CHAPTER 2

PLANT PROPERTY AND EQUIPMENT(PPE) IAS-16

Nature of PPE

The major characteristics of property, plant, and equipment are as follows.

 They are acquired for use in operations and not for resale. Only assets used in normal
business operations are classified as property, plant, and equipment. For example, an idle
building is more appropriately classified separately as an investment. Property, plant, and
equipment held for possible price appreciation are classified as investments. In addition,
property, plant, and equipment held for sale or disposal are separately classified and reported
on the statement of financial position. Land developers or subdividers classify land as
inventory.
 They are long-term in nature and usually depreciated. Property, plant, and equipment yield
services over a number of years. Companies allocate the cost of the investment in these
assets to future periods through periodic depreciation charges. The exception is land, which is
depreciated only if a material decrease in value occurs, such as a loss in fertility of agricultural
land because of poor crop rotation, drought, or soil erosion.
 They possess physical substance. Property, plant, and equipment are tangible assets
characterized by physical existence or substance. This differentiates them from intangible
assets, such as patents or goodwill. Unlike raw material, however, property, plant, and
equipment do not physically become part of a product held for resale.

PROPERTY, PLANT, AND EQUIPMENT

They are long-lived tangible assets that are of a permanent nature, used in the operations of the
business.
 Other descriptive titles are frequently used are plant assets, used either alone or in various
combinations.
 To be classified as a plant asset, an asset must
 have a useful service life of more than one year; and
 Be used in business operations rather than held for resale.
 The properties most frequently included in plant assets may be described in more specific
terms as equipment, furniture, tools, machinery, buildings, and land. On the balance sheet, you
will find these assets included under the heading “property, plant and equipment”.
 Unlike the other kinds of tangible property, land has an indefinite economic life. In general, land
does not deteriorate with the passage of time and is not physically exhausted through use.
 There may be exceptional cases. Agricultural land may suffer a loss of usefulness through
erosion or failure to maintain fertility. Building sites may be damaged or destroyed by slides,
floods, or earthquakes. Generally, land is accounted for as a non-depreciable plant asset.
 With the exception of land, all other plant assets have limited economic lives. The cost of such
assets is allocated through the process of depreciation to the cost of the goods and services
produced.

Complied by Tekalign N 1
 Acquisition Cost of Plant Assets
The cost of acquiring a plant asset includes all expenditures necessary to get it in place and ready
for use. The acquisition cost of a plant asset is the amount of cash /or cash equivalents given up to
acquire that asset and place it in operating condition at its proper location.

Thus, cost includes all normal, reasonable, and necessary expenditures to obtain the asset and get
it ready for use. Acquisition cost also includes the repair and reconditioning cost for used or
damaged assets.

Expenditures resulting from carelessness or errors in installing the asset, from vandalism, or from
other unusual occurrences do not increase the usefulness of the asset and should be treated as an
expense. Unnecessary costs (such as traffic tickets or fines) that must be paid as a result of
hauling machinery to a new plant are not part of the acquisition cost of the asset.
Cost of Land
▪ Land is non-depreciable. And the cost of land includes:
 The acquisition (purchase) (negotiated) price.
 All costs of closing the transaction and obtaining title, such as broker’s commission, real-
estate commission, attorney’s fees, existing mortgage note assumed, legal fees, escrow
fees (amount paid to agents), title investigations, and title insurance premiums.
 All costs of surveying (surveying fees), clearing, draining, grading or filling to make the
land suitable for the desired use, including the cost of demolishing existing unwanted
(unneeded) structures-that is- when land purchased as a building site contains an
unusable building that must be removed, the entire purchase price should be debited to
land, including the cost of removing the building less any cash received from the sale of
salvaged items, such as crops or fruit on the land; that occurs while the land is being
readied for use.
 Cost of landscaping and local assessments for side walks, streets, sewers and water
mines.
 Delinquent real estate taxes (unpaid taxes) (back taxes) (accrued property taxes and other
liens on land) assumed by purchaser or buyer.
▪ The costs incurred to make the land suitable for its intended purposes such as cost of clearing
trees, or of leveling hills or filling low spots, are included in the cost of land.
▪ Any salvage material recovered in the process of clearing land represents a cost offset.
▪ Land held as a potential building site or for investment purposes is not currently used in
operations and should be reported under investments in the balance sheet rather than as a
part of the plant assets category. The carrying costs, such as property taxes and weed control
incurred prior to the time that the land is placed in use, are capitalized (added to the cost of the
land). When the site is placed in use, the land is reclassified from the investment category to
the plant assets category, and future carrying costs are recognized as expenses.
Cost of Building
❖ All necessary expenditures relating to the purchase or construction of a building are charged to
the building account.

