Acct 101 Principle of Accounting

Chapter three

Accounting for plant assets

Introduction
Dear learners you have learnt in the previous two chapters how accounting for inventory
and payroll accounting is to be carried out. This chapter aims at acquainting you with the
constituents of the plant asset, how accounting for these plant assets is applied. This
chapter is sub divided in to five sections. The first section is about acquisition cost
computation and how the record has to be kept.

The second section discusses about type different types of depreciation methods, on the
basis of acquisition cost and estimated residual and life of the equipment

The third section deals with how and when disposal of plant asset has to be carried out.
The fourth section is about the natural resource and their accounting treatment
The fifth section is on what intangible assets are and how accounting for these intangible
assets is applied.

Objectives:
After studying this unit, you should be able to:
- define, classify and explain the nature of long term productive asset
- determine the cost of plant assets
- apply various cost allocation methods as assets are held and used over time
- account for disposals of plant assets
- explain the nature of intangible assets including good will
- account for depletion of natural resource and amortization of other intangible
assets

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Chapter Three Accounting For Plant Asset

Section 1: Nature and of plant assets

Overview

The discussion and illustration is the previous chapter all about payroll accounting system
in our country Ethiopia and costing system for inventory. And how we will deal with one
of the major challenge managers of most business face which in forecasting the
components long-term productive capacity it will need. If manager, underestimated the
need the company will not be able to produce enough goods or services to meet demand
and will miss an opportunity to earn revenue. On the other hand if they over estimate the
need the company will incur excessive costs that will reduce its profitability.

Objective
At the end of this section you will be able to
- Describe the notice of plant asset
- Differentiate the tangible and intangible assets.
- Discuss Cost that must be included a cost of plant asset.
Outline of this section
1.1. Nature of plant asset
1.2. Major categories of plant assets
1.3. Acquisition cost of plant assets

1.1. Nature of plant asset

The term plant assets (or plant end equipement) describe long lived assets acquired for
use in business operation rather than for resale to customer’s plant assets comprise largest
1.2. Major categories of plant assets
Plant and equipment items are often classified in to the following groups.
 Acct 101 Principle of Accounting

i. Tangible plant assets

The term “tangible” denotes physical substance, as exemplified by land, a building or
machinery. This category may be subdivided is to two distinct classification.
 Plants, properties subject to depreciation included are plant assets of limited
useful life such as buildings and office equipment etc.

 Land the only plant asset not subject to depreciation land, which has on
unlimited term of existence

ii. Intangible assets: The term “intangible assets” is used the describe assets
which are used in the operation of the business but have no physical substance
and are non current. Examples include patents, copy rights, trade mark,
franchises, and good will.

Dear Students! Note here current asset such as accounts receivable or prepaid rent are not
included in the intangible classification even though they are lacking in physical
substance.

iii. 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.
1.3. Acquisition cost of plant assets
The cost of a plant asset includes all expenditures that are reasonable and necessary for
getting the asset to desired location and ready for use. Thus many incidental costs may be
included in the cost assigned to a plant asset. These include for example, sales taxes on
purchase price delivery costs, and installation cost etc. See the following tables.

Land Building Equipment Land

Cost: Cost: Cost: improvement
 Purchase price  Architect fee  Sales taxes Costs:
 Sales tax  Engineers fees  Freight  Trees and shrubs
 Title fee  Insurance costs  Installation  Fences
 Surveying fee  Interest on many  Repairs  Out door lighting
 Grinding and borrowed  Reconditioning  Paved parking
leveling  Sales taxes repair areas
 Brokers  Reconditioning
commission
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Chapter Three Accounting For Plant Asset

An example determining cost

Assela malt factory order a machinery from GATEPRO at a list price of birr 10,000.
Payment will be made in 20% cash payment and 80% signing promissory note of 90
days, 8%, sales taxes of birr 600 must be paid as well as freight changes of 1,250.
Installation and other start up cost amount to birr 400. The cost of this merchandise is
Particulars Cost in birr
List price 10,000
Sales tax 600
Transportation changes 1250
Costs of installation and setup 400
Total cost debit to machinery account 12,250

Note that the interest expense on the promissory note will be recognized as an interest
expense in the period in which incurrence is carried out
The journal entries as follows
Machinery 12,250
Cash 4,250
Notes payable 8,000
To record acquisition cost

