UNI

TTHREE
ACCOUNTI
NGFORPLANTASSETSANDDEPRECI
ATI
ON
INTRODUCTI ON
Int hepr ev iouschapt ery ou hav el ear ntaboutt heaccount ing f orcur r
entasset s( i
.e.
account ingf orcash,r eceivablesandi nv entories) .I nt hischapt ery ouwi l
llear naboutt he
i
ssuesofpl antasset sandi tsr elateddepr eciation.
Mostbusi nessent er pri
sehol dssuchmaj orasset sasl and, bui l
dings, equi pment s,furniture,
tools,andet c.Theseasset shel ppr oducer ev enueov ermanyper iodsbyf acili
tati
ngt he
product ion and sal e ofgoods orser vices t o cust omer s.Because t hese asset s ar e
necessar yi nacompany ’
sday -to-dayoper ations, compani esdonotsel lthem i nt heor dinar y
cour seofbusi ness.Keepi nmi nd, though; onecompany ’slong- ter m assetmi ghtbeanot her
company ’
sshor t
-ter m asset .Forexampl e,adel iver yt rucki sal ong- term assetf ormost
compani es, butat ruckdeal erwoul dregar dadel iver yt ruckasacur rentassetmer chandi se
i
nv ent ory .
NATUREANDMEANI NGOFLONG- TERM ASSETS
Asset st hatcanbeusedbyabusi nessent erprisef orr elat
iv el
yl ongper iod( usuallymor e
thanoney ear )arecal edLong-
l Ter m Asset s.
Long- term asset sar edi vi
dedi nt otangi bleandi nt angi blecat egor ies.
Tangi ble asset s( also cal l
ed pl antasset s orf ixed asset s)ar e asset s wi th phy sical
subst ancet hatcanbechar gedi ntheoper ati
onsofbusi nessf orar elativelylongerper iodof
ti
me,usual lymor et hanoney earoroneoper atingcy clewhi chev erisl onger .Exampl esar e
l
and, bui l
di ngs, equi pment sandmachi neries, t
rucks, etc.
Incont r
ast ,intangi bleasset sar easset swi thoutaphy sicalf eat uret hatcanbechar gedi n
theoper at ionsofbusi nessf orl ongper iodoft ime.Theygener al
lyconsi stofr i
ght sor
adv ant ageshel dsuchasgoodwi ll
,pat ent s,copy r i
ght s,f ranchi se,t rademar ks,or ganization
cost s, etc.
DETERMI NATI ONOFTHEACQUI SITIONCOSTOFPLANTASSETS
Theacqui sitioncostofpl ant( fixed)asset sist hecashorcash- equi valentpur chasepr ice,
i
ncl udi ngi nci dentalcost srequi redt ocompl et
et hepur chase,t ot ranspor ttheasset ,andt o
prepar eitf oruse.
Forexampl e,expendi tur
esr elated tot heacqui sit i
onofapl antassetsuchasf reight,
i
nsur ancewhi l
eint ransi t
,andi nst all
ationar eincludedi nt hecostoft heassetbecauset hey
arenecessar yift
heasseti stof unct i
on.Accor dingt ot hemat chingpr inciple,ther efore, such
cost sar eal locatedt otheeconomi cli
feoft heassetr athert hanchar gedasexpensesi nt he
currentper iod.
Land
Theacqui sit
ioncostofl andincludesthenegotiat
edcashpr iceplusothercostssuchasthe
costofl andsurveys,legalfees,ti
tl
ef ees,br
oker’
scommi ssions,costofprepari
ngtheland
tobui l
don,andev ent hedemol i
ti
oncost sofoldstructurest hatmightbetorndownt oget
thel
andr eadyfori
tsintendeduse.
Undert hehi st
ori
calcostassumpt ion,landisrepor
t edint hebal ancesheetatitsori
ginal
cost.Landi snotsubjectedtodepr eci
ationbecauselanddoesnothav eali
miteduseful
li
fe.
Thef oll
owingill
ust
rationwillhelpushowt odeter
minet hecostofl and.
I
ll
ust
rat
ion-
1
Abusi nessenterpr
iseacquir
esapieceoflandforfut
uresi
te.Itpaysacashpr i
ceofBr.
210,000,pay
sbr okeragefeesofBr
.7500andt i
tl
efeesofBr.3000,pay
sBr .5000tohave
unwant edbuil
dingr emoved,andpays,Br
.1500t ohavethesi t
egraded.Thebusiness
receiv
es

1
Br
.2000salvagef rom theol dbui
lding.Thecostofthel
andi sdet erminedasfol
l
ows:
Cashpr i
ces( negotiatedpr
ice)…………………………………………Br .210,000.00
Tit
leFees……………………………………………………………………. .
3,000.00
BrokerageFees………………………………………………………………. ..
7,500.00
CostofGr ading……………………………………………………………. .
…1,500. 00
Costofr emov ing(demolit
ion)unwantedbuil
dingBr.5000
Less:Salvager ecei
v ed……………………………….( 2000)…………………3, 000.00
Totalcostofl and……………………………………………………. …. Br.225,000.00

