Chapter 7—Accounting for Plant Assets, Intangible Assets, and
In Chapter 4, you were introduced to the principles of internal control. In Chapters 5 and 6, you saw how
companies maintain control over three very important current assets: short-term investment, receivables,
and inventories. In this chapter, we continue the discussion of internal control with specific application to
non-current assets, also called long-lived assets. Long-lived assets include things such as equipment,
buildings, natural resources, and intangible assets. The learning objectives for the chapter are to
Determine the cost of a plant asset.
Account for depreciation.
Select the best depreciation method for income tax purposes.
Analyze the effect of a plant asset disposal.
Account for natural resource assets and depletion.
Account for intangible assets and amortization.
Report plant asset transactions on the statement of cash flows.
Objective 1 - Determine the cost of a plant asset.
Business assets are classified as current or long-lived (long-term) assets. Current assets are considered to
be useful for one year or less. Long-lived assets are expected to be useful longer than a year. Plant assets
are long-lived assets such as land and equipment. Plant assets are tangible; that is, they have physical
The cost of a plant asset is the purchase price plus any other amount paid to acquire it and make it ready
cost of land
includes the purchase price, brokerage commission, survey fees, legal fees, transfer
taxes, back property taxes, costs to grade or clear the land, and costs to demolish or remove any unwanted
buildings or other structures.
cost of an existing building
includes the purchase price, brokerage commission, taxes, and any
expenditure to repair or renovate the building to make it ready for use.
cost of machinery and equipment
includes the purchase price less any discounts, plus
transportation charges, transportation insurance, commissions, and installation costs.
Improvements to land
are not part of the cost of land because the usefulness of the improvement
decreases over time. Such improvements include roads, paving, fencing, driveways, parking lots, and
lawn sprinkler systems. Improvements to land should be recorded in a separate asset account. The cost of
improvements to leased assets are called
Construction in progress
assets a company has begun building but not yet finished. Capital leases refer to plant assets a company
does not own which are being leased over an extended period of time.