Activity
1. What are the major categories of plant assets?
________________________________________________________________
________________________________________________________________
________________
2. Identify the cost of building, equipment, land?
________________________________________________________________
________________________________________________________________
__________________________________
Acct 101 Principle of Accounting

Allocation of a lamp sum purchase

Several difference types of plant assets, often are purchased at one time, separate
controlling accounts are maintained for each type of plant asset, such or land, buildings
and equipment. When land, buildings (and perhaps other assets) are purchased for lamp
sum the purchase price must be allocated among the types of assets acquired. An
appraisal may be needed for this purpose.

Let us see this with example

Adama university purchased a building with land for birr 1,500,000 in Adama town. The
appraised value of the building was birr 1,400,000 and of the land is birr 280,000. Here as
you can see from the given data the appraised value the building and the land is given
The solution is as follows

Particulars Assessed value % of appraisal Allocation of birr

Land 280,000 16.67% 250,000
Building 1,400,000 83.33% 1,250000
Total 1, 680,000 100% 1,500,000

So the journal entry will be as follows

Land 250,000
Building 1,250,000
Cash 1,500,000
To record purchase of land with its building

Section 2

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Chapter Three Accounting For Plant Asset

Depreciation

Overview
Depreciation is the process of allocating the cost of building and equipment over their
productive lives using systematic and rational method. Students often are confused by the
concept of depreciation as accountants use it. In accounting depreciation is the process of
cost allocation not process of determine an assets current market value or worth. This
section demonstrate the way cost of plant asset be allocated over the use full life of the
asset. You will learn about the four bases that accountants use in allocating the cost of a
plant asset.

Objective
At the end of this section you will be able to
- identify the causes of depreciation
- depression methods
- demonstrate the computation of depreciation expense under the different
depreciation methods
Outline of this section
2.1. Depreciation and its causes
2.2. Types of depreciation

2.1. Depreciation and its causes

Tangible plant assets, with the exception of land, are of use to a company for only a
limited number of years. Depreciation is the allocation the cost of tangible plant asset to
expense in the periods in which services are received from the asset. In short the basic
objective of depreciation is to achieve the matching principle that is to offset the revenue
of an accounting period with the costs of the goods and services being consumed in the
effort to generate that revenue.

See the following diagram showing the cost allocation

Acct 101 Principle of Accounting

Balance sheet
Cost of plant assets
Asset
Plant and equipment

As the
services
are

Income statement

Revenue
Expenses (depreciation)

Dear student I want you to note that the journal entry to record depreciation expense is
Depreciation expense xxx
Accumulated depreciation xxxx
To record depreciation of expense

The credit portion of the journal entry removes from the balance sheet that portion of the
assets cost estimated to have been used up during the current period. The debit portion of
the entry allocates this expired cost to expense.

Depreciation differs from most other expenses in that it does not depend up on cash
payments at or near the time the expenses is recorded. For this reason depreciation often
called a “non cash” expense. Bear in mind, how ever that large cash payment may be
required at the time depreciable asset is purchased.

Book value of a plant asset is its cost minus the related accumulated depreciation.
Accumulated depreciation in a contra-asset account representing portion of the assets cost
that these already been allocated to expense.

2.1 Causes of depreciation

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Chapter Three Accounting For Plant Asset

There are two main causes of depreciation. These are physical deterioration and
obsolescence.
Physical deterioration: this results from use as well as from exposure to sun, wind, and
other climatic factors.

Obsolescence: means the process of becoming out of data or obsolete. A refrigerator for
example, may become obsolete even though it is in excellent physical condition; it
becomes obsolete because better refrigerator of superior design and preference have
become available.

