PROPERTY PLANT AND EQUIPMENT,

INTANGIBLE ASSETS AND NATURAL

RESOURCES

1
PROPERTY PLANT AND EQUIPMENT
i) Nature of PPE
• Property, plant, and equipment is defined as
tangible assets that are held for use in
production or supply of goods and services,
for rentals to others, or for administrative
purposes;
• They are expected to be used during more
than one period.

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• Property, plant, and equipment therefore
includes land, building structures (offices,
factories, warehouses), and equipment
(machinery, furniture, tools). The major
characteristics of property, plant, and
equipment are as follows.
1) They are acquired for use in operations
and not for resale.
2) They are long-term in nature and usually
depreciated except land
3) They possess physical substance(a definite
size and shape). 3
 There are four major plant assets .
o Those are:-
land,
land improvements,
buildings, and
 machinery and equipment.

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• Plant assets need accounting treatment during:
– Computing the cost of plant assets
– Allocating the cost of plant assets against
revenue for the period.
– Recording the disposal of plant assets.
1) Cost of Plant Assets
• Most companies use historical cost as the basis for
valuing property, plant, and equipment.
• Companies recognize property, plant, and equipment
when the cost of the asset can be measured reliably
and it is probable that the company will obtain
future economic benefits.

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• In general, companies report the following costs as
part of property, plant, and equipment.
1. Purchase price: including import duties and
not-refundable purchase taxes, less trade
discounts and rebates.
2. Costs attributable to bringing the asset to the
location and condition necessary for it to be used
in a manner intended by the company.
• Companies value property, plant, and equipment in
subsequent periods using either the cost method or
fair value (revaluation) method.

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A) Cost of Land
When purchases land on which to build a new store,
land costs typically include;
1) The purchase price,
2) Closing costs, such as title to the land, attorney’s
fees, recording fees,
3) Costs incurred in getting land in condition for its
intended use(cost of surveying, clearing, grading,
draining, and landscaping) ,
4) Assumption of any liens, mortgages, on property
5) Any additional land improvement that have an
indefinite life (such as roadways, sewers, and
sidewalks etc)
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• Generally, land is part of property, plant, and
equipment.
• However, if the major purpose of acquiring & holding
land is speculative, a company more appropriately
classifies the land as an investment.
• Land is not subjected to depreciation because land
does not have a limited useful life.

• To illustrate, assume that Hayes Manufacturing

Company acquires real estate site at a cash cost of
$100,000.

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• The property contains an old warehouse that is razed
at a net cost of $6,000 ($7,500 in costs less $1,500
proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, $1,000, and the
real estate broker’s commission, $8,000. The cost of
the land is $115,000, computed as follows.
Land
Cash price of property $100,000
Net removal cost of warehouse 6,000
Attorney’s fee 1,000
Real estate broker’s commission 8,000
Cost of land $115,000

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B) Cost of Buildings
A building may be acquired in two ways. These are:-
1. Purchase of building already constructed
The cost of this building includes:
 Purchase price, Brokerage, Taxes, Attorney costs and
 Repair or renovation to prepare the building for use such
as writing, lighting, flooring, and wall covering.
2. Self Constructed
Cost of this building includes:-
 Building permits
 Architects and designers fees
 Material costs, Labor costs, Allocate overhead costs,
Cost of heating, lighting, and power, Depreciation on
machinery used to construct the asset
 Interest on money borrowed during construction
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
C) Cost of Equipment
• The term “equipment” in accounting includes
delivery equipment, office equipment, machinery,
furniture and fixtures, furnishings, factory
equipment, and similar fixed assets.
• The cost of such assets includes the purchase price,
freight and handling charges incurred, insurance on
the equipment while in transit, cost of special
foundations if required, assembling and installation
costs, and costs of conducting trial runs.
• NB: Some machinery and equipment are ready for
use at the time of purchase and such costs as
assembling, installation, and testing costs are not
incurred. 11
• EXAMPLE
• To illustrate, assume Milk Company purchases factory
machinery at a cash price of $50,000. Related
expenditures are for sales taxes $3,000, insurance during
shipping $500, and installation and testing $1,000.