Generally,landispar tofpr operty,plantandequi pment .Ifthemaj orpur poseofacqui ri

ng
andhol dingl andi sspecul ati
ve,itismor eappr opriatelyclassifi
edasani nv est
ment .Ifthe
l
andi shel donar eal estat
econcer nf orresal
e, i
tshoul dbecl assifi
edasinv entory
.Whent he
l
andhasbeenpur chasedf orthepur poseofconst ructingabui l
ding,al
lcost sincurr
edupt o
theexcav ati
onf ort henew bui ldingar econsi deredl andcost s.Remov alofol dbui l
dings
clear
ing, gradingandf il
l
ingareconsi deredlandcost sbecauset hesecostsar enecessar yto
getthel andi ncondi tionforitsintendedpur pose.Anypr oceedsobt ai
nedi nt heprocessof
getti
ngt hel andreadyf orit
sintendeduse, suchassal vager eceipt
sont hedemol i
ti
onofan
oldbuil
di ngar etreatedasr eductionsi nthepriceoft heland.
Costofbui
ldi
ngs
Whenanexi sti
ngbuildi
ngispur chaseditscosti ncludes,t
hepur chasepr i
cepl usallrepairs
andot herexpensesr equir
edt oputi tinausabl econdi t
ions.Ont heot herhand,whena
business construct
s a new bui ldi
ng,t he costi ncludes allreasonabl e and necessar y
expenditur
es,suchast hosef ormat er
ials,labor,partoft heov erheadandot herindirect
costs,engineersandar chitect
s’fees,i
nsur ancedur ingconst r
uct i
on,i nt
erestincurredon
const r
ucti
onloansdur i
ngt heperiodofconst r
ucti
on,lawy ers'f
ees,andbui l
dingper mits.If
outside contr
actors are used int he const ruct
ion,t he netcont r actprice plus ot her
expenditur
esnecessar ytoputthebuildi
ngi nusabl econdit
ionar eincluded.
Costofequi
pment
Thet erm “equi pment ”inaccount i
ngi ncl udesof fi
ceequi pment ,storeequi pment ,factor y
equi pment ,del i
veryequi pment ,machi ner y,fur
ni turesandf ixtures,andsi milarfixedasset s.
Thecostofsuchasset si ncl
udest hei nv oice(pur chase)pr ice,transportat
ionandhandl i
ng
char ges, i
nsur anceont heequi pmentwhi lei ntransi t,assembl ingandi nstall
at i
oncost s,and
cost sofconduct i
ngt rai
lruns.Asi ndi cat edear lier, allcostsofget t
inganassetr eadyf orits
i
nt endedusear ecost soft hatasset.
NATUREANDMEANI NGOFDEPRECI ATI ON
Aspl antasset sar eusedi ntheoper at i
onsofabusi ness,t heirv al
uet opr ovideser vice
decr easest hroughusageandt hepassageoft ime.
Thi scostal locat i
onofpl antasset ,cal leddepr eci ation,isrecor dedi ntheaccount ingbooks
per i
odi cally.
Depr eci ati
oni sf requentlymi sunder stood.Thet erm depr eciation,asusedi naccount ing,
doesnotr ef ertot hephy sicaldet
er i
or ationofanassetort hedecr easeinmar ketv alueofan
assetov ert
ime.
Depr eci ati
onmeanst heal l
ocati
onoft hecostofapl antassett ot heperiodst hatbenef it
from t heser vi
cesoft heasset .
Thet erm depr eciationisusedt odescr i
bet hegr adualconv ersionoft hecostoft heasset
i
nt oanexpense.
Depr eci ati
oni snotapr ocessofv aluat ion.Account i
ngr ecordsar ekepti naccor dancewi th
thecostpr inciple;theyar enotindicat orsofchangi ngpr icelevels.Itispossiblethat ,through