2.2. Alternative depreciation methods

Dear learners! Because of significant differences among companies and the assets they
own, accountants have not be able to agree on a single best method of depreciation as a
result, managers may choose from several different acceptable depreciation methods

To calculate depreciation expense three amounts are reformed for each asset.
1. Acquisition cost
2. Estimated useful life of the asset
3. estimated residual value (selvage value)

Original cost Estimated Depreciable cost

- residual value =

1st 2nd 3rd 4th

Useful life represents managements estimated of the assets useful economic life to the
company rather than its total economic life to all potential users. The assets expected
physical life is often larger than the company methods to use the asset.
Acct 101 Principle of Accounting

Residual (or selvage) value represents managements estimated of the amount the
company expects to resource up on disposal of the asset at the end of its estimated useful
life.
There are several depreciation methods in application: some of these are
i. Straight line
ii. units of production
iii. declining balance
iv. sum of the years method

i. Straight line method

Straight line method is method that allocates the cost of an asset in equal periods amounts
over its useful life. This method is the most popular method of depreciation. So Dear
learner note that under this method
- depreciation expense is a constant amount each year
- accumulated depreciation increases by a equal amount
- net book value cash year decreases by the some amount
The formula to estimate the annual depreciation

Depreciation expense =

Let us see this with illustration. On Jan 2 Franco wholesale Grocery acquires a new
delivery truck. The data and estimates needed for the computation of the annual
depreciation expenses are
Cost 32,000
Estimated residual value 2,000
Estimated useful life 10 years
Solution

Annual deprecation = = 3, 000

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Chapter Three Accounting For Plant Asset

The some depreciation compotator shown below in tabular form

Cost of the depreciable asset Birr 32000
Less estimated residual value (2000)
Total amount to be depreciated 30,000
Estimated useful life 10 years
Depreciation expense per year 50,000/10 year = birr 3000

The following schedule summarizes the effects of straight line depreciation over entire
life of the asset
Depreciation schedule straight line method
Year Computation Depreciation Acc. Net value
expense deprecation
1 30,000 x 1/10 3,000 3,000 270,000
2 30,000 x 1/10 3,000 6,000 24,000
3 30,000 x 1/10 3,000 9,000 21,000
4 30,000 x 1/10 3,000 12,000 18,000
5 30,000 x 1/10 3,000 15,000 15,000
30,000 x 1/10 3,000 28,000 20,000
10 30,000 x 1/10 3,000

Dear student! It is also possible to state the amount of depreciation rate in percentage for
when straight line depreciation is in use the depreciation rate is simply 1 divided by the
life of the asset. The delivery track in our example has an estimated useful life of 10

years, so the depreciation expense each year is or 10%. Similar in asset with a 5 year

life has a depreciation rate of or 20% per year.

Acct 101 Principle of Accounting

ii. Unit of production method

The unit of production depreciation method relates depreciable cost to total estimated
productive out put. The formula to estimate annual depreciation expense under this
method is as follow

Unit of production formula

Deprecation expense = X actual production

Dividing the depreciable cost by the estimated total production yields the depreciation
rate unit of production which is then multiplied by the actual production for the period to
determine depreciation expense
Let us see the following illustration
On Jan 2, 2005 Franco Whole sales grocery acquired a new delivery truck. The data and
estimates needed for the computation of the annual depreciation expense are
Total cost to mark in use the delivery track is Br 62,500
Estimated salvage value Br 2500
Estimated useful life in 100,000 miles

The depreciation rate can be computed as follows =

= Birr 0.60 per mile

In our illustration for every mile that the next vehicle is driven, Franco record
depreciation expense of birr 0.60.
Assume that the actual service provide by delivery track in
Year 1 30,000 miles
Year 2 45,000 miles

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Chapter Three Accounting For Plant Asset

Year 3 20,000 miles

See the following depreciation schedule for the truck under the units of production
method would appear as follows
Year Computation Depreciation Accumulated Book value
expense depreciation
Acquisition - - - 62,500
End year 1 0.60 rate x 30,000 miles Birr 18,000 Birr 18000 44,500
Year 2 0.60 rate x 41,000miles Birr 27,000 41000 17,500
Year 3 0.60 rate x 20,000miles Birr 12,000 51000 5,500

i. Declining balance method

Under the declining balance depreciation method, depreciation expense amounts are
higher in the early years of an assets life and lower in the later years. Declining balance
depreciation is based on applying a rate exceeding the straight line rate to the assets net
book value over time. The rate is often double (two times) the straight line rate and is
termed the double declining balance rate.

