PLANT ASSETS,

NATURAL
RESOURCES, AND
INTANGIBLE
ASSETS
Chapter
10-1
 Objectives
Objectives

1. Describe how the cost principle applies to plant assets.

2. Explain the concept of depreciation.
3. Compute periodic depreciation using different methods.
4. Describe the procedure for revising periodic depreciation.
5. Distinguish between revenue and capital expenditures, and
explain the entries for each.
6. Explain how to account for the disposal of a plant asset.
7. Compute periodic depletion of natural resources.
8. Explain the basic issues related to accounting for intangible
assets.
9. Indicate how plant assets, natural resources, and intangible
assets are reported.
Chapter
10-2
 Plant
Plant Assets,
Assets, Natural
Natural Resources,
Resources,
and
and Intangible
Intangible Assets
Assets

Statement
Natural Intangible
Plant Assets Presentation
Resources Assets
and Analysis

Determining Depletion Accounting for Presentation

the cost of intangibles Analysis
plant assets
Depreciation
Expenditures
during useful
life
Plant asset
disposals
Chapter
10-3
 Plant
Plant Assets
Assets

Plant assets include land, land improvements,

buildings, and equipment (machinery, furniture, tools).
Major characteristics include:
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.

Referred to as property, plant, and equipment; plant and

equipment; and fixed assets.

Chapter
10-4
 Determining
Determining the
the Cost
Cost of
of PPE
PPE

General principle
 Property, plant and equipment are initially
recorded in the accounts of a business at their
cost.
 Cost is the amount of cash or cash equivalents paid
and the fair value of the other consideration
given to acquire an asset at the time of its
acquisition or construction.

Chapter
10-5
 Determining
Determining the
the Cost
Cost of
of PPE
PPE

The cost of an item of property, plant and machinery

consists of:
 its purchase price after any trade discounts and
rebates have been deducted, plus any import taxes or
non-refundable sales tax; plus
 When the entity has an obligation to dismantle and
remove the asset at the end of its life, its initial cost
should also include an estimate of the costs of
dismantling and removing the asset and restoring the
site where it is located.

Chapter
10-6
 Determining
Determining the
the Cost
Cost of
of PPE
PPE

 the directly attributable costs of ‘bringing the asset

to the location and condition necessary for it to be
capable of operating in the manner intended by
management’ (IAS 16 Property, plant and machinery).
These directly attributable costs may include:
 employee costs arising directly from the installation
or construction of the asset
 the cost of site preparation
 initial delivery and handling costs (‘carriage inwards’)
 installation and assembly costs
 testing costs
 professional fees
Chapter
10-7
 Cost
Cost
Cost not included in PPE
not included in PPE

a) Costs of opening a new facility;

b) Costs of introducing a new product or service
(including costs of advertising and promotional
activities);
c) Costs of conducting business in a new location or
with a new class of customer (including costs of
staff training); and
d) Administration and other general overhead costs.

Chapter
10-8
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Land
Includes all costs to acquire land and ready it for use.
Costs typically include:
(1) the purchase price;
(2) closing costs, such as title and attorney’s fees;
(3) real estate brokers’ commissions;
(4) costs of grading, filling, draining, and clearing;
(5) assumption of any liens, mortgages, or
encumbrances on the property.

Chapter
10-9
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Land Improvements
Includes all expenditures necessary to make the
improvements ready for their intended use.
Examples are driveways, parking lots, fences,
landscaping, and underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land
improvements over their useful lives.

Chapter
10-10
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Buildings
Includes all costs related directly to purchase or
construction.
Purchase costs:
Purchase price, closing costs (attorney’s fees, title
insurance, etc.) and real estate broker’s commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees,
building permits, and excavation costs.
Chapter
10-11
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

E10-3 On March 1, 2008, Penner Company acquired real

estate on which it planned to construct a small office
building. The company paid $80,000 in cash. An old
warehouse on the property was razed at a cost of $8,600;
the salvaged materials were sold for $1,700. Additional
expenditures before construction began included $1,100
attorney’s fee for work concerning the land purchase, $5,000
real estate broker’s fee, $7,800 architect’s fee, and $14,000
to put in driveways and a parking lot.
Instructions
Determine amount to be reported as the cost of the land.
For each cost not used, indicate the account debited.
Chapter
10-12
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

E10-3 Determine amount to be reported as the cost of the

land. Land
Company paid $80,000 in cash. $80,000
Old warehouse razed at a cost of $8,600 8,600
Salvaged materials were sold for $1,700. - 1,700
Expenditures before construction began:
$1,100 attorney’s fee for work on land purchase. 1,100
$5,000 real estate broker’s fee. 5,000
$7,800 architect’s fee. Building 0
$14,000 for driveways and parking lot. 0

Land Improvements Total $93,000

Chapter
10-13
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Equipment
Include all costs incurred in acquiring the equipment
and preparing it for use.
Costs typically include:
purchase price,
sales taxes,
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
Chapter
10-14
 Measurement
Measurement after
after Initial
Initial Recognition
Recognition

IAS 16 allows a choice of accounting treatments after

initial recognition.
All items of property, plant and equipment in a class can
be accounted for using one of two models:
 Cost model - Property, plant and equipment is carried
at cost less any accumulated depreciation and any
accumulated impairment losses.
 Revaluation model - Property, plant and equipment is
carried at a revalued amount. This is the fair value at
the date of the revaluation less any subsequent
accumulated depreciation and any accumulated
impairment losses.
Chapter
10-15
 Measurement
Measurement after
after Initial
Initial Recognition
Recognition

 The choice must be applied consistently.