2
anadv ant ageousbuyandspeci ficmar ketcondi tionst hemar ketv alueofabui l
dingmayr i
se.
Nev erthel ess,depr eciat i
onmustcont inuet oober ecor dedbecausei tist her esultofan
all
ocat i
on, notav aluat i
onpr ocess.
FACTORSTHATAFFECTTHECOMPUTATI ONOFDEPRECI ATI ON
Fourf act or saf fectt hecomput at i
onofdepr eciation.Theyar e:
(1)Cost
(2)Resi dual value
(3)Depr eci abl ecost ,and
(4)Est imat edeconomi c( usef ul)l i
fe.
Cost -i st henetpur chasepr icepl usal lr easonabl eandnecessar yexpendi turest ogett he
asseti npl aceandr eadyf oruse.
Resi dualval ue-al soknownassal vageval ue,di sposalv alue,scr apev alue,ort rade-inv al
ue
represent st heest i
mat edmar ketv al
ueoft heassetatt het imeofi tsr et ir
ement .
Depr eci abl ecost-r epr esent st hedi ffer encebet weent heassetcostandi tsest imated
residualv alue.Forexampl e,ani tem ofequi pmentt hatcost sBr .5000andhasar esidual
valueofBr .500woul dhav eadepr eci abl ecostofBr .4500,( Br .5000-Br .500) .The
depr eciabl ecost smustbeal locat edov ert heest imat edeconomi clifeoft heasset .
Estimat edeconomi c( usef ul)l if
e-t heest imat edeconomi cl ifeofanasseti st het otal
numberofser viceuni tsexpect edf rom t heasset .Ser viceuni tsmaybemeasur edi nt erms
ofy ear st he asseti sexpect ed t o be used,uni tsexpect ed t o be pr oduced,mi l
esor
kil
omet ersexpect edt obedr i
ven,orsi mi larmeasur es.I ndet ermi ni ngt heest imat edusef ul
l
ifeofanasset ,t heaccount antshoul dconsi deral lrelev anti nformat ion,i ncluding( 1)past
exper iencewi t
hsi mi larr epai rasset s,( 2)t heasset ’
spr esentcondi t
ion,( 3)t hecompany ’s
repairsandmai nt enancepol icy,( 4)cur r entt echnol ogi calandi ndust ryt rends,and( 5)l ocal
condi tionssuchaswhet her.
METHODSOFCOMPUTI NGDEPRECI ATI ON
Depr eci ationmet hodsdi fferpr imar i
lyi nt heamountofcostal l
ocat edt oeachper i
od.Al ist
ofdepr eci ationamount sf oreachy earofanasset ’
susef ull i
fei scal leddepr eciati
on
schedul e.
Themostcommonmet hodsofcomput ingdepr eci ationf orpl antasset sar e:
(1)Thest r
aightl i
nemet hod
(2)Theuni t
sofpr oduct i
onmet hod
(3)Thedoubl e-decl iningbal ancemet hod, and
(4)Thesum- of -they ears- di
gi t
smet hod.
1.St raight -
LineDepr eciat i
on
Whent hi smet hodi susedt oal locat edepr eci ation,t hedepr eciabl ecostoft heasseti s
spreadev enl y( uni forml y)ov ert heusef ull ifeofanasset .Thest rai ght-linemet hodi sbased
ont heassumpt iont hatdepr eciationdependsonl yont hepassageoft ime.Thedepr eciati
on
expensef oreachper iodi scomput edbydi v i
dingt hedepr eciabl ecostbyt henumberof
account i
ngper i
odsi nt heasset ’sest i
mat edusef ull i
fe.Thedepr eci ati
onexpenset obe
repor tedi st hesamei neachy ear .Thef ollowi ngi ll
ust rationwi l
lhel pust ounder st
andt he
Straight -Linemet hodofcomput ingdepr eci ation.
I
ll
ust
rat
ion-2
Suppose,
forexampl
eabusi nessenter
pri
seacqui
resanewcomput er(
offi
ceequi
pment)at
acostofBir
r6000.I
tisest
imat edt
hatthecomputerhasanesti
matedresi
dualv
alueofBirr
1000attheendofi tsest
imat edusefull
if
eof4y ear
s.Theyear
ly(annual
)depreci
ati
on
wouldbeBir
r1250computedasf ol
lows:
Annualdepreci
ati
on=Cost-Salvageval
ue

3
 Est
imat
edusef
ull
i
fe

=Bir
r6000–Bi rr1000 =Bi r
r1250
4y ear s
Thedepreci
ationt oberepor
tedforeachofthefoury ear swouldbeasf ol
lows:
Depreci
ati
onMet hod-Str
aight-LineMet hod
Year Cost Yearly Accumul ated Carry
ingvalue
Depreciation Depr eciati
on (
BookValue)
Begi
nni
ngoff irstyear Br.6000 - - Br.6000.00
Endoffi
rstyear 6000 Br .1250. 00 Br.1250.00 4750.00
Endofsecondy ear 6000 1250. 00 1250.00 3500.00
Endofthi
rdyear 6000 1250. 00 3750.00 2250.00
Endoffourt
hy ear 6000 1250. 00 5000.00 1000.00

NB.Therearethreeimport
antpointstonotefrom t
hedepreciat
ionscheduleforthest
raight
-
l
ine depreci
ati
on method.First,the depr
eciat
ion i
st he same each year.Second,t he
accumulateddepreci
ati
onincreasesunifor
mly.Thir
d,thecar r
ying(Book)valuedecreases
unif
ormlyunti
litr
eachestheesti
mat edresi
dualval
ue.
2.Uni tsofPr oductionMet hod
Thepr oduct i
onmet hodofdepr eciati
oni sbasedont heassumpt i
ont hatdepr eciati
oni s
mai nlyt her esultofuseandt hatt hepassageoft imepl ay snor oleint hedepr eciati
on
process.I fweassumet hatt heof fi
ceequi pmentf r
om t hepr evi
ousi l
l
ustrationhasan
estimat edusef ull
ifeof10, 000hour s,thedepr eciationcostperhourwoul dbedet ermi ned
asf oll
ows:
Hour l
ydepr eciation= Cost–Sal vagev alue =Br .6000.00–1000=Br .0.50
Rat e Est i
mateduni tsofusef ull
ife 10,000oper ati
nghr s.
Ifweassumet hattheuseoft heequi pmentwas2800hour sf orthef ir
sty ear,3600hour s
fort hesecond,2400hour sf orthet hird,and1200hour sf ort hef ourth,thedepr eciati
on
schedul ef ortheof fi
ceequi pmentwoul dappearasf oll
ows:
Depr eci
ati
onSchedul e–Pr oduct i
onMet hod
Year Cost Hours Depr eciatio Yearly Accum. Car r y
ingv al
ue
nPerHour Depr . Depr . (Bookv al
ue)
Beginni ngoft he Br .6,000 - Br.0.50 - - Br .6,000.00
Fir
sty ear
Endoff ir
sty ear 6,
000 2, 800 0.50 Br . Br.1,400.00 4,600.00
1,400.00
End of second 6,
000 3, 600 0.50 1,800.00 3,
200.00 2,800.00
year
Endoft hir
dy ear 6,
000 2, 400 0.50 1,200.00 4,
400.00 1,600.00
End of f ourt
h 6,
000 1, 200 0.50 600.00 5,
000.00 1,000.00
year