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The cost of the factory machinery is:
Factory building
Cash price $50,000
Sales taxes 3,000
Insurance during shipping 500
Installation and testing 1,000
Cost of factory machinery $54,500
• Milki makes the following summary entry to record
the purchase & related expenditures:

Factory Machinery 54,500

Cash 54,500
(To record purchase of factory machinery 13
D. Cost of Land Improvements
 Land improvements are fixed assets that are
neither as permanent as the land nor directly
associated with the building. Expenditure for
these improvements is recorded as a debit to
“land improvements” accounts, and depreciate
over their life span. Example of land
improvements include:-
 Parking lot
 Driveways
 Fences
 Lighting Systems etc.
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 2) Depreciation of PPE
• Depreciation is the accounting 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.
• Cost allocation enables companies to properly
match expenses with revenues in accordance with
the matching principle.
• All plant assets except land are considered to be
depreciable plant assets. The cost (original cost) of
these assets is allocated to expenses each period in
the form of depreciation.

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 Factors in Computation of Depreciation
1. Original (Initial) Cost: The cost of plant asset consists of
all expenditures necessary to acquire it and to prepare the
asset for its intended use.
2. Salvage Value: It is the estimated value of the plant
assets at the time that it is to be retired from service or at
the time of sale of plant assets . It is also called residual
value, scrap value, or trade-in-value. if an asset is
expected to have a salvage value, the total cost of the plant
asset is not charged to depreciation. If a fixed asset has no
residual value, then its entire cost should be allocated to
depreciation.
3. Useful life: - Useful life is the expected productive life of
the asset. It is the period over which the asset is expected
to be used by the business entity. It may be expressed in
terms of time such as years and months, units of activity or
4. Depreciable cost: It equals to an asset's total cost
(acquisition cost) minus the asset’s expected residual value. It
is the amount that is spread over the asset’s useful life as
depreciation expense.
The part of the original cost of plant asset that is charged to
depreciation each period over it’s life . Therefore, the total
amount of depreciation expense assigned to an asset over its
useful life never exceeds the asset's depreciable cost.
Mathematically;
Depreciable cost=Original cost of plant asset –
Salvage value/residual value of plant assets
5. Depreciation expense: It is the portion of the cost of plant
asset that was used up during a given period or the amount of
cost allocated to expenses each accounting period. It is the
periodic cost expiration of plant assets.
6. Accumulated depreciation: As the asset becomes older,
the depreciation of one year is added to the depreciation of
previous years. This is called the accumulated depreciation or
aggregate depreciation. The accumulated depreciation at the end
of any year is equal to the accumulated depreciation at the start
of the year plus the depreciation charge for that year.
7.Book value/Carrying value: Book value simply
represents the portion of an asset's cost that has not been
allocated to expense over the useful life of the asset. It is the
cost of the asset remaining as a benefit for future years.
• Methods of Depreciation
Depreciation is generally computed using one of the
following methods:
1. Activity method (unit of production method)
2. Straight-line method
3. Diminishing (accelerated)-charge method
• A) Sum-of-years’-digits.
• B) Declining-balance method

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To illustrate these depreciation methods, assume
that Guta Coal Mines Corp. recently purchased an
additional crane for digging purposes. Pertinent
data concerning this purchase is as follows:
Cost of crane $500,000
Estimated useful life 5 years
Estimated residual value $50,000
Productive life in hours 30,000 hours

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1) Activity Method
This method assumes that depreciation is a function
of use or productivity, instead of the passage of time.
•If the Corp. uses the crane for 4,000 hours in the first
year, the depreciation charge is:

•
= $60,000

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2) Straight-Line Method
The straight-line method considers depreciation as
a function of time rather than a function of usage.

=
Annual depreciation = $90,000

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•Depreciation Schedule – Straight Line method

Date Cost Value of Accum. Book value

Depreciation Depreciation

Date of 500,000 0 0 500,000

Purchase
End of 1st Year 500,000 90,000 90,000 410,000

End of 2st Year 500,000 90,000 180,000 320,000

End of 3st Year 500,000 90,000 260,000 230,000

End of 4st Year 500,000 90,000 340,000 140,000

End of 5st Year 500,000 90,000 410,000 50,000

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 Diminishing-Charge Methods
The diminishing-charge methods provide for a
higher depreciation cost in the earlier years and
lower charges in later periods.
The justification for this method is that companies
should charge more depreciation in earlier years
because the asset is most productive in its earlier
years.
Companies use one of two diminishing-charge
methods: the sum-of-the-years’-digits method or the
declining-balance method.

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3) Sum-of-the-Years’-Digits: The sum-of-the-
years’-digits method results in a decreasing
depreciation charge based on a decreasing fraction
of depreciable cost (original cost less residual value).
Each fraction uses the sum of the years as a
denominator (5 + 4 + 3 + 2 + 1 = 15).
In this method, the numerator decreases year by
year, and the denominator remains constant (5/15,
4/15, 3/15, 2/15, and 1/15).

