CHAPTER- 2

PLANT ASSETS AND INTANGIBILE ASSETS

IAS 16 defines Property, plant and equipment (PPE) as tangible items that are held for use in the production or
supply of goods or services, for rental to others, or for administrative purposes and expected to be used during
more than one accounting period. Plant asset are long-term or relatively permanent assets such as equipment,
machinery, buildings, vehicles, etc.
Classifications of long-lived assets typically found on a balance sheet are:
 Property, plant, and Equipment
 Investments - Long terms assets acquired for resale in the normal course of business
operation
 Intangibles - are used in the operation of the business, but lave no physical substance eg.
Patent, Goodwill,
Fixed (plant) Assets – are tangible long-lived resources that are used in the operation of the business & are not
intended for sale to customers.
Unique features of fixed (plant) assets are:
 Long lived - useful for longer than a year, and permanent in nature
 For use - Not for sale
 Tangible - can be seen & founded, they have physical existence.
It is important for a business enterprise to:
 Keep the assets in good operating condition
 Replace worn out or outdated facilities
 Expand its productive resources as needed
Plant assets are often subdivided in to five classes:
A. Land - such as building site
B. Buildings - such as stores, offices, factories and warehouses
C. Equipment - such as stores check out counters, cash registers, coolers, office furniture,
machinery & Trucks
D. Land improvement – expenditures for improvements that are neither as permanent as the land
nor directly associated with the building may be set apart in a land improvement account and
depreciated according to their different life spans. E.g.- drive ways, parking lots, fences
E. Natural resources - a site acquired for the purpose of extracting or removing some valuable
resource such as oil, minerals, or timber is classified as a natural resource, not as land

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Determining the cost of plant assets
Plant assets are recorded at cost in accordance with the cost principle of accounting. Cost consists of all
expenditures necessary to acquire the asset & make it ready for its intended use. For example the purchase,
price, freight costs paid by the purchaser & installation costs are all considered part of the cost of factor
machinery. Thus, all reasonable & necessary costs incurred to get an asset in position & condition ready for use
may be included as part of the cost of the asset.
Some of the common acquisition costs for property, plant and equipment assets are:
Land - is an asset that is considered to have unlimited useful life. It includes costs such as, Purchase price, sales
taxes, permits from government agencies broker’s commissions, title fees, surveying fees, real estate tax,
razing or removing unwanted buildings less any salvage, grading & leveling, paving a public street
bordering the land.
Building - costs of Architect's fees, Engineer's fees, insurance costs incurred during construction, interest on
money borrowed to finance construction, sales taxes, modifying for use, walk way to & around the
building.
Machinery & equip - Sales taxes, freight, installation, repairs (purchase of used equip), insurance while in-
transit, assembly, modifying for use, testing for use.
Land improvement - Cost of trees & shrubs, fences, outdoor lighting, paved parking areas and soon.

Illustration:1. Zhang Company purchases factory machinery at a cash price of HK$500,000. Related
expenditures are for sales taxes HK$30,000, insurance during shipping HK$5,000, and installation and testing
HK$10,000. Compute the cost of the machinery.

Prepare the journal entry to record these costs.

Equipment ……………..545,000
Cash………………………..545,000

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Illustration: 2 Huang Company purchases a delivery truck at a cash price of HK$420,000. Related
expenditures are sales taxes HK$13,200, painting and lettering HK$5,000, motor vehicle license HK$800, and a
three-year accident insurance policy HK$16,000. Compute the cost of the delivery truck.

Prepare the journal entry to record these costs.

Illustration: 3. Lew Company Ltd. acquires real estate at a cash cost of HK$2,000,000. The property contains
an old warehouse that is razed at a net cost of HK$60,000 (HK$75,000 in costs less HK$15,000 proceeds from
salvaged materials). Additional expenditures are the attorney’s fee, HK$10,000, and the real estate broker’s
commission, HK$80,000.

Illustration: 4 assume ABC Co. orders a machine at a list price of Br. 10,000 with terms of 2/10, 2/30, sales tax
of Br. 588 must be paid, as well as fright charges of Br. 1,250. Transportation form the rail road station to the
factory costs Br. 150 & installation labor amounts, to Br. 400. One employee with a salary of Br. 800 operates
the machine and the salary paid for the first month of operation was Br. 800. Cost of maintenance materials
needed during the first month of operation was Br.25. Repair cost of Br. 2,000 was paid for damage occurred
during unpacking and installing.

