Fund.II Ch.2-1 - Copy

Chapter two
Plant Assets and Intangible Assets
12/11/2024 By Gizachew Soboka 1

LEARNING OBJECTIVES
After completing the study of this unit, you will be
able to:
 Define, classify, and account for the cost of fixed
assets
Determine the initial cost of plant assets using cost
principle;
Identify the four depreciation methods;
Compute the periodic depreciation and make the
necessary adjusting entries at the end of a fiscal period;

LEARNING OBJECTIVES
 Compute partial year depreciation;
 Distinguish between revenue and capital expenditures;
 Explain how to account for disposal of fixed asset;
 Differentiate accounting for intangibles from other assets.

2.1. Nature of Fixed Assets
Plant assets: - are tangible assets acquired for use in the
operation of an enterprise and not intended for resale to
customers.
Plant assets are also called property, plant, and
equipment, or fixed assets.
Fixed assets such as equipment, buildings, and land
improvements lose their ability, over time, to provide
services. As a result, the costs of equipment, buildings,
and land improvements should be transferred to expense
accounts in a systematic manner during their expected
useful lives

Characteristics of plant assets
They are acquired and held for use rather than for
resale.
They have relatively long life (They are long term in
nature) and usually subject to depreciation.
Tangible in nature (They possess physical substance).
They do not become incorporated as part of the
product
They are used repeatedly to furnish service

Classification of plant assets
Plant assets are often subdivided in to four classes
 Land, such as a building site
Land improvements, are structural additions with
limited lives that are made to land, such as drive ways,
parking lots, fences, and underground sprinkler
systems.
Building, are facilities used in operations, such as
stores, offices, factories, warehouses, and airplane
hangars.
Equipment, includes assets used in operations, such
as store check-out counters, office furniture, factory
machinery, delivery trucks, and airplanes.
Accounting issues for plant assets
Four issues in accounting for plant assets are:
1. Computing the costs of plant assets,
2. Allocating the costs of plant assets,
3. Accounting for subsequent expenditures to plant
assets, and
4. Recording the disposal of plant assets.

Accounting issues for plant assets

Determining the Cost of Plant Assets
 Plant assets are recorded at cost when purchased
consistent with the cost principle.
Cost consists of all expenditures necessary to acquire
the asset and make it ready for its intended use
IFRS: Companies may select between historical cost
or revalued amount (a form of fair value). If
impaired, impairment loss may be reversed in
future periods

Costs of Acquiring Fixed Assets
1. Costs of Acquiring land

Cont…
Example: Assume that Hayes Company acquires real estate
at a cash cost of $100,000. The property contains an old
warehouse that is razed at a net cost of $6,000 ($7,500 in
costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and
the real estate broker’s commission, $8,000. What is the cost
of the land?
Cost of Land is
Cash price of property…………………………….. $100,000
Net removal cost of warehouse ($7,500 − $1,500) …….6,000
Attorney’s fee ………………………………………….1,000
Real estate broker’s commission ………………………8,000
Cost of land …………………………………………$115,000
Cont…
The journal entry needed to record the purchase of land
Companies record as debits (increases) to the Land
account all necessary costs incurred to make land ready
for its intended use.
Land……………………………… 115,000
Cash ………………………………….115,000
(To record purchase of land)

2. Cost of Land improvements
Entry for cash purchase of land improvements:

Land Improvements ………………….XX
Cash …………………………………….XX

3. Cost of Buildings

Cont…
Example
Assume that on January 1,2020 Ansif Company
purchased a building by incurring the following costs:
Paid Br. 340,000 for purchasing the building, Br. 20,000
for broker’s commission, Br. 10,400 taxes, Br. 27,200
title fees and Br. 8,000 paid attorney costs.
Required: Record the cost of the building.
Building ---------------------------405,600
Cash ------------------------------------405,600

4. Cost of Machinery and Equipment

Cont…
Example
Assume Sinke Inc. purchased equipment for $ 12,000.
Freight costs of $ 600 were incurred to transport the
equipment to the installation site. On site, installation
costs of $1,500 were incurred, including $500 due to an
error in installation.
purchase price …………………………...$ 12,000.
Freight costs ………………………………..$ 600
installation costs …………………………..$1,500
Less error on installation…………..………….500
Cost of Equipment ………………………...13,600
Cont…
The cost of the error in installing the equipment of $500 is
not included in the cost of the equipment, but instead is
recorded as an expense.
The journal entry to record the equipment is as follows:

5. Lump-Sum Purchase
Plant assets sometimes are purchased as a group in a single
transaction for a lump-sum price. This transaction is called a
lump-sum purchase, or group, bulk, or basket purchase.
When a lump-sum purchase is made, allocate the cost to the
assets acquired based on their relative market (or appraised)
values.
Example
Assume, ABC Co. paid Br. 9,000,000 cash to acquire a group
of items consisting of a building appraised at Br. 6,000,000
and land appraised at Br. 4,000,000. The Br. 9,000,000 cost is
allocated based on appraised values.
Required:
Compute and Record Costs in a Lump-Sum Purchase
Cont…
Appraised Value
Building ………………. 6,000,000
Land ……………………4,000,000
Totals ………………….10,000,000
Percent of Total
Building …….. 60% (6,000,000/10,000,000)
Land ………….40% (4,000,000/10,000,000)
Total…………... 100%
Apportioned Cost
Building………..5,400,000 (9,000,000 × 60%)
Land……………3,600,000 (9,000,000 × 40%)
Total…………….9,000,000
Cont…
The entry to record the lump-sum purchase is
Building ………………….5,400,000
Land ……………………...3,600,000
Cash ………………………….9,000,000
(To Record costs of plant assets)

