Chapter- 2

Plant Assets,
Natural Resources &
Intangible Assets
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Nature of Property, Plant and Equipment (PPE)
Plant assets are resources that have three
characteristics
A physical substance (a definite size and shape)
Used in the operations of a business and
Not intended for sale to customers
They are also called fixed assets
These assets are expected to provide
services to the company for a number of
years
Except for land, plant assets decline in service
potential
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over their useful lives
Determining the cost of PPE
– In general, companies record plant assets
at cost
– Cost consists of all expenditures
necessary to acquire the asset & make
it ready for its intended use
– Thus, all reasonable & necessary costs
incurred to get an asset in position &
condition ready for use may be included as
part of the cost of the asset
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LAND: Companies often use land as a site for a
manufacturing plant or office building
• The cost of land includes
(1) The cash purchase price,
(2) Closing costs such as title and attorney’s fees,
(3) Real estate brokers’ commissions, and
(4)Accrued property taxes and other liens
assumed by the purchaser
For example, if the cash price is $50,000 and the
purchaser agrees to pay accrued taxes of $5,000, the
cost of the land is $55,000. cost of land = purchase
price + accrued property tax
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• Companies record as debits (increases) to the Land
account all necessary costs incurred to make land
ready for its intended use.
Land.....................55,000
cash............................55,000
• When a company acquires vacant land, these
costs include expenditures for clearing, draining,
filling, and grading
• Sometimes, the land has a building on it that must be
removed before construction of a new building.
• In this case, the company debits to the Land
account all demolition and removal costs, less any
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EQUIPMENT
• Equipment includes assets used in
operations, such as office furniture, factory
machinery, delivery trucks, and airplanes.
• The cost of equipment, such as vehicles,
consists of the cash purchase price, sales
taxes, freight charges, and insurance during
transit paid by the purchaser.
• It also includes expenditures required in
assembling, installing, and testing the unit.
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Example:
Assume that ABC Co. orders a machine at a list price
of Br. 10,000 with terms of 2/10, n/30, sales tax of Br.
588 must be paid, as well as fright charges of Br.
1,250. Transportation form the rail road station to the
factory costs Br. 150 & installation labor amounts, to
Br. 400. One employee with a salary of Br. 800
operates the machine and the salary paid for the first
month of operation was Br. 800. Cost of maintenance
materials needed during the first month of operation
was Br.25. Repair cost of Br. 2,000 was paid for
damage occurred during unpacking and installing.
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List price of the Machine 10,000
Less cash discount (2% x Br. - 200
10,000)
Net cash price 9,800
Sales tax
+ 588
Freight + 1,250
Transportation + 150
Installation labor + 400
Cost of machine Br
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12,188
The acquisition of the machine is then recorded as
follows:
Machinery………………………………12,188
Salary expense …………………………800
Maintenance expense …………………25
Loss due to employee negligence …… 2,000
Cash …………………
15,013

Machinery………………12,188
10:00 AM Cash …………………12,188
Lump-sum acquisition
– A lump-sum purchase occurs when more
than one type of assets is acquired in a
single transaction
– The lamp-sum purchase price then must
be allocated equitably to the individual
components
– The most common method of allocation is
based on the relative fair market
value of the individual assets
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To illustrate, assume Delta Co. acquired Land, Building
& Machinery from ABC Co. for Br. 1,000,000. A
professional appraiser valued each of the assets at the
appraised fair mkt. Prices: Land, Br. 800,000; Building
Br. 560,000 & Machinery Br. 240,000. The Br. 1,000,000
is allocated among the assets as follows:
Asset Appraised Fair Purchase Price Cost Allocated to
Market value A s s ets
L an d Br. 800,000. 50% x 1,000,000. Br. 500,000.
B u ild in g 560,000. 35% x 1, 000,000. 350,000.
M ach in ery 240,000. 15% x 1, 000,000. 150,000.
Total 1,600,000. 1,000,000.
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The entry to record the lump-sum
purchase
Land ………………………… 500,000
Building …………………….. 350,000
Machinery ………………….. 150,000
Cash …………………1,000,000