Complied by Tekalign N 2
❖ When an existing building is purchased, its cost includes:
Purchase price
Closing costs (attorney’s fees, title insurance, etc)
Cost of remodeling rooms and offices and replacing or repairing the roof, floors, electrical
wiring, and plumbing (or repair and remodeling costs)
Unpaid taxes assumed by the purchaser, legal costs and real estate commissions paid.
❖ When a new building is constructed, its cost consists of:
1. Contract price (payments to contractors)
2. Fees paid for architects and engineers for plans and supervision (Architect’s fees)
3. Building permits
4. Cost of digging the foundation (Excavation cost)
5. Labor and materials to build the building
6. Salaries f officers supervising the construction
7. Insurance and taxes incurred during the construction
8. Cost of temporary structures used for offices or for storing tools and materials during
construction of a new building
9. Interest incurred during construction period on money borrowed to finance the construction
▪ Any miscellaneous amounts earned from the building during construction reduce the cost of
the building. For example, if a small completed portion of the building is rented out during
construction of the remainder of the building, the rental proceeds are credited to the building
account.
Cost of Land Improvements
The cost of land improvements includes all expenditures necessary to make the improvements
ready for their intended use. It is important to distinguish between the cost of land and the land
improvements because land has an indefinite life and land improvements usually do not. Land
improvement costs are capital expenditures and are either recorded as land cost or recorded in a
separate land improvements ledger account.

▪ Examples of land improvements include: temporary landscaping (such as bushes, gardens,

and trees), parking lots (costs of paving and lighting), drive ways and private roads, the cost of
fences, lawn and garden sprinkler systems
▪ Some of the land improvements (such as landscaping and drainage) are as indefinite
economic lives as that of land, so included (added) to land cost. However, the cost of land
improvements such as side walks, streets and sewers may or may not have indefinite
economic lives. In many localities, the cost of streets, sewers, and similar improvements are
paid by the owners of the benefited property, but the local governmental unit agrees to
maintain and replace them if they are built to standard specifications. In such cases the special
assessments expenditure is a part of land cost, because it is permanent in nature. However, if
the property owner is responsible for eventual replacement of land improvements, they have
limited economic lives and are recorded in a separate Land Improvements ledger account to
facilitate depreciation accounting.