Donated Assets
Civic groups and municipalities sometimes give land or
buildings to a corporation as an incentive to locate or
remain in a community. In such cases, the corporation
debits the assets for their fair market value and credits a
revenue account.
 To illustrate, assume that on April 20 the city of Finfine
donates land to Sifnaf Corporation as an incentive to
relocate its headquarters . The land was valued at Br.
500,000. Sifnaf Corporation would record the land as
follows:
Land ………………………………..500,000
Revenue from Donated Land ……………500000
2.2. Accounting for depreciation
Depreciation is the systematic and rational allocation
(transfer) of the cost of a plant asset to expenses over its
estimated useful life as their value is reduced.
Depreciation is an allocation process as opposed to a
valuation process.
Tangible fixed assets, with the exception of land, are
subjected to depreciation expense during their useful life.
The adjusting entry to record depreciation debits Depreciation
Expense and credits a contra asset account entitled
Accumulated Depreciation or Allowance for Depreciation.
The use of a contra asset account allows the original cost to
remain unchanged in the fixed asset account.
Causes of Depreciation
Depreciation can be caused by
1. Physical depreciation factors include wear and tear
during use or from exposure to weather.
2. Functional depreciation factors include obsolescence
and changes in customer needs that cause the asset
to no longer provide services for which it was
intended.
 For example, equipment may become obsolete due
to changing technology.

Cont…
Two common misunderstandings that exist about
depreciation as used in accounting include:
1. Depreciation does not measure a decline in the market
value of a fixed asset.
 depreciation is an allocation of a fixed asset’s cost to
expense over the asset’s useful life.
 Thus, the book value of a fixed asset (cost less
accumulated depreciation) usually does not agree with
the asset’s market value.
2. Depreciation does not provide cash to replace fixed
assets as they wear out.
Factors in Computing Depreciation Expense
Three factors in computing depreciation

Cont…

Cont…
Depreciable cost, is the amount that is spread over the
asset’s useful life as depreciation expense
The total amount of depreciation expense assigned to an
asset never exceeds the asset's depreciable cost.
Net book value is an asset's total cost minus the
accumulated depreciation assigned to the asset.
Book Value (BV) = Original Cost – Accumulated
Depreciation

Methods of Depreciation
The most common depreciation methods are:
1. Straight – line method (SL)
2. Units of production method
3. Declining – Balance method
4. Sum-of- the- years’- digits (SYD) method

Use of Depreciation Methods

1. Straight-Line Method (SL)
The simplest and the most widely used method of determining
depreciation.
Reports the same amount of depreciation expense each year.
The formula for straight-line depreciation is
Annual SL = Acquisition Cost – Savage value
depreciation Estimated useful life in years
Computing straight-line depreciation may be simplified by
converting the annual depreciation to a percentage of
depreciable cost.
 The straight-line percentage is determined by dividing 100%
by the number of years of expected useful life.

Cont…
Example
On January 1,2016, ABC Co. purchased Forklift. The
cost of Forklift is Br. 24,000, its estimated residual value
is Br. 2,000, and its estimated life is 5 years.
Required: Compute annual depreciation and Record
depreciation expense.
Annual dep. = Br. 24,000 – Br. 2,000
5 years
= Br. 4,400
Annual depreciation can be computed by multiplying the
depreciable cost by straight line percentage.
Cont…
Annual depreciation = depreciable cost X straight line
percentage.
Depreciable cost = Acquisition Cost – Savage value
Br. 24,000 – Br. 2,000 X (100%/5)
Br. 22,000 X 20%
Br. 4,400
Dec. 31 Depreciation Expense—Forklift…. 4,400
Accum. Depreciation—Forklift………. 4,400

Depreciation Schedule (Straight line Method)
Annual
Depreciab Deprecat Deprecatn Accumulated Book
Year le Cost ion Rate Expense Deprecation value
2016 22,000 20% 4,400 4,400 19,600
2017 22,000 20% 4,400 8,800 15,200
2018 22,000 20% 4,400 13,200 10,800
2019 22,000 20% 4,400 17,600 6,400
2020 22,000 20% 4,400 22,000 2,000

2. Units-of-Activity Method
provides the same amount of depreciation expense for
each unit of activity of the asset.
Depending on the asset, the units of activity can be
expressed in terms of hours, miles driven, or quantity
produced.
The units-of activity method may be called the units-
of-production method or units-of-output method


Cont…
The units-of-activity method is applied in the following
two steps:
Step 1. Determine the depreciation per unit.
Depreciation = Cost – Residual Value
per Unit Total Estimated Units of Activity
Step 2. Compute the depreciation expense
Depreciation = Depreciation × Units of
Expense per Unit Activity for Period