 A business cannot carry one item of property, plant
and equipment at cost and revalue a similar item.
 However, a business can use different models for
different classes of property, plant & equipment. For
example, companies might use the cost model for
plant and equipment but use the revaluation model for
property.

Chapter
10-16
 Depreciation
Depreciation

Depreciation is the process of allocating the cost of

tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the
use of the asset.
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing
ability of asset will decline over the asset’s
useful life.

Chapter
10-17
 Depreciation
Depreciation

Factors in Computing Depreciation

Illustration 10-6

Cost Useful Life Salvage Value

Chapter
10-18
 Depreciation
Depreciation

Depreciation Methods
Objective is to select the method that best
measures an asset’s contribution to revenue over its
useful life. Examples include:
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.

Chapter
10-19
 Depreciation
Depreciation

Exercise (Depreciation Computations—Three Methods)

Parish Corporation purchased a new machine for its assembly
process on January 2, 2008. The cost of this machine was
$117,900. The company estimated that the machine would
have a salvage value of $12,900 at the end of its service life.
Its life is estimated at 5 years and its working hours are
estimated at 1,000 hours. Year-end is December 31.
Instructions: Compute the depreciation expense under the
following methods.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
Chapter
10-20
 Depreciation
Depreciation

Straight-Line

Expense is same amount for each year.

Depreciable cost is cost of the asset less its
salvage value.
Straight-line method predominates in practice.

Chapter
10-21
 Depreciation
Depreciation

Exercise (Straight-Line Method)

D epreciable A nnual A c cum .
Y ear Cost Y ears Ex pense D eprec.
2008 $ 105,000 / 5 = $ 21,000 $ 21,000
2009 105,000 / 5 = 21,000 42,000
2010 105,000 / 5 = 21,000 63,000
2011 105,000 / 5 = 21,000 84,000
2012 105,000 / 5 = 21,000 105,000
$ 105, 000

2008 Journal Depreciation expense 21,000

Entry
Accumulated depreciation 21,000
Chapter
10-22
 Depreciation
Depreciation

Units-of-Activity

Expense varies based on units of activity.

Depreciable cost is cost less salvage value.
Companies estimate total units of activity to
calculate depreciation cost per unit.

Chapter
10-23
 Depreciation
Depreciation

Exercise (Units-of-Activity Method)

($105,000 / 1,000 hours = $105 per hour)
H ou rs Rate per A nnual A c c um .
Year U sed H our Ex pense Deprec .
2008 200 x $ 105 = $ 21 ,000 $ 21,000
2009 150 x 10 5 = 15 ,750 36,750
2010 250 x 10 5 = 26 ,250 63,000
2011 300 x 10 5 = 31 ,500 94,500
2012 100 x 10 5 = 10 ,500 10 5,000
1,000 $ 10 5,000
2008 Journal
Entry
Depreciation expense 21,000
Chapter Accumulated depreciation 21,000
10-24
 Depreciation
Depreciation

Declining-Balance
Decreasing annual depreciation expense over the
asset’s useful life.
Declining-balance rate is double the straight-line
rate.
Rate applied to book value (cost less accumulated
depreciation.

Chapter
10-25
 Depreciation
Depreciation

Exercise (Declining-Balance Method)

D eclining
Beginning Balance A nnual A ccum .
Y ear Book value R ate Ex pense D eprec.
2008 $ 117,900 x 40% = $ 47,160 $ 47, 160
2009 70,740 x 40% = 28,296 75, 456
2010 42,444 x 40% = 16,978 92, 434
2011 25,466 x 40% = 10,186 102, 620
2012 15,280 x 40% = 2, 380 105, 000
$ 105,000
Plug

2008 Journal Depreciation expense 47,160

Entry
Accumulated depreciation 47,160
Chapter
10-26
 Depreciation
Depreciation

Comparison of Depreciation Methods

Y ear SL DB A c tivity
2008 21,000 47,160 21,000
Comparison
2009 of Depreciation
21,000 28,296 15,750
2010
Methods 21,000 16,978 26,250
2011 21,000 10,186 31,500
2012 21,000 2,380 10,500
105,000 105,000 105,000

Chapter
10-27
 Depreciation
Depreciation for
for Partial
Partial Year
Year
Exercise (Depreciation Computations—Three Methods)
Parish Corporation purchased a new machine for its assembly
process on October 1, 2008. The cost of this machine was
$117,900. The company estimated that the machine would
have a salvage value of $12,900 at the end of its service life.
Its life is estimated at 5 years and its working hours are
estimated at 1,000 hours. During 2008, the machine was used
30 hours. Year-end is December 31.