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Sum-of-Years’-Digits Depreciation Schedule – Crane
Yea Depreciation Remaini Depreciation Depreciat Book
r base ng Life Fraction ion Value, End
in Years Expense of Year

1 $450,000 5 5/15 $150,000 $350,000

2 450,000 4 4/15 120,000 230,000

3 450,000 3 3/15 90,000 140,000

4 450,000 2 2/15 60,000 80,000

5 450,000 1 1/15 30,000 50,000a

15 15/15 $450,000
a
Residual value

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4) Declining-Balance Method: The declining
– balance method (often referred to as the reducing
– balance method) utilizes a depreciation rate
(expressed as a percentage) that is some multiple of
the straight-line method.

Companies apply the constant rate to the declining

book value each year.
The process continues until the book value of the
asset equals its estimated residual value.

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Guta’s Corp. depreciation charges if using the
double-declining approach is as follows:
Year Book value of Rate on Depreciation Balance Book Value,
asset first of declining expense Accumula End of Year
year balancea ted
Depreciati
on
1 $500,000 40% $200,000 $200,000 $300,000
2 300,000 40% 120,000 320,000 180,000
3 180,000 40% 72,000 392,000 108,000
4 108,000 40% 43,200 435,200 64,800
5 64,000 40% 14,800b 450,000 50,000
a
based on twice the straight-line rate of 20% (90,000 ÷ 450,000 = 20%; 20%
X 2 = 40%).
b
limited to $14,800 because book value should not be less than residual
value.
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Capital and revenue Expenditures
 After plant assets are acquired there may be other
subsequent expenditures to be allocated
throughout it’s life. Those expenditures grouped in
to two based on it’s contribution toward asset’s
productive life, capacity and efficiency.
1. Capital expenditure
These are cash outlays that increases;
 the asset’s capacity or efficiency or
 that extend the asset’s useful life.
 Cont’d
 Capital expenditures are material in amount and
occurred infrequently
 Examples;
Additions (enlargement to the physical layout of
a plant asset ) it increases capacity of plant asset.
Debit to asset account.
Betterments / improvements / replacements
( increases operating efficiency of asset).debit to
asset account.
Extraordinary repairs/ major
repairs( increases or extends asset productive life
and debit to accumulated depreciation when
allocated)
 Cont’d
2.Revenue Expenditure
 This is cash outlays in order to maintain the normal
operating efficiency of the asset. It is only helps to
generate current period revenue.
 it does not increase asset’s productive life, capacity
and efficiency.it debits to maintenance expense.
 It usually small amounts and occurred frequently.
Examples
• Ordinary repairs, maintenance, lubrication, cleaning and
inspection necessary to keep an asset in good working condition.

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For example, $300 paid for a tune-up/service
of a delivery truck is recorded as follows:
Repair and Maintenance Expense 300
Cash 300
For example, the service value of a delivery truck
might be improved by adding a $5,500 hydraulic lift
to allow for easier and quicker loading of cargo.

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iv) Disposal (De recognition) of PPE
 Plant asset which are not useful may be
discarded, sold or applied towards purchase
of another asset. Reason for disposal of plant
asset may be due to;
Wear out of the asset,
Obsolescence of the asset
Change in company’s business plan
Damage due to fire or accident etc.
• Then, the company should remove all
accounts related to the retired asset.
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Ways of disposal of plant assets
1. Discarding plant assets
Conditions to be satisfied
* The asset is no longer useful to the business and
* The asset has no market value.
If plant assets have been fully depreciated there is no loss to be
recognized.
Journal entries prepared on the date of disposal
Accumulated depreciation………………..*****
cost of plant asset……..……..*****
Example: Assume that an item of equipment acquired at a cost
of Br 6, 000.00 becomes fully depreciated at December 31, the
end of the preceding fiscal year. now it is discarded as it is worth
less on March 24, 2003. 34
B)Sale of Plant Assets
Companies record depreciation for the period of time
between the date of the last depreciation entry and the
date of sale.
To illustrate, assume that Birra Company recorded
depreciation on a machine costing $18,000 for nine
years at the rate of $1,200 per year. If it sells the
machine in the middle of the tenth year for $7,000,
Birra records depreciation to the date of sale as:
Depreciation Expense ($1,200 x ½) 600
Accumulated Depreciation - 600
Machinery

The entry for the sale of the asset then is: 35

Cash 7,000
Accumulated Depreciation
Computation of gain on disposal
11,400
Machinery 18,000
Gain on Disposal of Machinery 400