Cont…
Example: Assume that the forklift is estimated to have a
useful life of 10,000 operating hours. During its five-year
life, the forklift was used as follows:
Year 1…………. 2,100 hours
Year 2 ………….1,500
Year 3 ………….2,600
Year 4 ………….1,800
Year 5…………. 2,000
Total ………….10,000 hours
Required:
 Compute annual depreciation expense for the 5 years
 Prepare schedule
12/11/2024 of depreciation.
By Gizachew Soboka 37
Cont…
Step 1. Determine the depreciation per hour as follows:
Depreciation per Hour = Cost – Residual Value
Estimated Units of Activity
= Br. 24,000 – Br. 2,000
Total 10,000 Hours
= Br.2.20 per Hour
Step 2. Compute the depreciation expense as follows:
Depreciation = Depreciation × Units of
Expense of Y1 per Unit activity for Period
= Br. 2.20 per Hour × 2,100 Hours
= Br. 4,620
Cont…
Depreciation for the first year using the units-of-activity method is

Depreciation Schedule (Units of Activity Method)
Year Number Depreciation Depreciation Accum. Book
of hours per hour expense Depreciation value
2016 2,100 2.20/hour 4,620 4,620 19,380

2017 1,500 2.20 3,300 7920 16,080
2018 2,600 2.20 5,720 13,640 10,360
2019 1,800 2.20 3,960 17,600 6,400
2020 2,000 2.20 4,400 22,000 2,000

3. Double-Declining-Balance Method
provides for a declining periodic expense over the
expected useful life of the asset.
Characteristics of DDB method include:
 It charges a higher amount of depreciation expense is in
earlier useful life of plant asset and then a continuously
declining amount in subsequent periods.
 It uses double (twice) the straight line method rate.
 Salvage value is not considered in calculating periodic
depreciation expenses.
 The computation of periodic depreciation under this
method is based on a declining book value (cost less
accumulated depreciation) of the asset.
Cont…
DDB method is applied in three steps:
Step 1. Determine the straight-line percentage, using the
expected useful life.
Step 2. Determine the double-declining-balance rate by
multiplying the straight-line rate (from Step 1) by 2.
Step 3. Compute the depreciation expense by multiplying
the double-declining-balance rate (from Step 2) times
the book value of the asset.

Cont…
Illustration
Depreciation of the forklift for the first year using the
double-declining-balance method is computed and recorded
as follows:
To compute annual depreciation as follows:
Step 1. Straight-line percentage = 20% (100% ÷ 5)
Step 2. Double-declining-balance rate = 40% (20% X 2)
Step 3. Depreciation expense = Br. 9,600 (Br. 24,000 X 40%)
Entry to record depreciation expense of the first year is:

Depreciation Schedule (DDB Method)
Accum. Book Value DoubleDe Depreciati Book
Year Cost Dep. at at beg. of cliningBal on for Value at
Beginning Year ance Rate Year End of
of Year Year
2016 24,000.00 _ 24,000.00 40% 9,600.00 14,400.00

2017 24,000.00 9,600.00 14,400.00 40% 5,760.00 8,640.00
2018 24,000.00 15,360.00 8,640.00 40% 3,456.00 5,184.00
2019 24,000.00 18,816.00 5,184.00 40% 2,073.60 3,110.40
2020 24,000.00 20,889.60 3,110.40 _ 1,110.40 2,000.00
Note: The asset should not be depreciated below its

estimated residual value.
Cont…
Book value end of Year 4…………………3,110.40
Estimated residual value…………………2,000.00
Depreciation for Year 5……………………1,110.40

4. Sum-of-Years-Digit method (SYD)
The periodic charge for depreciation declines steadily over
the estimated life of the asset
Depreciable cost is determined by deducting salvage value
from original cost and it will be the same for all years of
useful life of a plant asset.
 A fraction is used for calculating depreciation expense of a
period.
Fraction = Numerator
Denominator
Numerator:-the number of years remains in the useful life
at the beginning of the period.
Denominator:-the sum of the integers from 1 up to the
number of years
12/11/2024 of useful
By Gizachew Sobokalife 46
Cont…
Depreciation expense = (Cost - Salvage value) x Fraction
Example:
Assume that ABC company bought a Forklift for Br.
24,000 January 2016 which is expected to be used for the
following 5 years. It is estimated that the Forklift will have
a salvage value of Br. 2,000 at the end of its service life.
Required:
 Compute annual depreciation for the life of the machine
and journalize the depreciation expense for the first two
years under SYD method.
Denominator = n (n+1) = 5(5+1) = 15
2 2
Depreciation Schedule (SYD Method)
Deprecia Depreciation Accumulated

Year ble Fraction Expense depreciation Book
Cost value
2016 22,000.00 5/15 7333.33 7333.33 16666.67
2017 22,000.00 4/15 5866.67 13200 10800.00
2018 22,000.00 3/15 4400.00 17600 6400.00
2019 22,000.00 2/15 2933.33 20533.33 3466.67
2020 22,000.00 1/15 1466.67 22,000 2000.00

Comparing Depreciation Method
The straight-line method provides for the same
periodic amounts of depreciation expense over the life
of the asset.
The units-of-activity method provides for periodic
amounts of depreciation expense that vary, depending
on the amount the asset is used.
The double-declining-balance method and Sum-of-
the years digit methods provide for a higher
depreciation amount in the first year of the asset’s use,
followed by declining amounts.

