Basic elements of accounting for natural resources and related depletion

chapter 6

Plant Assets

Learning Goals

• Apply the principles of ordinary and necessary cost, along with other special rules related to capitalization of expenditures.

• Understand conceptual and applied issues pertaining to alternative depreciation methods.

• Know the principles that govern the accounting for asset-related expenditures sub- sequent to acquisition.

• Record transactions related to the disposal of assets.

• Understand the basic elements of accounting for natural resources and related depletion.

• Understand the basic elements of accounting for intangibles and related amortization.

Copyright Barbara Chase/Corbis/AP Images

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CHAPTER 6Chapter Outline

Chapter Outline 6.1 Ordinary and Necessary Costs

Special Rules Materiality Issues Depreciation

6.2 Depreciation Methods The Straight-Line Method of Depreciation The Double-Declining-Balance Method of Depreciation The Units-of-Output Method of Depreciation Revisions in Depreciation Two Sets of Books?

6.3 Asset-Related Costs Subsequent to Acquisition Sale or Abandonment of Property, Plant, and Equipment Impairment Taking a “Big Bath” Natural Resources Intangible Assets Research and Development Costs Goodwill

Remember that a classified balance sheet includes a separate category entitled Property, Plant, and Equipment. This section typically follows the Long-Term Investments sec- tion. Property, Plant, and Equipment (PP&E) should reflect only the physical assets that are used in the business’s production activities. This would include land, buildings, and equipment. Idle facilities or assets acquired for speculative purposes should be shown in long-term investments. Within the PP&E section, assets are usually listed according to their useful lives. Land is listed first because it has a permanent life and is followed by buildings, then equipment. Table 6.1 shows a typical balance sheet disclosure.

Table 6.1: A typical balance sheet disclosure

Land $ 250,000

Buildings $ 600,000

Less: Accumulated depreciation (150,000) 450,000

Equipment $850,000

Less: Accumulated depreciation (550,000) 300,000 $1,000,000

This balance sheet section would appear within a company’s balance sheet, similar to Exhibit 6.1.

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CHAPTER 6Section 6.1 Ordinary and Necessary Costs

Exhibit 6.1: Mega Company balance sheet

6.1 Ordinary and Necessary Costs

The amount of cost reported for an item of PP&E is the ordinary and necessary cost to get the item in place and in condition for its intended use. These costs are referred to as capital expenditures. Capital expenditures include the direct purchase price and the cost of permits, sales tax, freight, installation, and other usual costs to prepare the item for use. Costs that are not ordinary and necessary, such as repairing damage caused by an accident during installation of equipment, would be expensed.

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