Page 448 - Accounting Principles (A Business Perspective)

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11. Plant asset disposals,

natural resources, and

intangible assets

Learning objectives
After studying this chapter, you should be able to:
• Calculate and prepare entries for the sale, retirement, and destruction of plant assets.
• Describe and record exchanges of nonmonetary assets.

• Determine the periodic depletion cost of a natural resource and calculate depreciation of plant assets located
on extractive industry property.
• Prepare entries for the acquisition and amortization of intangible assets.
• Analyze and use the financial results-total assets turnover.
A company accountant's role in measuring intangibles

Many assets have no physical substance. These assets are referred to as intangible. Even though these assets
have no substance, the accountant still must spend time measuring the value of these assets to corporation and how
these assets contribute to the cash flow of the entity.
The accountant must first place a value on something that cannot be seen by the naked eye. Then the accountant
must determine if the asset is making a contribution toward cash flow of the entity (if so and how long) and finally,

the accountant must determine if and when this benefit has indeed expired.
As we move ever more toward an information based economy, the per cent of intangible assets to total assets
also increases. In many cases, intangible assets compose a significant majority of total assets. Thus, the earning
power of such companies is primarily based on the valuation of assets that cannot be seen or touched. Some
intangible assets, such as human assets and internally generated intangibles, are not even recorded on the
company's books. This makes it even more difficult to value the assets and determine their contribution to earnings.
Investors and analysts often compare book value per share with the market price per share for a corporation.
This ratio is referred to as the price to book ratio (PB). It measures the market's beliefs about the value of net assets
as compared to the recorded amount of net assets. In 1998 Tootsie Roll had a PB ratio of approximately 5.2. The

recorded net assets were approximately USD 400 million, yet the market perceived Tootsie Roll to have net assets
worth over USD 2,000 million. What is the nature of those unrecorded (intangible) assets? In 1998, Microsoft had a
PB ratio of approximately 12.4. The real value of Microsoft's net assets exceeded those reported in the accounting
records by a factor of 12.4. It is reasonable to assume that a large portion of the unrecorded assets of Microsoft must
be intangible. How does the accountant value something that has no physical substance and in many cases has not
been recorded? It is similar to walking around in a dark closet wearing a blindfold.

Accounting Principles: A Business Perspective 449 A Global Text