Major Categories of Plant Assets:

1. Tangible Assets:

The term tangible denotes physical substance as exemplified by Land, a

Building, or a Machine.

2. Intangible Assets:

The term intangible is used to describe assets that are used in operation of
the business, but have no physical substance and are noncurrent. Examples
include Patents, Goodwill Copyrights and Trademarks.

3. Natural Resources:

A site acquires for the purpose of extracting or removing some valuable

resources such as oil, minerals are classified as natural resources, not as
land.

Determining the cost of Plant Assets:

The cost of the plant asset includes all expenditures that are reasonable and
necessary for getting asset to the desired location and ready for use. For
example Sales tax on the purchase price, transportation charges, insurance
in transit and installation charges.

List Price xxx

Less: Trade Discount (xxx)

Invoice Price xxx

Add:

Sales tax xxx

Transportation charges xxx

Insurance in Transit xxx

Cost of installation xxx

Total Cost xxx

Capital Expenditure and Revenue Expenditure:

Expenditure for the purchase or expansion of plant assets are called

capital Expenditure and are recorded in asset accounts. Expenditure for
ordinary maintenance, repair and all those expenses from which benefits
could be used up in current period are called revenue expenditure.

Depreciation:

Depreciation is the allocation of the cost of a tangible plant asset to

expense in the period in which services are received from the asset. In
short the basic purpose of depreciation is to achieve the matching
principle that is to offset the revenue of an accounting period with the
cost of the goods and services being consumed in the effort to generate
the revenue. Depreciation is a non cash expense.

Book Value:

Plants are shown in the balance sheet at their book values. The book
value of a plant asset is its cost minus the related accumulated
depreciation. Accumulated depreciation is a contra asset account
representing that portion of the asset’s cost that has already been
allocated to expense.

Cost xxx

Less: Accumulated Depreciation ( xxx)

Book Value xxx

Factors in Computing Depreciation:

1. Cost:

The cost of the plant asset includes all expenditures that are reasonable and
necessary for getting asset to the desired location and ready for use.

2. Salvage Value:
Salvage Value is a residual value or scrap value, is an estimate of the asset’s
value at the end of its benefit period.

3. Useful Life:

The useful life of a plant asset is the length of time it is productively used
in a company’s operation. Useful life is also called service life might not be
as long as the asset’s total productive life.

Methods of Computing Depreciation:

1. Straight Line Method:

Straight line charges the same amount of expense to each period of the
asset’s useful life.

2. Units of Production Method:

Units of production depreciation charge a varying amount to expense for

each period of an asset’s useful life depending on its usage.

Depreciation per unit =

Depreciation Expense = Depreciation per Unit x Units Produced in period

3. Declining Balance Method:

An Accelerated depreciation method yields larger depreciation expense in

the early years of an asset’s life and less depreciation in late year.

Depreciation Expense= Remaining book value x Accelerated depreciation

rate

4. Sum of Years Digit Method:

Under this method, the amount of the depreciation to be written off each
year is calculated by the formula:
 x depreciable cost of the asset

Q: XYZ Co. acquired a computer on January 1, 2007 at a cost of Rs.50,000;

its operating life was estimated as 5 years with salvage value of Rs.5,000.
The Co. accounting year ends on Dec 31st.

Required:

Calculate the Depreciable Cost and Depreciation charged on computer for

the years ended Dec 31st, 2007 and 2008 under each of the following method
separately:

i) Straight Line
ii) Diminishing Balance
iii) Sum of Year Digits

Q: On January 1st 2008, Apex Co. bought five machines at a list price of
Rs.40,000 each with a trade discount of 5%. The terms of payment 2/10,
n/30.The Co. made the payment within discount period. Additional expense
incurred and paid in cash were

1. Freight charges Rs.10,400

2. Paid interest on the money borrowed from the bank for the purchase of
machine Rs.200

3. Installation and testing charges Rs.23,200

4. Insurance in transit Rs.15,700

5. Sales Tax 8% of Invoice price

6. Some parts damaged during installation and get repaired for Rs.4,300

It is estimated that these Machines will have a useful life of 15 years with a
salvage value of Rs.10,700.

Required:

Calculate the Cost and Depreciation charged for the years 2008 and 2009
under each of the following method separately:
i) Straight Line
ii) Diminishing Balance
iii) Sum of Year Digits