Page 469 - Accounting Principles (A Business Perspective)

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

• Depletion charges usually are computed by the units-of-production method. Total cost is divided by the
estimated number of units that are economically extractable from the property. This calculation provides a per

unit depletion cost that is multiplied by the units extracted each year to obtain the depletion cost for that year.
• Depreciable assets located on extractive industry property should be depreciated over the shorter of the (1)
physical life of the asset or (2) life of the natural resource. The periodic depreciation charges usually are
computed using the units-of-production method. Using this method matches the life of the plant asset with the
life of the natural resource.
• Only outright purchase costs are included in the acquisition cost of an intangible asset. If an intangible
asset is internally generated, its cost is immediately expensed.

• Intangibles should be amortized over their finite useful lives. The method of amortization should be based
upon the pattern in which the economic benefits are used up. If no pattern is apparent, straight-line
amortization should be used.
Netsales
• Total assets turnover=
Average totalassets
• This ratio indicates the efficiency with which a company uses its assets to generate sales.
Demonstration problem
Demonstration problem A On 2007 January 2, Darton Company purchased a machine for USD 36,000
cash. The machine has an estimated useful life of six years and an estimated salvage value of USD 1,800. Darton
uses the straight-line method of depreciation.
a. Compute the book value of the machine as of 2010 July 1.

b. Assume the machine was disposed of on 2010 July 1. Prepare the journal entries to record the disposal of the
machine under each of the following unrelated assumptions:
• The machine was sold for USD 12,000 cash.
• The machine was sold for USD 18,000 cash.
• The machine and USD 24,000 cash were exchanged for a new machine that had a cash price of USD
39,000. The exchange has commercial substance.
• The machine was completely destroyed by fire. Darton expects to recover cash of USD 10,800 from the

insurance company.
Demonstration problem B Howard Company acquired on 2010 January 1, a tract of property containing
timber at a cost of USD 8,000,000. After the timber is removed, the land will be worth about USD 3,200,000 and
will be sold to another party. Costs of developing the site were USD 800,000. A building was erected at a cost of
USD 160,000. The building had an estimated physical life of 20 years and will have an estimated salvage value of
USD 80,000 when the timber is gone. It was expected that 50,000,000 board feet of timber can be economically
cut. During the first year, 16,000,000 board feet were cut. Howard uses the units-of-production basis to depreciate
the building.
Prepare the entries to record:

a. The acquisition of the property.
b. The development costs.
c. Depletion cost for the first year.
d. Depreciation on the building for the first year.

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