Complied by Tekalign N 3
Cost of Machinery and Equipment
▪ The cost of machinery or equipment consists of seller’s net invoice price (whether the discount
is taken or not), sales and other taxes, legal fees, broker’s fees, transportation (freight)
charges, insurance during transit paid by the purchaser, cost of installation, testing and break-
in costs, costs of accessories, other costs needed to put the machine or equipment in
operating condition in its intended location for use
▪ It also includes expenditures required in assembling, installing, and testing the unit. However,
Motor vehicle licenses and accident insurance on company trucks and cars are expensed as
incurred, because they represent annual recurring expenditures and do not benefit future
periods.
▪ The cost of machinery does not include costs of removing and disposing of a replaced, old
machine that has been used in operations. Such costs are part of the gain or loss on disposal
of the old machine.
▪ The cost of machinery or equipment includes any cost incurred to get the machinery and
equipment ready for its intended use.
Nature Of Depreciation
❖ As time passes, all plant assets with the exception of land lose their capacity to yield services.
Accordingly, the cost of such assets should be transferred to the related expense accounts in
an ordinary manner during their expected useful life. This periodic cost expiration is called
“depreciation”.
❖ Depreciation is the amount of plant asset cost allocated to each accounting period benefiting
from the plant asset’s use and is a process of allocation, not asset valuation.
❖ All plant assets are subject to depreciation except land.
❖ The Purpose of calculating depreciation of plant assets is to properly measure net income
through matching principle. Depreciation expense is often a significant factor in determining
net income. For this reason, most financial statement users interested in the amount of, and
methods used to compute, a company’s depreciation expense. And to recognize the decline
in the usefulness of plant assets.
Major Causes of Depreciation
▪ Factors contributing to a decline in usefulness may be divided into two categories:
1. Physical Depreciation, which includes wear from use and deterioration from the
action of the elements, and
2. Functional (Economic) Depreciation, which includes inadequacy and obsolescence.
1. Physical Depreciation or Physical Deterioration
▪ Results from the use of the assets-wear and tear- and the action of elements (the forces of
the nature). These physical forces terminate the usefulness of plant assets by rendering
them incapable of performing the services for which they were intended and thus set the
maximum limit on economic life. Unusual events such as accidents, floods, and earth
quakes also serve to terminate or reduce the economic life of plant assets. For example,
an automobile may have to be replaced after a time because its body rusted out.
2. Functional (Economic) Depreciation, which includes inadequacy and obsolescence.

Complied by Tekalign N 4
 • Inadequacy: A plant asset becomes inadequate if its capacity is not sufficient to meet the
demands of increased production. The inadequacy of plant asset is its inability to produce
enough products or provide enough services to meet current demands. For example, an
air line cannot provide air service for 125 passengers on a flight serviced by a plane with a
seating capacity of 90.
• Obsolescence: A plant asset is obsolete if the commodity that it produces is no longer in
demand or if a newer machine can produce a commodity of better quality or at a great
reduction in cost. The obsolescence of an asset is its decline in usefulness brought about
by inventions and technological progress. For example, the development of the
xerographic process of reproducing printed matter rendered almost all previous method of
duplication obsolete.
➢ The use of a plant asset in business operations transforms a plant asset cost to an operation
expense. Depreciation then, is a cost of operating a business. Because depreciation does not
require current cash out lay, it is often called a non cash expense; cash was given up in the
period when the asset was acquired, not during the periods when depreciation expense is
recorded.
➢ The meaning of term “depreciation” as used in accounting is often misunderstood because the
same term is also commonly used in business to meet a decline in the market value of an
asset. The amount unexpired cost of plant assets reported in the balance sheet is not likely to
agree with the amount that could be realized from their sale. Plant assets are held for use in
the enterprise rather than as a going concern. Consequently, the decision to dispose of a plant
asset is based mainly on its usefulness to the enterprise and not on its market value.
Accounting for Depreciation
▪ If a plant asset is expected to have no value at the time that it is retired from service, its
entire initial cost should be spread over the expected useful life of the asset as depreciation
expense. Also, if a plant asset’s value at the time of retirement is expected to be very small in
comparison with the cost of the asset, this value may be ignored and the entire cost speared over
the asset’s expected useful life. If a plant asset is expected to have a significant value at the time
that it is retire from service, the different between its initial cost and this value is the cost
(depreciation cost) that should be speared over the useful life of the asset as depreciation
expense.
Factors to Be Considered in Computing Depreciation
▪ In determining the amount of depreciable cost (depreciation base) (cost minus estimated
salvage value) that is to be recognized as periodic depreciation expense, three factors needed
to be considered: the plant asset’s
A. Initial Cost: all expenditures necessary to acquire the asset and make it ready for intended
use.
B. Residual Value/Salvage Value / Scrap Value: is the plant asset’s estimated value at the
time that it is to be retired from service.
▪ In other words, salvage value (or scrap value) is the amount of money the company
expects to recover, less disposal costs, on the date a plant asset is scrapped, sold, or

