyright ©2021 John Wiley & Sons, Inc. 71
Gain Treatment Journal Entry
In recording an exchange with a gain, four steps are required:
• Eliminate the book value of the asset given up.
• Record the cost of the asset acquired.
• Recognize the gain on disposal of plant assets.
• Record cash paid or received.
Equipment (new) 22,000
Accumulated Depreciation—Equipment 28,000
Equipment (old) 40,000
Gain on Disposal of Plant Assets 7,000
Cash 3,000

LO 6 Copyright ©2021 John Wiley & Sons, Inc. 72

A Look at IFRS

LEARNING OBJECTIVE 7
Compare the accounting for long-lived assets under GAAP
and IFRS

IFRS follows most of the same principles as GAAP in the

accounting for property, plant, and equipment. There are,
however, some significant differences in the
implementation. IFRS allows the use of revaluation of
property, plant, and equipment, and it also requires the
use of component depreciation. In addition, there are
some significant differences in the accounting for both
intangible assets and impairments.

LO 7 Copyright ©2021 John Wiley & Sons, Inc. 73

A Look at IFRS
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.
• IFRS also views depreciation as an allocation of cost over an
asset’s useful life. IFRS permits the same depreciation methods
(e.g., straight-line, accelerated, and units-of-activity) as GAAP.
LO 7 Copyright ©2021 John Wiley & Sons, Inc. 74
A Look at IFRS
More Similarities
• Under both GAAP and IFRS, changes in the depreciation method used and
changes in useful life and salvage value are handled in current and future
periods. Prior periods are not affected.
• The accounting for subsequent expenditures (such as ordinary repairs and
additions) are essentially the same under IFRS and GAAP.
• The accounting for plant asset disposals is essentially the same under I FRS and
GAAP.
• Initial costs to acquire natural resources are essentially the same under I FRS
and GAAP.
• The definition of intangible assets is essentially the same under I FRS and GAAP.
• The accounting for exchanges of nonmonetary assets has recently converged
between IFRS and GAAP. GAAP now requires that gains on exchanges of
nonmonetary assets be recognized if the exchange has commercial substance.
This is the same framework used in IFRS.
LO 7 Copyright ©2021 John Wiley & Sons, Inc. 75
A Look at IFRS
Differences
• IFRS uses the term residual value rather than salvage 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. Companies that choose to use the revaluation
framework must follow revaluation procedures. 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.

LO 7 Copyright ©2021 John Wiley & Sons, Inc. 76

A Look at IFRS
More 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 GAAP, under IFRS 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.
LO 7 Copyright ©2021 John Wiley & Sons, Inc. 77
Copyright
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from the use of the information contained herein.

Copyright ©2021 John Wiley & Sons, Inc. 78