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 List price of the Machine 10,000
Less cash discount ( 2% x Br. 10,000) 200
Net cash price 9,800
Sales tax 588
Freight 1,250
Transportation 150
Installation labor 400
Cost of machine Br. 12,188.00
The salary of employee is not part of the acquisition cost because it is incurred after the machine become
operational.
The acquisition of the machine is then recorded as follows:
Machinery 12,188
Salary expense. 800
Maintenance expense. 25
Loss due to employee negligence 2,000
Cash 15,013
(To record the acquisition of a machine)
Costs not necessary for getting a fixed asset ready for use don't increase the asset’s usefulness. Such costs
should not be included as part of the asset's total cost.
 Mistake in installation eg. Repair cost incurred which is not covered under insurance Uninsured theft
 Damage during unpacking & installing
 Fines for not obtaining proper permits from government agencies
These costs of such items should be debited to an expense not to the asset account
Lump-sum acquisition
A lump-sum purchase occurs when more than one type of assets is acquired in a single transaction. The lamp-
sum purchase price then must be allocated equitably to the individual components. The most common method
of allocation is based on the relative fair market value of the individual assets.
To illustrate, assume Delta Co. acquired Land, Building & Machinery from ABC Co. for Br. 1,000,000. A
professional appraiser valued each of the assets at the appraised fair mkt. Prices: Land, Br. 800,000; Building
Br. 560,000 & Machinery Br. 240,000. The Br. 1,000,000 is allocated among the assets as follows:
Asset Appraised Fai Percent of Total Appraised Purchase Price Cost Allocated to
r Market Value Assets
value

Land Br. 800,000. Br.800, 000 / 1, 600,000. = 50% 50% x 1,000,000. Br. 500,000.
Building 560,000. 560, 000 / 1, 600,000. = 35% 35% x1, 000,000. 350,000.
Machinery 240,000. 240, 000 / 1, 600,000. = 15% 15% x1, 000,000. 150,000.
Total 1,600,000. 100% 1,000,000.

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The entry to record the lump-sum purchase:
Land 500,000
Building 350,000
Machinery 150,000
Cash 1,000,000
(To record acquisition of land building & machinery)

Concept of Depreciation
Depreciation- is the process of allocating the cost of a plant asset over its useful (service) life in a rational and
systematic manner. The basic purpose of depreciation is to provide the proper matching of
expense with revenues in accordance with the matching principle.
 Depreciation is a process of cost allocation, not a process of assets valuation. Accountants make no
attempt to measure the change in an assets mkt. value during ownership, because plant assets are not
held for resale.
 Depreciation does not mean that the business sets aside or accumulates cash to replace assets as they
become fully depreciated. Establishing such a cash fund is decision entirely separate from depreciation.
Accumulate depreciation is that portion of the plant asset's cost that has already been recorded as
expense.
Causes of Depreciation
The two major causes of depreciation are physical deterioration & obsolescence.
a. Physical Deterioration – occurs from wear & tear while in use as well as from the action of the weather
(exposure to sun, wind, and other climatic factors)
b. Obsolescence (Function Depreciation) - is the process of becoming out of date before the assets physically
wears out.
In todays rapidly advance in technology, obsolescence is a more important consideration than physical
deterioration. E.g. a personal computer made in the 1980's would not be able to provide an Internet connection.
Assets like computers, other electronic equipment & airplanes may become obsolete before they physically
deteriorate. An asset is obsolete when another asset can do the job better or more efficiently.
Three factors affect the computation of depreciation:
a. Cost - is the initial cost incurred in acquiring the asset. Cost is measured in accordance with the cost
principle of accounting. Cost is objective fact.
b. Useful Life - is an estimate of the expected productive life, also called service life, of the asset. Useful
life maybe expressed in term of time, units of activity such as machine hours, or in units of output.
c. Salvage Value - also called scrap or residual value is an estimate of the asset's value at the end of its
useful life.
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 o The full cost of a plant asset is depreciated if the asset is expected to have no residual value.
o The plant assets cost minus its estimated residual value is called the depreciable cost.

