Page 460 - Accounting Principles (A Business Perspective)

11. Plant asset disposals, natural resources, and intangible assets

Because the life of the mine (10 years or 1,000,000 tons) is shorter than the life of the building (20 years), the
building should be depreciated over the life of the mine. The basis of the depreciation charge is tons of ore rather
than years because the mine's life could be longer or shorter than 10 years, depending on how rapidly the ore is

removed.
Suppose that during the first year of operations, workers extracted 150,000 tons of ore. Building depreciation
for the first year is USD 45,000, computed as follows:
Assetcost – Estimated salvage value
Depreciation per unit=
Total tonsof ore∈minethat can beeconomicallyextracted
$310,000−$10,000
= tons=$0.30per ton
1,000,000
Depreciation for year=Depreciation per unit X Unitsextracted
USD 0.30per ton X150,000 tons=USD 45,000
On the income statement, depreciation on the building appears as part of the cost of ore sold and is carried as

part of inventory cost for ore not sold during the period. On the balance sheet, accumulated depreciation on the
building appears with the related asset account.
Plant assets and natural resources are tangible assets used by a company to produce revenues. A company also
may acquire intangible assets to assist in producing revenues.

Intangible assets
Although they have no physical characteristics, intangible assets have value because of the advantages or
exclusive privileges and rights they provide to a business. Intangible assets generally arise from two sources: (1)
exclusive privileges granted by governmental authority or by legal contract, such as patents, copyrights, franchises,
trademarks and trade names, and leases; and (2) superior entrepreneurial capacity or management know-how and
customer loyalty, which is called goodwill.

All intangible assets are nonphysical, but not all nonphysical assets are intangibles. For example, accounts
receivable and prepaid expenses are nonphysical, yet classified as current assets rather than intangible assets.
Intangible assets are generally both nonphysical and noncurrent; they appear in a separate long-term section of the
balance sheet entitled "Intangible assets".
Initially, firms record intangible assets at cost like most other assets. However, computing an intangible asset's
acquisition cost differs from computing a plant asset's acquisition cost. Firms may include only outright purchase
costs in the acquisition cost of an intangible asset; the acquisition cost does not include cost of internal

development or self-creation of the asset. If an intangible asset is internally generated in its entirety, none of its
costs are capitalized. Therefore, some companies have extremely valuable assets that may not even be recorded in
their asset accounts. To explain the reasons for this practice, we discuss the history of accounting for research and
development costs next.
Research and development (R&D) costs are costs incurred in a planned search for new knowledge and in
translating such knowledge into new products or processes. Prior to 1975, businesses often capitalized research and
development costs as intangible assets when future benefits were expected from their incurrence. Due to the
difficulty of determining the costs applicable to future benefits, many companies expensed all such costs as
incurred. Other companies capitalized those costs that related to proven products and expensed the rest as

incurred.

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