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Chapter 10-1 CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS Accounting Principles, Eighth Edition Chapter 10-2 Study Study Objectives Objectives 1. Describe how the cost principle applies to plant assets. 2. Explain the concept of depreciation. 3. Compute periodic depreciation using different methods. 4. Describe the procedure for revising periodic depreciation. 5. Distinguish between revenue and capital expenditures, and explain the entries for each. 6. Explain how to account for the disposal of a plant asset. 7. Compute periodic depletion of natural resources. 8. Explain the basic issues related to accounting for intangible assets. 9. Indicate how plant assets, natural resources, and intangible assets are reported. Chapter 10-3 Plant Plant Assets, Assets, Natural Natural Resources, Resources, and and Intangible Intangible Assets Assets Plant Assets Determining the cost of plant assets Depreciation Expenditures during useful life Plant asset disposals Chapter 10-4 Natural Resources Intangible Assets Depletion Accounting for intangibles Research and development costs Statement Presentation and Analysis Presentation Analysis Section Section 11 –– Plant Plant Assets Assets Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools). Major characteristics include: “Used in operations” and not for resale. Long-term in nature and usually depreciated. Possess physical substance. Referred to as property, plant, and equipment; plant and equipment; and fixed assets. Chapter 10-5 Determining Determining the the Cost Cost of of Plant Plant Assets Assets Land Includes all costs to acquire land and ready it for use. Costs typically include: (1) the purchase price; (2) closing costs, such as title and attorney’s fees; (3) real estate brokers’ commissions; (4) costs of grading, filling, draining, and clearing; Chapter 10-6 (5) assumption of any liens, mortgages, or LO 1 Describe howon thethe costproperty. principle applies to plant assets. encumbrances Determining Determining the the Cost Cost of of Plant Plant Assets Assets E10-3 On March 1, 2008, Penner Company acquired real estate on which it planned to construct a small office building. The company paid $80,000 in cash. An old warehouse on the property was razed at a cost of $8,600; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,100 attorney’s fee for work concerning the land purchase, $5,000 real estate broker’s fee, $7,800 architect’s fee, and $14,000 to put in driveways and a parking lot. Instructions Determine amount to be reported as the cost of the land. For each cost not used, indicate the account debited. Chapter 10-7 LO 1 Describe how the cost principle applies to plant assets. Determining Determining the the Cost Cost of of Plant Plant Assets Assets Land Improvements Includes all expenditures necessary to make the improvements ready for their intended use. Examples are driveways, parking lots, fences, landscaping, and underground sprinklers. Limited useful lives. Expense (depreciate) the cost of land improvements over their useful lives. Chapter 10-8 LO 1 Describe how the cost principle applies to plant assets. Determining Determining the the Cost Cost of of Plant Plant Assets Assets Buildings Includes all costs related directly to purchase or construction. Purchase costs: Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission. Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing. Construction costs: Chapter 10-9 Contract price plus payments for architects’ fees, LO 1 Describe how and the cost principle applies building permits, excavation costs.to plant assets. Determining Determining the the Cost Cost of of Plant Plant Assets Assets E10-3 Determine amount to be reported as the cost of the land. Land Company paid $80,000 in cash. Old warehouse razed at a cost of $8,600 Salvaged materials were sold for $1,700. $80,000 8,600 - 1,700 Expenditures before construction began: $1,100 attorney’s fee for work on land purchase. $5,000 real estate broker’s fee. $7,800 architect’s fee. Building $14,000 for driveways and parking lot. Land Improvements Chapter 10-10 Total 1,100 5,000 0 0 $93,000 LO 1 Describe how the cost principle applies