Assets – Control/

Economic
Benefits

Fixed / Non-
Current
Current

Benefits over a Benefits over a

longer period shorter period
Accounting for Fixed Assets
Illustration 1
• Fast-track Limited is a dealer of commercial vehicles and spare parts. It
bought 10 trucks at a cost of Rs. 1.5 million each. Seven of these trucks are
intended to be sold in the ordinary course of business, whereas other three
are meant to be used within the business for carrying goods from one
godown to another.
• How should the consideration amount of Rs. 15 million be accounted for?

• Rs. 10.50 million (1.5 mn *7) will be charged to profit and loss account of the
year
• Rs. 4.50 million (1.5mn *3) will be capitalized and will be amortized over the
useful life of these trucks
 Nature of Expenses
• Operating Expenses (OPEX)/ Revenue Expenses – Benefit a particular accounting period –
charged to Profit and Loss Account (Accrual Basis)

• Capital Expenditure (CAPEX) - Result in Creation or acquisition of long term assets(fixed

assets) which will generate benefits in more than one accounting period – Cost is
matched over the period of benefit

• Nature of asset v/s Intended Use decides whether it is OPEX or CAPEX

• Classification of expenses incurred as capital expenditure or operating expense will have

significant impact on the value of the asset in the balance sheet as well as profit or loss
as shown in the statement of profit and loss.
Types of Fixed Assets/ Non Current Assets
• Tangible Assets – Property Plant and Equipment (PPE)
Items Used for production of goods or supply of services
Not for sale in ordinary course of business
Future economic benefits flow to the entity
Includes: Land, Building, Plant, Machinery, Furniture, Computer….

• Intangible Assets – Legal rights with associated economic benefits

• Includes: Patents, Copyrights, Trademarks
Issues in Accounting for Fixed Assets
• Determining the cost of asset- recorded at coat – Cost Concept
• Allocating the cost to several accounting periods
• Recording the disposal of an item of asset
Cost of PPE – Tangible Fixed Assets
• Initial Acquisition Cost ( net of trade discount and refundable taxes )
• Import duty
• Freight, transit insurance
• Stamp duty, registration fees
• Commission or brokerage on purchase
• Installation Cost
• Cost of testing
Illustration 2
• During 2018-19, New Age Fashion limited bought a machine at a cost
of Rs 6.5 million. Additionally it paid Rs 80,000/-towards freight
charges and Rs 25,000/- towards insurance during transportation.
Cost of installation and test run came to Rs 1,20,000/- at what value
the machine will be capitalized.
• The machine will be recorded at Rs 67,25,000
Illustration 3
Invoice Price of a machine
List Price 50,00,000
Less: Trade Discount 1,00,000
Balance 49,00,000
Add: GST 6,00,000 55,00,000
Transportation charges to factory site 25,000
Special Foundation and installation charges 75,000
Determine the cost of the machine.
State accounting policy on the valuation of machine
Solution
• Cost of the Machine :
• Invoice Price (net ) 49,00,000 (55,00,000 -6,00,000)
• Add: Transportation 25,000
• Add: Installation 75,000
• Total 50,00,000