Undert hepr oducti

onmethod,thereisadirectrel
ationbet weent heamountsofdepreci
ati
on
eachy earandt heunit
sofout putoruse.Also,theaccumul at
eddepr eci
ati
onincr
easeseach
yearindirectrelat
iont
ounitsofout putoruse.Fi nall
y,thecar ry
ingamountdecreaseseach
yearindirectrelat
iont
ounitsofout putoruseuntilitreachest heesti
matedresi
dualval
ue.
Undert hepr oducti
onmethod,theuni t
sofout putoruset hatisusedt omeasureesti
mated
usefulfif
ef oreachassetshouldbeappr opri
ateforthatasset .Forexample,f
oronemachine
4
 numberofunit
sproducedmaybeanappr opri
atemeasure,f
oranot
hernumberofhours
maybeabet t
ermeasure.Thepr
oducti
onmet hodshouldbeusedonlywhent
heoutputof
anassetov
eri
tsusef
ulli
fecanbeest
imatedwithreasonabl
eaccur
acy
.

3.Decl i
ningBal anceMet hod
Thismet hodofdepr eciationr esul tsi nrelativelylargeamountofdepr eciationi nt heear ly
yearsofanasset slifeandsmal leramount si nl atery ears.Thi smet hodi sbasedont he
assumpt ionoft hepassageoft i
me.Si ncemostki ndsofpl antasset sar emostef fici
ent
whennew,andsot heypr ov idemor eandbet t
erser v iceint heear lyyear sofusef ullife.Iti s
consistentwi ththemat chi ngr ulet oal l
ocat emor edepr eci ationt ot heear lyy earst hant o
l
atery earsifthebenef it
sorser v i
cesr eceivedi nt heear l
yy ear sar egr eat er
.
Thedecl ining-balancemet hodi st hemostcommonaccel er atedmet hodofdepr eci ation.
Undert hismet hoddepr eciat ioni scomput edbyappl yingaf ixedr atetot hebookv alueoft he
asset,resul t
ingi nhi gherdepr eciat ionchar gesdur ingt heear lyy earsoft heasset ’sl i
f e.
Thoughanyf i
xedr atemi ghtbeusedundert hemet hod,t hemostcommonr atei sa
percentageequalt ot wicet hest r
ai ght-l
ineper centage.Whent wicet hest raight-li
ner at ei s
used,themet hodi susual lycal l
edt hedoubl e-decl i
ningbal ancemet hod.
Referri
ngt ot hepr eviousexampl e, theequi pmenthadanest imat edusef ulli
feoff oury ear s.
Consequent l
y,undert hest raight -
linemet hod,t hedepr eciat ionr atef oreachy earwas25
percent,(100/est imat edusef ullif
eoft heassetf or100/4y ear s).
Therefore,undert hedoubl e- decl i
ningbal ancemet hod,t hef ixedr atei s50per cent( 2X25
percent).Thisf i
xedr ateof50per centi sappl iedt ot her emai ningcar ryingv alueatt heend
ofeachy ear.Est i
mat edr esi dualv al ueisnott akeni ntoaccounti ncomput ingdepr eciat i
on
excepti nthel asty earofanasset ’
susef ulli
fe,whendepr eci ati
oni sl i
mi tedt ot heamount
necessar ytobr i
ngt hecar ryingv al
uedownt ot heest imat edr esidual value.
I
ll
ust
rat
ion-3
Suppose,f
orexampl eabusinessenterpriseacqui
resanewcomputer(offi
ceequi
pment)at
acostofBirr6000.Itisest
imatedt
hatt hecomput erhasanesti
matedresi
dualv
alueofBi
rr
500attheendofi t
sest i
matedusef
ul l
i
feof4y ear
s.
Depreci
ati
onSchedule, Double-
Decli
ningBal
anceMethod

Year Cost FixedDepr

. Yearl
y Accumul at
e Car
ryi
ngVal
ue
Rate Depr eci
ati
o d (
BV)
n Depr eci
ati
o
n
Dateofpurchase Br.6000 50% - - Br.6000
Endoffi
rstyear 6000 50% Br.3000 Br.3000 3000
End of Second 6000 50% 1500 4500 1500
year
Endofthi
rdy ear 6000 50% 750 5250 750
Endoffourthyear 6000 50% 250 5500 500

NB.Thef ixedrat
eof50%i salwaysappli
edt otheBookval
ueattheendoft heprevi
ousyear.
Thedepr eciat
ionisgreatestinthefir
styearanddecl i
neseachyearafterthat
.Final
ly,t
he
depreci
ationinthel astyearislimit
edt otheamountnecessar yt
or educebookval ueto
resi
dualvalue,Br.250=Br .750–Br.500( i
.e.Previ
ousbookval
ueminusr esi
dualval
ue).
4.TheSum oft
heYear
sDi
git
sMet
hod

5
Likethedecli
ningbal ancemet hod,t
hesum oft hey ear
’sdi gi
tsmet hodpr ovidesahigher
amountofper iodicdepr eciat i
onexpensei ntheear l
ieruseoft heasset '
sl i
feanddecl i
ne
depreci
ati
onexpenset hereaf t
erbecauseasuccessi vel
ysmal lerf r
actioni sappliedeach
yeartothedepr eci
ablecostoft heasset.Undert hi
smet hod,firstwemustdet er
minethe
denominatoroft hefraction,whi chist hesum oft hedi gi
tsr epresentingt hey ear
sofl i
fe.
Whi l
ecomput i
ngdepr eciation,thedenomi natoroft hef racti
oni sunchangedandwoul d
remainthesame.Ont heot herhandthenumer atoroft hef racti
on,decr easesy earbyyear
(4/10,
3/10/2/
10/ 1/
10) .Att heendoft heasset’
susef ulli
fe,thebal ancer emainingshoul
dbe
equaltothesalvagev alue.Forexampl e,foraplantassetwi t
hanest imatedl i
feof4y ears,
thedenominatorofthef r
act ionis4+3+2+1=10.Thedepr eciati
onschedul eforthismethod
i
sasf oll
ows:
DEPRECI ATIONSCHEDULE: - SUM -OF-THE-YEARS-DI GITSMETHOD