to plant assets. Determining Determining the the Cost Cost of of Plant Plant Assets Assets Equipment Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include: purchase price, sales taxes, freight and handling charges, insurance on the equipment while in transit, assembling and installation costs, and costs of conducting trial runs. Chapter 10-11 LO 1 Describe how the cost principle applies to plant assets. Depreciation Depreciation Depreciation is the process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Process of cost allocation, not asset valuation. Applies to land improvements, buildings, and equipment, not land. Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life. Chapter 10-12 LO 2 Explain the concept of depreciation. Depreciation Depreciation Factors in Computing Depreciation Illustration 10-6 Cost Chapter 10-13 Useful Life Salvage Value LO 2 Explain the concept of depreciation. Depreciation Depreciation Depreciation Methods Objective is to select the method that best measures an asset’s contribution to revenue over its useful life. Examples include: (1) Straight-line method. (2) Units-of-Activity method. (3) Declining-balance method. Illustration 10-8 Chapter 10-14 Use of depreciation methods in 600 large U.S. companies LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Exercise (Depreciation Computations—Three Methods) Parish Corporation purchased a new machine for its assembly process on January 2, 2008. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Year-end is December 31. Instructions: Compute the depreciation expense under the following methods. (a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance. Chapter 10-15 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Straight-Line Expense is same amount for each year. Depreciable cost is cost of the asset less its salvage value. Straight-line method predominates in practice. Chapter 10-16 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Exercise (Straight-Line Method) Year Depreciable Cost Annual Expense 2008 $ 105, 000 / 5 = 2009 105, 000 / 5 2010 105, 000 / 2011 105, 000 2012 105, 000 Years $ Accum. Deprec. 21, 000 $ 21, 000 = 21, 000 42, 000 5 = 21, 000 63, 000 / 5 = 21, 000 84, 000 / 5 = 21, 000 105, 000 $ 105, 000 2008 Journal Entry Chapter 10-17 Depreciation expense 21,000 Accumulated depreciation 21,000 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Units-of-Activity Expense varies based on units of activity. Depreciable cost is cost less salvage value. Companies estimate total units of activity to calculate depreciation cost per unit. Chapter 10-18 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Exercise (Units-of-Activity Method) ($105,000 / 1,000 hours = $105 per hour) Year Hours Used Rate per Hour A nnual Expense 2008 200 x $ 105 = 2009 150 x 105 = 15, 750 36, 750 2010 250 x 105 = 26, 250 63, 000 2011 300 x 105 = 31, 500 94, 500 2012 100 x 105 = 10, 500 105, 000 1, 000 2008 Journal Entry Chapter 10-19 $ $ Depreciation expense 21, 000 A ccum. Deprec. $ 21, 000 105, 000 21,000 Accumulated depreciation 21,000 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Declining-Balance Decreasing annual depreciation expense over the asset’s useful life. Declining-balance rate is double the straightline rate. Rate applied to book value (cost less accumulated depreciation. Chapter 10-20 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Exercise (Declining-Balance Method) Declining Balance Rate Year Beginning Book value Annual Expense 2008 $ 117, 900 x 40% = 2009 70, 740 x 40% 2010 42, 444 x 2011 25, 466 2012 15, 280 $ 47, 160 $ 47, 160 = 28, 296 75, 456 40% = 16, 978 92, 434 x 40% = 10, 186 102, 620 x 40% = 2, 380 105, 000 $ 105, 000 2008 Journal Entry Chapter 10-21 Accum. Deprec. Depreciation expense Plug 47,160 Accumulated depreciation 47,160 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Comparison of Depreciation Methods Year 2008 SL 21, 000 DB 47, 160 Activity 21, 000 2009 21, 000 28, 296 15, 750 Comparison of Depreciation Chapter 10-22 2010 21, 000 Methods 16, 978 26, 250 2011 21, 000 10, 186 31, 500 2012 21, 000 2, 380 10, 500 105, 000 105, 000 105, 000 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation for for Partial Partial Year Year The following additional slides are included to illustrate the calculation of partial-year depreciation expense. The amounts are consistent with the previous slides illustrating the calculation of depreciation expense. Chapter 10-23 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation for for Partial Partial Year Year Exercise (Depreciation Computations—Three Methods) Parish Corporation purchased a new machine for its assembly process on October 1, 2008. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. During 2008, the machine was used 30 hours. Year-end is December 31. Instructions: Compute the depreciation expense under the following methods. (a) Straight-Line. (b) Units-of-Activity. (c) Declining-Balance. Chapter 10-24 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation for for Partial Partial Year Year Exercise (Straight-line Method) Year Depreciable Base Annual Expense 2008 $ 105, 000 / 5 = $ 21, 000 2009 105, 000 / 5 = 2010 105, 000 / 5 2011 105, 000 / 2012 105, 000 2013 105, 000 Years Current Year Expense Partial Year x 5, 250 $ 5, 250 21, 000 21, 000 26, 250 = 21, 000 21, 000 47, 250 5 = 21, 000 21, 000 68, 250 / 5 = 21, 000 21, 000 89, 250 / 5 = 21, 000 15, 750 105, 000 x 3/ 12 9/ 12 = = $ Accum. Deprec. $ 105, 000 J ournal entry: 2008 Depreciation expense Accumult ated depreciation Chapter 10-25 5, 250 5, 250 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation for for Partial Partial Year Year Exercise (Units-of-Activity Method) ($105,000 / 1,000 hours = $105 per hour) Year (Given) Hours Used Rate per Hours Annual Expense 2008 30 x $105 = 2009 150 x 105 = 2010 250 x 105 2011 300 x 2012 100 2013 170 3, 150 $ Accum. Deprec. 3, 150 $ 3, 150 15, 750 15, 750 18, 900 = 26, 250 26, 250 45, 150 105 = 31, 500 31, 500 76, 650 x 105 = 10, 500 10, 500 87, 150 x 105 = 17, 850 $ 17, 850 105, 000 $ 105, 000 $ 105, 000 1, 000 $ Current Year Expense J ournal entry: 2008 Depreciation expense 3, 150 Accumultated depreciation Chapter 10-26 3, 150 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation for for Partial Partial Year Year Exercise (Declining-Balance Method) Declining Balance Rate Year Depreciable Base Annual Expense 2008 $ 117, 900 x 40% = 2009 106, 110 x 40% = 2010 63, 666 x 40% 2011 38, 200 x 2012 22, 920 2013 13, 752 $ 47, 160 x Partial Year 3/ 12 Current Year Expense Accum. Deprec. = $ 11, 790 $ 11, 790 42, 444 42, 444 54, 234 = 25, 466 25, 466 79, 700 40% = 15, 280 15, 280 94, 980 x 40% = 9, 168 9, 168 104, 148 x 40% = 852 852 105, 000 Plug $ 105, 000 J ournal entry: 2008 Depreciation expense A ccumultated depreciation Chapter 10-27 11, 790 11, 790 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Depreciation and Income Taxes IRS does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. IRS requires the Modified Accelerated Cost Recovery System, which is NOT acceptable under GAAP. Chapter 10-28 LO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Revising Periodic Depreciation Accounted for in the period of change and future periods (Change in Estimate). Not handled retrospectively. Not considered error. Chapter 10-29 LO 4 Describe the procedure for revising periodic depreciation. Depreciation Depreciation Arcadia HS purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2008 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time. Questions:  What is the journal entry to correct the prior years’ depreciation?  Calculate the depreciation expense for 2008. Chapter 10-30 No Entry Required LO 4 Describe the procedure for revising periodic depreciation. Depreciation Depreciation Equipment cost Salvage value Depreciable cost Useful life (original) years Annual depreciation After 7 years $510,000 - 10,000 $500,000 / 10 First, First, establish establish BV BV at at date date of of change change in in estimate. estimate. x 7 years = $ 50,000 $350,000 Balance Sheet (Dec. 31, 2007) Fixed Assets: Equipmen $510,000 tAccumulated depreciation - 350,000 Book value (BV) Chapter 10-31 $160,000 LO 4 Describe the procedure for revising periodic depreciation. Depreciation Depreciation After 7 years Book value $160,000 Salvage value (new) 5,000 Depreciable cost $155,000 Useful life remaining /8 years Annual depreciation $ 19,375 Journal entry for 2008 Depreciation expense Depreciation Depreciation Expense Expense calculation calculation for for 2008. 