• Accounting Policy: The company values its machine at invoice price

net of taxes plus transportation charges and installation charges
Assets Acquired in Exchange
• The cost of acquisition will be the fair market value of either the asset
given up or the fair market value of the asset acquired, whichever is
more evident.
Illustration 4
• Peerless Chemical Limited is acquiring a new machine in exchange of an old
one. The Book value of the old machine is Rs 2,00,000/-.The consideration for
the new machine will be met by a cash payment of Rs 2.7 million and the old
machine. At what value the new machine should be recorded in each of the
following situation:
• The fair market price of old machine is difficult to determine but the fair price
of the new machine is Rs 3 million .
• As the market price of a new machine is evident at Rs 3 million, it will be
recorded at the same.
• New machine Dr 30,00,000
• To Old Machine 2,00,000
• To Cash 27,00,000
• To P/L A/ c 1,00,000
Illustration 3
• Peerless Chemical Limited is acquiring a new machine in exchange of an
old one. The Book value of the old machine is Rs 2,00,000/-.The
consideration for the new machine will be met by a cash payment of Rs
2.7 million and the old machine. At what value the new machine should be
recorded in each of the following situation:
• The fair market price of the old machine is Rs 4,00,000/-.
• The new machine will be recorded at Rs 3.1 million i.e cash payment of
Rs 2.7 million plus fair market price of old machine at Rs 4,00,000/-
• New machine Dr 31,00,000
• To Old Machine 2,00,000
• To Cash 27,00,000
• To P/L A/ c 2,00,000
Illustration 3
• Peerless Chemical Limited is acquiring a new machine in exchange of an old
one. The Book value of the old machine is Rs 2,00,000/-.The consideration for
the new machine will be met by a cash payment of Rs 2.7 million and the old
machine. At what value the new machine should be recorded in each of the
following situation:
• As the machine are highly specialized ascertaining the fair market value of
either of them is difficult.
• As the market value of either machine is difficult to determine, the new
machine will be recorded at the cash consideration plus the book value of the
old machine. Accordingly the cost of acquisition will be taken at 2.9 million.
• New machine Dr. 29,00,000
• To Old Machine 2,00,000
• To Cash 27,00,000
Capitalization Of Interest

• Borrowing cost (Interest) generally treated as expense of the period

• Borrowing cost (Interest) when should be capitalized?
• When funds are borrowed for acquisition of asset, interest of the
period till the time the asset is put to use will be added to the cost of
the asset
• Borrowing Cost (Interest) after the asset is ready for use is debited to
the P/L A/C as a expense (operating expense)
Basket Purchase
• Several fixed assets purchased for a consolidated price

• The consideration is apportioned to various assets as per the fair

values of the assets as identified by competent valuers

• Basket purchase takes place when all or selected fixed assets of an

existing entity without its liabilities are purchased.
Basket Purchase -Several fixed assets
purchased for a consolidated price
• Krishna bought a bakery for Rs. 3,00,000
• The bakery’s assets and their fair values are:
• Land: Rs.1,80,000
• Building : Rs. 1,50,000
• Equipment : Rs.50,000
• Furniture: Rs.20,000

• Allocate the purchase price of Rs.3,00,000 to the various assets in the ration of
(1.8:1.5:0.5:0.2)
• i.e Land = 1,35,000, Building = 1,12,500, Equipment = 37,500, Furniture = 15,000
Intangible Assets
• Legal rights, control, future benefits
• Trademarks, Copyrights, Patents, Brand Names, Franchise

• Customer lists
• Computer Software
• Licenses
• Website domain names
• Carbon credits
• Supplier relationships
• Customer loyalty
• Employee Skill
• Market Share
Intangible Assets
• Intangible Assets – Difficult to develop, acquire and copy – more
competitive advantage as compared to industry peers
• Service industries- more intangible assets- important to recognise it
appropriately – future of accounting
• Recorded at cost
• Includes purchase price and all expenses necessary to make the asset
ready for its intended use
• A publisher buys the copyright of a book for Rs.1,00,000. Pays
Rs.5,000 for lawyers services and Rs.2,000 for copyright filing and
registration
Intangible Assets
• Intangible assets generally have finite useful lives
• Obsolescence and legal terms of contract determine the useful life
• Intangible assets are normally amortized using SLM (Straight Line
Method).
• The publisher expects the book to be sold over next 5 years though
the copyright has a legal life of 50 years
Intangible Assets
• Brands –important marketing tool
• Companies invest heavily in acquiring and developing brand
• Brands if acquired by an enterprise can be recognized as an intangible
asset at the acquisition price and all related expenses (internally
generated brands cannot be recognized)
• What is Goodwill ?
• Internally generated goodwill is not allowed to be recognized – Does
not arise from contractual or legal rights.
• Acquired value of the goodwill is recognized at cost.
• Amount spent of R and D- should it be capitalized?
Illustration 5
• Wolf Limited acquired Lamb Limited for a purchase consideration of Rs.
12,00,000/- The agreed value of assets and liabilities of Lamb Limited were
Rs. 18,00,000/- and Rs. 7,00,000/- respectively. What is the value of
goodwill to be recorded in the books of Wolf Limited?

