BackPlant Assets, Natural Resources, & Intangibles: Measurement, Depreciation, and Disposal
Study Guide - Smart Notes
Tailored notes based on your materials, expanded with key definitions, examples, and context.
Plant Assets, Natural Resources, & Intangibles
Measuring and Accounting for the Cost of Plant Assets
Plant assets are long-term tangible assets used in the operations of a business. The cost of a plant asset is determined by summing all expenditures necessary to acquire the asset and prepare it for its intended use.
Working Rule: The cost of any asset is the sum of all costs incurred to bring the asset to its intended use.
Cost includes:
Purchase price
Taxes
Commissions
Other amounts paid to make the asset ready for use
Land
The cost of land includes all expenditures to acquire the land and prepare it for use.
Purchase price (cash plus any note payable given)
Brokerage commission
Survey fees
Legal fees
Back property taxes paid by purchaser
Expenditures for grading, clearing, and removing unwanted buildings
Example: FedEx purchases land for $300,000 and incurs additional costs (commission, taxes, removal, survey fee) totaling $24,000. The total cost of land is $324,000.
Account | Debit | Credit |
|---|---|---|
Land | 324,000 | |
Notes Payable | 300,000 | |
Cash | 24,000 |
Buildings, Machinery, and Equipment
Cost of constructing a building:
Architectural fees
Building permits
Contractors’ charges
Payments 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 paid
Expenditures to repair and renovate the 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’s placed in service
Cost of any special platforms
Lump-Sum (Basket) Purchases of Assets
When several assets are purchased together for one price, the total cost is allocated to each asset based on their relative market values using the relative-sales-value method.
Asset | Market (Sales) Value | Total Market Value | Percentage of Total Market Value | Total Cost | Cost of Each Asset |
|---|---|---|---|---|---|
Land | $300,000 | $3,000,000 | 10% | $2,800,000 | $280,000 |
Building | $2,700,000 | $3,000,000 | 90% | $2,800,000 | $2,520,000 |
Total | $3,000,000 | $3,000,000 | 100% | $2,800,000 | $2,800,000 |
Example: For a $120,000 lump-sum purchase with market values of $40,000 (land), $95,000 (building), and $15,000 (equipment):
Asset | Estimated Market Value | Percentage of Total Market Value | Total Cost | Cost of Each Asset |
|---|---|---|---|---|
Land | $40,000 | 26.7% | $120,000 | $32,040 |
Building | $95,000 | 63.3% | $120,000 | $75,960 |
Equipment | $15,000 | 10% | $120,000 | $12,000 |
Total | $150,000 | 100% | $120,000 | $120,000 |
Distinguishing Capital Expenditures from Immediate Expenses
Expenditures related to plant assets can be classified as either capital expenditures or immediate expenses.
Capital expenditures: Increase the asset's capacity or extend its useful life. These costs are capitalized, meaning they are added to the asset account and not expensed immediately.
Immediate expenses: Costs that maintain the asset in its current condition, such as ordinary repairs and maintenance, are expensed as incurred.
Record as Asset (Capital Expenditures) | Record as Expense (Ordinary Repairs) |
|---|---|
Major engine overhaul | Repair of transmission or other mechanism |
Modification of body for new use | Oil change, lubrication, etc. |
Addition to storage capacity | Replacement of tires, windshield, or paint job |
Measuring and Recording Depreciation on Plant Assets
Depreciation is the process of allocating a plant asset’s cost to expense over its useful life. It matches the cost of the asset to the revenue it helps generate each period. Depreciation expense is reported on the income statement, while accumulated depreciation is reported on the balance sheet. Land is not depreciated.
Key Elements Needed to Measure Depreciation
Cost: The total amount paid to acquire the asset.
Estimated Useful Life: The expected period of use, expressed in years, units of output, or other measures.
Estimated Residual Value: Also called scrap or salvage value; the expected value at the end of the asset’s useful life. Not depreciated.
Depreciable Cost Formula:
Depreciation Methods
Straight-line Method: Assigns an equal amount of depreciation to each year (or period). Formula:
Units-of-Production Method: Depreciation is based on usage or output.
Double-Declining-Balance Method: Accelerated depreciation method; higher expense in early years.
Straight-Line Method Example
Cost of truck: $41,000; Residual value: $1,000; Useful life: 5 years.
Account | Debit | Credit |
|---|---|---|
Depreciation Expense - Truck | 8,000 | |
Accumulated Depreciation - Truck | 8,000 |
Date | Cost | Rate | Depreciable Cost | Yearly Expense | Accum. Deprec. | Book Value |
|---|---|---|---|---|---|---|
1/1/2011 | 41,000 | 0.2 | 40,000 | 8,000 | 8,000 | 33,000 |
12/31/2012 | 41,000 | 0.2 | 40,000 | 8,000 | 16,000 | 25,000 |
12/31/2013 | 41,000 | 0.2 | 40,000 | 8,000 | 24,000 | 17,000 |
12/31/2014 | 41,000 | 0.2 | 40,000 | 8,000 | 32,000 | 9,000 |
12/31/2015 | 41,000 | 0.2 | 40,000 | 8,000 | 40,000 | 1,000 |
Depreciation for Partial Years
When assets are acquired partway through the year, depreciation must be prorated.
Example: UPS purchases a warehouse for $500,000 on April 1. Estimated life: 20 years; residual value: $80,000.
Full-year depreciation: Partial-year depreciation:
Changing the Useful Life of a Depreciable Asset
If new information arises, managers may change the useful life or residual value of an asset. This is called a change in estimate and is accounted for in the period of change and future periods; prior years are not adjusted.
Example: Equipment cost: $510,000; original useful life: 10 years; residual value: $10,000. After 7 years, new useful life: 15 years; new residual value: $5,000.
Net book value after 7 years: $160,000
Depreciable base: $160,000 - $5,000 = $155,000
Remaining useful life: 8 years
Annual depreciation:
Account | Debit | Credit |
|---|---|---|
Depreciation Expense | 19,375 | |
Accumulated Depreciation | 19,375 |
Analyzing the Effect of a Plant Asset Disposal
When a plant asset is disposed of, depreciation must be brought up to date to measure the asset’s final book value and record expense up to the date of sale. The asset and related accumulated depreciation are then removed from the books.
Disposing of a Fully Depreciated Asset for No Proceeds
If an asset is fully depreciated and has zero residual value, the disposal entry removes both the asset and its accumulated depreciation.
Account | Debit | Credit |
|---|---|---|
Accumulated Depreciation - Machinery | 60,000 | |
Machinery | 60,000 |
Disposing of a Fully Depreciated Asset with Book Value
If the asset has a remaining book value, a loss is recorded equal to the book value.
Account | Debit | Credit |
|---|---|---|
Accumulated Depreciation - Equipment | 50,000 | |
Loss on Disposal of Equipment | 10,000 | |
Equipment | 60,000 |
Selling a Plant Asset
If cash received is greater than book value: Gain
If cash received is less than book value: Loss
Additional info: These notes cover the measurement, depreciation, and disposal of plant assets, including examples and journal entries, as well as the distinction between capital expenditures and immediate expenses. The content is suitable for Financial Accounting college students studying Chapter 7: Plant Assets, Natural Resources, and Intangibles.