Instructions: Compute the depreciation expense under the

following methods.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining-Balance.
Chapter
10-28
 Depreciation
Depreciation for
for Partial
Partial Year
Year

Exercise (Straight-line Method)

Current
D epreciab le A nnual Partial Y ear A c cum .
Y ear Base Y ears Ex pense Y ear Ex pen se D eprec.
2008 $ 105, 000 / 5 = $ 21, 000 x 3/ 12 = $ 5, 250 $ 5,250
2009 105, 000 / 5 = 21, 000 21,000 26,250
2010 105, 000 / 5 = 21, 000 21,000 47,250
2011 105, 000 / 5 = 21, 000 21,000 68,250
2012 105, 000 / 5 = 21, 000 21,000 89,250
2013 105, 000 / 5 = 21, 000 x 9/ 12 = 15,750 105, 000
$ 105,000
J ournal ent ry:

2008 D ep reciat ion exp ense 5 ,2 5 0

A ccumult at ed dep reciat ion 5 ,2 5 0

Chapter
10-29
 Depreciation
Depreciation for
for Partial
Partial Year
Year
Exercise (Units-of-Activity Method)
($1 0 5 ,0 0 0 / 1 ,0 0 0 hours = $1 0 5 per hour)
(Given) Current
H ours R ate per A nnual Y ear A cc um .
Y ear U sed H ours Ex pense Ex pense D eprec.
2008 30 x $105 = $ 3,150 $ 3,150 $ 3,150
2009 150 x 105 = 15,750 15,750 18,900
2010 250 x 105 = 26,250 26,250 45,150
2011 300 x 105 = 31,500 31,500 76,650
2012 100 x 105 = 10,500 10,500 87,150
2013 170 x 105 = 17,850 $ 17,850 105,000
1,000 $ 105,000 $ 105,000
Journal entry:
2008 D epreciation ex pense 3,150
A ccum ultated depreciation 3,150

Chapter
10-30
 Depreciation
Depreciation for
for Partial
Partial Year
Year

Exercise (Declining-Balance Method)

D ec lining Current
D epreciable Balance A nnual Partial Y ear A c cum .
Y ear Base R ate Expense Y ear Expense D eprec .
2008 $ 117,900 x 40% = $ 47,160 x 3/12 = $ 11,790 $ 11,790
2009 106,110 x 40% = 42,444 42,444 54,234
2010 63, 666 x 40% = 25,466 25,466 79,700
2011 38, 200 x 40% = 15,280 15,280 94,980
2012 22, 920 x 40% = 9,168 9, 168 104,148
2013 13, 752 x 40% = 852 Plug 852 105,000
$ 105,000
J ournal ent ry:

2008 D ep reciat ion exp ense 1 1 ,7 9 0

A ccumult ated dep recia tion 1 1 ,7 9 0

Chapter
10-31
 Depreciation
Depreciation

Depreciation and Income Taxes

FBR does not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.

Chapter
10-32
 Tax Depreciation

22. Depreciation.— (1) Subject to this section, a person

shall be allowed a deduction for the depreciation of
the person‘s depreciable assets used in the person‘s
business in the tax year.
(2) Subject to sub-section (3) , the depreciation
deduction for a tax year shall be computed by
applying the rate specified in Part I of the Third
Schedule against the written down value of the asset
at the beginning of the year.

Chapter
10-33
 Tax Depreciation

(3) Where a depreciable asset is used in a tax year

partly in deriving income from business chargeable to
tax and partly for another use, the deduction allowed
under this section for that year shall be restricted to
the fair proportional part of the amount that would
be allowed if the asset was wholly used to derive
income from business chargeable to tax.

Chapter
10-34
 Tax Depreciation

(5) The written down value of a depreciable asset of a

person at the beginning of the tax year shall be –—
(a) where the asset was acquired in the tax year, the cost of
the asset to the person as reduced by any initial allowance in
respect of the asset under section 23; or
(b) in any other case, the cost of the asset to the person as
reduced by the total depreciation deductions (including any
initial allowance under section 23) allowed to the person in
respect of the asset in previous tax years.

Chapter
10-35
 Tax Depreciation

Explanation,- For the removal of doubt, it is clarified

that where any building, furniture, plant or machinery is
used for the purposes of business during any tax year
for which the income from such business is exempt,
depreciation admissible under sub-section (1) shall be
treated to have been allowed in respect of the said tax
year and after expiration of the exemption period,
written down value of such assets shall be determined
after reducing total depreciation deductions (including
any initial allowance under section 23) in accordance
with clauses (a) and (b) of this sub-section.