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Depreciation of PPE
• Depreciation is the process of allocating to expense the
cost of a plant asset over its useful (service) life in a
rational and systematic manner
• Cost allocation enables companies to properly match
expenses with revenues in accordance with the
expense recognition principle
• It is important to understand that depreciation is a
process of cost allocation. It is not a process of
asset valuation
• Depreciation does not apply to land because its
usefulness and revenue-producing ability generally
remain intact over time. Thus, land is not a
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depreciable asset.
 Causes of Depreciation
a) Physical Deterioration – occurs from wear & tear
while in use as well as from the action of the weather
(exposure to sun, wind, and other climatic factors).
b) Obsolescence (Function Depreciation) - is the
process of becoming out of date before the assets
physically wears out
– In today’s rapidly advance in technology,
obsolescence is a more important consideration
than physical deterioration.
– Assets like computers, other electronic equipment &
airplanes may become obsolete before they
physically deteriorate.
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Factors in Computing Depreciation
Three factors affect the computation of
depreciation:
− Cost - is the initial cost incurred in acquiring the
asset. Cost is measured in accordance with the
cost principle of accounting.
− Useful Life - is an estimate of the expected
productive life, also called service life, of the
asset.
− Salvage Value - also called scrap or residual
value is an estimate of the asset's value at the
end
10:00 AMof its useful life.
 Depreciation Methods
• Depreciation is computed using one of the following different
methods:
1. Straight line method
2. Units of activity method
3. Declining balance method
• Each method is acceptable under IFRS. Management selects
the method(s) it believes to be appropriate.
• Once a company chooses a method, it should apply it
consistently over the useful life of the asset. Consistency
enhances the comparability of financial statements.
• Depreciation affects the statement of financial position through
accumulated depreciation and the income statement
through
10:00 AM depreciation expense
1. Straight - Line Method
– Companies expense the same amount of
depreciation for each year of the asset’s
useful life.
– It is measured solely by the passage of
time
– To compute depreciation expense under the
straight-line method, companies need to
determine depreciable cost
– Depreciable cost is the cost of the asset
10:00less
AM its residual value
•

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Year Computation Annual End of Year
Depreciab Depreciati Depreciation
le cost on Rate Cost
Accumula Book
ted Value
Depreciat
ion
1st 12,000 20 % Birr 2,400 Birr 2,400 Birr 10,600
2nd 12,000 20 % Birr 2,400 Birr 4,800 Birr 8,200
3rd 12,000 20 % Birr 2,400 Birr 7,200 Birr 5,800
4th 12,000 20 % Birr 2,400 Birr 9,600 Birr 3,400
5th 12,000 20 % Birr 2,400 Birr 12,000 Birr 1,000

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Year Computation Annual End of Year
Depreciab Depreciati Depreciation
le cost on Rate Cost
Accumula Book
ted Value
Depreciat
ion
1st 12,000 20 %*9/12 Birr 1,800 Birr 1,800 Birr 11,200
2nd 12,000 20 % Birr 2,400 Birr 4,200 Birr 8,800
3rd 12,000 20 % Birr 2,400 Birr 6,600 Birr 6,400
4th 12,000 20 % Birr 2,400 Birr 9,000 Birr 4,000
5th 12,000 20 % Birr 2,400 Birr 11,400 Birr 1,600
6th 12,000 20 %*3/12 600 12,000 1,000

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• If the asset had been acquired during the
year, on April 1, it would have been in use for
only 9 months, or 9/12 of a year.
• Then, the depreciation expense for the Nine
months would be computed as follows:
• Depreciation on December 31
= Br. 12,000.00 x 20% x 9/12 =
1,800

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2. Unit of Activity Method
• This method is used for assets whose useful
life is limited by physical wear- and -tear rather
than obsolescence
• The asset life is expressed in expected units of
output, such as hours, miles, or number of
units
• It is based on the assumption that an asset
depreciates only as it is used
• Thus the asset life is expressed in expected
units
10:00 AM of output such as miles
•

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• In the units-of-output method, a fixed amount of depreciation is assigned to
each unit of output produced or each unit of capacity used by the plant
assets.
Year 1 depreciation exp. = Br. 0.12 x 15,000miles = Br. 1,800
The units-of-activity depreciation schedule, using assumed mileage, is
Year Computation Annual End of Year
as follows.
Depreciatio
Unit of Depreciatio n Cost Accumulated Book Value
Activity n cost/Unit Depreciation

1st 15,000 Birr 0.12 Birr 1,800 Birr 1,800 Birr 11,200
2nd 30,000 Birr 0.12 Birr 3,600 Birr 5,400 Birr 7,600
3rd 20,000 Birr 0.12 Birr 2,400 Birr 7,800 Birr 5,200