Depreciation Methods
There are several alternative methods of computing depreciation. A business need not use the same method of
depreciation for all its various assets.
Depreciation is computed using one of the following different methods:
1. Straight line method
2. Units of output (Activity) method
3. Declining balance method
Like the inventory costing method, each method is acceptable under IFRS, thus it is up to the management of
the business to select a method, which is believed to be appropriate in the circumstance. Depreciation affects the
Balance sheet reports through the account of accumulated depreciation, as well as the Income statement through
the account of depreciation expense. Thus, its proper accounting and record is imperative for financial
reporting.
Straight - Line Method
Under the Straight - Line Method, an equal portion of the cost of the asset is allocated to each period of use;
consequently, this method is most appropriate when usage of an asset is fairly uniform from year to year.
 The Straight Line Method is the simplest & most widely used method of computing depreciation.
 The Straight Line Method depreciation assumed that a business receives equal benefits from an
asset each day of the asset's life. Straight Line, then, allocates an equal part of the total cost to
each day of an asset's useful life.
To illustrate, on January 1 2017, assume a delivery truck has a cost of Br.17, 000 a residual value of Br
2,000 and an estimated useful life of five years. The annual computation of depreciation exp. will be as
follows:
Straight - Line depreciation per year = Cost - Residual value
Useful life in years
Br. 17,000 - Br. 2,000
5
= Br. 3,000

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 Depreciation Schedule – Straight-line method
Computation Depreciati
Depreciable on Accumulated Book
Year Depreciation cost Expense depreciation value
Rate
1st 20% x Br. 15,000 Br. 3,000. Br. 3,000. Br. 17,000.
2nd 20% x 15,000 3,000. 6,000. 11,000.
3rd 20% x 15,000 3,000. 9,000. 8,000.
4th 20% x 15,000 3,000. 12,000. 5,000.
5th 20% x 15,000 3,000. 15,000. 2,000.
100% Br. 15,000.

In the illustration, it was assumed that the asset was acquired on Jan. 1, the beginning of the accounting period.
If the asset had been acquired during the year, on October 1, it would have been in use for only 3 months, or
3/12 of a year. Then, the deprecation expense for the three months would be computed as follows:
Depreciation on December 31 2017= Br. (15,000 x 20% x 3/12 = 750 on the first 3 month of 2017
And Depreciation on December 31 2022= (15000 x 20% ) x 9/12= 2250 on the last 9 month of 2022

Computation Depreciati
Depreciabl on Partial Accumulated Book
Year e Depreciation Expense dep exp. depreciation value
cost
Rate
1st(3month) 20% x Br. 15,000 Br. 3,000. 3/12 ( 750) Br. 750. Br. 17,000.
2nd 20% x 15,000 3,000. 3750. 13,250.
3rd 20% x 15,000 3,000. 6,750. 10,250.
4th 20% x 15,000 3,000. 9750. 7250.
5th 20% x 15,000 3,000. 12750. 4250
6th(9month) 20% x 15000 3000 9/12(2250) 15000 2000
.

The straight-line method predominates in practice. It is simple to apply, & it matches expenses with revenues
appropriately when the use of the asset is reasonably uniform throughout the service life.

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 2. Unit of Output (activity ) Method
This method is used for assets whose useful life is limited by physical wear- and -tear rather than obsolescence.
The asset life is expressed in expected units of output, such as hours, miles, or number of units. This method is
appropriate when the service of a fixed asset is related to use rather than time. It is based on the assumption that
an asset depreciates only as it is used. Thus the asset life is expressed in expected units of output such as miles,
To illustrate, assume that the delivery truck in the previous example has an estimated useful life of 100,000
miles, and in the first year of its usage it is driven 15,000.00 miles. The depreciation for the first year, is then
computed as follows:
Depreciation Per unit of output = Cost - Residual Value
Est. Units of Output (Miles)
Br. 17,000. - Br. 2,000.
100,000 Miles
Br. 0.15 Dep. per mile
In the units-of-output method, a fixed amount of depreciation is assigned to each unit of output produced or
each unit of capacity used by the plant assets. Year 1, 15000 miles, Year 2, 7000 miles, Year 3, 25000 miles,
Year 4, 50000 miles and Year 5, 3000 miles
Year 1 depreciation exp. = Br. 0.15 x 15,000miles
= Br. 2,250
Year 2 depreciation exp. = Br. 0.15 x 7,000miles
= Br. 1,050
Year 3 depreciation exp. = Br. 0.15 x 25,000miles
= Br. 3750
Year 4 depreciation exp. = Br. 0.15 x 50,000miles
= Br. 7500
Year 5 depreciation exp. = Br. 0.15 x 3000miles
= Br. 450
So, when the amount if use of a fixed asset varies from year to year, the units- of – output method is more
appropriate than the straight –line method. In such a case, the units-of-output method better matches the
expense with related revenue.