Chapter
10-36
 Tax Depreciation

(6) Where sub-section (3) applies to a depreciable asset

for a tax year, the written down value of the asset
shall be computed on the basis that the asset has
been solely used to derive income from business
chargeable to tax.
(7) The total deductions allowed to a person during the
period of ownership of a depreciable asset under this
section and section 23 shall not exceed the cost of
the asset.

Chapter
10-37
 Tax Depreciation

(8) Where, in any tax year, a person disposes of a

depreciable asset, no depreciation deduction shall be
allowed under this section for that year and —
(a) if the consideration received exceeds the written down
value of the asset at the time of disposal, the excess shall
be chargeable to tax in that year under the head ―Income
from Business‖; or
(b) if the consideration received is less than the written down
value of the asset at the time of disposal, the difference
shall be allowed as a deduction in computing the person‘s
income chargeable under the head ―Income from Business
for that year.

Chapter
10-38
 Tax Depreciation

(9) Where sub-section (3) applies, the written down value of the
asset for the purposes of sub-section (8) shall be increased by
the amount that is not allowed as a deduction as a result of the
application of sub-section (3).
(10) Where clause (a) of sub-section (13) applies, the consideration
received on disposal of the passenger transport vehicle for the
purposes of sub-section (8) shall be computed according to the
following formula —
A x B/C
where –
A is the 1[amount] received on disposal of the vehicle;
B is the amount referred to in clause (a) of sub-section (13); and
C is the actual cost of acquiring the vehicle

Chapter
10-39
 Tax Depreciation

(11) Subject to sub-sections (13) and (14), the rules in

Part III of Chapter IV shall apply in determining the
cost and consideration received in respect of a
depreciable asset for the purposes of this section.
(12) The depreciation deductions allowed to a leasing
company or an investment bank or a modaraba or a
scheduled bank or a development finance institution
in respect of assets owned by the leasing company or
an investment bank or a modaraba or a scheduled
bank or a development finance institution and leased
to another person shall be deductible only against the
lease rental income derived in respect of such
Chapter assets.]
10-40
(
 Tax Depreciation

(13) For the purposes of this section, —

(a) the cost of a depreciable asset being a passenger transport
vehicle not plying for hire shall not exceed two and half
million rupees;
(b) the cost of immovable property or a structural improvement
to immovable property shall not include the cost of the land;
(c) any asset owned by a leasing company or an investment bank
or a modaraba or a scheduled bank or a development finance
institution and leased to another person is treated as used in
the leasing company or the investment bank or the modaraba
or the scheduled bank or the development finance
institution‘s business; and]
(d) where the consideration received on the disposal of
immovable property exceeds the cost of the property, the
Chapter
consideration received shall be treated as the cost of the
10-41 property.
 Tax Depreciation

(14) Where a depreciable asset that has been used by a

person in Pakistan is exported or transferred out of
Pakistan, the person shall be treated as having
disposed of the asset at the time of the export or
transfer for a consideration received equal to the
cost of the asset.

Chapter
10-42
 Tax Depreciation

(15) In this section, —

―depreciable asset means any tangible movable
property, immovable property (other than unimproved
land), or structural improvement to immovable
property, owned by a person that —
(a) has a normal useful life exceeding one year;
(b) is likely to lose value as a result of normal wear and tear, or
obsolescence; and
(c) is used wholly or partly by the person in deriving income
from business chargeable to tax,

Chapter
10-43
 Tax Depreciation

but shall not include any tangible movable property, immovable

property, or structural improvement to immovable property in
relation to which a deduction has been allowed under another
section of this Ordinance for the entire cost of the property or
improvement in the tax year in which the property is acquired or
improvement made by the person; and
―structural improvement‖ in relation to immovable property, includes any
building, road, driveway, car park, railway line, pipeline, bridge, tunnel,
airport runway, canal, dock, wharf, retaining wall, fence, power lines, water
or sewerage pipes, drainage, landscaping or dam :
―Provided that where a depreciable asset is jointly owned by a taxpayer and
an Islamic financial institution licensed by the State Bank of Pakistan or
Securities and Exchange Commission of Pakistan, as the case may be,
pursuant to an arrangement of Musharika financing or diminishing Musharika
financing, the depreciable asset shall be treated to be wholly owned by the
taxpayer.

