Plant Assets, Natural Resources & Intangibles

Types of Long-term Assets

Long-term assets are resources owned by a business that are expected to provide economic benefits over multiple years. They are classified into three main categories:

• Property, Plant, and Equipment (PP&E): Includes land, buildings, equipment, machinery, furniture, autos, and trucks.

• Natural Resources: Includes oil and gas deposits, timber tracts, and mineral deposits.

• Intangible Assets: Includes patents, copyrights, trademarks, franchises, and goodwill.

These assets are essential for generating revenue and supporting business operations.

Initial Cost of Long-term Assets

The initial cost of a long-term asset is the sum of its purchase price and all expenditures necessary to get the asset ready and in place for its intended use. This includes:

• Buildings: Architectural fees, permits, contractor charges, materials, labor, overhead, and interest (if constructed); purchase price, commissions, taxes, repairs, and renovations (if purchased).

• Equipment: Purchase price, transportation, insurance, taxes, commissions, installation, testing, and special platforms.

• Land: Purchase price, closing costs, attorney fees, agent commissions, title search, insurance, recording fees, mortgage origination, inspection, survey, back taxes, clearing, draining, and removal of old buildings (less proceeds from salvage sales).

Land Improvements and Leasehold Improvements

Land improvements (driveways, signs, fences, sprinklers) are recorded separately from land and depreciated over their useful life. Leasehold improvements are enhancements made to leased property and are depreciated over the shorter of the lease term or the improvement's useful life.

Lump-Sum (Basket) Purchase of Assets

When multiple assets are purchased together for a single price, the total cost is allocated among the assets based on their relative market values. This technique is called the allocation of basket purchase cost.

Capital Expenditure vs. Immediate Expense

Capital expenditures increase the asset's value or extend its useful life and are capitalized (added to the asset's cost). Immediate expenses are costs that do not provide future benefits and are expensed in the period incurred.

Depreciation on Plant Assets

Depreciation is the process of allocating the cost of a plant asset over its useful life. It matches the asset's cost with the revenue it helps generate each period. Depreciation expense is reported on the income statement, while land is not depreciated.

• Journal Entry: Dr: Depreciation Expense, Cr: Accumulated Depreciation

• Book Value:

Depreciation Methods

There are three main methods for calculating depreciation:

• Straight-Line Method: Allocates equal depreciation expense each year.

• Units-of-Production Method: Depreciation is based on actual usage or production.

• Double-Declining-Balance Method: An accelerated method that records higher depreciation in early years.

Key Data for Depreciation:

• Cost: Purchase price plus necessary costs to ready the asset.

• Estimated Useful Life: Expected period of service.

• Estimated Residual Value: Expected value at the end of useful life.

Comparing Depreciation Methods

The following image visually compares the annual depreciation expense for the three methods:

• Straight-Line: Best for assets generating revenue evenly over time.

• Units-of-Production: Best for assets that wear out due to use.

• Double-Declining-Balance: Best for assets generating more revenue early in their life.

Depreciation for Partial Years

When assets are purchased or disposed of partway through the year, depreciation is prorated based on the time the asset was in use.

Plant Asset Disposal

Disposal refers to removing an asset from the books. The process involves:

1. Measuring the final book value

2. Calculating up-to-date depreciation

3. Comparing book value to selling price

4. Recording gain or loss on disposal

• Journal Entry: Dr: Cash, Dr: Accumulated Depreciation, Dr: Loss on Disposal, Cr: Gain on Disposal, Cr: Asset

Natural Resources

Natural resources are long-term assets that are depleted as they are used. Depletion tracks the flow of the resource from its raw state through inventory to cost of goods sold.

• Depletion Rate:

• Example: If ExxonMobil buys an oil reserve for $100m with 10m barrels, the depletion rate is $10 per barrel. If 3m barrels are extracted, depletion expense is $30m.

Intangible Assets

Intangible assets are long-term assets with no physical form but carry special rights. Examples include patents, copyrights, trademarks, franchises, and goodwill. They are accounted for as follows:

• Finite Lives: Amortization is recorded over the asset's useful life.

• Indefinite Lives: Checked annually for impairment (value decrease).

Intangible assets are often associated with recognizable brands and logos, as shown below:

Research and Development (R&D) Costs

R&D costs are incurred to develop new products. Under U.S. GAAP, these costs must be expensed as incurred and cannot be capitalized as assets.

Example: A company spends $1m on R&D this is reported as an expense on the income statement, not as an asset.