Chapter 10

PLANT ASSETS, NATURAL

RESOURCES, AND
INTANGIBLES

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
 10 - 2

C1

PLANT ASSETS
Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

 10 - 3

C1

PLANT ASSETS
 10 - 4

C1

COST DETERMINATION

Purchase All expenditures

price needed to
prepare the
Acquisition asset for its
Cost intended use

Acquisition cost excludes

financing charges and
cash discounts
 10 - 5

C1

LAND
Title insurance premiums
Purchase Delinquent
price taxes

Real estate Surveying

commissions fees

Title search and transfer fees

Land is not depreciable.

 10 - 6

C1

LAND IMPROVEMENTS

Parking lots, driveways, fences, walks, shrubs,

and lighting systems.

Depreciate
over useful life of
improvements.
 10 - 7

C1

BUILDINGS
Cost of purchase or Title fees
construction

Brokerage Attorney fees

fees

Taxes
 10 - 8

C1

MACHINERY AND EQUIPMENT

Purchase
price Taxes

Transportation
charges

Installing,
assembling, and Insurance while
testing in transit
 10 - 9

P1

LUMP-SUM ASSET PURCHASE

The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.

CarMax paid $90,000 cash to acquire a group of items

consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:
 10 - 10

P1

DEPRECIATION

Depreciation is the process of allocating the

cost of a plant asset to expense in the
accounting periods benefiting from its use.

Balance Sheet Income Statement

Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)
 10 - 11

P1

FACTORS IN COMPUTING DEPRECIATION

The calculation of depreciation requires

three amounts for each asset:
1. Cost
2. Salvage Value
3. Useful Life
 10 - 12

P1

DEPRECIATION FOR TAX REPORTING

Most corporations use the Modified

Accelerated Cost Recovery System
(MACRS) for tax purposes.
MACRS depreciation provides for rapid
write-off of an asset’s cost in order to
stimulate new investment.
 10 - 13

C2

CHANGE IN ESTIMATES FOR DEPRECIATION

Predicted Predicted
salvage value useful life

Depreciation
is an estimate

Over the life of an asset, new information may

come to light that indicates the original estimates
were inaccurate.
 10 - 14

C3

ADDITIONAL EXPENDITURES
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes
Capital Balance sheet
Deferred Higher Higher
Expenditure account debited
Revenue Income statement Currently
Lower Lower
Expenditure account debited recognized

If the amounts involved are not material,

most companies expense the item.
 10 - 15

C3

REVENUE AND CAPITAL EXPENDITURES

Type of Capital or
Expenditure Revenue Identifying Characteristics
1. Maintains normal operating condition.
Ordinary 2. Does not increase productivity.
Revenue
Repairs 3. Does not extend life beyond original
estimate.
Betterments 1. Major overhauls or partial
and replacements.
Extraordinary Capital
Repairs 2. Extends life beyond original estimate.
 10 - 16

END OF CHAPTER 10