Chapter
10-44
 Tax Depreciation

23. Initial allowance.—(1) A person who places an eligible

depreciable asset into service in Pakistan for the first time
in a tax year shall be allowed a deduction (hereinafter
referred to as an ―initial allowance‖) computed in
accordance with sub-section (2), provided the asset is used
by the person for the purposes of his business for the first
time or the tax year in which commercial production is
commenced, whichever is later .
(2) The amount of the initial allowance of a person shall be
computed by applying the rate specified in Part II of the
Third Schedule against the cost of the asset.
(3) The rules in section 76 shall apply in determining the cost
of an eligible depreciable asset for the purposes of this
Chaptersection.
10-45
 Tax Depreciation

(4) A deduction allowed under this section to a leasing company or

an investment bank or a modaraba or a scheduled bank or a
development finance institution in respect of assets owned by
the leasing company or the investment bank or the modaraba or
the scheduled bank or the development finance institution and
leased to another person shall be deducted only against the
leased rental income derived in respect of such assets.
(5) In this section, ―eligible depreciable asset‖ means a
depreciable asset other than —
(a) any road transport vehicle unless the vehicle is plying for hire;
(b) any furniture, including fittings;
(c) any plant or machinery4[that has been used previously in Pakistan]; or
(d) any plant or machinery in relation to which a deduction has been allowed
under another section of this Ordinance for the entire cost of the asset in
the tax year in which the asset is acquired.

Chapter
10-46
 Tax Depreciation

23A. First Year Allowance.— (1) Plant, machinery and equipment

installed by any industrial undertaking set up in specified rural
and under developed areas or engaged in the manufacturing of
cellular mobile phones and qualifying for exemption under clause
(126N) of Part I of the Second Schedule] and owned and
managed by a company shall be allowed first year allowance in
lieu of initial allowance under section 23 at the rate specified in
Part II of the Third Schedule against the cost of the ―eligible
depreciable assets‖ put to use after July 1, 2008.
(2) The provisions of section 23 except sub-sections (1) and (2)
thereof, shall mutatis mutandis apply.
(3) The Federal Government may notify ―specified areas‖ for the
purposes of sub-section (1).]

Chapter
10-47
 Tax Depreciation

23B. Accelerated depreciation to alternate energy projects.— (1)

Any plant, machinery and equipments installed for generation of
alternate energy by an industrial undertaking set up anywhere in
Pakistan and owned and managed by a company shall be allowed
first year allowance in lieu of initial allowance under section 23,
at the rate specified in Part II of the Third Schedule against
the cost of the eligible depreciation assets put to use after
first day of July, 2009.
(2) The provisions of section 23 except sub-sections (1) and (2)
thereof, shall mutatis mutandis apply.]

Chapter
10-48
 Tax Depreciation

24. Intangibles.—(1) A person shall be allowed an amortisation

deduction in accordance with this section in a tax year for the
cost of the person‘s intangibles–
(a) that are wholly or partly used by the person in the tax year in deriving
income from business chargeable to tax; and
(b) that have a normal useful life exceeding one year.
(2) No deduction shall be allowed under this section where a
deduction has been allowed under another section of this
Ordinance for the entire cost of the intangible in the tax year
in which the intangible is acquired.
(3) Subject to sub-section (7), the amortization deduction of a
person for a tax year shall be computed according to the
following formula, namely:—

Chapter
10-49
 Tax Depreciation

where —
A is the cost of the intangible; and
B is the normal useful life of the intangible in whole years.
(4) An intangible —
(a) with a normal useful life of more than ten years; or
(b) that does not have an ascertainable useful life, shall be treated as if it had
a normal useful life of ten years.
(5) Where an intangible is used in a tax year partly in deriving
income from business chargeable to tax and partly for another
use, the deduction allowed under this section for that year shall
be restricted to the fair proportional part of the amount that
would be allowed if the intangible were wholly used to derive
income from business chargeable to tax.

Chapter
10-50
 Tax Depreciation

(6) Where an intangible is not used for the whole of the tax year in
deriving income from business chargeable to tax, the deduction
allowed under this section shall be computed according to the
following formula, namely: —
A x B/C
where —
A is the amount of amortization computed under sub-section (3) or (5), as the
case may be;
B is the number of days in the tax year the intangible is used in deriving income
from business chargeable to tax; and
C is the number of days in the tax year.
(7) The total deductions allowed to a person under this section in
the current tax year and all previous tax years in respect of an
intangible shall not exceed the cost of the intangible.
(8) Where, in any tax year, a person disposes of an intangible, no
amortisation deduction shall be allowed under this section for
10-51 that year and —
Chapter
 Tax Depreciation

(a) if the consideration received by the person exceeds the written

down value of the intangible at the time of disposal, the excess
shall be income of the person chargeable to tax in that year
under the head ―Income from Business ; or
(b) if the consideration received is less than the written down value
of the intangible at the time of disposal, the difference shall be
allowed as a deduction in computing the person‘s income
chargeable under the head ―Income from Business‖ in that year.

Chapter
10-52
 Tax Depreciation

(9) For the purposes of sub-section (8) —

(a) the written down value of an intangible at the time of disposal shall be the
cost of the intangible reduced by the total deductions allowed to the person
under this section in respect of the intangible or, where the intangible is not
wholly used to derive income chargeable to tax, the amount that would be
allowed under this section if the intangible were wholly so used; and
(b) the consideration received on disposal of an intangible shall be determined
in accordance with section 77.
(10) For the purposes of this section, an intangible that is available
for use on a day (including a non-working day) is treated as used
on that day.