Year Depreci
abl
e Rat
e Year
ly Accumulate BookVal
ue
Cost Depr
eci
ati
on d
Depr
eciat
ion
Dateofpurchase Br
6000 - - - Br
.6000
Endoffi
rstyear 6000 4/
10 Br
.2200 Br.2200 3800
Endofsecondy ear 6000 3/
10 1650 3850 2150
Endofthi
rdy ear 6000 2/
10 1100 4950 1050
Endoffourthyear 6000 1/
10 550 5500 500

NB.Theabov eil
lustrati
onfort hesum ofy ear
’sdigi
tmet hodisbasedont heassumpti
on
thatthefi
rstuseoft heassetconci dewiththebeginningofthefiscalperi
od.Whent hefi
rst
useoft heassetdoesnotconci dewi t
ht hebeginningofaf iscalyear,iti
snecessaryt o
all
ocateeachf ul
lyear ’
sdepreciati
onb/nt hetwof i
scalyearsbenefit
ed.Assumi ngthatt
he
assetintheexampl ewaspl acedi nservi
ceafterfourmont hsoft hefiscalyearhadbeen
elapsed,
thedepreciationforthatfi
scalyearwouldbeBr .1466.
67comput edasfoll
ows:

Fi
rstyeardepreci
ation=4/ 10X(6000–500)X8/12………………….Br
.1466.
67
Theref
or e,
thedepreciat
ionfort
hesecondyearwoul
dbe ….Br
.1833.
33
Comput edasfoll
ows:

=4/
10X(
6000–500)X4/
12……………….
.Br. 733.33
=3/
10X(
6000–500)X8/
12……………………. 1100.
00

Tot
al,
secondf
iscal
yeardepr
eci
ati
on…………………………… Br
.1833.
33

COMPARI
SONOFDEPRECI
ATI
ONMETHODS

Thest r
aight-l
i
nedepr eci
ati
onpr ovidesauni f
or m orequaldepr eci
ationchargestoexpense
throughouttheser v
iceli
feoftheasset .
The pr oducti
on met hod ofdepr eciati
on pr ovides f
orper iodic charges to depreci
ati
on
expenset hatmayv aryconsiderably,dependingupont heamountofusageoft heasset.The
productionmet hoddoesnotgener at
ear egul arpatt
ernbecauseoft her andom fl
uctuati
on
ofthedepr ecati
onf r
om yeartoy ear.
Themaj orli
mi t
ati
onoft hepr oduct i
onmet hodi sthatitisnotappr opri
ateinsituati
onin
whi chdepreciati
onisaf unctionoft i
mei nsteadofact ivi
ty.Anotherpr oblem inusingthe

6
pr
oducti
onmethodist
hatanest
imat
eofuni
tsofout
putorser
vicehour
srecei
vedi
sof
ten
di
ff
icul
ttodet
ermi
ne.

Botht hedecli
ningbalanceandthesum oft heyear
sdi gi
tsmethodsar
er ef
err
edtoas
accelerat
ed depreci
ati
on methods,because they provi
des (
repor
t)rel
ati
vel
y hi
gher
depreciat
ionexpenseintheearl
i
erusesoft heli
feoftheassetandagradual
lydecl
i
ning
peri
odicexpensether
eafter
.

Themai njustif
icati
onf orthi
sapproachi st hatmor edepreciat
ionshoul dbechargedin
earl
i
ery earsbecauset heassetsuff
ersitsgreatestlossofser v
icesi nthoseyear
s.
Accelerat
eddepr eci
ati
onmet hodalsor ecognizest hatchangingt echnologi
esmakesome
equi
pmentl oset heircapaci
tytoyieldservicesr apidl
y.Thus,itisappr opri
atetoal
locat
e
moret odepr eci
ationintheearl
yyears,t
hani nlateryears.

Anot herar gumenti nf av orofanaccel er atedmet hodi st hatr epair(mai ntenance)expensei s