Cont…
Year Straight Units of Double Sum of
Line Production Declining Years
Balance Digit
2016 4,400 4,620 9,600.00 7333.33
2017 4,400 3,300 5,760.00 5866.67
2018 4,400 5,720 3,456.00 4400.00
2019 4,400 3,960 2,073.60 2933.33
2020 4,400 4,400 1,110.40 1466.67
Total 22,000.00 22,000.00 22,000.00 22,000.00

Partial-Year Depreciation
A fixed asset may be purchased and placed in service
other than the first month or end of an accounting period.
 depreciation is prorated based on the month the asset
is placed in service.
Assets may also be placed in service other than the first
day of a month.
 Assets placed in service during the first half of a
month are normally treated as having been purchased

on the first day of that month.
 Asset purchases during the second half of a month
are treated as having been placed in service on the

first day of the next month.
Cont…
Straight-Line Method
depreciation is prorated based on the number of months the
asset is in service.
To illustrate, assume that the Company purchased the
forklift on October 1 instead of January 1.
Solution
The first-year depreciation would be based upon three
months (October, November, December).
Annual Depreciation = (Br. 22,000 – Br. 2,000) ÷ 5 years
= Br. 4,400
First-Year Depreciation = Br. 4,400 × (3 ÷ 12) = Br. 1,100
Cont…
Units-of-Activity Method
computes depreciation expense using an activity rate and the activity
level for the period.
Example
 Assume that the company purchased the forklift on October 1 instead of
January 1. Assume also that during the period from October 1 to
December 31, the forklift was used for 400 hours. First-year depreciation
would be
Solution
Depreciation per Hour = (Br. 24,000 – Br. 2,000) ÷ 10,000 Hours
= Br. 2.20 per Hour

First-Year Depreciation = Br. 2.20 per Hour × 400 Hours
= Br. 880
Cont…
Double-Declining-Balance Method
the annual double-declining-balance depreciation is prorated
based on the number of months the asset is in service.
Illustration
 Assume that forklift was purchased and placed into service on
October 1 instead of January 1. First-year depreciation would
be ,
Solution
Double-Declining-Balance Rate = (100% ÷ 5) × 2 = 40%
First-Year Annual Depreciation = Br. 24,000 × 40% = Br. 9,600
First-Year Partial Depreciation = Br. 9,600 × (3 ÷ 12) = Br. 2,400
 The second-year depreciation would be computed by
multiplying the book value on January 1 of the second year by
the double-declining-balance
12/11/2024 By Gizachew Soboka
rate. 54
Change in Estimates and Revision of
Periodic Depreciation
Revising the estimates of the residual value and the useful life is
normal.
When these estimates are revised, they are used to determine
the depreciation expense in future periods.
They do not affect the amounts of depreciation expense
recorded in earlier years.
Illustration
Assume that a fixed asset purchased for Br. 130,000 was
originally estimated to have a useful life of 30 years and a
residual value of Br. 10,000. The asset has been depreciated at
Br. 4,000 per year [(Br. 130,000 - Br. 10,000) / 30 years] for 10
years by the straight-line method. At the end of ten years, the
asset’s book value (undepreciated cost) is Br. 90,000,
determined as follows:
Cont…
Asset cost ………………………………………...Br. 130,000
LessAaccum. depreciation ($4,000 / year X10 years).. 40,000
Book value (undepreciated cost), end of tenth year ……90,000
During the eleventh year, it is estimated that the remaining
useful life is 25 years (instead of 20) and that the residual
value is Br. 5,000 (instead of Br. 10,000). The depreciation
expense for each of the remaining 25 years is Br. 3,400,
computed as follows:

Cont…
Book value , end of tenth year …………….Br. 90,000
Less revised estimated residual value ………….5,000
Revised remaining depreciable cost ………Br. 85,000
÷ Remaining years ……………………………. 25
Revised annual depreciation expense……… Br. 3,400
The journal entry before revision
Deprecation expense ……………….6,000
Accumulated Deprecation ……………6,000
(Same for the first ten years before revision)
The journal entry after revision
Deprecation expense ……………….3,400
Accumulated Deprecation ……………3,400
12/11/2024(Same for By the remaining
Gizachew Soboka years after revision) 57
2.3. Capital expenditures and revenue
expenditures
Capital expenditures are the costs of acquiring fixed
assets, adding to a fixed asset, improving a fixed asset, or
extending a fixed asset’s useful life.
Such expenditures are recorded by either debiting the
asset account or its related accumulated depreciation
account.
Also called balance sheet expenditures.
Revenue expenditures are costs that benefit only the
current period or costs incurred for normal maintenance
and repairs.
Such expenditures are debited to expense account
Cont…
1. Ordinary Maintenance and Repairs
Costs related to the ordinary maintenance and repairs:
 Are revenue expenditures

 recorded as an expense of the current period.
 are recorded as debits to Repairs and Maintenance
Expense and credit to cash.