Cost of Machinery $18,000

Less: Accumulated depreciation 11,400
Book value at date of disposal 6,600
Proceeds from sale 7,000
Gain on disposal 400
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 Illustration
Example: - Assume that the equipment was bought at Br.57, 000;
Salvage value Br.3, 000, and Estimated useful life is six years.
The company use Straight line depreciation methods. The
equipment sold on December 31year 4.
Required; prepare journal entries to remove asset account and
accumulated depreciation under the following three cases;
a) if it was sold for Br.25,000
b) if it was sold for Br.19,000
c) if it was sold for Br. 21,000

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Involuntary Conversion
Sometimes, an asset’s service is terminated through
some type of involuntary conversion such as fire,
flood, theft, or condemnation.
Companies report the difference between the
amount recovered (e.g., from a condemnation
award or insurance recovery), if any, and the asset’s
book value as a gain or loss. They treat these gains
or losses like any other type of disposition.

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v) Internal Control of Plant Assets

• Because of their dollar value and long-term

nature, it is important to design and apply
effective internal controls over fixed assets. Such
controls should begin with authorization and
approval procedures for the purchase of fixed
assets. Controls should also exist to ensure that
fixed assets are acquired at the lowest possible
costs.
• One procedure to achieve this objective is to
require competitive bids from preapproved
vendors.
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• As soon as a fixed asset is received, it should be
inspected and tagged for control purposes and
recorded in a subsidiary ledger.
• Fixed assets should be insured against theft, fire,
flooding, or other disasters. They should also be
safeguarded from theft, misuse, or other damage.

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vi) Presentation of PPE on the Balance Sheet
• A company should disclose the basis of valuation
– usually historical cost – for property, plant, and
equipment, along with pledges, liens, and other
commitments related to these assets.
• When depreciating assets, a company credits a
valuation account, normally called Accumulated
Depreciation.

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2.2. Intangible Assets
i) Nature and Classification of Intangible Assets
• Long-term assets that are used in the operations of
the business but do not exist physically are called
intangible assets.
• May be acquired through innovative, creative
activities or through the purchase of the rights from
another company.
Typical Examples of Intangible Assets
1) Marketing-Related Intangible Assets
• Companies primarily use marketing-related
intangible assets in the marketing or promotion of
products or services.
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43
Examples
• Trademarks or trade names, newspaper mastheads, Internet
domain names, and non-competition agreements.
• If a company purchases the trademark or trade name, its cost is
the purchase price,
• If a company develops and maintains the trademark or trade
name, any costs related to these activities are expensed as
incurred. Because trademarks and trade names have indefinite
lives, they are not amortized
2) Customer-Related Intangible Assets
• Customer-related intangible assets result from interactions with
outside parties.
Examples include customer lists, order or production backlogs etc.
3) Artistic-Related Intangible Assets
• Artistic-related intangible assets involve ownership rights to
plays, literary works, musical works, pictures, photographs, and
video and audiovisual material.
• Eg; Copyrights protect these ownership rights. 44
4) Contract-Related Intangible Assets
• Contract-related intangible assets represent the value of
rights that arise from contractual arrangements. Examples
are franchise and licensing agreements, construction
permits, broadcast rights, and service or supply contracts.
5) Technology-Related Intangible Assets
• These are related to innovations or technological
advances. Examples are patented technology and trade
secrets granted by a governmental body.
• The initial cost of a patent is the cash or cash equivalent
price paid to acquire the patent.
• In many countries, a patent gives the holder exclusive
right to use, manufacture, and sell a product or process for
a period of 20 years without interference or infringement
by others. 45
6) Good Will
• Goodwill represents the value of all favorable attributes
that relate to a company that is not tied to any other
specific asset. These attributes include exceptional
management, desirable location, good customer
relations, skilled employees, high-quality products, and
harmonious relations with labor unions.
• It is often called “the most intangible part of the intangible
assets” because it is identified only with the business as
a whole. The only way to sell goodwill is to sell the
business.
• Companies record goodwill only when an entire business
is purchased. In that case, goodwill is the excess of cost
over the fair value of the net assets (assets less
liabilities) acquired.
• Goodwill is not amortized because it is considered46 to
ii) Recognition & Measurement at the time of
Acquisition
• Companies record at cost intangibles purchased from
another party.
• Cost includes all acquisition costs plus expenditures
to make the intangible asset ready for its intended
use.
• Typical costs include purchase price, legal fees, and
other incidental expenses like title defending costs
incase of lawsuits if any.
• Sometimes companies acquire intangibles in
exchange for shares or other assets. In such cases,
the cost of the intangible is the fair value of the
consideration given or the fair value of the intangible
received, whichever is more clearly evident. 47
• Essentially, the accounting treatment for purchased
intangibles closely parallels that for purchased tangible
assets.
iii) Measurement after Acquisition
Amortization of Intangibles
• The allocation of the cost of intangible assets in a systematic
way is called amortization. Intangibles have either a limited
(finite) useful life or an indefinite useful life.
• Only the costs of intangible assets with limited life is subject
to amortization
• To record amortization, Amortization Expense is debited
and the specific intangible asset is credited. A separate
contra asset account is
usually not used for intangible assets. 48
 Illustration
National Labs purchases a patent at a cost of
$60,000 with a remaining legal life of the patent
of 12 years. If the useful life of the patent is
eight years, the annual amortization expense is
$7,500 ($60,000 ÷ 8).
Patent Expense is classified as an operating
expense in the income statement. The entry to
record the annual patent amortization is:
Date Account Titles and Explanation Debit Credit