Chapter
10-53
 Tax Depreciation

(11) In this section, —

―cost in relation to an intangible, means any expenditure incurred
in acquiring or creating the intangible, including any expenditure
incurred in improving or renewing the intangible; and
―intangible‖ means any patent, invention, design or model, secret
formula or process, copyright , trade mark, scientific or
technical knowledge, computer software, motion picture film,
export quotas, franchise, licence, intellectual property], or
other like property or right, contractual rights and any
expenditure that provides an advantage or benefit for a period
of more than one year (other than expenditure incurred to
acquire a depreciable asset or unimproved land).

Chapter
10-54
 Tax Depreciation

Depletion Allowance
3. In determining the income of such undertaking for
any year ending after the date on which commercial
production has commenced, an allowance for depletion
shall be made equal to fifteen per cent of the gross
receipts representing the well-head value of the
production, but not exceeding fifty per cent of the
profits or gains of such undertaking before the
deduction of such allowance.

Chapter
10-55
 Depreciation
Depreciation

Revising Periodic Depreciation

Accounted for in the period of change and
future periods (Change in Estimate).
Not handled retrospectively.
Not considered error.

Chapter
10-56
 Depreciation
Depreciation

Arcadia HS purchased equipment for $510,000 which

was estimated to have a useful life of 10 years with a
salvage value of $10,000 at the end of that time.
Depreciation has been recorded for 7 years on a
straight-line basis. In 2008 (year 8), it is determined
that the total estimated life should be 15 years with a
salvage value of $5,000 at the end of that time.
Questions:
 What is the entry to correct the prior years’
depreciation? - None
 Calculate the depreciation expense
for 2008.
Chapter
10-57
 Depreciation
Depreciation After 7 years

Equipment cost $510,000 First,

First,establish
establishBV
BV
Salvage value - 10,000 at
atdate
dateofofchange
changein
in
Depreciable cost $500,000 estimate.
estimate.
Useful life (original) / 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2007)

Fixed Assets:
Equipment $510,000
Accumulated depreciation - 350,000
Book value (BV) $160,000
Chapter
10-58
 Depreciation
Depreciation After 7 years

Book value $160,000 Depreciation

Depreciation
Salvage value (new) - 5,000 Expense
Expensecalculation
calculation
Depreciable cost $155,000 for
for2008.
2008.
Useful life remaining / 8 years
Annual depreciation $ 19,375

Journal entry for 2008

Depreciation expense 19,375

Accumulated depreciation 19,375

Chapter
10-59
 Expenditures
Expenditures During
During Useful
Useful Life
Life

Ordinary Repairs - expenditures to maintain the

operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.

Additions and Improvements - costs incurred to

increase the operating efficiency, productive capacity, or
useful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.

Chapter
10-60
 Plant
Plant Asset
Asset Disposals
Disposals

Companies dispose of plant assets in three ways —

Retirement, Sale, or Exchange (appendix).
Illustration 10-18

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Chapter
10-61
 Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement

BE10-9 Prepare journal entries to record the following.

(a) Gomez Company retires its delivery equipment, which cost
$41,000. Accumulated depreciation is also $41,000 on this
delivery equipment. No salvage value is received.
(b) Assume the same information as (a), except that
accumulated depreciation for Gomez Company is $39,000,
instead of $41,000.

(a) Accumulated depreciation 41,000

Equipment
41,000

Chapter
10-62
 Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement

BE10-9 Prepare journal entries to record the following.

(a) Gomez Company retires its delivery equipment, which cost
$41,000. Accumulated depreciation is also $41,000 on this
delivery equipment. No salvage value is received.
(b) Assume the same information as (a), except that
accumulated depreciation for Gomez Company is $39,000,
instead of $41,000.

(b) Accumulated depreciation 39,000

Loss on disposal 2,000
Equipment
41,000
Chapter
10-63
 Plant
Plant Asset
Asset Disposals
Disposals

Sale of Plant Assets

Compare the book value of the asset with the
proceeds received from the sale.
If proceeds exceed the book value, a gain on
disposal occurs.
If proceeds are less than the book value, a loss
on disposal occurs.

Chapter
10-64
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

BE10-10 Chan Company sells office equipment on

September 30, 2008, for $20,000 cash. The office
equipment originally cost $72,000 and as of January 1,
2008, had accumulated depreciation of $42,000.
Depreciation for the first 9 months of 2008 is $5,250.
Prepare the journal entries to (a) update depreciation to
September 30, 2008, and (b) record the sale of the
equipment.

Chapter
10-65
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

BE10-10 Prepare the journal entries to (a) update

depreciation to September 30, 2008, and (b) record the
sale of the equipment.