• Agreed value of assets taken over Rs. 18,00,000

• Less: Agreed value of liabilities taken over Rs. 7,00,000
• Net Asset Taken Over Rs. 11,00,000
• Excess of purchase consideration (Rs. 12,00,000) over the net assets (Rs.
11,00,000) will be taken as the acquisition cost of goodwill (Rs. 1,00,000)
EXERCISE -1
• Sam Limited incurred the following expenditure during the year 2019-
20. Please state whether each of them should be treated as operating
expenses for the year or capitalized as an asset.

• A calculator was purchased for office use for Rs. 400

Though a calculator is intended to be used over a long period and hence
is a fixed asset to be capitalized. However as the amount is not material
the same will be treated as operating expense.

• Incurred Rs. 50,000 towards repair of a machine which had a major

breakdown.
Repair expenses are operating in nature.
EXERCISE -1
• Incurred Rs. 675,000 for overhauling a second hand machine recently
purchased.
• Expenses necessary to be incurred to bring the asset to its intended use
are capital expenditure
• A FMCG company sponsored a cricket series incurring Rs. 50 million
towards the sponsorship fees. It is expected that it will enhance the
brand value of the company.
Self generated brands cannot be capitalized and hence to be treated as
operating expenses.

• Paid Rs. 1 million to an author for buying the copyrights of his new book.
Since the payment made will result in long term benefit and is resulting
in an identifiable asset the same will be treated as capital expenditure.
EXERCISE -1

• Paid Rs. 1000,000 towards insurance of a new machine while it was

being transported to the factory premises for installation.
Capital expenditure – incurred to bring the asset to its intended use.

• Incurred Rs. 700,000 for replacing a major part that has become faulty.
It is also expected that the new part will also result in increasing the
capacity of the machine by 20%.
Since the expenditure is resulting in improvement – capital expenditure
EXERCISE -2
• King Kong Limited acquired a piece of land for setting up a factory for Rs. 50
million on 1st October 2019. It took a loan of Rs. 30 million from the State Bank
of India at 10% for this purpose, the balance being met from internal resources.
• It also incurred 1% of the cost of land towards commission to the real estate
agent and 5% towards registration fees.
• The earlier owner has defaulted in the payment of property tax and the same
was also paid by company amounting to Rs. 50,000.
• It incurred Rs. 1 million towards clearing and fencing of the land.
• The construction of the factory commenced on 1st January 2020 and completed
on 31st December 2020. The company repaid the loan to SBI on 31st March
2021.
• You are required to determine the cost at which the land will be capitalized in
the books of King Kong Limited.
 
Solution
• Cost of land: 5,00,00,000
• Commission: 5,00,000
• Registration Fees: 25,00,000
• Property Tax: 50,000
• Clearing and Fencing: 10,00,000
• Interest (15 months): 37,50,000
• Total 5,78,00,000
 EXERCISE -3
• Sona Software Limited acquired Mona Hardware Limited for a cash
consideration of Rs. 300 million. The agreed value of assets and liabilities
taken over are as follows:
Assets  (Rs. in Million)
1. Ascertain the value of
Cash and Bank balance 11.10 goodwill to be recorded in
Land and Building 97.25 the above transaction?
Plant and machinery 105.20
2. How will be the Goodwill
Sundry debtors 66.45 amount treated in the
Other assets 26.50 books of Sona Software
Limited?
Liabilities  
 
Sundry creditors 44.25
Other liabilities 12.85
Solution
• Fair Value of Assets taken over = 306.50
• Less: Fair Value of Liabilities taken over = 57.10
• Net Assets 249.40
• Purchase consideration 300.00
• Less: Net Assets taken over 249.40
• Goodwill 50.60

