CHAPTER 10

1 10-1 CHAPTER 10 Plant Assets, Natural Resources,and Intangible AssetsASSIGNMENT CLASSIFICATION TABLES tudy how the cost principleapplies to plant , 2, 31, 21, 2, the concept , periodic depreciationusing different , 7, 223, 4, 5, 65, 6, 72A, 3A,4A, 5A2B, 3B,4B, the procedure forrevising periodic between revenueand capital expenditures, andexplain the entries for , how to account forthe disposal of a plant , 119, 109, 105A, 6A5B, periodic depletionof natural , the basic issuesrelated to accounting forintangible , 15, 16,17, 18, 191212, 137A, 8A7B, 8B 10-2 ASSIGNMENT CLASSIFICATION TABLE (Continued)Study ObjectivesQuestionsBriefExercisesExercis esAProblemsBProblems9.

2 Indicate how plant assets,natural resources, andintangible assets , 21, 2313, 14145A, 7A, 9A5B, 7B, 9B*10. Explain how to accountfor the exchange of , 2615, 1615, 16 10-3 ASSIGNMENT CHARACTERISTICS TABLEP roblemNumberDescriptionDifficultyLevelTi meAllotted (min.)1 ADetermine acquisition costs of land and 302 ACompute depreciation under different 403 ACompute depreciation under different 404 ACalculate revisions to depreciation 305 AJournalize a series of equipment transactions related topurchase, sale, retirement, and 506 ARecord 407 APrepare entries to record transactions related to acquisitionand amortization of intangibles.

3 Prepare the intangibleassets 408 APrepare entries to correct errors made in recording andamortizing intangible 409 ACalculate and comment on asset turnover 101 BDetermine acquisition costs of land and 302 BCompute depreciation under different 403 BCompute depreciation under different 404 BCalculate revisions to depreciation 305 BJournalize a series of equipment transactions related topurchase, sale, retirement, and 506 BRecord 407 BPrepare entries to record transactions related to acquisitionand amortization of intangibles; prepare the intangibleassets 408 BPrepare entries to correct errors made in recording andamortizing intangible 409 BCalculate and comment on asset turnover 10 BLOOM S TAXONOMY TABLE 10-4 Correlation Chart between Bloom s Taxonomy, Study Objectives and End-of- CHAPTER Exercises and ProblemsStudy ObjectiveKnowledgeComprehensionApplicati onAnalysisSynthesisEvaluation1.

4 Describe how the cost principleapplies to plant Explain the concept Compute periodic depreciationusing different Describe the procedure forrevising periodic Distinguish between revenue andcapital expenditures, and explainthe entries for Explain how to account for thedisposal of a plant Compute periodic depletion ofnatural Explain the basic issues relatedto accounting for intangible Indicate how plant assets, naturalresources, and intangible assetsare *10. Explain how to account for theexchange of plant Your PerspectiveCommunicationExploring the WebDecision Making Across the OrganizationFinancial ReportingComp. AnalysisDecision Making Across the OrganizationEthics CaseComp. AnalysisAll About You 10-5 ANSWERS TO QUESTIONS plant assets, the cost principle means that cost consists of all expenditures necessary to acquirethe asset and make it ready for its intended use.

5 Of land improvements include driveways, parking lots, fences, and underground sprinklers. 3.(a) When only the land is to be used, all demolition and removal costs of the building less anyproceeds from salvaged materials are necessary expenditures to make the land ready for itsintended use.(b) When both the land and building are to be used, necessary costs of the building includeremodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, andplumbing. should explain to the president that depreciation is a process of allocating the cost of a plantasset to expense over its service (useful) life in a rational and systematic manner. Recognition ofdepreciation is not intended to result in the accumulation of cash for replacement of the asset. 5.(a) Salvage value, also called residual value, is the expected value of the asset at the end of itsuseful life.

6 (b ) Salvage value is used in determining depreciation in each of the methods except the declining-balance method. 6.(a) Useful life is expressed in years under the straight-line method and in units of activity underthe units-of-activity method.(b) The pattern of periodic depreciation expense over useful life is constant under the straight-linemethod and variable under the units-of-activity method. effects of the three methods on annual depreciation expense are: Straight-line constantamount; units of activity varying amount; declining-balance decreasing amounts. revision of depreciation is made in current and future years but not retroactively. The rationaleis that continual restatement of prior periods would adversely affect confidence in the financialstatements.

7 Expenditures are ordinary repairs made to maintain the operating efficiency and productivelife of the asset. Capital expenditures are additions and improvements made to increase operatingefficiency, productive capacity, or useful life of the asset. Revenue expenditures are recognizedas expenses when incurred; capital expenditures are generally debited to the plant asset a sale of plant assets, the book value of the asset is compared to the proceeds received from thesale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. Ifthe proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal plant asset and its accumulated depreciation should continue to be reported on the balancesheet without further depreciation adjustment until the asset is retired.

8 Reporting the asset andrelated accumulated depreciation on the balance sheet informs the reader of the financial statementsthat the asset is still in use. However, once an asset is fully depreciated, even if it is still beingused, no additional depreciation should be taken. In no situation can the accumulated depreciation onthe plant asset exceed its cost. 10-6 Questions CHAPTER 10 (Continued) resources consist of underground deposits of oil, gas, and minerals, and standing long-lived productive assets have two distinguishing characteristics: they are physicallyextracted in operations, and they are replaceable only by an act of is the allocation of the cost of natural resources to expense in a rational and systematicmanner over the resource s useful life.

9 It is computed by multiplying the depletion cost per unit bythe number of units extracted and terms depreciation, depletion, and amortization are all concerned with allocating the cost ofan asset to expense over the periods benefited. Depreciation refers to allocating the cost of aplant asset to expense, depletion to recognizing the cost of a natural resource as expense, andamortization to allocating the cost of an intangible asset to intern is not correct. The cost of an intangible asset should be amortized over that asset suseful life (the period of time when operations are benefited by use of the asset). In addition,some intangibles have indefinite lives and therefore are not amortized at favorable attributes which could result in goodwill include exceptional management, desirablelocation, good customer relations, skilled employees, high-quality products, and harmonious relationswith labor is the value of many favorable attributes that are intertwined in the business can be identified only with the business as a whole and, unlike other assets, cannot besold separately.

10 Goodwill can only be sold if the entire business is sold. And, if goodwill appearson the balance sheet, it means the company has purchased another company for more than thefair market value of its net is recorded only when there is a transaction that involves the purchase of an entirebusiness. Goodwill is the excess of cost over the fair market value of the net assets (assets lessliabilities) acquired. The recognition of goodwill without an exchange transaction would lead tosubjective valuations which would reduce the reliability of financial and development costs present several accounting problems. It is sometimes difficultto assign the costs to specific projects, and there are uncertainties in identifying the extent andtiming of future benefits. As a result, the FASB requires that research and development costs berecorded as an expense when s asset turnover ratio is computed as follows:assets total Averagesales Net= $ billion$ billion =.