For example if the life of a assets is 10 years the rate of straight line depreciation method
is 1/10 years = 10% per year and the double declining balance rate is 2 time 10% equal
20%.
Note that residual value is not included in computing depreciation expense at this stage. It
is not subtracted from cost as in the other methods presented. However, an asset book
value cannot be depreciated below residual value.
As an illustration see the following
Assume that Franco whole seller Grocery delivery truck acquired for 60,000 and
estimated residual value of 5,000 and estimated useful life of 4 years.

Here under computation of declining balance depreciation expense is illustrated in the

depreciation schedule:
 Acct 101 Principle of Accounting

Year Computation Depreciation Accumulated Net book value

expense depreciation
At acquisition - - - 60,000
Year 1 60,000 x 0.5 30,000 30,000 30,000
Year 2 (60,000 – 30,000) x 0.5 15,000 45,000 15,000
Year 3 (60,000 – 45,000) x 0.5 7,500 52,500 75,000
Year 4 (60,000 – 52,500) x 0.5 2,500 55,000 5,000
NB: The depreciation expense for the 4th year is not based on the formula rather based on
the principle that states that an asset book value cannot be depreciated below residual
value.
Vi. Sum of the years digits method

Under the sum of the years method of depreciation expenses is determined by

multiplying the original cost of the asset less its estimated residual value by a smaller
fraction each year. The denominator of the fraction used in determining the depreciation
expenses is the sum of the digit of the years of the assets useful life or by using the
following formula

S=

And the numerator of the fraction is the number of years of useful with remaining at the
beginning of each year for which depreciation is being computed

Let us see it with illustration

An asset having cost of birr 28,000 and estimated residual value of 4,000 and estimated
use full life is 5 years will have depreciation expense during the life of the asset as below

Year Computation Depreciation Accumulated Book value

expenses deprecation

Year 1 24,000*5/15 Birr 8,000 8,000 20,000

Year 2 24,000*4/15 Birr 6,400 14,400 13,600

Year 3 24,000*3/15 Birr 4,800 19,200 18,800

Year 4 24,000*2/15 Birr 3,200 22,400 5,600

Year 5 24,000*1/15 Birr 1,600 24000 4,000

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 Chapter Three Accounting For Plant Asset

Self test quiz

Assume that Abonesh company has acquired new computer equipment at a cost of birr
240,000. the equipment has a estimated life of six years, an estimated operating life of
50,000 hours and estimated residual value of birr 30,000. Determine depreciation
expense for the first full year of each of the following methods.
1. Straight line depreciation
2. Double declining balance method
3. Unit of production method (assume that the equipment from for 8000 hours in
the first year)
4. Sum of the year digit method

After you have completed year ensures, check then with the solutions that follows
a. (240,000 – 30000) x 1/6 – birr 35,000
b. (240,000 – 0) x 2/6 = birr 80,000
c. ((240,000 – 30,000) 50,000) x 8,000 = birr 32,600
d. (240,000 - 30,000) (6/21) = birr 60,000

Revenue & capital expenditure

Dear learner’s expenditures for the purchase for expansion of plant assets are called
capital expenditures and are recorded in asset accounts. Accountants often use the verb
capitalize to mean charging expenditure to and asset rather than to an expense account.
Expenditures for ordinary repairs, maintenance, fuel and other items necessary to the
ownership and use of plant and equipment are called revenue expenditures and are
recorded by debiting expense accounts. The charge to and expense account is based on
the assumption that the benefits from the expenditure will be used up in the current
period, and the cost should therefore be deducted from the revenue of the period in
determining the net income.
Acct 101 Principle of Accounting

Self test quiz

A building that originally cost birr 400,000 has been used over the past 10 years and needs
continues maintenance and repairs. To each of the following expenditure indicate whether it should
be expensed in the current period or capitalized s part of the cost of the asset.