• The goodwill amount will be capitalized in the books of Sona Software Limited
at `50.60 million and will be shown in the Balance Sheet as a non-current
asset.
Practice Example
• A Ltd. is a recognised export house. In the month of Jan 2017, it
imported a highly sophisticated machine from US at a cost of $
2,00,000.
• At the time of import, the prevailing exchange rate was $=Rs.65.
• The company incurred an amount of Rs.1,00,000 towards freight and
insurance during transit.
• The machine was transported to the factory building at an additional
cost of Rs.20,000 towards local transportation. Expenses of
installation Rs.30,000. The installation was complete on 31.3.2017.
• The test runs were conducted during April 2017. During the test run
company spent a sum of Rs.25,000. After successful test run the
machine was put to commercial use.
Solution
• How would the amount up to 31.3.2017 impact the Balance Sheet
and Profit and Loss Account ?

• As the machine is not ready for use by 31.3.2017 the amount spent
will be shown as Capital WIP in balance sheet under the heading Fixed
Assets.
• No impact on Profit and Loss Account for the year ended 31.3.2017 as
depreciation will commence after the machine is ready for use.
Solution
• When and what value the machine should be capitalized?
• On 1.4.2017 the value of the machine will be capitalized
• Purchase Price (2,00,000 * 65) 1,30,00,000
• Freight and insurance 1,00,000
• Local Transport 20,000
• Installation Expenses 30,000
• Test Run 25,000
• Total Cost 1,31,75,000
Practice Example
• Disha Apparels Ltd. part exchanged its old generator
set with a new one from Achal Machines Ltd.
• Net book value of the old set was Rs.2,85,600.
However the vendor assessed its exchange value at New machine Dr 4,25,000
Rs.2,65,000 to which Disha Apparels Ltd. agreed. P/L A/ c Dr. 30,600
• The selling price of the new set as per the company To Old Machine 2,85,600
price list was Rs.4,25,000 To Bank 1,70,000
• Disha Apparels Ltd paid Rs.1,70,000 by cheque
drawn on its SBI current account to the vendor.
• Determine the cost at which the new generator set
will be recorded in the financial statements of Disha
Apparels Ltd.
Practice Example
• Disha Apparels Ltd. part exchanged its old generator
set with a new one from Achal Machines Ltd.
• Net book value of the old set was Rs.2,85,600.
However the vendor assessed its exchange value at New machine Dr 4,35,000
Rs.2,65,000 to which Disha Apparels Ltd. agreed. (2,65,000+ 1,70,000)
• The selling price of the new set as per the company P/L A/ c Dr. 20,600
price list was Rs.4,25,000 To Old Machine 2,85,600
• Disha Apparels Ltd paid Rs.1,70,000 by cheque To Bank 1,70,000
drawn on its SBI current account to the vendor.
• Determine the cost at which the new generator set
will be recorded in the financial statements of Disha
Apparels Ltd.
Practice Example
• Disha Apparels Ltd. part exchanged its old generator
set with a new one from Achal Machines Ltd.
• Net book value of the old set was Rs.2,85,600.
However the vendor assessed its exchange value at New machine Dr 4,55,600
Rs.2,65,000 to which Disha Apparels Ltd. agreed. To Old Machine 2,85,600
• The selling price of the new set as per the company To Bank 1,70,000
price list was Rs.4,25,000
• Disha Apparels Ltd paid Rs.1,70,000 by cheque
drawn on its SBI current account to the vendor.
• Determine the cost at which the new generator set
will be recorded in the financial statements of Disha
Apparels Ltd.
Practice Example
• Fast Track Ltd. is a provider of cab services in new Delhi. The company
purchased a new car with a list price of Rs.8,00,000 in exchange of an
old car and cash consideration of Rs.6,80,000.
• The old car was purchased four years back at a cost of Rs.5,00,000
and the accumulated depreciation of the same is Rs.4,00,000.
• The company recently received a bid for the old car at Rs.90,000.
• At what value should the new car be capitialized?
Solution
• The capitalized value of the new car will be

• Cash consideration 6,80,000

• FMV of the car given up 90,000
• Total 7,70,000