Example,
ABC co. paid Br. 300 for a tune-up of the forklift. The
journal entry to record the payment is
Repairs and Maintenance Expense……….. 300
12/11/2024
Cash…………………………………………
By Gizachew Soboka
300 59
Cont…
2. Extraordinary Repairs
Costs incurred to extend the asset’s useful life.
Such costs are capital expenditures
are recorded as a decrease in an accumulated
depreciation account.
For example, the engine of a forklift that is near the end of
its useful life may be overhauled at a cost of Br. 4,500,
extending its useful life by eight years. The journal entry is:
Accumulated Depreciation—Forklift …….4,500
Cash …………………………………..4,500

Cont…
Because the forklift’s remaining useful life has changed,
depreciation for the forklift will also change based on the
new book value of the forklift
3. Asset Improvements
Costs incurred to improve the asset.
are capital expenditures
are recorded as increases to the fixed asset account.
Debited to fixed assets and credited to cash.
For example, the service value of a delivery truck might be
improved by adding a $5,500 hydraulic lift to allow for
easier and quicker loading of cargo. The journal entry to
record this expenditure is
Cont…
Delivery Truck …………………5,500
Cash ……………………………..5,500
Note: the cost of the delivery truck has increased,
depreciation for the truck will also change over its
remaining useful life.

Revenue and Capital Expenditures summary

2.4. Disposal of plant assets
Fixed assets that are no longer useful may be
discarded, sold, or traded for other fixed assets.
The book value of the asset must be removed from
the accounts.
The entry for this purpose debits the asset’s
accumulated depreciation account for its balance on
the date of disposal and credits the asset account for
the cost of the asset.

Methods of plant asset disposal

Steps for Disposals of Plant Assets
The steps for disposing plant assets
1. Record depreciation up to the date of disposal—this
also updates Accumulated Depreciation.
2. Record the removal of the disposed asset’s account
balances—including its accumulated depreciation.
3. Record any cash (and/or other assets) received or
paid in the disposal.
4. Record any gain or loss—equal to the value of any
assets received minus the disposed asset’s book
value
1. Discarding Plant Assets
A plant asset is discarded when it is no longer useful to
the company and it has no market value.
Example 1
Assume that an office furniture costing Br. 60,000 with
accumulated depreciation of Br. 60,000 is discarded.
When accumulated depreciation equals the asset’s cost, it
is said to be fully depreciated (zero book value). The entry
to record the discarding of this asset is
Accum. Depreciation—Machinery ……. 60,000
Machinery …………………………….. 60,000
(To Discard fully depreciated office furniture)

Cont…
To record the above entry.
Step 1 is unnecessary because the machine is fully
depreciated.
Step 2 is reflected in the debit to Accumulated
Depreciation and credit to Machinery.
Because no other asset is involved, step 3 is irrelevant.
Finally, because book value is zero and no other asset is
involved, no gain or loss is recorded in step 4.

Cont…
How do we account for discarding an asset that is not
fully depreciated or one whose depreciation is not up-
to-date?
Example 2
On July 1, 2020, Wright Company discards an office
furniture. Original cost was Br. 60,000 and as of
January 1, 2020, had accumulated depreciation of Br.
41,000. Depreciation for the first 6 months of 2020 is
Br. 8,000.
The journal entry to record the discarding of office
furniture is:
Cont…
Step 1 is to bring depreciation up-to-date.
Jul. 1 Depreciation Expense …………………8,000
Accum. Depreciation—Equipment ………8,000
Steps 2 through 4
This loss is computed by comparing the equipment’s Br.
11,000 book value (Br. 60,000 − Br. 41,000 − Br. 8000)
with the zero net cash proceeds.
The loss is reported in the Other Expenses and Losses
section of the income statement

Cont…
July 1 Accum. Depreciation—Equipment …….49,000
Loss on Disposal of Equipment ………...11,000
Equipment……………………………….60,000
(To Discard equipment with a Br. 11,000 book value.)
2. Selling Plant Assets
 In a disposal by sale, the company compares the book value
of the asset with the proceeds received from the sale.
 If the proceeds of the sale exceed the book value of the plant
asset, a gain on disposal occurs.
 If the proceeds of the sale are less than the book value of the
plant asset sold, a loss on disposal occurs

Cont…
In selling the plant assets, we cover three different
possibilities.
A. Sale at Book Value
On July 1, 2020, Wright Company sells office furniture
for Br. 11,000 cash. Original cost was Br. 60,000 and as of
41,000 . The entry to record the disposal is
Mar. 31 Cash …………………………..11,000
Accum. Deprec—Equip………49,000
Equipment …………………..60,000
(To Record sale of equipment for no gain or loss)
Cont…
B. Sale above Book Value
On July 1, 2020, Wright Company sells office furniture
for Br. 16,000 cash. Original cost was Br. 60,000 and as of
41,000. Depreciation for the first 6 months of 2020 is Br.
8,000.
Step 1. The entry to record depreciation expense and
update accumulated depreciation to July 1 is as follows
Depreciation Expense ……………8,000
Accumulated Depreciation…………8,000