No. Particulars Expensed or

capitalized
1 Replacing electrical wiring throughout the building
2 Repairs to the front do or of the building
3 Annual cleaning of the titles on the buildings air conditioning system
4 significant repairs due to damage from an unusual and infrequent flood

If you have completed you are check them with the solution that fellows:
1. Capitalize 3. Expenses
2. Expense 4. Capitalized

Section three

Disposal of plant asset and equipment

Overview
As units of plant and equipment wear out or become obsolete they must be scrapped sold
or trade-in on new equipment. Upon the disposal or retirement of depreciable asset the
cost of property is removed from the from the related contra asset account. Dear students
in this section you examine different way under which disposal of plant asset will be
made after study this section you are expected to meet the following objective.
Objective

At the end of this section you will be able to

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Chapter Three Accounting For Plant Asset

 Identify the different ways of disposing the plant asset

 Demonstrate the ways of disposing plant asset

Outline of this section

3.1 Discarding fixed asset
3.2 Selling fixed asset
3.3 Exchanging the fixed asset

3.1 Discarding fixed asset

When fixed assets are no longer useful to the business and have no residual or market
value, they are discarded
To make it clear for you
Equipment acquired at cost of birr 20,000 is fully depreciated at Dec. 31 the end of the
current fiscal year on February 14 the equipment was discarded. The entry to record this
event is
Acc. Depreciation – equipment 20,000
Equipment 20,000

If the asset has not been fully depreciated, depreciation should be recorded prior to
removing it from service and from the accounting records.
To make it more clear the following example
An equipment costing birr 8,000 is depreciated at an annual rate of 10% on and on Dec.
31 of the preceding year the accumulated depreciation balance after adjusting entry was
birr 6,800. The asset was removed from service on the following march 24. The entry to
record the depreciation for the three months of the current year before removal from
service
Depreciation exp- equipment 200
Accumulated depreciation 200
To record current period depreciation on equipment discarded
The discarding of equipment them recorded by the following entry
Accumulated depreciation- equipment 7000
Loss on disposal of fixed asset 1000
Equipment 8000
To write off the equipment discarded

The loss of birr 1000 is recorded because of accumulated depreciation account is less
than the balance in the equipment account

3.2 Selling fixed assets

The entry to record the sale of a fixed asset is similar to the entries illustrated above,
except that the cost or other asset received must also be recorded. if the selling price is
Acct 101 Principle of Accounting

more than the book value of the asset the transaction result in a gain. If the selling price is
less than the book value there is a loss.
Let us see this with example
Equipment is acquired at a cost of birr 10,000 and is depreciated at an annual straight line
rate of 10%. The equipment is sold for cash on Oct. 12 of the eighth year of its use.
Form this example you can infer that the accumulated depreciation balance at the end of
the preceding year is equal to 1000*8 = 7000 and the depreciation expense of this period
is 1000* 9/12 = 750. Total of birr 7,750.

For which you are expected to journalize the following

Deprecation expense – equipment 750.00
Accumulated deprecation- 750.00
equipment
To record current period depreciation on equipment sold

After the current deprecation is recorded the book value of the asset is birr
2,250.00(10000.00-7750.00)

The entry to record sale sat birr 2,250.0 is

Cash 2250
Accumulated depreciation- equipment 7750
Equipment 10000
To record sales of used equipment

If the sales was carried out at birr 1000 the entry will be as follows
Cash 1000
Accumulated depreciation- equipment 7750
Loss on disposal of fixed asset 1250
Equipment 10000
To record sales of used equipment

But if the sales was carried out at birr 1000 the entry will be as follows
Cash 2800
Accumulated depreciation- equipment 7750
Equipment 10000
Gain on disposal of fixed asset 550.00
To record sales of used equipment

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Chapter Three Accounting For Plant Asset

3.4 Exchange of plant asset

Exchange of similar fixed assets

Dear learners! Old equipment is often traded in for new equipment having a similar use.
In such cases the seller allows the buyer an amount for the old equipment traded in, this
amount is called the trade in allowance may be greater or less than the book value of the
old equipment. The remaining balance the amount owed is either paid in cash or recorded
as a liability. It is normally called boot, which is its tax name. Gains on exchanges of
similar fixed assets are no recognized for financial reporting purpose. When the trade-in
allowance exceeds the book value of an asset traded in and no gain is recognized the cost
recorded for the new asset can be determined in either two ways.
1. Cost of new asset = list price of new asset – unrecognized gain
2. Cost of new asset = cash given + book value of old asset

Example
See the following data

List price provide for new equipment 6,000

The amount that the seller allows the buyer form the old equipment 2,100
Cost of old equipment is 5,000
Accumulated depreciation on old equipment is 4,200