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 3. Declining Balance Method
The basic idea behind the declining balance method is that more service benefits are received in the early years
of an asset's life when it is new, & fewer benefits are received each year as the asset grows older. So this
method assigns more (greater) depreciation exp. to the early years of the asset's life & less to later ones.
To illustrate, consider the previous e.g. of the Br. 17,000 delivery truck.
To depreciate the truck by the double declining balance method, we double the straight-line rate of 20% &
apply the doubled rate of 40% to the book value at the beginning of each year.
Depreciation Schedule Declining Balance Method
Year Computation Annual Dep. exp. Accumulated Book
Book Value Depreciation Depreciation Value end of
Beg. Of year Rate year

1st Br. 17,000. 40% Br. 6,800. Br. 6,800. 10,200.

2nd 10,200. 40% 4,080. 10,880. 6,120.
3rd 6,120. 40% 2,448. 13,328 3,672.
4th 3,672. 40% 1,469. 14,797. 2,203.
5th 2,203 40% 203. 15,000 2,000.

 The declining balance method produces a decreasing annual depreciation expense over the useful life of
the asset.
 The method is so named because computation of periodic depreciation is based on a declining book value
(cost less accumulated. depreciation) of the asset.
 The depreciation rate remains constant from year to year, but the book value to which the rate is applied
declines each year.
 Unlike the other depreciation methods, salvage value is ignored in determining the amount to which the
declining balance is applied. Salvage value, however, does limit the total depreciation that can be taken.
Depreciation stops when the asset's B.V. equals expected salvage value.
 Because the declining balance method produces higher depreciation expense in the early years than in the
later years, it is considered an accelerated depreciation method.
If the asset has been acquired on October 1, rather than on January 1, depreciation for only 3 months would be
computed as follows: 40% x Br. 17,000.00 x 3/12 = Br. 1,700
For the next year, the calculation would be, 40% x (17,000 -1,700) =Br. 6120

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Year Computation Annual Dep. Partial Accumulated Book
Book Value Dep’exp exp. exp. Depreciation Value
Beg. Of year Rate

1st Br. 17,000. 40% Br. 6,800. 3/12 Br. 1700 15,300.
nd
2 15,300. 40% 6120. 7820 9180.
rd
3 9180. 40% 3672. 11492 5508.
th
4 5508. 40% 2203 13695 3305
th
5 3305 40% 1322 1305* 2,000.
*= 15000-13695
Comparison of the Depreciation Methods
Unit-of-output Declining
Year Straight Line Balance
1st Br. 3,000 Br. 2,250 Br. 6,800.
2nd 3,000. 1,050. 4,080.
3rd 3,000. 3,750 2,448
4th 3,000 7,500. 1,469.
5th 3,000 450. 203.
Br. 15,000 Br. 15,000 Br. 15,000

COMPONENT DEPRECIATION
Thus far, we have assumed that plant assets use a single depreciation rate. However, IFRS requires component
depreciation for plant assets. Component depreciation requires that any significant parts of a plant asset that
have significantly different estimated useful lives should be separately depreciated.
To illustrate component depreciation, assume that Lexure Construction builds an office building for
$4,000,000, not including the cost of the land. If the $4,000,000 is allocated over the 40-year useful life of the
building, Lexure reports $100,000 ($4,000,000 ÷ 40) of depreciation per year, assuming straight-line
depreciation and no residual value. However, assume that $320,000 of the cost of the building relates to
personal property and $600,000 relates to land improvements. Because the personal property has a depreciable
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life of five years and the land improvements have a depreciable life of 10 years, Lexure must use component
depreciation. It must reclassify $320,000 of the cost of the building to personal property and $600,000 to the
cost of land improvements.
Assuming that Lexure uses straight-line depreciation, component depreciation for the first year of the office
building is computed as follows.