Complied by Tekalign N 5
 trade in. In making the estimate, management should consider how it plans to dispose
of the asset and its exchange with similar assets.
C. Useful Life: refers to the length of time the company owning the assets intended to use it;
useful life is not necessarily the same time period as either economic life or physical life.
The economic life of a car may be 7 years and its physical life may be 10 years, but if a
company has a policy of trading cars every 3 years, useful life may be expressed in years,
months, working hours, or units of production. Obsolescence may also affect useful life.
For example, a machine may be capable of producing units for 20 years, but it is expected
to be obsolete in 6 years. Thus, its estimated useful life is 6 years – not 20.
Depreciation Methods
▪ Depreciation generally computed using one of the following methods.
A. Straight-Line Method
B. Activity Method (Units of Use or Production Method)
C. Diminishing (Accelerated) Charge
a. Double Declining Balance method
b. Sum- of The -Years- Digits method).
▪ It is not necessary that an enterprise use a single method of computing depreciation for all
classes of its depreciable assets. The method used in the accounts and financial
statements may also differ from the methods used in determining income taxes and
property taxes.
▪ As it is true for inventory methods, a company is normally free to adopt the method(s) of
depreciation it believes most appropriate for its business operations.
▪ The theoretical guideline is to use a depreciation method that reflects most closely the
underlying economic circumstances. Thus, companies should adopt the depreciation
method that allocates plant asset cost to accounting period according to the benefits
received from the use of the asset.
▪ In practice, the measurement of benefits from the use of a plant asset is impractical and
often not possible. As a result, a depreciation method must meet only on standard: The
depreciation method must allocate plant asset cost to accounting periods in a systematic
and rational manner.
▪ Regardless of the method or methods chosen, the company must disclose its depreciation
method (s) in the footnotes to its financial statements.
▪ “Note: Companies may use different depreciation methods for different plant assets.”
Straight Line Method
▪ The straight-line method of determining depreciation provides for equal periodic charges to
expense over the estimated life of the asset.
▪ Under the straight-line method, depreciation is the same for each year of the asset’s useful life.
It is measure solely by the passage of time. To apply the straight-line method, an equal amount
of plant asset cost is charged to each accounting period.
▪ In order to compute depreciation expense, it is necessary to determine depreciable cost.
Depreciable cost is the cost of the assets less its salvage value. It is the total amount subject to
depreciation. Depreciable costs then, divided by the asset’s useful life to determine
depreciation expense.

Complied by Tekalign N 6
▪ The formula for calculating depreciation under the straight-line method is

▪ The distinguishing characteristic of the straight-line method of depreciation is that each full
year of service absorbs an equal portion of cost.
▪ . Use of the straight-line method is appropriate for assets where:
1) Time rather than obsolescence is the major factor limiting the asset’s life and
2) Relatively constant amount of periodic services are received from the asset. Assets
that possess these features include pipelines, fencing, and storage tanks.
▪ The straight-line method is widely used because of its simplicity. In addition, it provides a
reasonable allocation of costs to periodic revenue when usage is relatively the same from
period to period.

Units of Production Method

▪ The units-of-production depreciation method assigns an equal amount of depreciation to each
unit of product manufactured or service rendered by an asset. Since this method of
depreciation is based on physical output, it is applied in situations where usage rather than
obsolescence is the main factor leading to the demise of the asset.
▪ The units of production method yields a depreciation charges that varies with the amount of
asset usage. To apply this method, the length of the life of the asset is expressed in terms of
productive capacity, such as hours, miles or number of units.
▪ Under this method, depreciation is first computed for the appropriate unit of production, and the
depreciation for each accounting period is then determined by multiplying the unit depreciation
by the number of units used.
▪ The unit of activity method is ideally suited to factory machinery; production can measure in
terms of units of out put or in terms of machine hours used in operating the machine. It is also
possible to use this method for such items as delivery equipment (miles driven) and air plane
(hours in use). The units of activity method is generally not suitable for such assets as building
or furniture because depreciation for these assets in more a function of time than of use.
▪ The units-of-production depreciation formulas are:

▪ Note: when production of the asset varies significantly from one period to another, the unit of
activity (units –of-production) method results in the best matching of expected costs with
revenues.