Solution
Recorded cost of new equipment method one
List price of new equipment 6,000
Trade in allowance 2,100
Book value of old equipment 800
Unrecognized gain on exchange (300)
Cost of new equipment 4,700

Method two
Book value of old equipment 800
Cash paid at the date of exchange 3,900
Cost of new equipment 4,700

The journal entry is

Accumulated depreciation 4,200
Equipment (new) 4,700
Equipment 5,000
Cash 3,900
To record exchange of plant asset for new plant asset
Acct 101 Principle of Accounting

Loss on exchange
Dear student for financial reporting purposes, losses are recognized on exchange of
similar fixed assets if the trade in allowance is less than the book value of the old
equipment. When there is a loss the cost recorded for the new asset should be the market
price. To illustrate assume the following exchanges

List price of new equipment 12000

Trade in allowance 4000
Cash paid 8000
Cost of old equipment 9000
Acc. Depr. At the date of exchange 6600
Book value 2400
Trade in allowance 2000
Loss in exchange 400
The journal entry is as follows

Accumulated depreciation 6,600

Equipment(new) 12,000
Loss on disposal of fixed asset 400
Equipment(old) 9,000
Cash 8,000
To record to record the exchange of plant asset and loss occurred
on exchange

Section 4

Natural resource

Overview
Natural resources include mines, oil fields and standing timber. You have explained that
plant asset such as building s and equipment depreciate because of physical deterioration
or obsolescence.

Objective

At the end of this section you will be able to:

 Define the natural resource

 Demonstrate how amortization of intangible asset

Outline of this section

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Chapter Three Accounting For Plant Asset

4.1 Natural resource and depletion calculation

4.1 Natural resource

The fixed assets of some business include timber metal ores minerals or other natural
resource. As the business harvest or mine and then sell there resources a portion of the
cost acquiring then must be debited to an expense account. This process of transferring
the cost of natural resource to expenses is determined by multiplying the quality extracted
during the period by the depreciation rate. This process of allocating cost of natural
resource is known as depletion.

See the following example

Muger cement paid birr 400,000 for the mining right to mineral deposit estimated at rate
1,000,000 tone of ore. Add during the first year of operation the factory mined 90,000
tone. Therefore the computation of depreciation rate is simply divide the birr paid for
estimated tons of ore.

400,000/1,000,000 = birr 0.4

The computation of depletion expense during the first year is birr 36,000 (90000ton
X0.4birr) and the entry to record these is
Depletion expense 36,000
Accumulated depletion 36,000
To record the depletion expense of the current year

Self test quiz

MEDROC LEGA DENBI purchased mineral right to 250000 tons of ore for
birr 1,500,000. If 35,000 tons of ore were mined in the first year. Compute

a. The depletion rate per ton

b. The depletion expanses for the fist year

Answer a. Birr 6 per ton (1,500,000/250,000tons)

b. Birr 210,000 (35,000ton*birr 60)
Acct 101 Principle of Accounting

Section 5

Intangible asset

Overview

As the word intangible suggests, assets in this classification have no physical substance
common example are goodwill, patents and trademarks. And accounts receivable for
example has no physical attributes by classified as a current asset and is not regarded as
an intangible. Intangible assets are assets that are used in the operation and are
noncurrent. This section illustrates the way that amortization of intangible asset is carried
out and the different types of intangible assets
Objectives
Upon completion of this section you will be able to:
 Define intangible asset
 Demonstrate the amortization of cost of intangible assets
 Differentiate the types of intangible asset.

Outline of this section

5.1 Intangible asset
5.2 Types of intangible asset

5.1 Intangible Assets

These long-lived assets have special rights but no physical substance most intangible
assets are evidenced only by legal documents. Intangible assets are classified in the
balance sheet as subgroup of plant assets however not all assets that lack physical
substance are regarded as intangible assets. The cost of intangible asset with limited life,
such as a patent or copyright, is allocated on a straight line basis over each period of its
useful life in a process called amortization, which is similar to depreciation.
Here under you will see the most common types of intangible assets.