Depreciation and Income Taxes

Tax laws allow corporate taxpayers to deduct depreciation expense when they compute taxable income.
However, tax laws often do not require corporate taxpayers to use the same depreciation method on the tax
return that is used in preparing financial statements.
Many corporations use
Straight-line in their financial statements to maximize net income.
An accelerated-depreciation method on their tax returns to minimize their income taxes.

REVISING PERIODIC DEPRECIATION

Depreciation is one example of the use of estimation in the accounting process. Management should
periodically review annual depreciation expense. If wear and tear or obsolescence indicate that annual
depreciation estimates are inadequate or excessive, the company should change the amount of depreciation
expense.
When a change in an estimate is required, the company makes the change in current and future years. It does not
change depreciation in prior periods. The rationale is that continual restatement of prior periods would
adversely affect confidence in financial statements.
To determine the new annual depreciation expense, the company first computes the asset’s depreciable cost at
the time of the revision. It then allocates the revised depreciable cost to the remaining useful life.
To illustrate, assume that Barb’s Florists decides on January 1, 2020, to extend the useful life of the truck by
one year (a total life of six years) and increase its residual value to €2,200. The company has used the straight-
line method to depreciate the asset to date. Depreciation per year was €2,400 [(€13,000 − €1,000) ÷ 5].
Accumulated depreciation after three years (2017–2019) is €7,200 (€2,400 × 3), and book value is €5,800
(€13,000 − €7,200). The new annual depreciation is €1,200, as shown in Illustration 9-17.

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Revaluation of Plant Assets
IFRS allows companies to revalue plant assets to fair value at the reporting date.
Companies that choose to use the revaluation framework must follow revaluation procedures. If revaluation is
used, it must be applied to all assets in a class of assets. Assets that are experiencing rapid price changes must
be revalued on an annual basis. Otherwise, less frequent revaluation is acceptable.
GAIN SITUATION
To illustrate asset revaluation accounting, assume that Pernice Ltd. applies revaluation to equipment purchased
on January 1, 2017, for HK$1,000,000. The equipment has a useful life of five years and no residual value. On
December 31, 2017, Pernice makes the following journal entry to record depreciation expense, assuming
straight-line depreciation.
Dec. 31 Depreciation Expense 200,000
Accumulated Depreciation—Equipment 200,000
(To record depreciation expense in 2017)

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After this entry, Pernice’s equipment has a carrying amount of HK$800,000 (HK$1,000,000 - HK$200,000). At
the end of 2017, independent appraisers determine that the asset has a fair value of HK$850,000. To report the
equipment its fair value of HK$850,000 on December 31, 2017, Pernice eliminates the Accumulated
Depreciation—Equipment account, reduces Equipment to its fair Value of HK$850,000, and records
Revaluation Surplus of HK$50,000.

The entry to record the revaluation is as follows.

Dec. 31 Accumulated Depreciation—Equipment 200,000
Equipment 150,000
Revaluation Surplus 50,000
(To adjust the equipment to its fair value)
Thus, Pernice follows a two-step process. First, Pernice records depreciation based on the cost basis of
HK$1,000,000. As a result, it reports depreciation expense of HK$200,000 on the income statement. Second, it
records the revaluation. It does this by eliminating any accumulated depreciation, adjusting the recorded value
of the equipment to its fair value, and debiting or crediting the revaluation surplus account. In this example, the
revaluation surplus is HK$50,000, which is the difference between the fair value of HK$850,000 and the book
value of HK$800,000. Revaluation surplus is an example of an item reported as other comprehensive income.
LOSS SITUATION
Assume again that Pernice’s equipment has a carrying amount of HK$800,000 (HK$1,000,000 - HK$200,000).
However, at the end of 2017, independent appraisers determine that the asset has a fair value of HK$775,000,
which results in an impairment loss of HK$25,000 (HK$800,000 - HK$775,000). To record the equipment at
fair value and to record this loss, Pernice first eliminates the balance in the Accumulated Depreciation—
Equipment account of HK$200,000. Next, it reduces the Equipment account by HK$225,000 to report the
equipment at HK$775,000 (HK$1,000,000 - HK$225,000).
The entry to record the equipment and report the impairment loss is as follows
Dec. 31 Accumulated Depreciation—Equipment 200,000
Impairment Loss 25,000
Equipment 225,000
(To record impairment loss of equipment)

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Expenditures During Useful Life
During the useful life of a plant asset, a company may incur costs for ordinary repairs, additions, or
improvements.
Ordinary repairs are expenditures to maintain the operating efficiency and productive life of the unit. They
usually are fairly small amounts that occur frequently. Examples are motor tune-ups and oil changes, the
painting of buildings, and the replacing of worn-out gears on machinery. Companies record such repairs as
debits to Maintenance and Repairs Expense as they are incurred. Because they are immediately charged as an
expense against revenues, these costs are often referred to as revenue expenditures.