Diminishing (Accelerated) Charge

▪ Diminishing (Accelerated) Charge method records higher amounts of depreciation during the
early years of an asset’s life and lower amounts in the asset’s later years.
▪ A business might choose an accelerated depreciation for the following reasons:

Complied by Tekalign N 7
 1) The value of the benefits received from the asset decline with age (for example, office buildings).
2) The asset is a high-technology asset subject to rapid obsolescence (for example, computers)
3) Repairs increase substantially in the asset’s later years and under this method the depreciation
and repairs remain fairly constant over the asset’s life (for example, automobiles).
▪ The two most common accelerated methods of depreciation are:
A. The Double Declining Balance (DDB) method.
B. The Sum-of-the-Year’s-Digits (SOYD) method.

Double-Declining Balance Method

▪ The double-declining-balance (DDB) yields a declining periodic depreciation charge over
estimated life of the asset.
▪ The DDB method of computing periodic depreciation charges is applied by first calculating the
straight-line rate depreciation rate. The straight-line rate is calculated by dividing 100% by the
number of years of useful life of the asset. Then, multiply this rate by 2. The resulting double-
declining rate is applied to the declining book value (cost minus accumulated depreciation) of
the asset.
▪ Salvage value is ignored in making the calculations. However, at the point where book
value is equal to the salvage value, no more depreciation is taken.
▪ The formula for DDB depreciation is:

▪ Note that estimated residual value is not considered in determining the depreciation rate. It is
also ignored in computing periodic depreciation, except that the asset should not be
depreciated below the estimated residual value.

Sum-of-The-Year’s-Digits (SOYD) Method

▪ The sum-of-the-years –digits method yield result like those obtained by the use of the double
declining balance method.
▪ This method is similar to the double declining balance method because it also assumes that an
asset is used more extensively during the first-years of operation. Under this method, an
important consideration is give to the number of years in the asset’s useful life.
▪ The periodic charge for depreciation declines steadily over the estimated life of the asset
because a successively smaller fraction is applied each year to the original cost of the asset
less the estimated residual value.
▪ The denominator of the fraction, which remains the same, is the sum of the digits representing
the years of life. The numerator is the fraction, which changes each year, is the number of
years of life remaining at the beginning of the year for which depreciation is being computed.
▪ The sum-of-the-years –digits (SOYD) method is so called because the consecutive digits for
each year of an asset’s estimated life are added together and used as the denominator of a
fraction. The numerator is the number of years of useful life remaining at the beginning of the
accounting period.

Complied by Tekalign N 8
▪ To compute that period’s depreciation expense, this fraction is then multiplied by the
acquisition cost of the asset less estimated salvage value.

▪ The years are totaled to find SOYD. For an asset with a 10-year useful life,

▪ Alternatively, rather than adding the digits for all years together, the following formula can be
used to find the SOYD for any given number of periods:

✓ Where n is the number of periods in the assets useful life. Thus, SOYD for an asset
with a 10-year useful life is:

▪ For the first year, the numerator is 5, for the second year 4 and so on. When the first use of the
asset does not coincide with the beginning of a fiscal year, it is necessary to allocate each full
year’s depreciation between the two fiscal years benefited.

Revision of Periodic Depreciation (Changes In Estimates)

 After an asset is depreciated down to its estimated salvage value, no more depreciation is
recorded on the asset even if it continues to be used. However, when the estimated useful life
of an asset or its salvage value is found to be incorrect before the asset is depreciated down to
its estimated salvage value, revised depreciation charges are computed.
 When a change in an estimate is required, the change is made in current and future years but
not to prior periods. Thus, when a change is made,
1) There is no correction of previously recorded depreciation expense,
2) Depreciation expense for current and future years is revised.
 That is, these revised charges do not correct past depreciation taken; they merely compensate
for past incorrect charges through changed expense amounts in current and future periods.
The rationale for this treatment is that continual restatement of prior periods would adversely
affect the reader’s confidence in financial statements.