l
ikelyt o begr eateri nl atery ear st han i n ear lyy ear s.Thus,t her educed amount sof
depr eci ati
onr epor tedi nl atery ear soft heasset ’sl if
ear eof fsett osomeext entbyi ncr eased
repai r(mai ntenance)expense.
Int heabov egr apht hatshowsy ear l
ydepr eciation,st raight-linedepr eciati
oni suni for m at
Birr1375pery earov erthef oury ear sper iod.Howev er, t
hedecl i
ningbal ancemet hodbegi ns
atanamountgr eatert hanst raightl ine( Br.3000)anddecr easeseachy eart oamount st hat
arel esst hanst raightl i
ne( ultimat ely,Br .250) .Thepr oduct ionmet hoddoesnotgener at ea
regul arpat ternbecauseoft her andom f luctuationoft hedepr eciationf r
om y eart oy ear .In
gener alcompani esusedi f
fer entmet hodsofdepr ecat ionf orgoodsr eason.Thest raight -l
ine
met hodcanbeadv antageousf orf i
nanci alrepor tingbecausei tcanpr oducet hehi ghestnet
i
ncome,and t he accel er ated depr eci ation met hod can be benef i
cialf ort axpur poses
becausei tcanr esul tinl oweri ncomet axes.
RECORDI NGDEPRECI ATI ON
Theamountbywhi chaf ixedassetdecr easesi sanexpenseoft hebusi ness.Theamountof
depr eci ati
onexpenseshoul dber ecor dedeachf iscalper iod.I fdepr eci ati
onexpensei snot
recor ded,t hei ncomest at ementwi llnotcont ainal ltheexpensesoft hebusi ness.Thi swi l
l
causet heneti ncomet ober epor tedhi ghert hani tshoul dbe.I ncomet axl awsal l
ow a
busi nesst odeductdepr eciationasanexpensei ndet er mini ngneti ncome.I fdepr eci ation
expensesar enoti ncludedont hei ncomet axr epor t
s,t hebusi nesswi l
lpaymor ei ncome
taxest hani tshoul dbe.
Depr eci ationmayber ecor dedbyanent ryatt heendofeachmont h, ort headj ust mentmay
bedel ay edunt i
l theendoft hey ear .
Tor ecor dt heper iodiccostexpi ration( allocation)ofpl antasset ,theexpenseaccount ,
depr eci ati
onexpensei sdebi tedandt hepar toft heent rythatr ecor dst hedecr easei nt he
plantasseti scr edi t
edt oacont raassetaccountent it
ledAccumul atedDepr eci ationor
Allowancef orDepr eciation.Theuseoft hiscont raassetaccountper mi tstheor iginal costt o
remai nunchangedi nt hepl antassetaccount .Thi sf acili
tatest hecomput ationofper iodic
depr eci ati
on,t hel i
st i
ngofbot hcostandaccumul ateddepr eciationont hebal ancesheet ,
andr epor tingr equi redf orpr oper tyandi ncomet axpur poses.
NB.Anexcept
iont
othegeneralpr
ocedureofr ecor
dingdepreci
ati
onmont
hlyorannual
l
yis
oft
enmadewhenaplantasseti
ssold,
traded-
in,ordi
scarded.
Exerci
se

7
1.Whatwoul
dbet
hej
our
nalent
ryt
orecor
dthedepr
eci
ati
onexpenseofamachi
net
hat
costsBr.3000,wi
thnosalv
agev al
ueandhasanest
imat
edeconomi
cli
feof10y
ear
sif
thestr
aight
-l
inemethodi
sappl
ied?

DISPOSALOFPLANTASSETS
Recordi
ngDi
scar
dingofaPl
antAsset

I
fapl antassetisofnof urt
heruset othebusinessandcannotbesol dort raded,thenthe
plantassetisdi scarded.Iftheassethasnobookv al
ue.(i
.e.
,ifiti
sf ul
lydepr eci
ated)
,the
plantassetaccounti screditedfortheamountoft heor i
ginalcostoft hei t
em being
discarded.Att hesamet ime,t heaccumulateddepreciati
onaccounti sdebi t
edf orthe
amountoft het otalaccumul ateddepreciat
ionoft heit
em bei ngdiscarded.I nthiscase
neithergainnorl ossisreali
zed.Ont heotherhand,ifaplantassethasabookv alue(i
fnot
full
ydepr eci
ated)atthetimei tisdi
scarded,t
hebusinessincursaloss.

I
ll
ust
rat
ion-1
Supposeforexampl e,
onJul y5, year5,equipmentthatwasacquir
edOnJan10, y
ear1, ata
costofBr.11,000, i
sdiscardedaswor t
hless.Thediscar
dedequipmenthasacar r
y i
ngv al
ue
ofBr.2000att het i
meofdi sposal.Thecar ryi
ngv al
ueiscomput edast hediff
erence
betweenthecostofassetBr .11,
000andaccumul ateddepr
eciat
ion,Br.9000.Alossequal
tothecar
ryingv alueshouldber ecordedwhent heequipmenti
sdiscarded.

Sol
uti
on:

Thej
our
nalentryr
equi
redt
odiscardtheplantassetasofJul
y5,year5,
is:
Year5
Jul
y5.Accumulat
edDepreciati
on,Equi
pment…………9000. 00
Lossondi
sposal
ofpl antAsset
…………………2000. 00
Equi
pment………………………………. 11000.
00
Di
scar
dingEqui
pmentnol
ongerusedi
nthebusi
ness.

Recor
dingt
heSal
eofPl
antAsset

Theentryt or ecordthesal eofanassetf orcashi ssimilartot heonei llustrat

edabov e
exceptthatther ecei
ptofcashshoul dal sober ecorded.Thef ol
l
owi ngent r
iesshowhowt o
recor
dthesal eofequipmentundert hreeassumpt i
onsaboutt hesel l
ingpr ice.Inthefi
rst
case,t
heBr .2000cashr ecei
vedi sexactlyequaltot hebookv al
ueoft heequi pment(whi
ch
i
sequal toBr.2000) .
Case1.Sol datanamountequal toBookv alue,Br.2000,nogainorl ossresults.
Year5
July5.Cash……………………………………2000. 00
AccumulatedDepr eciati
on,Equip……..
.9000.
00
Equipment………………………………. .11000.00
Sal
eofequi
pmentatanamountequalt
obookval
ue
Case2.SoldatBr.1500cash;
LossofBr.500,
(BV=Br
.2000)
Year5
July5.Lossonsaleofequi
pment………………………….
500.00
AccumulatedDepr
eci
ati
on……………………… 9000.
00