In contrast, additions and improvements are costs incurred to increase the operating efficiency, productive
capacity, or useful life of a plant asset. They are usually material in amount and occur infrequently. Additions
and improvements increase the company’s investment in productive facilities. Companies generally debit these
amounts to the plant asset affected. They are often referred to as capital expenditures.
Disposal of Plant Asset
Eventually, a plant asset ceases to serve a Company’s needs. The asset may have become worn out, obsolete, or
for some other reason no longer useful to the business.
Plant assets of various types may be disposed of in three ways:
1. Retirement – the plant asset is scrapped or discarded
2. Sale – the plant asset is sold to another party
3. Exchange – an existing plant asset is traded in a new plant asset.
At the time of disposal, it is necessary to determine the book value of the plant asset. The book value is the
difference between the cost of the plant asset and the accumulated depreciation to date.
1. Retirement (Discarding) Fixed Asset
Under fixed asset are no longer useful to the business and have no residual or market value, they are discarded.
To illustrate, the accounting for a retirement, assume that ABC Company retires its computer printers, which
cost Br. 32,000. The accumulated depreciation on these printers is also
Br. 32, 000; to equip, is therefore, fully depreciated (zero book value), the enter to read this retirement is:
Accumulated depreciation – printing equip. ------------- 32,000
Printing equips ------------------------------------ 32,000
(To record installment of fully depreciation equip.)

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What about if a fully depreciated plant asset is still useful to the company?
Assume that moon light company discards its delivery equipment, which cost Br. 18,000, and has accumulated
depreciation of Br. 14,000 at the date of retirement. The entry to record the retirement is as follows:
Accumulated depreciation-Deliver equip. ------ 14,000
Loss on disposal ------------------------------ 4,000
Delivery equip ------------------------------------- 18,000
2. Selling of Plant Assets
In a disposal by sale, the book value of the asset is compared to the proceeds received for the sale.
If the proceeds received from the sale exceed the book value of the plant asset, a gain on disposal occurs.
However, If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal
occurs.
To illustrate, assume that on July 1, 1993 Gura Trading Company sells Office Furniture for Br 16,000 cash.
The Office- furniture originally cost Br. 60,000 and as of Jan 1, 1993, had accumulated depreciation of Br.
41,000. The yearly depreciation is Br. 16,000.
Depreciation for the first six months of 1995 is Br. 8,000. The entry to record depreciation expense and update
accumulated depreciation to July 1 is as follows:
July 1, Depreciation expense ------------------- 8,000
Accumulated depreciation of furniture ----------- 8,000
(To record depreciation expense for the 1st six months of 1993)
After the accumulated depreciation balance is updated, a gain on disposal of Br. 5,000 is computed.
Cost of furniture ----------------------------------- Br. 60,000
Less: Accumulated Depreciation (41,000 + 8,000) 49,000
Book value at date of disposal 11,000
Proceeds from sale 16,000
Gain on disposal Br. 5,000
The entry to record the sale and the gain on disposal is as follows:
July 1. Cash ----------------------------------------- Br, 16,000
Accumulated. Dep. - Office furn. ------------ 49,000
Office furn. ---------------------------------- 60,000
Gain on Disposal --------------------------- 5,000
(To record sale of office furniture at a gain)

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 Loss on Disposal
Assume that instead of selling the office furniture for Br. 16,000, Guna trading sells it for Br. 9,000. In this
case, a loss of Br. 2,000 is computed as follows:
Cost of office furniture ------------------------ Br. 60,000
Less: accumulated depreciation. ------------- 49,000
Book value at date of disposal --------------- 11,000
Proceeds from sale ----------------------------- 9,000
Loss on disposal ------------------------------- Br.2,000