2008. 19,375 Accumulated depreciation Chapter 10-32 19,375 LO 4 Describe the procedure for revising periodic depreciation. Expenditures Expenditures During During Useful Useful Life Life Ordinary Repairs - expenditures to maintain the operating efficiency and productive life of the unit. Debit - Repair (or Maintenance) Expense. Referred to as revenue expenditures. Additions and Improvements - costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset. Debit - the plant asset affected. Referred to as capital expenditures. Chapter 10-33 LO 5 Distinguish between revenue and capital expenditures, and explain the entries for each. Plant Plant Asset Asset Disposals Disposals Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix). Illustration 10-18 Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account. Chapter 10-34 LO 6 Explain how to account for the disposal of a plant Plant Plant Asset Asset Disposals Disposals -- Retirement Retirement BE10-9 Prepare journal entries to record the following. (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), except that accumulated depreciation for Gomez Company is $39,000, instead of $41,000. (a) Chapter 10-35 Accumulated depreciation Equipment 41,000 41,000 LO 6 Explain how to account for the disposal of a plant Plant Plant Asset Asset Disposals Disposals -- Retirement Retirement BE10-9 Prepare journal entries to record the following. (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), except that accumulated depreciation for Gomez Company is $39,000, instead of $41,000. (b) Accumulated depreciation Loss on disposal Equipment Chapter 10-36 39,000 2,000 41,000 LO 6 Explain how to account for the disposal of a plant Plant Plant Asset Asset Disposals Disposals Sale of Plant Assets Compare the book value of the asset with the proceeds received from the sale. If proceeds exceed the book value, a gain on disposal occurs. If proceeds are less than the book value, a loss on disposal occurs. Chapter 10-37 LO 6 Explain how to account for the disposal of a plant Plant Plant Asset Asset Disposals Disposals -- Sale Sale BE10-10 Chan Company sells office equipment on September 30, 2008, for $20,000 cash. The office equipment originally cost $72,000 and as of January 1, 2008, had accumulated depreciation of $42,000. Depreciation for the first 9 months of 2008 is $5,250. Prepare the journal entries to (a) update depreciation to September 30, 2008, and (b) record the sale of the equipment. Chapter 10-38 LO 6 Explain how to account for the disposal of a plant Plant Plant Asset Asset Disposals Disposals -- Sale Sale BE10-10 Prepare the journal entries to (a) update depreciation to September 30, 2008, and (b) record the sale of the equipment. (a) Depreciation expense 5,250 Accumulated depreciation (b) Cash Accumulated depreciation Loss on disposal Office equipment Chapter 10-39 5,250 20,000 47,250 4,750 72,000 LO 6 Explain how to account for the disposal of a plant Section Section 22 –– Natural Natural Resources Resources Natural resources consist of standing timber and underground deposits of oil, gas, and minerals. Distinguishing characteristics: Physically extracted in operations. Replaceable only by an act of nature. Chapter 10-40 Section Section 22 –– Natural Natural Resources Resources Cost - price needed to acquire the resource and prepare it for its intended use. Depletion - allocation of the cost to expense in a rational and systematic manner over the resource’s useful life. Depletion is to natural resources as depreciation is to plant assets. Companies generally use units-of-activity method. Depletion generally is a function of the units extracted. Chapter 10-41 LO 7 Compute periodic depletion of natural resources. Section Section 22 –– Natural Natural Resources Resources BE10-11 Olpe Mining Co. purchased for $7 million a mine that is estimated to have 35 million tons of ore and no salvage value. In the first year, 6 million tons of ore are extracted and sold. (a) Prepare the journal entry to record depletion expense for the first year. (b) Show how