Cont…
After the accumulated depreciation is updated, a gain on
disposal of Br. 5,000 is computed:
Cost of office furniture ………………………….Br. 60,000
Less: Accum. depreciation (Br. 41,000 + Br. 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:
Cash …………………………………….16,000
Accumulated Depr.-Office Furniture ……49,000
Office Furniture ………………………..60,000
12/11/2024
Gain onByDisposal ………………………...5,000
Gizachew Soboka 74
Cont…
3. Sale below Book Value
Instead of selling the office furniture for Br. 16,000,
Wright sells it for Br. 9,000. In this case, a loss of Br.
2,000 is computed:
Cost of office furniture …………………………..Br. 60,000
Less: Accum. depreciation (Br. 41,000 + Br. 8,000) ...49,000
Book value at date of disposal ……………………….11,000
Proceeds from sale
…………………………………….9,000
Loss on disposal …………………………………...Br.
2,000
Cont…
The entry to record the sale and the loss on disposal is as
follows:
Cash ……………………………………9,000
Accumulated Depr.-Office Furniture ….49,000
Loss on Disposal ……………………….2,000
Office Furniture ……………………….60,000
(To record the sale and the loss on disposal)

3. Exchanges of plant assets
Exchanges can be for similar or dissimilar assets
For similar assets, the new asset performs the same
function as the old asset
 Necessary to determine two things:
1. the cost of the asset acquired
2. the gain or loss on the asset given up

Loss treatment
 Losses on exchange of similar assets
– recognized immediately
 Cost of the new asset received
– equal to the fair market value of the old asset
exchanged plus any cash or other consideration
given up
 Losses result when the book value is greater than the fair
market value of the asset given up

Cont…
Computation of cost of new office equipment
Example
Roland Company exchanges old office equipment for new
similar office equipment. The book value of the old office
equipment is Br. 26,000 (Br. 70,000 cost less Br. 44,000
accumulated depreciation), And its fair market value is Br.
10,000, and Br. 81,000 of cash is paid. The cost of the
new office equipment, Br. 91,000, is calculated as follows
Fair market value of old office equipment ….Br. 10,000
Cash ……………………………………………..81,000
Cost of new office equipment ……………….Br. 91,000
Cont…
Computation of loss on disposal
A loss results when the book value is greater than the fair
market value of the asset given up. The calculation is as
follows:
Book value of old office equipment
(Br. 70,000 –Br. 44,000) …………………..…Br. 26,000
Fair market value of old office equipment ……….10,000
Loss on disposal………………………………. Br.16,000
In recording an exchange at a loss, four steps are required:
1. eliminate the book value of the asset given up,
2. record the cost of the asset acquired,
Cont…
3. recognize the loss on disposal of plant assets, and
4. record cash paid or received.
Office Equipment (new) …………………..91,000
Accum. Depreciation-Office Equipment ….44,000
Loss on Disposal ………………………….16,000
Office Equipment (old) ……………………70,000
Cash ……………………………………….81,000

Gain treatment
Gains of similar assets
 not
recognized immediately, but, are deferred by
reducing the cost basis of the new asset
 Cost of the new asset
 fair market value of the old asset exchanged plus
any cash or other consideration given up

Gains result when the fair market value is greater than
the book value of the asset given up

Cont…
Cost Of New Equipment (Before Deferral Of Gain)
Mark’s Express Delivery exchanges old delivery equipment
plus Br. 3,000 cash for new delivery equipment. The book
value of the old delivery equipment is Br. 12,000 (Br. 40,000
cost less Br. 28,000 accumulated depreciation), its fair
market value is Br. 19,000. The cost of the new delivery
equipment, Br. 22,000, is calculated as follows:
Fair market value of old delivery equipment …….Br. 19,000
Cash ……………………………………………………3,000
Cost of new delivery equipment(before deferral
of gain) ……………………………………………..Br.
22,000
Cont…
Computation of gain on disposal
Fair market value of old delivery equipment …Br. 19,000
Book value of old delivery equipment ……………12,000
Gain on disposal ………………………………..Br. 7,000
Cost of new delivery equipment (after deferral of gain)
The Br. 7,000 gain on disposal is then offset against the
Br. 22,000 cost of the new delivery equipment. The result
is a Br. 15,000 cost of the new delivery equipment, after
deferral of the gain.

Cont…
Cost of new delivery equipment
(before deferral of gain)…………………………Br. 22,000
Less: Gain on disposal ………………………………7,000
Cost of new delivery equipment (after deferral
of gain) ………………………………………….Br. 15,000
The entry to record the exchange is:
Delivery Equipment (new) ……………….15,000
Accum. Deprec. - Delivery Equip. (old) ….28,000
Delivery Equipment (old) ………………40,000
Cash ………………………………………3,000
Accounting rules for plant assets exchange

2.5. Leasing of plant assets
A lease is a contract for the use of an asset for a period of
time
The two parties to a lease contract are the lessor and the
lessee.
The lessor is the party who owns the asset.
The lessee is the party to whom the rights to use the asset
are granted by the lessor.
The lessee is obligated to make periodic rent payments for
the lease term.

