PROPERTY PLANT AND EQUIPMENT,

INTANGIBLE ASSETS AND NATURAL

RESOURCES

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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).
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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. 5
 There are four major plant assets .
o Those are:-
land,
land improvements,
buildings, and
 machinery and
equipment.

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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
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
land is $115,000, computed as follows.
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:-
 Material costs, Labor costs, Allocate overhead
costs, Cost of heating, lighting, and power,
Depreciation on machinery used to construct the
asset
 Architects and designers fees
 Building permits
 Interest on money borrowed during construction 10
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.
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• 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 $54,500
• Milki makes the following summary entry to
machinery
record the purchase & related expenditures:
Factory Machinery 54,50
0
Cash 54,500
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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.
• For the purpose of depreciation, plant assets are
classified into:
• depreciable and non-depreciable plant
assets.
• 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. 15
 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
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.
Mathematically; Book value = Original cost –
• 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 Accuml. 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 Depreciati Remain Depreciation Depreci Book
r on base ing Life Fraction ation Value,
in Expense End of
Years Year
1 $450,000 5 5/15 $150,00 $350,000
0
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 $450,00
0
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:
Yea Book value Rate on Depreciation Balance Book
r of asset first declinin expense Accumul Value,
of year g ated End of
balancea Deprecia Year
tion
1 $500,000 40% $200,000 $200,00 $300,000
0
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. 28
 B) Capital Expenditure and
Revenue Expenditure
Once a fixed asset has been acquired and
placed in service, costs may be incurred for
ordinary maintenance and repairs.
Costs that benefit only the current period are
called revenue expenditures. Costs that
improve the asset or extend its useful life are
capital expenditures.
A) Ordinary Maintenance and Repairs: Costs
related to the ordinary maintenance and
repairs of a fixed asset are recorded as an
expense of the current period.
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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
 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 of
a delivery truck is recorded as follows:
Repair and Maintenance 300
Expense
For Cash
example, the service value of a delivery300
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
 Plantasset 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 assents
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.
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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 600
½)
Accumulated Depreciation - 60
Machinery 0
The entry for the sale of the asset then is:
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Cash 7,000
Accumulated Depreciation
Computation of gain on disposal 11,400
Machinery 18,00
0
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.
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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44
Examples
• Trademarks or trade names, newspaper
mastheads, Internet domain names, and non-
competition agreements.
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.45
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.
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• 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.
6) Good Will
• Goodwill represents the future economic
benefits arising from the other assets acquired
in a business combination that are not
individually identified and separately
recognized.
• 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.
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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.
• 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. 48
• 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.
• 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.
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 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. 52
• 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 =
 Total Depletion
(Cost + Restoration
Costs - Residual  Estimated Cost per
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
and then sold, a portion of their cost is
debited to an expense account called
depletion expense.

Depletion Cost per Unit =

• To compute depletion, the cost per unit is

then multiplied by the number of units
extracted.

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For 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, therefore,
€1,000,000.

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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
Depletion as follows.
expense 250,00
0
Accumulated Depletion 250,00
0
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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.

59
• 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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