Plant Assets Disposal

 All plant assets except land eventually wear out or become inadequate or obsolete and must
be sold, retired or traded for new assets. When disposing of plant assets, a company must
remove both the asset’s cost and accumulated depreciation from the accounts.
 Overall, then, all plant asset disposal have the following steps in common.
A. Bring the asset depreciation up to date.
B. Record the disposal by:
1) Writing off the asset’s cost.
2) Writing off the accumulated depreciation
3) Record any consideration (usually cash) received or paid or to be received or paid.

Complied by Tekalign N 9
 4) Recording the gain or if any.
 To account for disposal, credit the asset account and debits its related accumulated
depreciation. Suppose the final year’s depreciation expense has just been recorded for a
machine that costs Br. 6,000 and was estimated to have zero residual value. The machine
accumulated depreciation thus totals Br. 6,000. Assume the assets cannot be sold or
exchanged. The entry to record its disposal is;
Accumulated depreciation-Machinery Br. 6,000
Machinery Br. 6,000
To dispose a fully depreciated machine

 If assets are junked prior to being fully depreciated, the company records a loss equal to the
assets book value. Suppose store fixtures that cost Br. 4,000, are disposed in this manner.
Accumulated depreciation is Br. 3,000, and book value is therefore Br. 1,000. Disposal of these
store fixtures is recorded as follows:
Accumulated depreciation-store fixtures Br. 3,000
Loss on disposal of store fixtures 1,000
Store fixtures Br. 4000
To dispose store fixtures
Loss accounts such as loss on disposal of store fixtures decreases net income. Losses are
reported on the income statement and closed to income summary along with expenses.

Sale of Plant Assets

 Companies frequently dispose of a plant asset by selling them. By comparing an asset’s book
value (cost less accumulated depreciation) with its selling price (or net amount realized if there
are selling expenses), the company may show either again or loss. If the sale price is less than
the asset book value, the company shows a loss. If the sales price is greater than the asset’s
book value, the company shows a gain. Of course, when the sale price equals the asset’s book
value, no gain or loss occurs
 To illustrate accounting for the sales of plant assets, assume that a company sells Equipment
costing Br. 45,000 with accumulated depreciation of Br. 14,000 for Br. 35,000. The firm
realizes a gain of Br. 4,000.

Equipment cost Br. 45,000

Less: Accumulated depreciation 14,000
Book value Br. 31,000
Sales price 35,000
Gain realized Br. 4,0000
The journal entry to record the sale is:

Cash Br. 35,000

Accumulated depreciation- Equipment 14,000
Equipment Br. 45,000
Gain on disposal of plant assets 4,000
To record sale of equipment at a price greater than book value

Complied by Tekalign N 10
 If on the other hand, the company sells the equipment for Br. 28,000, it realizes loss of Br.
3,000[31,000 book value- Br. 28,000 sales price]. The journal entry to record the sales is:

Cash Br. 28,000

Accumulated depreciation-Equipment 14,000
Loss from disposal of a plant asset 3,000
Equipment Br. 45.000
 If a firm sells the equipment for Br. 31,000, no gain or loss occurs. The journal entry to record
the sale is

Cash Br. 31,000

Accumulated depreciation- Equipment 14,000
Equipment Br. 45,000
Exchange Of Plant Assets (Non-Monetary Assets)
 Non monetary assets are those prices may change overtime, such as inventories, property,
plant, and equipment. In accounting for the exchange of non monetary assets, ordinarily firms
base the recoded amount on the fair market value of the assets given up or the fair market
value of the assets received, whichever is more clearly evident. If a gain or loss results from
the exchange companies always recognizes the loss. They may or may not recognize the gain,
depending on whether the asset exchanged is similar or dissimilar to the assets received.