The entry to record the sale and the loss on disposal is as follow:
July 1. Cash -------------------------------------------- 9,000
Accumulated dep. - office furn. ----------- 49,000
Loss on disposal ----------------------------- 2,000
Office furniture ------------------------------------- 60,000
(To record sales of office furniture at a loss)
3. Exchanging Fixed Asset
Plant assets may also be disposed of trough exchange. Business often exchange (trade – in) their old plant assets
for similar assets that are newer and more efficient. This occurs for example, when old equipment is exchanged
for new delivery equipment or when old office furniture is exchanged for new office furniture. At the time of
exchange, the seller allows the buyer an amount for the old equipment traded in. The rational for recognizing a
gain or loss is that most exchanges have commercial substance.
Gain Treatment
Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated
depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also
paid €3,000.
Cost of old equipment €40,000
Less: Accumulated depreciation 28,000
Book value 12,000
Fair market value of old equipment 19,000
Gain on disposal € 7,000
Fair market value of old equipment €19,000
Cash paid 3,000
Cost of new equipment €22,000
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Prepare the entry to record the exchange of assets by Mark Express.
Equipment (new) 22,000
Accumulated Depreciation—Equipment (old) 28,000
Equipment (old) 40,000
Gain on Disposal of Plant Assets 7,000
Cash 3,000
Loss treatment
Illustration: Roland NV exchanged used trucks (cost €64,000 less €22,000 accumulated depreciation) plus
cash of €17,000 for a new semi-truck. The used trucks had a fair market value of €26,000.
Cost of used trucks €64,000
Less: Accumulated depreciation 22,000
Book value 42,000
Fair market value of used trucks 26,000
Loss on disposal €16,000
Fair market value of used trucks €26,000
Cash paid 17,000
Cost of semi-truck €43,000
Prepare the entry to record the exchange of assets by Roland NV.

Equipment (new) 43,000

Accumulated Depreciation—Equipment 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old) 64,000
Cash 17,000

Natural Resources
The fixed assets of some businesses include standing timber and underground deposits of oil, gas, minerals or
other natural resources. As this business harvest or mine and sell these resources, a portion of the cost of
acquiring them must be debited to an expense account. This process of transferring the cost of natural resources
to an expense account is called depletion.
A natural resource as its name implies is a resource existing naturally, not constructed by humans. Examples of
typical natural resources are deposits of coal, oil, and other minerals. These natural resources are typically used
as raw manufacture in the production of other goods .A quantity of natural resource can be considered as
consisting of a total bundle of materials, tons of coal, barrels of oil, etc. As these materials are removed, a part
of the natural resource is used up – depleted.

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The acquisition cost of a natural resource is the cash or cash equivalent price, necessary to acquire the resource
and prepare it for its intended use. For already discovered resources such as an existing Coal Mine ,cost is the
price paid for the property.
The systematic write-off of the cost of natural resources is called depletion. The units of activity (output)
method are generally used to compute depletion, because periodic depletion generally is a function of the units
extracted during the year.
Depletion Cost Total Cost - Salvage
Per Unit = Total Estimated Units

Periodic Depletion Depletion Cost Number of Units

Expense = Per Unit X Extracted & Sold
To illustrate, assume that the Global Coal Co. invests Br. 5,000,000 in a mine estimated to have 10 million tons
of coal and no salvage value. In the first year, 800,000 tons of coal are extracted and sold.
Using the above formula, the computations are as follows:
Depletion Cost = $ 5,000,000
per unit 10,000,000
= Br. 0.5 depletion cost per ton.
Depletion expense = Br. 0.5 x 800,000 tons
= Br. 400,000
The enter to record depletion expense for the first year of operation is as follows:
Dec. 31 Depletion expense ---------------- 400,000
Accumulated depletion -------------------- 400,000
(To record depletion expense on coal deposits)
Accumulated depletion, a contra asset account similar to accumulated deprecation, is deducted from the cost of
the natural resources in the balance sheet as follows:
Coal Mines -------------------------------- Br. 5,000,000
Less: Accumulated depletion ----------- 400,000 = Br. 4,600,000
 Sometimes, natural resources extracted in one accounting period will not be sold until a later period. In
this case, depletion is not expensed until the resource is sold. The amount not sold is reported in the
current asset section as inventory.