this mine is reported on the balance sheet at the end of the first year. Depletion cost per unit = $7,000,000 ÷ 35,000,000 = $.20 depletion cost per ton $.20 X 6,000,000 = $1,200,000 Chapter 10-42 LO 7 Compute periodic depletion of natural resources. Section Section 22 –– Natural Natural Resources Resources BE10-11 (a) Prepare the journal entry to record depletion expense for the first year. (b) Show how this mine is reported on the balance sheet at the end of the first year. (a) Depletion expense Accumulated depletion 1,200,000 1,200,000 (b) Balance Sheet Presentation Ore mine 7,000,000 Less: Accum. depletion 5,800,000 Chapter 10-43 1,200,000 LO 7 Compute periodic depletion of natural resources. Section Section 33 –– Intangible Intangible Assets Assets Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance. Intangible assets are categorized as having either a limited life or an indefinite life. Common types of intangibles: Patents Chapter 10-44 Copyrights Trademarks or trade names Franchises or licenses Goodwill LO 8 Explain the basic issues related to accounting for Accounting Accounting for for Intangible Intangible Assets Assets Valuation Purchased Intangibles: Recorded at cost. Includes all costs necessary to make the intangible asset ready for its intended use. Internally Created Intangibles: Generally expensed. Only capitalize direct costs incurred in perfecting title to the intangible, such as legal costs. Chapter 10-45 LO 8 Explain the basic issues related to accounting for Accounting Accounting for for Intangible Intangible Assets Assets Amortization of Intangibles Limited-Life Intangibles: Amortize to expense. Credit asset account or accumulated amortization. Indefinite-Life Intangibles: No foreseeable limit on time the asset is expected to provide cash flows. No amortization. Chapter 10-46 LO 8 Explain the basic issues related to accounting for Accounting Accounting for for Intangible Intangible Assets Assets Patents Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant. Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter. Expense any R&D costs in developing a patent. Legal fees incurred successfully defending a patent are capitalized to Patent account. Chapter 10-47 LO 8 Explain the basic issues related to accounting for Accounting Accounting for for Intangible Intangible Assets Assets BE10-11 Galena Company purchases a patent for $120,000 on January 2, 2008. Its estimated useful life is 10 years. (a) Prepare the journal entry to record patent expense for the first year. (b) Show how this patent is reported on the balance sheet at the end of the first year. (a) Amortization expense (b) Patent Balance Sheet Presentation 12,000 12,000 Intangible assets: Patent Chapter 10-48 108,000 LO 8 Explain the basic issues related to accounting for Accounting Accounting for for Intangible Intangible Assets Assets Copyrights Give the owner the exclusive right to reproduce and sell an artistic or published work.  plays, literary works, musical works, pictures, photographs, and video and audiovisual material. Copyright is granted for the life of the creator plus 70 years. Capitalize acquisition costs. Amortized to expense over useful life. Chapter 10-49 LO 8 Explain the basic issues related to accounting for Accounting Accounting for for Intangible Intangible Assets Assets Trademarks and Trade Names Word, phrase, jingle, or symbol that identifies a particular enterprise or product.  Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca-Cola, and Jeep. Trademark or trade name has legal protection for indefinite number of 10 year renewal periods. Capitalize acquisition costs. No amortization. Chapter 10-50 LO 8 Explain the basic issues related to accounting for Accounting Accounting for for Intangible Intangible Assets Assets Franchises and Licenses Contractual arrangement between a franchisor and a franchisee.  