Patents

A patent is an exclusive right granted by the federal government for manufacture, use and
sale of a particular product. The purpose of this exclusive grant is to encourage the
invention of new product and processes. When a company acquires a patent by purchase
from the inventor or other holder, the purchase price should be recorded by debiting the
intangible asset account patents.
Let’s assume a company purchases the paten, having 17 years expected life, from the
inventory at a cost of birr 100,000 after seven years of legal life have expired. The
remaining legal life is therefore, 10 years. The amortization of the cost of the patent is
made as follows
Amortization expense = 100,000/10

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Chapter Three Accounting For Plant Asset

= 10000 birr per year

The entry to record the event is as follows

Amortization expense 10,000

Patent 10,000
To record the amortization expense on patent of the current year

Trademarks

I hope that you all know coca-cola. Coca-cola’s famous name, usually written in a
distinctive typeface, is a classic example of a trademark known around the world. A
permanent exclusive right to the use of a trademark, brand name or commercial symbol
may be obtained by registering it with the federal government.
The cost of developing a trademark or brand name often consist of advertising
campaigns, which should be treated as expenses when incurred. If a trademark or brand
name is purchased, however, the cost may be substantial. Such cost should be capitalized
and amortized to expense over a period estimated.
Franchises

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. The cost of franchises varies greatly and
often is quite substantial. When the cost of a franchise is small, it may be charged
immediately to expense or amortized over a short period such as five years.

Copy rights
A copy right is an exclusive right granted by the federal government to protect the
production and sale of literary or artistic materials for the life of the creator plus 50 years.
The cost of obtaining a copyright in some cases is minor and therefore is chargeable to
expense when paid. Only when a copyright is purchased will the expenditure be material
enough to warrant its being capitalized and spread over the useful life.

Good will
Business executives used the term goodwill in a variety of ways before it become part of
accounting sense concerns the benefits derived from a favorable reputation among
customers
Acct 101 Principle of Accounting

Summary of chapter
 Plant assets are long-lived assets acquired for use in the business and not for
resale to customers. The matching principle requires that we include in the plant
and equipment accounts those costs that will provide service over a period of
years. During these years, the use of the plant assets contributes to the earning of
revenues. The cost of plant asset includes all expenditures reasonable and
necessary in acquiring the asset and placing in a position and condition for use in
the operations of the business.
 Depreciation is the process by which cost of pant or equipment is allocated over
the useful life of the asset. The straight line depreciation method assigns an equal
portion of an asset’s cost of expense in each period of the asset’s life. Declining
balance is an accelerated method under which each year, a fixed depreciation rate
is applied to the remaining book value of the asset. Unit of production method
depreciation is based on some measure of output other than the passage of time.
Sum of the years’ digits is a form of accelerated depreciation.
 Capital expenditures include any material expenditure that will benefit several
accounting periods. Therefore, these expenditures are charged to asset accounts
and are recognized as expense in future periods. Revenue expenditures are
charged directly to expense account because either 1) there is no objective
evidence of future benefits or 2) the amounts are immaterial.
 When plant assets are disposed of, depreciation should be recorded to the date of
disposal. The cost is then removed from the asset account and the total recorded
depreciation is removed from the accumulated depreciation account. The sale of a
plant asset at a price above or below book value results in a gain or loss to be
reported in the income statement.
 Natural resources include mines, oil fields, and standing timber. Their cost is
converted into inventory as the resource is mined, pumped, or cut. This allocation
of the cost of a natural resource to inventories is called depletion. The depletion
rate per unit extracted equals the cost of the resource (less residual value) divided
by the estimated number of units it contains.
 Intangible assets are assets owned by the business that have no physical
substance, are noncurrent and are used in business operations. Examples include
trademarks, patent, goodwill and copyright.

Adama university Department of Accounting

Chapter Three Accounting For Plant Asset

Check list
Dear students now you have completed the third chapter you need to check whether you
have grasped the concepts discussed in this chapter. If your answer to the questions
below is “no” then you have to go back and read the relevant subsection again.

Number Can you Yes No

1 Define plant asset
2 Identify the types of plant assets
3 Discuss about acquisition cost of plant asset
4 Distinguish the capital expenditure and revenue expenditure
5 Identify and discuss the type of cost allocation of plant and equipment
6 Demonstrate the cost allocation methods over the useful life
7 Discuss the disposal of plant and equipment
8 Demonstrate accounting for natural resources

9 Differentiate the intangible assets

Good! You can proceed to the next exercise