8
 Cash………………………………………………. 1500.00
Equipment…………………………………. …………11000. 00
Case3.Sol datBr .3000cash; gai
nofBr .1000,
cashr ecei
vedthr ough Sal
elessbookv
alue
oftheasset(Br.3000–Br .2000)
Year5
Jul
y5.
Cash………………………………………. 3000.00
Accumul at
edDepr ,Equi
pment……………9000. 00
Equipment ……………………………………………. .
11000.00
Gainonsal eofplantasset……………………………. ..
1000.00
RecordingExchangeofPl antAssets

Businessesalsodisposeofplantassetsbytradingt hem i
nonthepurchaseofot
herplant
assets.Exchangesmayi nv
olv
esimilarasset
s, suchasanol dmachinetr
aded-
inonanewer
model ,ordissi
milarasset
s,suchasamachi net raded-
inonat r
uck.Ineit
hercase,the
purchasepriceisr
educedbytheamountoft het rade-i
nall
owance.

Thebasi caccounti
ngf orexchangesofplantassetsissi
milartoaccounti
ngf orsal
esof
plantasset
sforcash.Ifthetrade-
inal
lowancerecei
vedisgr
eaterthanthecarr
yingval
ueof
theassetssurrendered,ther
ehasbeenagai n.Ifthetr
ade-
inallowanceislessthanthe
carryi
ngval
ue,therehasbeenal oss.

Therearespecialrul
esforr
ecogni
zi
ngt
hesegainsandl
osses,dependingont henat
ureof
theassetsexchanged.
Exchange Losses Gains
Recognized Recognized
ForFi
nanci
alRepor
ti
ngPur
poses:

 Ofsi
mil
arassets………………………… Yes……………………………….
No
 OfDi
ssi
milarasset
s……………………….
.Yes…………………………….
.Yes

LossRecogni
zedont
heExchange
Alossisrecogni
zedf
orf
inanci
alr
epor
ti
ngpur
posesonal
lexchangei
nwhi
chamat
eri
al
l
ossoccur
s.

I
ll
ust
rat
ion-
2
Toil
lust
rat
etherecogni
ti
onofal
oss,assumethatt
hebusi
nessexchangeamachi
newit
ha
costofBr.11,
000,andaccumul
ateddepreci
ati
onofBr.9000foranewermor emodern
machineonthef
ollowi
ngter
ms:

Costofnewmachi
ne………………………Bi rr12000.
Trade-
inAl
l
owanceforol
dmachine……………( 1500)
Cashpaymentr
equi
red(Boot
)……………..Bi
rr10500.

Sol
uti
on

I
nt hei
ll
ustr
ati
onabov
e,t het
rade-
inal
l
owance(1500)i
slessthanthecarr
yingv
alue(Br
.
2000)oftheoldmachine.Thelossontheexchangei
sBr .500,(
Br.2000– Br.1500)
.

9
Ther
efor
e,t
hej
our
nal
ent
ryr
equi
redt
orecor
dtheexchangeofasset
swoul
dbeasf
oll
ows:

Year5.
Jul
y5.Equi
pment( New) ……………………..120,00.
00
Accum.Depreci
ati
on-Equip…………………...
9,000.
00
LossonExchangeofplantassets……………….500.00
Equipment(old)……………………………………11, 000.
00
Cash……………………………. ………………….10, 500.
00
Gai
nRecogni
zedont
heExchange

Gainsonexchangesar erecogni
zedforfi
nanci
alreport
ingpur
poseswhendi
ssi
mil
arassets
areexchanged.Toil
lustr
atetherecogni
ti
onofagai n,assumethefol
l
owi
ngter
msinwhi ch
themachinesbeingexchangedservedif
fer
entfunct
ions:

Pr i
ceofnewmachine………………………………Bi r
r12,
000.
00
Trade-
inAll
owanceforol
dmachine………………….(
3000)
Cashpaymentrequi
red(Bootgi
ven)
……………….Bi
rr9,
000.
00

Herethet r
ade-i
nallowance( Br.3000)exceedst hecar r
yingv al
ue(Br
.2000)oft heold
machinebyBr .1000.t hus,t hereisagai nont heexchange,i fthetrade-i
nall
owance
repr
esent sthefai
rmar kv al
ueoft heoldmachi ne.Assumingt hatthi
scondit
ionist
rue,t
he
entr
ytor ecordthetr
ansact i
oni sasfoll
ows:
Year s5
July5.Equipment( New) ……………………………12, 000
AccumulatedDepr eciat
ion……………………. 9,000
Equipment( ol
d)…………………………. 11,
000
Cash………………………………………9, 000
GainonexchangeofEqui p………………. .1,
000
Gai
nNotRecogni
zedont
heExchange:
Againonanexchangeshoul dnotberecognizedi
ntheaccount ingr
ecordsiftheassets
perf
orm si milarfuncti
ons.Thecostbasi
sforthenewequipmentmustindicat
etheeffectof
theunr ecordedgai n.Thi
scostbasisiscomput edbyaddi ngthecashpay menttot he
carr
yingv alueoft heoldasset
:
Carryingv alueofol
dequipment…………………………. .
Birr2,
000.00
Cashpai d(BootGiven)
…………………………………………9, 000.00
Costbasi sofnewEqui pment…………………………….Bi rr11,000.
00

