CHAPTER- 2

PLANT ASSETS AND INTANGIBILE ASSETS

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 lack no physical substance e.g. 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 Replace worn out or outdated facilities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
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 Fair Percent of Total Appraised Value Purchase Price Cost Allocated to Assets
Market 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% x 1, 000,000. 350,000.

Machinery 240,000. 240, 000 / 1, 600,000. = 15% 15% x 1, 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.
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.

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Depreciation is computed using one of the following different methods:
1. Straight line method
2. Units of output method
3. Declining balance method
4. Sum-of-the-years’-digits method
Like the inventory costing method, each method is acceptable under GAAP, 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.
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.
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.
1. 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, 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. 17,000.00 - Br. 2,000.00
5
Br. 3,000.00

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 Depreciation Schedule – Straight-line method
Computation
Depreciation Depreciable Depreciation Accumulated
Year Rate Cost Expense Depreciation Book value
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.
Depreciation rates for various types of assets can conveniently be stated as percentages.
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 = Br. 15,000.00 x 20% x 3/12 = 750
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.
2. Unit of Output 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

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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 depreciation exp. = Br. 0.15 x 15,000miles
= Br. 2,250
Year 1 depreciation exp. = Br. 0.15 x 7,000miles
= Br. 1,050
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.
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
Beg. Of year Rate
0 - - - - Br. 17,000.
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.

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  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. 1,620
4. Sum of the years Digits method
Like the declining balance method, the sum of the year's digit allocates a large portion of the asset cost to
the early years of its use as accelerated depreciation method. The depreciation rate to be used is a fraction,
of which the numerator is the remaining years of useful life (as of the beginning of the year) & the
denominator is the sum of the individual years that comprise total service life.
SYD is an appropriate method for assets that provide more service benefits in the early years of their lives
& less in later years. Many assets are efficient when first purchased but become less efficient as time
passes. This decrease in utility may be caused by technological obsolescence or by accumulated effects of
physical wear and tear. Copying machines & computer are examples of assets that are depreciated by an
accelerated depreciation method
Consider again the example of the delivery truck costing Br. 17,000 having an estimated life of Five (5)
years & an estimated residual value of Br. 2,000.
First the sum of the digits of the years of the asset’s useful life has to be determined through a short cut
formula that yields the same results as the more tiresome addition process.
Sum of the digits = n (n+1), where n is number of years in the assets life
2
5- Years sum of the digits = 5(5+1) = 5 (3) = 15
2

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 Computation Annual Dep. Accumulated Book
Year Depreciable SYD exp. Depreciation Value
Cost Fraction
0 - - - - Br 17,000.00
1st Br. 15,000. 5/15 Br. 5,000. Br. 5,000. 12,000.00
2nd 15,000. 4/15 4,000 9,000. 8,000.00
3rd 15,000. 3/15 3,000. 12,000. 5,000.00
4th 15,000. 2/15 2,000 14,000. 3,000.00
5th 15,000. 1/15 1,000. 15,000. 2,000.00
Br.15, 000.
If the truck was acquired on Oct 1, since the asset was in use for only 3 months during the first
accounting period, the depreciation to be recorded in the 1st period will be for only 3/12 of a full year. i.e.
3/12 x Br.5, 000. = Br.1, 250
For the second year, Br.15, 000 x 5/15 x 9/12 = Br. 3,750
15,000 x 4/15 x 3/12 = 1,000
Total 4,750
Third year, Br.15, 000. X 4/15 x9/12 = 3,000
Br.15, 000. X 3/15 x3/12 750
Total Br. = 3,500
Capital Expenditure versus Revenue Expenditure
The difference between these two types of expenditure can be summarized as follows:
Capital Expenditure Revenue Expenditure
Increases the operating efficiency, productive - Merely maintains its existing condition or
Capacity, or extend the useful life of the plant assets restore the asset to good working order
 Material in amount and occur infrequently - Fairly small amounts that occur frequently
 Benefits more than one accounting period - Primarily benefits one (the current
accounting) Period.
 Such expenditures are debited to the asset - Such costs are debited to expense account
Account or to the related accumulated
Depreciation account

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Examples of Capital Expenditures
Additions – an addition generally results in a larger physical unit and increased productive capacity.
Additions are debited to the asset account to which the expenditure pertains.E.g- cost of adding an air
conditioning, major engine overhaul.
Betterment/Improvements: may result in replacement of a subunit of a productive asset with a new unit.
E.g. a factory machine with a l0 h.p. electric motor may be improved by
replacing the motor in a 15 h.p. motor. The cost of the new unit should then
be debited to the machine account.
Extra Ordinary Reports - an expenditure that increases the useful life of an asset beyond its original
estimate is called an extraordinary repair. Such expenditure should be
debited to the related accumulated depreciation account. In such cases, the
repairs are said to be restore or make good a portion of the depreciation
recorded in years. The depreciation for future periods should be computed
on the basis of the revised book value of the asset and the revised estimate
of the remaining unequal life.
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.
If the disposal accounts at any time during the year, depreciation for the fraction of the year to the date of
the disposal must be recorded.
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 equip ------------------------------------ 32,000

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 (To record installment of fully depreciation equip.)
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 equips. ------ 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. If,
however, 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 (4,000 + 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 ----------------------------------------- 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)
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

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 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. Exchange can be for either similar or dissimilar
assets because exchanges of similar assets are more common; we will focus more on the exchange for
similar assets.
Exchange of similar assets involves assets of the same type. 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. This
amount called the trade in-allowance may be either greater or less than the book value of the old
equipment. The remaining balance- the amount owed – is either paid in cash or a liability is recorded. It
is normally called boot, which is its tax name.
The cost recorded for the new asset can be determined in either of two ways:
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.

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The following are some common intangibles.
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, which
ever 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)
Note that although the remaining life is 12 years, the estimated useful life is only four years., amortization
should be based on this shorter period.
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.
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.

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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.

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