1. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-1
PLANT AND
INTANGIBLE ASSETS
Chapter
9

2. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-2
Long-lived assets acquired for use in
business operations.
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
The cost of plant assets
is the advance purchase
of services.
As years pass, and the
services are used, the
cost is transferred to
depreciation expense.
Plant AssetsPlant Assets

3. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-3
L a n d , b u ild in g s ,
e q u ip m e n t,
f u r n it u r e , f ix t u r e s .
L o n g - t e rm
a s s e t s h a v in g
p h y s ic a l s u b s t a n c e .
T a n g i b l e P l a n t
A s s e ts
P a t e n t s , c o p y r ig h t s ,
t r a d e m a r k s ,
f r a n c h is e s , g o o d w ill.
N o n c u r r e n t a s s e ts
w it h n o p h y s ic a l
s u b s t a n c e .
I n t a n g i b le
A s s e ts
O il r e s e r v e s ,
t im b e r , o t h e r
m in e r a ls .
S it e s a c q u ir e d f o r
e x t ra c t in g v a lu a b le
r e s o u r c e s .
N a t u r a l
R e s o u r c e s
Major Categories of Plant AssetsMajor Categories of Plant Assets

4. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-4
Acquisition.
Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
Sale or disposal.
Acquisition.
Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
Sale or disposal.
Accountable EventsAccountable Events

5. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-5
Asset
price
Asset
price
Reasonable and
necessary costs . . .
Reasonable and
necessary costs . . .
. . . for getting
the asset to the
desired location.
. . . for getting
the asset to the
desired location.
. . . for getting
the asset ready
for use.
. . . for getting
the asset ready
for use.
CostCost
Acquisition of Plant AssetsAcquisition of Plant Assets
+

6. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-6
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
Determining CostDetermining Cost

7. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-7
Prepare the journal entry.
Determining CostDetermining Cost

8. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-8
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Land
Improvements
Land
Improvements
LandLand
Special ConsiderationsSpecial Considerations

9. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-9
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
BuildingsBuildings
Special ConsiderationsSpecial Considerations
EquipmentEquipment
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.

10. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-10
I think I’ll buy the
whole thing; barn,
land, and animals.
Special ConsiderationsSpecial Considerations
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
The total cost
must be
allocated to
separate
accounts for
each asset.
The total cost
must be
allocated to
separate
accounts for
each asset.
Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase

11. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-11
Capital
Expenditure
Capital
Expenditure
Revenue
Expenditure
Revenue
Expenditure
Any material expenditure
that will benefit several
accounting periods.
Any material expenditure
that will benefit several
accounting periods.
To capitalize an expenditure
means to charge it to an
asset account.
To capitalize an expenditure
means to charge it to an
asset account.
Expenditure for
ordinary repairs
and maintenance.
Expenditure for
ordinary repairs
and maintenance.
To expense an expenditure
means to charge it to an
expense account.
To expense an expenditure
means to charge it to an
expense account.
Capital Expenditures and Revenue
Expenditures
Capital Expenditures and Revenue
Expenditures

12. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-12
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Cost of
plant
assets
Balance SheetBalance Sheet
Assets:
Plant and
equipment
Assets:
Plant and
equipment
Income StatementIncome Statement
Revenues:
Expenses:
Depreciation
Revenues:
Expenses:
Depreciation
as the services
are received
DepreciationDepreciation

13. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-13
Book Value
 Cost – Accumulated Depreciation
Accumulated Depreciation
 Contra-asset
 Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence
Book Value
 Cost – Accumulated Depreciation
Accumulated Depreciation
 Contra-asset
 Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence
DepreciationDepreciation

14. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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Cost - Residual Value
Years of Useful Life
Depreciation
Expense per Year
=
Straight-Line DepreciationStraight-Line Depreciation

15. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-15
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.
Straight-Line DepreciationStraight-Line Depreciation

16. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-16
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Salvage ValueSalvage Value
Straight-Line DepreciationStraight-Line Depreciation

17. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-17
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
Half-Year Convention
In the year of
acquisition, record six
months of
depreciation.
Half-Year Convention
In the year of
acquisition, record six
months of
depreciation.
½
Depreciation for Fractional PeriodsDepreciation for Fractional Periods

18. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-18
Half-Year ConventionHalf-Year Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31,
2003, for equipment purchased in 2003. The
equipment cost $75,000, has a useful life of 10
years and an estimated salvage value of
$5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1
/2 = $3,500
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1
/2 = $3,500

19. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-19
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
Declining-Balance MethodDeclining-Balance Method

20. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-20
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
double-declining balance method.
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
double-declining balance method.
Declining-Balance MethodDeclining-Balance Method

21. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-21
Compute depreciation for the rest of the
boat’s estimated useful life.
Compute depreciation for the rest of the
boat’s estimated useful life.
Declining-Balance MethodDeclining-Balance Method
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.

22. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-22
Estimates of Useful Life and
Residual Value
 May differ from company to
company.
 The reasonableness of
management’s estimates is
evaluated by external auditors.
Principle of Consistency
 Companies should avoid switching
depreciation methods from period to
period.
Estimates of Useful Life and
Residual Value
 May differ from company to
company.
 The reasonableness of
management’s estimates is
evaluated by external auditors.
Principle of Consistency
 Companies should avoid switching
depreciation methods from period to
period.
Financial Statement DisclosuresFinancial Statement Disclosures

23. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-23
So depreciation
is an estimate.
So depreciation
is an estimate.
Predicted
salvage value
Predicted
salvage value
Predicted
useful life
Predicted
useful life
Over the life of an asset, new information
may come to light that indicates the
original estimates need to be revised.
Over the life of an asset, new information
may come to light that indicates the
original estimates need to be revised.
Revising Depreciation RatesRevising Depreciation Rates

24. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-24
Revising Depreciation RatesRevising Depreciation Rates
On January 1, 2003, equipment was
purchased that cost $30,000, has a useful
life of 10 years and no salvage value.
During 2006, the useful life was revised to 8
years total (5 years remaining).
Calculate depreciation expense for the year
ended December 31, 2006, using the
straight-line method.
On January 1, 2003, equipment was
purchased that cost $30,000, has a useful
life of 10 years and no salvage value.
During 2006, the useful life was revised to 8
years total (5 years remaining).
Calculate depreciation expense for the year
ended December 31, 2006, using the
straight-line method.

25. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-25
When our estimates change,
depreciation is:
When our estimates change,
depreciation is:
Book value at
date of change
Salvage value at
date of change
Remaining useful life at date of change
–
Revising Depreciation RatesRevising Depreciation Rates
Asset cost 30,000$
Accumulated depreciation, 12/31/2005
($3,000 per year × 3 years) 9,000
Remaining book value 21,000$
Divide by remaining life ÷ 5
Revised annual depreciation 4,200$

26. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-26
If the cost of an asset
cannot be recovered
through future use or
sale, the asset should
be written down to its
net realizable value.
If the cost of an asset
cannot be recovered
through future use or
sale, the asset should
be written down to its
net realizable value.
Impairment of AssetsImpairment of Assets

27. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-27
Update depreciation
to the date of disposal.
Update depreciation
to the date of disposal.
Recording cash
received (debit)
or paid (credit).
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Removing accumulated
depreciation (debit).
Removing the
asset cost (credit).
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
Recording a
gain (credit)
or loss (debit).
Disposal of Plant and EquipmentDisposal of Plant and Equipment
Journalize disposal by:Journalize disposal by:

28. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-28
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Recording cash
received (debit)
or paid (credit).
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Removing accumulated
depreciation (debit).
Removing the
asset cost (credit).
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
Recording a
gain (credit)
or loss (debit).
Disposal of Plant and EquipmentDisposal of Plant and Equipment

29. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide
9-29
On September 30, 2003, Evans Map Company
sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in
service on January 1, 1998. It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
On September 30, 2003, Evans Map Company
sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in
service on January 1, 1998. It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
Disposal of Plant and EquipmentDisposal of Plant and Equipment

30. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-30
The amount of depreciation
recorded on September 30, 2003,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
The amount of depreciation
recorded on September 30, 2003,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to Sept. 30:
9/12 × $8,000 = $6,000
Disposal of Plant and EquipmentDisposal of Plant and Equipment

31. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-31
After updating the depreciation, the
machine’s book value on
September 30, 2003, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
After updating the depreciation, the
machine’s book value on
September 30, 2003, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
Cost 100,000$
Accumulated Depreciation:
(5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000$
Disposal of Plant and EquipmentDisposal of Plant and Equipment

32. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000.
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000. Cost 100,000$
Accum. Depr. 46,000
Book value 54,000$
Cash received 60,000
Gain 6,000$
Disposal of Plant and EquipmentDisposal of Plant and Equipment

33. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-33
Accounting depends on whether
assets are similar or dissimilar.
Accounting depends on whether
assets are similar or dissimilar.
Airplane
for
Airplane
Airplane
for
Airplane
Truck
for
Airplane
Truck
for
Airplane
Only situations where cash
is paid will be demonstrated.
Only situations where cash
is paid will be demonstrated.
Trading in Used Assets
for New Ones
Trading in Used Assets
for New Ones

34. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-34
Recognize
Gains?
Recognize
Losses?
Similar Assets
and Cash Paid
Yes No
Yes Yes
Dissimilar
Assets
Trading in Used Assets
for New Ones
Trading in Used Assets
for New Ones

35. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-35
On May 30, 2003, Essex Company
exchanged a used airplane and $35,000
cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and
a fair value of $4,000.
On May 30, 2003, Essex Company
exchanged a used airplane and $35,000
cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and
a fair value of $4,000.
SIMILAR
Trading in Used Assets
for New Ones – Similar Assets
Trading in Used Assets
for New Ones – Similar Assets

36. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-36
The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
Cost 40,000$
Accum. Depr. 30,000
Book Value 10,000$
Fair Value 4,000
Loss 6,000$
Prepare a journal entry
to record the exchange.
Trading in Used Assets
for New Ones – Similar Assets
Trading in Used Assets
for New Ones – Similar Assets

37. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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Trading in Used Assets
for New Ones – Similar Assets
Trading in Used Assets
for New Ones – Similar Assets
Prepare the journal entry to record
the trade.
Prepare the journal entry to record
the trade.

38. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-38
Noncurrent assets
without physical
substance.
Noncurrent assets
without physical
substance.
Useful life is
often difficult
to determine.
Useful life is
often difficult
to determine.
Usually acquired
for operational
use.
Usually acquired
for operational
use.
Often provide
exclusive rights
or privileges.
Often provide
exclusive rights
or privileges.
Intangible AssetsIntangible Assets
CharacteristicsCharacteristics

39. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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 Patents
 Copyrights
 Leaseholds
 Leasehold
Improvements
 Goodwill
 Trademarks and
Trade Names
Record at
current cash
equivalent cost,
including
purchase price,
legal fees, and
filing fees.
Intangible AssetsIntangible Assets

40. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-40
Amortize over shorter of economic
life or legal life, subject to a maximum
of 40 years.
Use straight-line method.
Research and development costs are
normally expensed as incurred.
Amortize over shorter of economic
life or legal life, subject to a maximum
of 40 years.
Use straight-line method.
Research and development costs are
normally expensed as incurred.
Intangible AssetsIntangible Assets

41. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
Occurs when one
company buys
another company.
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
Only purchased
goodwill is an
intangible asset.
Intangible Assets – GoodwillIntangible Assets – Goodwill
GoodwillGoodwill

42. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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Not amortized.Not amortized.
Subject to assessment
for impairment
value and may be
written down.
Subject to assessment
for impairment
value and may be
written down.
Intangible Assets – GoodwillIntangible Assets – Goodwill
GoodwillGoodwill

43. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-43
Eddy Company paid $1,000,000 to
purchase all of James Company’s assets
and assumed liabilities of $200,000. The
acquired assets were appraised at a fair
value of $900,000.
Eddy Company paid $1,000,000 to
purchase all of James Company’s assets
and assumed liabilities of $200,000. The
acquired assets were appraised at a fair
value of $900,000.
Intangible Assets – GoodwillIntangible Assets – Goodwill

44. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-44
What amount of goodwill should be
recorded on Eddy Company books?
a. $100,000.
b. $200,000.
c. $300,000.
d. $400,000.
What amount of goodwill should be
recorded on Eddy Company books?
a. $100,000.
b. $200,000.
c. $300,000.
d. $400,000.
Intangible Assets – GoodwillIntangible Assets – GoodwillIntangible Assets – Goodwill

45. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-45
Exclusive right granted
by federal government to sell or
manufacture an invention.
Exclusive right granted
by federal government to sell or
manufacture an invention.
Cost is purchase
price plus legal
cost to defend.
Cost is purchase
price plus legal
cost to defend.
Amortize cost
over the shorter of
useful life or 17 years.
Amortize cost
over the shorter of
useful life or 17 years.
Intangible Assets – PatentsIntangible Assets – Patents

46. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-46
A symbol, design, or logo
associated with a business.
A symbol, design, or logo
associated with a business.
Purchased
trademarks
are recorded
at cost, and
amortized over
shorter of legal
or economic life,
or 40 years.
Internally
developed
trademarks
have no
recorded
asset cost.
Intangible Assets –
Trademarks and Trade Names
Intangible Assets –
Trademarks and Trade Names

47. © The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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9-47
Legally protected right to sell products
or provide services purchased by
franchisee from franchisor.
Legally protected right to sell products
or provide services purchased by
franchisee from franchisor.
Purchase price is intangible asset
which is amortized over the shorter of
the protected right or 40 years.
Purchase price is intangible asset
which is amortized over the shorter of
the protected right or 40 years.
Intangible Assets – FranchisesIntangible Assets – Franchises

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Exclusive right granted by the
federal government to protect
artistic or intellectual properties.
Exclusive right granted by the
federal government to protect
artistic or intellectual properties.
Amortize cost
over a period not
to exceed 40 years.
Amortize cost
over a period not
to exceed 40 years.
Legal life is
life of creator
plus 50 years.
Legal life is
life of creator
plus 50 years.
Intangible Assets – CopyrightsIntangible Assets – Copyrights

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Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Examples: oil, coal, goldExamples: oil, coal, gold
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Natural ResourcesNatural Resources

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Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Total Units of Capacity
Cost – Salvage Value
Depletion of Natural ResourcesDepletion of Natural Resources

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Total depletion cost for a period is:
Unit Depletion
Rate
Number of Units
Extracted in Period×
Total
depletion
cost
Total
depletion
cost
Inventory
for sale
Inventory
for sale
Unsold
Inventory
Unsold
Inventory
Cost of
goods sold
Cost of
goods sold
Depletion of Natural ResourcesDepletion of Natural Resources

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Specialized plant assets may be required
to extract the natural resource.
These assets are recorded in a separate
account and depreciated.
Depletion of Natural ResourcesDepletion of Natural Resources

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Cost per Unit
of Output
=
Cost - Residual Value
Estimated Units of Output
Depreciation
Expense
=
Cost per Unit
of Output
×
Number of
Units Produced
The Units-of-Output MethodThe Units-of-Output Method

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MACRS = Modified Accelerated Cost Recovery SystemMACRS = Modified Accelerated Cost Recovery System
Based on
Declining-Balance
Methods
Based on
Declining-Balance
Methods
Asset Cost × MACRS rate
Rates are available from tables
provided by the IRS.
Asset Cost × MACRS rate
Rates are available from tables
provided by the IRS.
The only accelerated method
allowed by the IRS when
computing depreciation for tax
return purposes.
The only accelerated method
allowed by the IRS when
computing depreciation for tax
return purposes.
MACRS: The “Tax Method”MACRS: The “Tax Method”

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A survey of 600 Publicly Owned Corporations
563
44
11
70
53
9
Straight-line
Declining-balance
Sum-of-the-years'-digits
Accelerated methods (not specified)
Units-of-output
Other
Which Depreciation Methods
Do Most Businesses Use?
Which Depreciation Methods
Do Most Businesses Use?

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End of Chapter 9End of Chapter 9