(a) Depreciation expense 5,250

Accumulated depreciation
5,250
(b) Cash 20,000
Accumulated depreciation 47,250
Loss on disposal 4,750
Office equipment
72,000
Chapter
10-66
 Natural
Natural Resources
Resources

Natural resources consist of standing timber and

underground deposits of oil, gas, and minerals.
Distinguishing characteristics:
Physically extracted in operations.
Replaceable only by an act of nature.

Chapter
10-67
 Natural
Natural Resources
Resources

Cost - price needed to acquire the resource and

prepare it for its intended use.
Depletion - allocation of the cost to expense in a rational
and systematic manner over the resource’s useful life.

Depletion is to natural resources as depreciation

is to plant assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units
extracted.

Chapter
10-68
 Natural
Natural Resources
Resources

BE10-11 Olpe Mining Co. purchased for $7 million a

mine that is estimated to have 35 million tons of ore and
no salvage value. In the first year, 6 million tons of ore
are extracted and sold. (a) Prepare the journal entry
to record depletion expense for the first year. (b)
Show how this mine is reported on the balance sheet at
the end of the first year.

Depletion cost per unit = $7,000,000 ÷ 35,000,000 =

$.20 depletion cost per ton
$.20 X 6,000,000 = $1,200,000

Chapter
10-69
 Section
Section 22 –– Natural
Natural Resources
Resources

BE10-11 (a) Prepare the journal entry to record

depletion expense for the first year. (b) Show how
this mine is reported on the balance sheet at the end of
the first year.

(a) Depletion expense 1,200,000

Accumulated depletion 1,200,000

(b) Balance Sheet Presentation

Ore mine 7,000,000
Less: Accum. depletion 1,200,000 5,800,000

Chapter
10-70
 Section
Section 33 –– Intangible
Intangible Assets
Assets

Intangible assets are rights, privileges, and

competitive advantages that do not possess physical
substance.

Intangible assets are categorized as having either a

limited life or an indefinite life.
Common types of intangibles:

Patents Trademarks or trade names

Copyrights Goodwill
Franchises or licenses
Chapter
10-71
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible
asset ready for its intended use.

Internally Created Intangibles:

Generally expensed.
Only capitalize direct costs incurred in perfecting title
to the intangible, such as legal costs.

Chapter
10-72
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.

Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.

Chapter
10-73
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Patents
Exclusive right to manufacture, sell, or otherwise
control an invention for a period of 20 years from the
date of the grant.
Capitalize costs of purchasing a patent and amortize
over its 20-year life or its useful life, whichever is
shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent
are capitalized to Patent account.

Chapter
10-74
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

BE10-11 Galena Company purchases a patent for

$120,000 on January 2, 2008. Its estimated useful life is
10 years. (a) Prepare the journal entry to record patent
expense for the first year. (b) Show how this patent is
reported on the balance sheet at the end of the first
year.

(a) Amortization expense 12,000

Patent
(b) Balance Sheet Presentation 12,000
Intangible assets:
Patent108,000
Chapter
10-75
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Copyrights
Give the owner the exclusive right to reproduce and
sell an artistic or published work.
 plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
Copyright is granted for the life of the creator plus
70 years.
Capitalize acquisition costs.
Amortized to expense over useful life.

Chapter
10-76
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Trademarks and Trade Names

Word, phrase, jingle, or symbol that identifies a
particular enterprise or product.
 Wheaties, Game Boy, Frappuccino, Kleenex,
Windows, Coca-Cola, and Jeep.
Trademark or trade name has legal protection for
indefinite number of 10 year renewal periods.
Capitalize acquisition costs.
No amortization.

Chapter
10-77
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Franchises and Licenses

Contractual arrangement between a franchisor and a
franchisee.
 Shell, Taco Bell, or Rent-A-Wreck are franchises.

Franchise (or license) with a limited life should be

amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at
cost and not amortized.

Chapter
10-78
 Accounting
Accounting for
for Intangible
Intangible Assets
Assets

Goodwill
Includes exceptional management, desirable location,
good customer relations, skilled employees, high-quality
products, etc.
Only recorded when an entire business is purchased.

Goodwill is recorded as the excess of ...

purchase price over the FMV of the identifiable net
assets acquired.

Internally created goodwill should not be capitalized.

Chapter
10-79
 Research
Research and
and Development
Development Costs
Costs

Frequently results in something that a company

patents or copyrights such as:

new product, formula,

process, composition, or
idea, literary work.

All R & D costs are expensed when incurred.

Chapter
10-80
 Statement
Statement Presentation
Presentation and
and Analysis
Analysis

Presentation Illustration 10-24

Companies usually include natural resources under “Property, plant,

and equipment” and show intangibles separately.

Chapter
10-81
 Statement
Statement Presentation
Presentation and
and Analysis
Analysis

Analysis Illustration 10-25

Each dollar invested in assets produced $0.96 in sales.

If a company is using its assets efficiently, each dollar
of assets will create a high amount of sales.

