Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 10
Plant Assets, Natural Resources,
and Intangible Assets
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Lecture note chap 10, Summaries of Financial Accounting
lecture note chap 10 plant assets
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Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 10
Plant Assets, Natural Resources,
and Intangible Assets
Prepared by
Coby Harmon
University of California, Santa Barbara Westmont College
Chapter 10
Plant Assets, Natural Resources,
and Intangible Assets
Copyright ©2019 John Wiley & Son, Inc. 4
Plant assets are resources that have
- physical substance (a definite size and shape)
- are used in the operations of a business
- are not intended for sale to customers
- are expected to be of use to the company for a
number of years
Referred to as property, plant, and equipment ; plant
and equipment ; and fixed assets.
Plant Asset Expenditures
Copyright ©2019 John Wiley & Son, Inc. 5
Plant assets are critical to a company’s success.
Plant Asset Expenditures
ILLUSTRATION 10. Percentages of plant assets in relation to total assets
Copyright ©2019 John Wiley & Son, Inc. 7
Land
All necessary costs incurred in making the land ready for
its intended use increase (debit) the Land account.
Costs typically include:
- cash purchase price,
- closing costs such as title and attorney’s fees,
- real estate brokers’ commissions, and
- accrued property taxes and other liens on land
assumed by purchaser.
Determining the Cost of Plant Assets
Copyright ©2019 John Wiley & Son, Inc. 8
Illustration: Lew Ltd. acquires real estate at a cash cost of
HK$2,000,000. The property contains an old warehouse that is
razed at a net cost of HK$60,000 (HK$75,000 in costs less
HK$15,000 proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, HK$10,000, and the real
estate broker’s commission, HK$80,000. Determine the amount to be
reported as the cost of the land.
Determining the Cost of Plant Assets
Copyright ©2019 John Wiley & Son, Inc. 10
Land Improvements
Structural additions with limited lives that are made to
land. Cost includes all expenditures necessary to make
the improvements ready for their intended use.
- Examples: driveways, parking lots, fences,
landscaping, and underground sprinklers
- Limited useful lives
- Expense (depreciate) cost of land improvements over
their useful lives
Determining the Cost of Plant Assets
Copyright ©2019 John Wiley & Son, Inc. 11
Buildings
Includes all costs related directly to purchase or
construction.
Purchase costs:
- Purchase price, closing costs (attorney’s fees, title
insurance, etc.) and real estate broker’s commission
- Remodeling and replacing or repairing the roof,
floors, electrical wiring, and plumbing
Determining the Cost of Plant Assets
Copyright ©2019 John Wiley & Son, Inc. 13
Equipment
Includes all costs incurred in acquiring the equipment
and preparing it for use.
Costs typically include:
- Cash purchase price
- Sales taxes
- Freight charges
- Insurance during transit paid by purchaser
- Assembling, installing, and testing
Determining the Cost of Plant Assets
Equipment
Cash price HK$420,
Sales taxes 13,
Painting and lettering 5,
Cost of delivery truck HK$438,
Copyright ©2019 John Wiley & Son, Inc. 14
Illustration: Huang Group purchases a delivery truck at a cash
price of HK$420,000. Related expenditures consist of sales taxes
HK$13,200, painting and lettering HK$5,000, motor vehicle
license HK$800, and a three-year accident insurance policy
HK$16,000. Compute the cost of the delivery truck.
Determining the Cost of Plant Assets
Copyright ©2019 John Wiley & Son, Inc. 16
Ordinary Repairs are expenditures to maintain the
operating efficiency and productive life of the unit.
- Debit to Maintenance and Repairs Expense
- Referred to as revenue expenditures
Additions and Improvements are costs incurred to
increase the operating efficiency, productive capacity, or
useful life of a plant asset.
- Debit plant asset affected
- Referred to as capital expenditures
Expenditures During Useful Life
LO 1 Copyright ©2019 John Wiley & Son, Inc.^17
The Missing Controls Documentation procedures. The company’s accounting system was a disorganized collection of non-integrated systems, which resulted from a series of corporate acquisitions. Top management took advantage of this disorganization to conceal its fraudulent activities. Independent internal verification. The fraud should have been detected by a comparison of actual physical assets with the list of physical assets shown in the accounting records.
Total take: $7 billion
ANATOMY OF A FRAUD
Bernie Ebers was the founder and CEO of the phone company WorldCom (USA). The company engaged in a series of increasingly large, debt-financed acquisitions of other companies. These acquisitions made the company grow quickly, which made the share price increase dramatically. However, because the acquired companies all had different accounting systems, WorldCom’s financial records were a mess. When WorldCom’s performance started to flatten out, Bernie coerced WorldCom’s accountants to engage in a number of fraudulent activities to make net income look better than it really was and thus prop up the share price. One of these frauds involved treating $ 7 billion of line costs as capital expenditures. The line costs, which were rental fees paid to other phone companies to use their phone lines, had always been properly expensed in previous years. Capitalization delayed expense recognition to future periods and thus boosted current- period profits.
Copyright ©2019 John Wiley & Son, Inc. 19
Depreciation
Process of allocating to expense the cost of a plant asset
over its useful (service) life in a rational and systematic
manner.
- Process of cost allocation, not asset valuation
- Applies to land improvements, buildings, and
equipment, not land
- Depreciable because the revenue-producing ability of
asset will decline over the asset’s useful life
Depreciation Methods
LO 2 Copyright ©2019 John Wiley & Son, Inc.^20
Factors in Computing Depreciation
Helpful Hint Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the statement of financial position as a deduction from plant assets.
Alternative Terminology Another term sometimes used for salvage value is residual value.
ILLUSTRATION 10. Three factors in computing depreciation