slide 9-1. slide 9-2 chapter 9 plant assets, natural resources, and intangible assets financial...

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Chapter 9

Plant Assets, Plant Assets,

Natural Resources, andNatural Resources, and

Intangible AssetsIntangible AssetsFinancial Accounting, IFRS Edition

Weygandt Kimmel Kieso

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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.

Revaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant AssetsRevaluation of Plant Assets

SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.

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Illustration: 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 depreciation200,000



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

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Illustration: 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 assets150,000



Revaluation surplus is an example of an item reported as other comprehensive income, as discussed in Chapter 5.

Revaluation surplus50,000

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Pernice now reports the following information in its statement of financial position at the end of year 1.



$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).

Illustration 9-18

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Ordinary Repairs - expenditures to maintain the operating

efficiency and productive life of the unit.

Debit - Repair (or Maintenance) Expense.

Referred to as revenue expenditures.

Expenditures During Useful LifeExpenditures During Useful LifeExpenditures During Useful LifeExpenditures During Useful Life

SO 5 Distinguish between revenue and capital expenditures, SO 5 Distinguish between revenue and capital expenditures, and explain the entries for each.and explain the entries for each.

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.

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Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).

Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals

SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.

Illustration 9-19

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

Plant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - Retirement



Printing equipment32,000

Question: What happens if a fully depreciated plant asset is still useful to the company?

Retirement of Plant Assets

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Illustration: Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulateddepreciation of $14,000. The journal entry is:

Plant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - RetirementPlant Asset Disposals - Retirement



Loss on disposal 4,000

Companies report a loss on disposal in the “Other income and expense” section of the income statement.

Delivery equipment18,000

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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.

Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals


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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.


Plant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - SalePlant Asset Disposals - Sale

Depreciation expense 8,000


Gain on Disposal

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Illustration: Wright records the sale as follows.



Cash 16,000


Illustration 9-20Computation of gain ondisposal

Office equipment60,000Gain on disposal

5,000

July 1

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



Loss on Disposal

Cash 9,000


Office equipment60,000Loss on disposal 5,000

July 1

Illustration 9-21Computation of loss on disposal

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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.

Section 2Section 2 – Natural Resources – Natural ResourcesSection 2Section 2 – Natural Resources – Natural Resources

SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.

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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.

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.



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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

Depletion expense 400,000

Accumulated depletion 400,000

Journal entry:


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Financial Statement PresentationFinancial Statement PresentationFinancial Statement PresentationFinancial Statement Presentation

Illustration 9-23Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported as inventory in the current assets section.


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Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance.

Section 3Section 3 – Intangible Assets – Intangible AssetsSection 3Section 3 – Intangible Assets – Intangible Assets

Patents

Copyrights

Franchises or licenses

Intangible assets are categorized as having either a limited life or an indefinite life.

Common types of intangibles:

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

Trademarks and trade names

Goodwill

IFRS permits revaluation of intangible assets to fair value, except for goodwill.

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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.

Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets


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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.

Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets


Amortization expense 7,500

Patent 7,500

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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.



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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.



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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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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 overover the fair value of the identifiable net assets acquired.

Internally created goodwill should not be capitalized.



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slide 9-1. slide 9-2 chapter 9 plant assets, natural resources, and intangible assets financial...

Documents

revaluation of plant

pernices plant assets

plant assets150

periodic depreciation

class of assets

record depreciation

depreciation expense200

straightline depreciation