Chapter
10-82
 Exchange
Exchange of
of Plant
Plant Assets
Assets

Ordinarily, companies record a gain or loss on

the exchange of plant assets.
The rationale for recognizing a gain or loss is
that most exchanges have commercial
substance.
An exchange has commercial substance if the
future cash flows change as a result of the
exchange.

Chapter
10-83
 Exchange
Exchange of
of Plant
Plant Assets
Assets –– Loss
Loss Treatment
Treatment
Assume Roland Company exchanged a set of used
trucks plus cash for a new semi-truck. The used
trucks have a combined book value of $42,000 (cost
of $64,000 and accumulated depreciation of
$22,000). The used trucks have a fair market value
of $26,000. Roland must pay $17,000 for the semi-
truck.
Compute the loss on the exchange.
Book value of used trucks $42,000
Fair market value of used trucks 26,000
Loss on exchange $16,000
Chapter
10-84
 Exchange
Exchange of
of Plant
Plant Assets
Assets –– Loss
Loss Treatment
Treatment
Assume Roland Company exchanged a set of used
trucks plus cash for a new semi-truck. The used
trucks have a combined book value of $42,000 (cost
of $64,000 and accumulated depreciation of
$22,000). The used trucks have a fair market value
of $26,000. Roland must pay $17,000 for the semi-
truck.
Prepare the journal entry to record the exchange.
Semi truck 43,000
Accumulated depreciation 22,000
Loss on disposal 16,000
Used trucks 64,000
Cash 17,000
Chapter
10-85
 Exchange
Exchange of
of Plant
Plant Assets
Assets –– Gain
Gain Treatment
Treatment
Assume Mark Express Delivery decides to exchange
its old delivery equipment plus cash of $3,000 for
new delivery equipment. The book value of the old
delivery equipment is $12,000 (cost $40,000 less
accumulated depreciation of $28,000), and the fair
market value of the old equipment is $19,000.
Compute the gain on the exchange.
Fair market value of old equipment $19,000
Book value of old equipment 12,000
Gain on exchange $ 7,000

Chapter
10-86
 Exchange
Exchange of
of Plant
Plant Assets
Assets –– Gain
Gain Treatment
Treatment
Assume Mark Express Delivery decides to exchange
its old delivery equipment plus cash of $3,000 for
new delivery equipment. The book value of the old
delivery equipment is $12,000 (cost $40,000 less
accumulated depreciation of $28,000), and the fair
market value of the old equipment is $19,000.
Prepare the journal entry to record the exchange.

Delivery equipment 22,000

Accumulated depreciation 28,000
Delivery equipment 40,000
Gain on disposal
7,000
Chapter
10-87
Cash 3,000
 Disclosures

IAS 16 Property, plant and equipment requires the following disclosures in

the notes to the financial statements, for each major class of property,
plant and equipment.
 The measurement bases used (cost or revaluation model)
 The depreciation methods used
 The useful lives or depreciation rates used
 Gross carrying amounts and the accumulated depreciation at the
beginning and at the end of the period
 A reconciliation between the opening and closing values for gross
carrying amounts and accumulated depreciation, showing:
 additions during the year
 disposals during the year
 depreciation charge for the year
 assets classified as held for sale in accordance with IFRS 5
 acquisitions of assets through business combinations
 impairment losses
 the net exchange differences
Chapter  the effect of revaluations.
10-88
 Disclosures

An entity must also disclose:

 the existence and amounts of restrictions on title, and
property, plant and equipment pledged as security for liabilities;
 the amount of expenditures recognised in the carrying amount
of an item of property, plant and equipment in the course of its
construction;
 the amount of contractual commitments for the acquisition of
property, plant and equipment; and
 if it is not disclosed separately in the statement of
comprehensive income, the amount of compensation from third
parties for items of property, plant and equipment that were
impaired, lost or given up that is included in profit or loss.

Chapter
10-89
 Disclosures

When items of property, plant and equipment are stated at revalued

amounts the following must be disclosed:
 the effective date of the revaluation;
 whether an independent valuer was involved;
 the methods and significant assumptions applied in estimating
the items’ fair values
 the extent to which the items’ fair values were determined
directly by reference to observable prices in an active market or
recent market transactions on arm’s length terms or were
estimated using other valuation techniques
 for each revalued class of property, plant and equipment, the
carrying amount that would have been recognised had the assets
been carried under the cost model; and
 revaluation surplus, indicating the change for the period and any
restrictions on the distribution of the balance to shareholders.
Chapter
10-90
 Disclosures

IAS 16 encourages disclosure of the following information

as users of financial statements might find it to be useful.
 the carrying amount of temporarily idle property, plant
and equipment;
 the gross carrying amount of any fully depreciated
property, plant and equipment that is still in use;
 the carrying amount of property, plant and equipment
retired from active use and held for disposal; and
 when the cost model is used, the fair value of property,
plant and equipment when this is materially different
from the carrying amount.
Chapter
10-91
 Thank You

Chapter
10-92