Dec. 31 Amortization Expense 7,500

Patents
7,500
To record patent amortization.
iv) Presentation of Intangible Assets on the
Balance Sheet
• The reporting of intangible assets is similar to the
reporting of property, plant, and equipment. However,
contra accounts may not be shown for intangibles on
the statement of financial position.
• On the income statement, companies should present
amortization expense and impairment losses and
reversals for intangible assets other than goodwill
separately in net income (usually in the operating
section), usually presented as a separate line item.

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2.3. Natural Resources
i) Nature of Natural Resources
• Natural resources are plant assets that are
extracted from the earth or naturally available on
the earth.
• Example: petroleum, minerals, and timberlands.
• Natural resources can be further subdivided into
two categories: (1) biological assets such as
timberlands, and (2) mineral resources such as oil,
gas, and mineral mining.
• The accounting and reporting requirements for
biological assets such as timberlands use a fair
value approach.
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• Accounting profession uses the term depletion for
the process of allocating the cost of mineral
resources.
• Normally, companies compute depletion (often
referred to as cost depletion) on a units-of-
production method (an activity approach). Thus,
depletion is a function of the number of units
extracted during the period.
• In this approach, the total cost of the mineral
resource less residual value is divided by the
number of units estimated to be in the resource
deposit, to obtain a cost per unit of product.

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• To compute depletion, the cost per unit is then
multiplied by the number of units extracted.
ii) Recognition and Measurement
• Natural resources are classified as a type of fixed
asset.
• The cost of a natural resource includes the cost of
obtaining and preparing it for use.
• For example, Purchase price, Exploration costs,
Development costs, legal fees incurred in
purchasing a natural resource are included as part
of its cost.
• If the resource is already discovered, cost is the
price paid for the property.
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 Depletion determination
Step 1. Determine the depletion rate as:
Depletion Cost = (Cost
 Total Depletion
+ Restoration Costs -
 Estimated Cost per
Residual Value ) Units Unit
Step 2. Multiply the depletion rate by the
quantity extracted from the resource during
the period

Number of
Depletion Depletion
Units
Cost per Expense
Extracted
Unit
and Sold
• As natural resources are harvested or mined, a
portion of their cost is debited to an asset account
extracted and reduction of the carrying value of
Natural resource is Credited to Accumulated
depletion account.
• When the extracted asset is sold, cost of good sold
is debited & inventory is credited.
Example: MaClede Co. acquired the right to use
1,000 acres of land in South Africa to mine for silver.
The lease cost is €50,000, and the related
exploration costs on the property are €100,000.
Intangible development costs incurred in opening the
mine are €850,000. Total costs related to the mine
before the first ounce of silver is extracted are,
55
therefore, €1,000,000.
MaClede estimates that the mine will provide
approximately 100,000 ounces of silver.
Depletion Cost per Unit = €1,000,000 ÷ 100,000 =
€10 per ounce
• If MaClede extracts 25,000 ounces in the first year,
then the depletion for the year is €250,000 (25,000
ounces x €10). It records the depletion as follows.

Inventory (Silver) 250,000

Accumulated Depletion 250,000

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iii) Presentation of Natural Resources on the
Balance sheet
• A company should disclose the basis of valuation –
usually historical cost – for property, plant,
equipment, and mineral resources along with
pledges, liens, and other commitments related to
these assets.

57
• Illustration: Medroc Company invests $5 million in
a mine estimated to have 10 million tonnes of coal
and a $200,000 residual value. $500,000 will be
required to restore the site after ore has been
extracted. In the first year, 800,000 tonnes of coal
are extracted and sold.
• Required
A) Compute the depletion of the first year and
prepare journal entry?

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End of Chapter Two
Thank you

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