Theent rytorecordthet r
ansacti
oni sasf
oll
ows:
YEAR5
July5.Equipment( New)……………………………. .11,
000. 00
Accumul atedDepreciati
on…………………… 9, 000.00
Equipment(old)…………………………………. .11,000.00
Cash…………………………………………………9, 000.00
Aswi ththenor ecogniti
onoflosses, t
henorecognit
ionoft hegainonexchangesi
s,i
neff
ect
,
apost ponementoft hegain.Sincedepreci
ati
onwi llbecomput edonthecostbasi
sofBr.
11,000,the“unrecognized”gainisrefl
ect
edinlessdepr ecationeachy
earonnewequipment
thanifthegainhadbeenr ecognized.
ACCOUNTI NGFORI NTANGI BLEASSETSANDNATURALRESOURCES

10
I
ntangi
bleAsset
s:ar
elong-
ter
m asset
sthatdonothav
ephy
sicalsubst
anceandi
nmost
casesrel
atetolegalri
ght
soradvantagesheld.
Int
angi
bleassetsi ncl
udepatent
s,copy r
ight
s,tr
ademarks,fr
anchi
ses,organi
zat
ioncosts,
l
easeholds,l
easeholdimpr
ovements,andgoodwill
.Theall
ocat
ionofi
ntangibl
easset
stothe
peri
odstheybenefitsi
scaledamor
l tizat
ion.
I
ll
ust
rat
ion-3
AssumethatonJan2,2002MOHASof tDri
nkBott
li
ngcompanypur
chasedapat
entona
uni
quebott
lecapforBr
.54,000.
Theent
rytorecor
dthepatentwoul
dbeasf
oll
ows:
2002
Jan2.Pat ent……………………………. .
54,000
Cash……………………………………. .
54,000
Assumet hatMOHA’ smanagementdet ermi
nesthat,al
thoughthepatentf
ort
hebottl
ecap
wil
ll
astforsev enteenyears,
theproductusingthecapwi l
lbesol
donlyfort
henextsi
xyear
s.
Theentr
yt orecordt heannualamorti
zationwouldbeasf ol
lows:

Amort
izat
ionExpense………………………. .9,000.00
Pat ent
……………………………………………9, 000.
00
I
fthepat
entbecomeswor thl
essbef orei
tisf ull
yamorti
zed,theremaini
ngcar
ryi
ngval
ueis
wri
tt
enoffasal oss.Forinstance,assumet hataf t
erthefi
rsttwoyearsMOHAsof tDri
nk
Bot
tl
ingCompany ’
schi efcompetit
or ’
soff
ersabot tl
ewithanew t ypeofcapthatmakes
MOHA’scapobsolete.Theentrytorecordthel ossi
s:
Lossonpatent……………………………36,
000.
00
Patent……………………………………36,
000.
00
Depl
eti
onofNat
uralResour
ces
Depleti
on i sthe accounti
ng measure used t
o all
ocat
et he acquisi
tion costofnat ural
resources.Deplet
iondiff
ersfr
om depr
eciati
onbecausedepleti
onf ocusesspeci f
ical
lyonthe
physicaluseandexhaust i
onoft henat ur
alresour
ces,whi l
edepr eciati
onf ocusesmor e
broadlyonanyr educti
onoft heeconomi cvalueofapl antorf ixedasset .Thecostsof
naturalresour
cesareusuallycl
assi
fi
edasl ong-
ter
msasset s.
I
ll
ust
rat
ion-4
Supposeforexampl e,MI DROCConst ruct
ionhasacquiredtherighttouse10,000acresof
l
andi nKibre-Mengistt err
it
oryt ominef orgoldatat ot
alcostof ,Br.10,
000.000.The
Companyest imatedt hatthemi newill
;provi
deapproxi
mat el
y500,000gramsofgol d.The
depl
eti
onrateest abl
ishediscomput edinthefol
lowi
ngmanner .
Tot
al cost–Sal vageval
ue =Depleti
oncostperunit
.
Tot
al esti
mateduni tsavail
abl
e
Br
.10,
000,
000 =Br
.20pergr
am
500,
000uni
ts
I
f100,
000gr
amsar eext
ract
edinthefir
styear
,thenthedepl
eti
onfort
hey
eari
s2000.
000
(
1000,
000xBr.20.
00)
.Theentr
ytorecor
dthedeplet
ioni
sther
efore:
Depl
eti
onExpense…………………. .
2,000,
000
AccumulatedDeplet
ion………………………. 2,
000,
000
CAPITALANDREVENUEEXPENDI TURES
Capi
talExpendit
ures-ar
eexpenditur
esthati
mprov
etheoper
ati
ngef
fi
ciency(
orcapaci
ty)or

11
cost
sincur
redt
oachi
evegr
eat
erf
utur
ebenef
it
s.
I
nadditi
ontotheacquisi
ti
onofplantassets,capi
talexpendi
tur
esincludedaddi
ti
onsand
bet
ter
ments.Anot
hert
ypesofcapi
talexpendit
uresi
ncludeextr
aordi
naryrepai
rs
Revenueexpenditures
Revenueexpendi
turesar
eexpendi
tur
esi
ncur
redi
nor
dert
omai
ntai
nthenor
maloper
ati
ng
ef
fi
ciencyoftheasset.
Amongt hemor eusualki ndsofrevenueexpendit
uresf orpl
antassetar
ether
epai
rs,
maintenance,lubr
icat
ion,Cleani
ngandi nspect
ionnecessaryt
okeepanassetingood
worki
ngcondi t
ion.

12