Plant Assets, Natural Resources, and Intangibles: Key Concepts and Accounting Procedures

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Chapter 7: Plant Assets, Natural Resources, and Intangibles

Overview of Long-Lived Assets

Long-lived assets are resources owned by a business that provide economic benefits over multiple accounting periods. These assets are classified into plant assets, natural resources, and intangible assets, each with specific accounting treatments for related expenses.

Asset Account (Balance Sheet)	Related Expense Account (Income Statement)
Land	None
Buildings, Machinery, and Equipment	Depreciation Expense
Furniture and Fixtures	Depreciation Expense
Land Improvements	Depreciation Expense
Natural Resources	Depletion Expense (through cost of goods sold)
Intangible Assets	Amortization Expense

Accounting for the Cost of Plant Assets

Plant assets are tangible resources used in operations and not intended for resale. The cost of a plant asset is the total of all expenditures necessary to acquire the asset and prepare it for its intended use.

Purchase price
Taxes
Commissions
Other costs to make the asset ready for use

Key Principle: The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use.

Land

Costs Included in Land Acquisition

The cost of land includes all expenditures necessary to acquire the land and prepare it for use.

Purchase price
Brokerage commission
Survey fees
Legal fees
Back property taxes
Expenditures for grading and clearing land
Removing any unwanted buildings

Costs Excluded from Land Acquisition

Certain expenditures related to land are not included in the cost of land but are instead capitalized as land improvements and depreciated over time.

Fencing
Paving
Security systems
Lighting

Land improvements are separate plant assets and are subject to depreciation.

Example: Calculating Land Cost

FedEx signs a $300,000 note payable to purchase 20 acres of land. Additional costs include:

$10,000 real estate commission
$8,000 back property tax
$5,000 removal of old building
$1,000 survey fee
$260,000 paving parking lot (not included in land cost, but as land improvement)

Calculation:

Land cost = $300,000 + $10,000 + $8,000 + $5,000 + $1,000 = $324,000
Paving cost ($260,000) is recorded as a land improvement and depreciated.

Building, Machinery, and Equipment

Cost of Constructing a Building

When constructing a building, the following costs are capitalized:

Architectural fees
Building permits
Contractors' charges
Payment for material, labor, and overhead
Interest on money borrowed to finance construction

Cost of Purchasing a Building

Purchase price
Brokerage commission
Sales and other taxes
Expenditures to repair and renovate building for its intended purpose

Cost of Equipment

Purchase price (less any discounts)
Transportation from the seller
Insurance while in transit
Sales and other taxes
Purchase commission
Installation costs
Expenditures to test the asset before it is placed in service
Cost of any special platforms

Land Improvements and Leasehold Improvements

Land Improvements

Land improvements are assets attached to land that have limited useful lives and are subject to depreciation.

Driveways
Signs
Fences
Sprinkler systems
Other similar items

Leasehold Improvements

Improvements made to leased property
Depreciated or amortized over the lease term

Lump-Sum (or Basket) Purchases of Assets

Businesses may acquire multiple fixed assets in a single transaction for a lump-sum price. The total cost is allocated among the assets based on their relative market values using the relative-sales-value method.

Each asset is assigned a portion of the total cost proportional to its appraised value.

Example: Lump-Sum Purchase Allocation

FedEx purchases land and a building for $2,800,000. Appraised values:

Land: $300,000
Building: $2,700,000

Allocation Formula:

Total appraised value = $300,000 + $2,700,000 = $3,000,000
Land allocation = $2,800,000 × ($300,000 / $3,000,000) = $280,000
Building allocation = $2,800,000 × ($2,700,000 / $3,000,000) = $2,520,000

Each asset is recorded at its allocated cost.

Journal Entry for Lump-Sum Purchase

When cash is paid for the assets, the entry is:

Debit Land for allocated cost
Debit Building for allocated cost
Credit Cash for total purchase price

Additional info: The notes provide foundational concepts for the accounting of long-lived assets, including cost determination, asset classification, and allocation methods. These are essential for understanding subsequent topics such as depreciation, amortization, and asset disposal.