Shell, Taco Bell, or Rent-A-Wreck are franchises. Franchise (or license) with a limited life should be amortized to expense over the life of the franchise. Franchise with an indefinite life should be carried at cost and not amortized. Chapter 10-51 LO 8 Explain the basic issues related to accounting for Accounting Accounting for for Intangible Intangible Assets Assets Goodwill Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc. Only recorded when an entire business is purchased. Goodwill is recorded as the excess of ... purchase price over the FMV of the identifiable net assets acquired. Internally created goodwill should not be capitalized. Chapter 10-52 LO 8 Explain the basic issues related to accounting for Research Research and and Development Development Costs Costs Frequently results in something that a company patents or copyrights such as: new product, formula, process, composition, or idea, literary work. All R & D costs are expensed when incurred. Chapter 10-53 LO 8 Explain the basic issues related to accounting for Statement Statement Presentation Presentation and and Analysis Analysis Presentation Illustration 10-24 Companies usually include natural resources under “Property, plant, and equipment” and show intangibles separately. Chapter 10-54 LO 9 Indicate how plant assets, natural resources, and intangible assets are Statement Statement Presentation Presentation and and Analysis Analysis Analysis Illustration 10-25 Each dollar invested in assets produced $0.96 in sales. If a company is using its assets efficiently, each dollar of assets will create a high amount of sales. Chapter 10-55 LO 9 Indicate how plant assets, natural resources, and intangible assets are Exchange Exchange of of Plant Plant Assets Assets Ordinarily, companies record a gain or loss on the exchange of plant assets. The rationale for recognizing a gain or loss is that most exchanges have commercial substance. An exchange has commercial substance if the future cash flows change as a result of the exchange. Chapter 10-56 LO 10 Explain how to account for the exchange of plant assets. Exchange Exchange of of Plant Plant Assets Assets –– Loss Loss Treatment Treatment Assume Roland Company exchanged a set of used trucks plus cash for a new semi-truck. The used trucks have a combined book value of $42,000 (cost of $64,000 and accumulated depreciation of $22,000). The used trucks have a fair market value of $26,000. Roland must pay $17,000 for the semi-truck. Compute the loss on the exchange. Book value of used trucks Fair market value of used trucks Chapter 10-57 Loss on exchange $42,000 26,000 $16,000 LO 10 Explain how to account for the exchange of plant assets. Exchange Exchange of of Plant Plant Assets Assets –– Loss Loss Treatment Treatment Assume Roland Company exchanged a set of used trucks plus cash for a new semi-truck. The used trucks have a combined book value of $42,000 (cost of $64,000 and accumulated depreciation of $22,000). The used trucks have a fair market value of $26,000. Roland must pay $17,000 for the semi-truck. Prepare the journal entry to record the exchange. Semi truck 43,000 Chapter 10-58 Accumulated depreciation 22,000 Loss on disposal Used trucks 16,000 Cash 64,000 17,000 LO 10 Explain how to account for the exchange of plant Exchange Exchange of of Plant Plant Assets Assets –– Gain Gain Treatment Treatment Assume Mark Express Delivery decides to exchange its old delivery equipment plus cash of $3,000 for new delivery equipment. The book value of the old delivery equipment is $12,000 (cost $40,000 less accumulated depreciation of $28,000), and the fair market value of the old equipment is $19,000. Compute the gain on the exchange. Fair market value of old equipment $19,000 Chapter 10-59 Book value of old equipment 12,000 LO LO 10 Explain how to account for the exchange of plant assets. Exchange Exchange of of Plant Plant Assets Assets –– Gain Gain Treatment Treatment Assume Mark Express Delivery decides to exchange its old delivery equipment plus cash of $3,000 for new delivery equipment. The book value of the old delivery equipment is $12,000 (cost $40,000 less accumulated depreciation of $28,000), and the fair market value of the old equipment is $19,000. Prepare the journal entry to record the exchange. Delivery equipment 22,000 Accumulated depreciation Delivery equipment 40,000 Chapter 10-60 Cash 28,000 Gain on disposal 7,000 3,000 LO 10 Explain how to account for the exchange of plant Copyright Copyright “Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 10-61