Advantages of leasing an asset
The lessee has access to an asset without having to spend
a large amount of funds or borrow to buy the asset.
Expenses such as maintenance and repair costs may be the
responsibility of the lessor.
The risk of incurring additional cost because the asset
becomes obsolete before the end of its useful life can be
mitigated by leasing an asset.

Classification of lease
FASB and IASB recently completed a project to merge
U.S. and international standards on leasing. The new
FASB standard distinguishes between finance leases and
operating leases.
Finance lease
the lessee records an asset and a liability similar
to having purchased the asset.
Operating lease
 the lessee records prepaid rent (and, if necessary,
a liability for future lease payments) and records
rent expense as the asset is used.
2.6. Internal controls of plant assets
controls should begin with authorization and approval
procedures for the purchase of fixed assets.
Controls should ensure that fixed assets are acquired at
the lowest possible costs.
competitive bids from preapproved vendors.
As soon as a fixed asset is received, it should be inspected

and tagged for control purposes and recorded in a
subsidiary ledger.
Fixed assets should be insured against theft, fire, flooding,
or other disasters. They should also be safeguarded from
theft, misuse, or other damage.
Cont…
A physical inventory of fixed assets should be taken
periodically in order to verify the accuracy of the
accounting records. In addition, fixed assets should be
inspected periodically in order to determine their
condition.
Careful control should also be exercised over the disposal
of fixed assets.
 All disposals should be properly authorized and
approved.
Fully depreciated assets should be retained in the
accounting records until disposal has been authorized
and they are removed from service
2.7. Intangible Assets
 do not exist physically
 acquired through innovative, creative
activities or through the purchase of the
rights
 represent rights, privileges, and competitive
advantages owned by a business
 Examples of intangible assets include:
 Patents,
 Copyrights,
 Franchises,
 Trademarks,
 Goodwill and etc.

Accounting for intangible assets
The accounting for intangible assets is similar to that for
fixed assets. The major issues are:
1. Determining the initial cost.
2. Determining the amortization, which is the amount of
cost to transfer to expense.
Amortization results from the passage of time or a decline
in the usefulness of the intangible asset.

Differences between accounting for
intangible assets and plant assets
The term used to describe the allocation of the cost of an
intangible asset to expense is amortization, rather than
depreciation.
A difference in determining cost.
 Costs of Plant assets,
purchase price of an asset and the costs incurred by
a company in designing and constructing the plant

asset.
 cost for an intangible asset
 only the purchase price.
The amortization period of an intangible asset cannot be

longer than 40 years.
Cont…
For intangibles, no Accumulated Amortization account is
used; the credit is made to the Asset account itself.
Types of intangibles
Patents
exclusive rights to produce and sell goods with one or
more unique features.
rights are granted by the federal government.
These rights continue in effect for 20 years.
May be purchased, or developed by its own research and
development efforts.

Cont…
The initial cost of a purchased patent, including any
related legal fees, is debited to an asset account
The estimated useful life of the patent may also change as
technology or consumer tastes change.
The straight-line method is normally used to determine
the periodic amortization.
When the amortization is recorded, it is debited to an
expense account and credited directly to the patents
account.
A separate contra asset account is usually not used for
intangible assets.
Cont…
Note: IFRS allow certain research and development
(R&D) costs to be recorded as assets when incurred.
Typically, R&D costs are classified as either research costs
or development costs. If certain criteria are met, research
costs can be recorded as an expense, while development
costs can be recorded as an asset. This criterion includes
such considerations as the company’s intent to use or to
sell the intangible asset.

Cont…
Example: Assume that at the beginning of its fiscal year, a
business acquires patent rights for Br.100,000. The patent
had been granted 6 years earlier by the Federal Patent
Office. Although the patent will not expire for 14 years, its
remaining useful life is estimated as 5 years. The adjusting
entry to amortize the patent at the end of the fiscal year is
as follows:
Dec. 31, Amortization expense ……………20,000
Patent………………………. …….20,000

Cont…
Copyrights
The exclusive right to publish and sell a literary, artistic,
or musical composition.
Copyrights are issued by the federal government and
extend for 70 years beyond the author’s death.
The costs of a copyright include all costs of creating the
work plus any administrative or legal costs of obtaining
the copyright.
A copyright that is purchased from another should be
recorded at the price paid for it.
Cont…
Trademarks
name, term, or symbol used to identify a business and its
products.
 Most businesses identify their trademarks with ® in
their advertisements and on their products.

