Plant Assets, Natural Resources, and Intangibles

Introduction

This chapter covers the accounting for property, plant, and equipment (PP&E), natural resources, and intangible assets. It explains how to measure, depreciate, and report these assets, as well as how to account for their disposal and evaluate business performance using asset-related ratios.

Property, Plant, and Equipment (PP&E)

Definition and Characteristics

• PP&E are long-lived, tangible assets used in business operations, such as land, buildings, equipment, furniture, fixtures, and vehicles.

• They are recorded at historical cost, which includes the purchase price and all costs necessary to get the asset ready for use.

• The cost of PP&E is allocated to expense over its useful life through depreciation, following the matching principle.

Measuring the Cost of PP&E

• Historical cost includes purchase price, taxes, commissions, and other costs to prepare the asset for use.

• The cost principle requires assets to be recorded at their actual cost.

Land and Land Improvements

• Cost of land includes purchase price, brokerage commission, survey/legal fees, delinquent property taxes, title transfer fees, and clearing costs.

• Land improvements (e.g., fencing, paving, lighting) are recorded separately and depreciated.

Buildings, Machinery, and Equipment

• Building costs include construction or purchase price and renovation costs.

• Machinery and equipment costs include purchase price (less discounts), transportation, insurance in transit, taxes, commissions, installation, and testing.

Furniture and Fixtures

• Includes desks, chairs, cabinets, etc. Costs include purchase price and all costs to ready the asset for use.

Lump-Sum (Basket) Purchases

• When multiple assets are purchased together, the total cost is allocated based on each asset's relative fair market value (relative-market-value method).

Capital and Revenue Expenditures

• Capital expenditures increase asset capacity, efficiency, or useful life (e.g., extraordinary repairs).

• Revenue expenditures maintain the asset in working order (e.g., routine repairs).

Data Analytics in Accounting

• Data analytics help companies optimize property investments, monitor resource consumption, and plan maintenance.

Depreciation of Plant Assets

What Is Depreciation?

• Depreciation allocates the cost of a plant asset (except land) over its useful life.

• Depreciation is based on cost, estimated useful life, and estimated residual value.

• Depreciable cost = Cost – Estimated residual value.

Depreciation Methods

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

• Units-of-Production Method: Depreciation varies with asset usage.

• Double-Declining-Balance Method: Accelerated method, more expense early in asset's life.

Depreciation for Tax Purposes

• The IRS requires the Modified Accelerated Cost Recovery System (MACRS) for tax reporting, which is not GAAP-compliant.

Partial-Year Depreciation

• Depreciation is prorated for assets purchased during the year, often using the modified half-month convention.

Changing Estimates

• If useful life or residual value estimates change, recalculate depreciation for current and future periods only.

Reporting PP&E

• PP&E are reported at book value (cost minus accumulated depreciation) on the balance sheet.

Disposal of Plant Assets

Recording Disposals

• Disposals may involve discarding, selling, or exchanging assets.

• Steps: Update depreciation, remove asset and accumulated depreciation, record cash received/paid, recognize gain or loss.

Natural Resources

Accounting for Natural Resources

• Natural resources are depleted using the units-of-production method.

• Depletion expense is recorded as the resource is used.

Intangible Assets

Definition and Types

• Intangible assets lack physical substance (e.g., patents, copyrights, trademarks, franchises, goodwill).

• Purchased intangibles are recorded at cost.

• Intangibles with definite lives are amortized; those with indefinite lives are tested for impairment.

Patents

• Exclusive right to produce/sell an invention for 20 years.

• Amortized over the shorter of useful or legal life.

Copyrights and Trademarks

• Copyrights: Exclusive right to creative works, lasting life of creator plus 70 years.

• Trademarks: Distinctive identifications of products/services, often renewable indefinitely.

Franchises and Licenses

• Franchises: Rights to sell goods/services under specific conditions.

• Licenses: Government-granted privileges to use public property.

Goodwill

• Goodwill is the excess paid over the fair value of net assets in a business acquisition.

• Not amortized; tested for impairment annually.

Asset Turnover Ratio

Evaluating Business Performance

• The asset turnover ratio measures how efficiently a company uses its assets to generate sales.

• Formula:

• A higher ratio indicates more efficient use of assets.

Exchanges of Plant Assets

Accounting for Exchanges

• Exchanges with commercial substance require recognition of gains or losses.

• Journal entries reflect the removal of old asset, recognition of gain/loss, and recording of new asset and any cash paid/received.

Additional info: This summary covers all major aspects of accounting for plant assets, natural resources, and intangibles, including measurement, depreciation, disposal, and performance evaluation, as outlined in a typical financial accounting curriculum.