 Similar assets are those the same general type, that perform the same functions or that are
employed in the same line of business. Examples of the exchanges of similar assets include
exchanging a building for another building, a delivery truck for another delivery truck, and
equipment for equipment. Conversely, examples of the exchanges of dissimilar assets include
exchanging a building for land or equipment for inventory.

 In general, companies recognize losses on non monetary assets regardless of whether the
assets are similar or dissimilar. They recognize gains, if the assets are dissimilar in nature
because the earning process related to those assets is considered to be completed.

Exchange of Similar Assets

 Often firms exchanges plant assets such as an automobile, trucks, and office equipment by
trading the old assets for a similar new one. When such an exchange occurs, the companies
receive a trade-in allowance for the old assets, and pay the balance in cash. Usually, the cash
price of the new asset is stated. If not, accountants assume the cash price of the fair market
value of the old assets plus the cash paid.

 When similar assets are exchanged, we must modify the general rule that new asset are
recorded at the fair market value of what is given up or received. The companies record the
new asset at [1] the cash price of the asset received or [2] the book value of the old asset plus
the cash paid, whichever is lower. When applying this rule to exchanges of similar assts, firms
recognize losses, but not gain.

 To illustrate the accounting for exchange of similar plant assets assume that a delivery
services exchanged, Br. 50,000 cash and Truck No 1- which cost Br. 45,000, had Br. 38,000 of

Complied by Tekalign N 11
 up-to-date accumulated depreciation, and had a Br. 5,000 fair market value for Truck No 2.
The new truck has a cash price of (fair market value) of Br. 55,000. The delivery service
realized a loss of Br. 2,000 on the exchange.

Cost of truck No 1 Br. 45,000

Accumulated depreciation 38,000
Book value Br. 7,000
Fair market value of old asset (trade-in allowance) 5.000
Loss on exchange of plant assets Br. 2,000
 The journal entry to record the exchange is:

Trucks (cost of No 2) Br. 55,000

Accumulated depreciation-Trucks 38,000
Loss from disposal of plant assets 2,000
Trucks (cost of No 1) Br. 45,000
Cash 50,000
To record loss on exchange of similar plant assets.

 Note that firms record exchanges of similar plant assets just like exchanges of dissimilar plant
assets when a loss occurs from the exchange.

 Accounting for any gain resulting from exchanges of dissimilar plant assets is different than
accounting for any gain resulting form exchange of dissimilar plant assets. To illustrate assume
that in the preceding example , the delivery service gave Truck No 1( now with a fair market
value of Br. 9,000) and Br. 46,000 cash in exchange for truck No 2. The gain on the exchange
is Br. 2,000.

Cost of truck No 1 Br. 45,000

Accumulated depreciation 38,000
Book value Br. 7,000
Fair market value of old asset (trade-in allowance) 9,000
Gain indicated Br. 2,000

 The journal entry to record the exchange is:

Trucks (cost of No 2) Br. 53,000

Accumulated depreciation-Trucks 38,000
Trucks (cost of No 1) Br. 45,000
Cash 46,000
 When a firm exchange of similar assets, it does not recognize a gain. It records the new asset
at book value of the old asset [%7,000] plus cash paid [Br. 46,000]. The company deducts the
gain from the cost of the new asset [Br. 55,000]. Thus the cost basis of the new delivery truck
is equal to Br. 55,000 less the Br. 2,000 gains, or Br. 53,000. The delivery service uses this Br.
53,000 cost basis in recoding depreciation on the truck and determining any gain or loss on its
disposal.

Complied by Tekalign N 12
 Book value of old Truck [No-1] Br. 7,000
Cash paid 46,000
Cost of new truck {No.2] Br. 53,000 Equal
Fair market value of new truck [No. 2] Br. 55,000
Less: gain indicated 2,000
Cost of new truck Br. 53,000

Complied by Tekalign N 13