Under federal law, businesses can protect against others
using their trademarks by registering them for 10 years
and renewing the registration for 10-year periods
thereafter.
The legal costs of registering a trademark with the federal
government are recorded as an asset.
Cont…
Since the legal costs for establishing these trademarks are
immaterial , they are not shown on the balance sheet.
If a trademark is purchased from another business, the
cost of its purchase is recorded as an asset.
The cost of a trademark in most cases considered to have
an indefinite useful life. Thus, trademarks are not
amortized over a useful life rather, they should be tested
periodically for impaired value. When a trademark is
impaired from competitive threats or other circumstances,
the trademark should be written down and a loss
recognized.
Cont…
Goodwill
created from such favorable factors as location, product
quality, reputation, and managerial skill.
l allows a business to earn a greater rate of return than
normal.
GAAP allow goodwill to be recorded only if it is objectively
determined by a transaction. An example of such a transaction
is the purchase of a business at a price in excess of the fair
value of its net assets (assets less liabilities). The excess is
recorded as goodwill and reported as an intangible asset.
Goodwill is not amortized. However, a loss should be
recorded if the future prospects of the purchased firm become
impaired.
Cont…
Example: Assume that on December 31, ABC Company
has determined that Br. 250,000 of the goodwill created
from the purchase of Electronic Systems is impaired. The
entry to record the impairment is as follows:
Dec. 31 Loss from Impaired Goodwill ….250,000
Goodwill ……………………………250,000
(To record Impaired goodwill.)

2.8. Accounting for Natural Resources
Natural resources are assets that are

physically consumed when used.
 Examples are standing timber, mineral
deposits, and oil and gas fields.

Natural Resources are considered "wasting"
assets
Involve extraction of a resource.
The basic problem is to account for the units
taken out of the resource.

Characteristics of natural resources
Naturally Occurring:
 For
example, timber is a natural resource that
naturally grows over time.
 Removed for Sale:
The asset is consumed by removing it from its land
source.
For example, timber is removed for use when it is
harvested, and minerals are removed when they are
mined.
Removed and sold over more than one year

Cost Determination and Depletion
The cost of a natural resource is the price needed to
acquire the resource and prepare it for its intended use.
The allocation of the cost of natural resources in a rational
and systematic manner over the resource’s useful life is
called depletion.
 Natural resources are reported on the balance sheet at
cost minus accumulated depletion.
The depletion expense per period is usually based on units
extracted from cutting, mining, or pumping. This is
similar to units-of-production depreciation.

Depletion Expenses
As natural resources are harvested or mined and then sold, a
portion of their cost is debited to an expense account called
depletion expense. Depletion is determined as follows:
Step 1. Determine the Depletion cost per unit
Depletion per unit= Total Cost of Resource – Salvage value
Total Estimated Units Available
Step 2. Multiply the Depletion Cost per unit by the quantity
removed from the resource during the period.
Depletion Expense = Depletion Cost per unit x Quantity
Extracted

Cont…
An entry to record annual depletion expense is,
Depletion Expense …………….. XX
Accumulated Depletion…………………XX
Example: Assume that Keraji Company acquired mineral
rights for Br. 4,000,000. The mineral deposit is estimated at
1,000,000 tons. During the current year, 90,000 tons were
mined and sold.
Required:
1. Compute depletion cost per unit.
2. Compute annual depletion expense.
3. Journalize the adjusting entry on December 31 to
recognize the depletion expense
Cont…
Solution
1. Depletion per unit= Total Cost of Resource – Salvage value
Total Estimated Units Available
= Br. 4,000,000
1,000,000 tones
= Br. 4 per tone
2. Annual depletion expense = Br. 4 X 90,000 = Br. 360,000
3. Depletion Expense …………….. Br. 360,000

Accumulated Depletion………………… Br. 360,000
2.9. Financial Reporting for Long-Term Assets:
Fixed and Intangible
On the income statement, depreciation and amortization
expense should be reported separately or disclosed in a
note.
The methods used in computing depreciation should be
reported.
 On the balance sheet, each class of fixed assets should be
disclosed on the face of the statement along with its
related accumulated depreciation.
If there are many classes of fixed assets, a single amount
may be presented on the balance sheet, supported by a
note with a separate listing.
Cont…
Fixed assets may be reported under the more descriptive
caption of property, plant, and equipment.
Intangible assets are usually reported on the balance sheet
in a separate section following fixed assets
The balance sheet presentation for Senaf company’s fixed
and intangible assets follows:

Cont…
 Senaf company
Balancesheet
December 31,2021
 Current assets:
Cash………………………………………………….….. $XXX
Accounts
receivable…………………………………….... XXX
Merchandise inventory………………………………...…. XXX
Total current
assets…………………………………………………..$XXX
Property, plant, and equipment
 Land . ………………………………………………………XXX
Buildings
……………………………………………XXX Less accumulated
depreciation ……………………..XXX XXX Office equipment
……………………………………XXX Less accumulated
depreciation . ………………….…XXX XXX Total property, plant,
and equipment ……………… ………………XXX Intangible
assets: Patents
……………………………………………………..…………XXX
 .
O
.
T W
E R
P T
A
C H
OF
ND
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Chapter two

Plant Assets and Intangible Assets

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Entry for cash purchase of land improvements:

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Depreciation for the first year using the units-of-activity method is

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2016 2,100 2.20/hour 4,620 4,620 19,380

2020 2,000 2.20 4,400 22,000 2,000

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2016 24,000.00 _ 24,000.00 40% 9,600.00 14,400.00

Note: The asset should not be depreciated below its

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Deprecia Depreciation Accumulated

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month are normally treated as having been purchased

are treated as having been placed in service on the

= Br. 2.20 per Hour

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 Are revenue expenditures

 are recorded as debits to Repairs and Maintenance

Expense and credit to cash.

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