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Intangible Assets
Long-lived assets that (1) lack physical substance and (2) are not held for investments are classified as
intangible assets. The acquisition cost of intangible assets is determined by using the same general rule as
property, plant, and equipment.
There are few differences between accounting for intangible assets and accounting for plant assets.
 The term used to describe the write-off of an intangible asset is amortization, rather than
depreciation.
 The amortization period of an intangible asset cannot be longer than 40 years.
 Unlike plant assets, all intangible assets are typically amortized on a straight-line basis. The
universal use of this method adds comparability.
1. Patent
A Patent is an exclusive right granted by the government for manufacturing, use, and sale of a particular
product. The purpose of this exclusive right is to encourage the invention of new machine and processes.
Although patents may be granted for fixed period time (17 or 20 Years) it may change as technology or
consumer tastes change. So the cost of a patent should be amortized over its legal life or useful life, whichever
is shorter.
To illustrate, assume that a patent is purchased from the investor at a cost of Br. 100,000 after five years of the
legal life have expired (its legal life is 17 years). It is estimated that the useful life after purchase is only four
years. The entry to be made to record the purchase and the annual amortization expense would be:
Jan 1, Patent -------------------------------------- 100,000
Cash ------------------------------------- 100,000
(To record acquisition of patent that until have a legal life of 17 years)
Dec. 31 Amortization Expense - Patent --------- 25,000
Patents ----------------------------------------- 25,000
(To amortize cost patent on a straight-line basis and estimated life of four years)
2. Copy right
A copyright is on exclusive right granted by government to protect the production and sell of literary or artistic
materials for the life of the creator plus 50 years. The useful life of a copyright generally is shorter than its legal
life. Similar to other intangible assets, the maximum write-off is 40 years. However, because of the difficulties
of determining the period over which benefits are to be received, copyrights usually are amortized over a
relatively short period of time.

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 3. Trade mark and Trade Names
A trademark or trade name is a word, phrase, or symbol that distinguishes or identifies a particular enterprise
or product. E.g. Co-Ca Cola, Sony, Dell, Nike etc…
The creator or original user may obtain exclusive legal right to the trademark or trade name by registering it
with the government office.
4. Franchise and Licenses
A franchise is a right granted by a company or a governmental unit to conduct a certain type of business in a
specific geographical area.
When the cost of franchise is small, it may be charged immediately to expense or amortized over a short period
such as five years. When the cost is material, amortization should be based upon the life of the franchise (if
limited) and the amortization period, however, may not exceed 40 years.
5. Goodwill
In business, goodwill refers to an intangible asset of a business that is created from such favorable factors as
location, product quality, reputation, and managerial skill. Goodwill allows a business to earn a rate of return on
its investment that is often in excess of the normal rate for other firms in the same business.
GAAP permits the recording of goodwill in the accounts only if it is objectively determined by a transaction.
E.g. Purchase or sale of business.
Goodwill must be amortized over its estimated useful life, which cannot exceed 40 years.
To illustrate how goodwill is determined and accounted consider the following example:
At. Cost At fair Mkt. Value
ABC-Hotel Total Assets 4,300.000 6,350.000
Balance sheet Total Liability -1,100.000 -1,100.000
Net Asset 3,200.000 5,250.000
Purchase Price (Cost) ------------------------ - Br. 6,100.000
Less: Fair mkt. Value of the assets -------- 5,250.000
Goodwill -------------------------------------- 850.000

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Research and development costs
Research and development costs are expenditures that may lead to patents, copyrights, new processes, and new
products. Many companies spend considerable sums of money on research and development (R&D).
Research and development costs present accounting problems as it is sometimes difficult to assign these costs to
specific c projects. Also, there are uncertainties in identifying the amount and timing of future benefits. Costs in
the research phase are always expensed as incurred. Costs in the development phase are expensed until specific
criteria are met, primarily that technological feasibility is achieved. Development costs incurred after
technological feasibility has been achieved are capitalized to Development Costs, which is considered an
intangible asset.
Illustration: Laser Scanner Ltd. spent NT$1 million on research and NT$2 million on development of new
products. Of the NT$2 million in development costs NT$500,000 was incurred prior to technological feasibility
and NT$1,500,000 was incurred after technological feasibility had been demonstrated. The company would
record these costs as follows.
Research and Development Expense 1,500,000
Development Costs 1,500,000
Cash 3,000,000

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