4th 25,000 Birr 0.12 Birr 3,000 Birr 10,800 Birr 2,200
5th 10,000 Birr 0.12 Birr 1,200 Birr 12,000 Birr 1,000
• This method is easy to apply for assets purchased mid-year.
• In such a case, the company computes the depreciation using the
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productivity of the asset for the partial year.
3. Declining Balance Method
• The declining-balance method produces a decreasing
annual depreciation expense over the asset’s useful
life
• The method is so named because the periodic depreciation
is based on a declining book value (cost less
accumulated depreciation) of the asset
• With this method, companies compute annual depreciation
expense by multiplying the book value at the
beginning of the year by the declining-balance
depreciation rate
• The depreciation rate remains constant from year to
year, but the book value to which the rate is applied
declines
10:00 AM each year
• A common declining-balance rate is double
the straight-line rate.
• The method is often called the double-
declining-balance method. To illustrate,
consider the previous e.g. of the Br. 13,000
delivery truck.
• To depreciate the truck by the double
declining balance method, we double the
straight-line rate of 20% & apply the doubled
rate of 40% to the book value at the
beginning
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 The depreciation schedule under this method is as
Year Computation
follows.
Annual End of Year
BV Beg Depreciat Depreciati Accumulated Book
of the ion Rate on Cost Depreciation Value
year
1st 13,000 0.40 Birr 5,200 Birr 5,200 Birr 7,800
2nd 7,800 0.40 Birr 3,120 Birr 8,320 Birr 4,680
3rd 4,680 0.40 Birr 1,872 Birr 10,192 Birr 2,808
4th 2,808 0.40 Birr 1,123 Birr 11,315 Birr 1,685
5th 1,685 0.40 Birr 685 Birr 12,000 Birr 1,000
• Since the declining-balance method produces higher
depreciation expense in the early years than in the later
years, it is considered an accelerated-depreciation
method.
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 The depreciation schedule under this method is as
Year Computation
follows.
Annual End of Year
BV Beg Depreciat Depreciati Accumulated Book
of the ion Rate on Cost Depreciation Value
year
1st 100,000 0.40 Birr 40,000 Birr 40000 Birr 60000
2nd 60000 0.40 Birr 24000 Birr 64000 Birr 36000
3rd 36000 0.40 Birr 14400 Birr 78400 Birr 21600
4th 21600 0.40 Birr 8640 Birr 87040 Birr 12960
5th 12960 0.40 Birr 2960 Birr 90000 Birr
• Since the declining-balance method produces 10,000
higher
depreciation expense in the early years than in the later
years, it is considered an accelerated-depreciation
method.
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 COMPARISON OF METHODS
Year Straight line Unit of Activity Declining
Balance
1st Birr 2,400 Birr 1,800 Birr 5,200
2nd 2,400 3,600 3,120
3rd 2,400 2,400 1,872
4th 2,400 3,000 1,123
5th 2,400 1,200 685
Birr 12,000 Birr 12,000 Birr 12,000
Annual depreciation varies considerably among the
methods, but total depreciation is the same for the
five-year period under all three methods
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 Expenditures During Useful Life
Capital expenditures and revenue expenditures
• During the useful life of a plant asset, a company may incur costs
for ordinary repairs, additions, or improvements
• Ordinary repairs are expenditures to maintain the operating
efficiency and productive capacity of the asset
• They usually are fairly small amounts that occur frequently.
Examples are oil changes, the painting of buildings, and the replacing
of worn-out gears on machinery. Companies record such repairs as
debits to Maintenance and Repairs Expense as they are incurred.
Maintenance and Repairs Expense-----1000
cash--------------------1000
• Because they are immediately charged as an expense against
revenues, these costs are often referred to as revenue expenditures
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• In contrast, additions and improvements are costs
incurred to increase the operating efficiency,
productive capacity, or useful life of a plant asset
• They are usually material in amount and occur
infrequently
• Additions and improvements increase the company’s
investment in productive facilities.
• Companies generally debit these amounts to the
plant asset affected. They are often referred to as
capital expenditures
Machinery------------100000
cash--------------------------100000
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 Difference
Capital Expenditure
 Increases the operating efficiency, productivity Capacity, or
extend the useful life of the plant assets
 Material in amount and occur infrequently
 Benefits more than one accounting period
 Such expenditures are debited to the asset account or to the
related accumulated depreciation account
Revenue Expenditure
 Merely maintains its existing condition or restore the asset
to good working order
 Fairly small amounts that occur frequently
 primarily benefits the current accounting period.
 Such costs are debited to an expense account
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 Revision of periodic depreciation
 When SV and/or BV are revised based on
currently available information or
incurring capital expenditures
 revise periodic depreciation using:
 revised remaining economic life and/or
salvage value and
 book value of the plant asset at the
time of revision

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 Example
On January 1, 2000 ABC Company purchased a
delivery truck for $42,000. At the time of
purchase it was thought that the truck would last
six years, with salvage value of $3,000, and it was
depreciated accordingly on the straight-line basis.
At the beginning of 2003, it is estimated that the
asset will last for four more years with a salvage
value of $2,500.
Required: Determine revised depreciation charge
for 2003
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Annual Depreciation = cost- salvage value
useful life

Annual Depreciation= $42,000-3000

6

Annual Depreciation = $6,500

Accumulated Depreciation on the date of revision

= $6,500*3= $19,500

Book value on the date of revision = $42,000-19,500= $22,500

Revised annual Depreciation= $22,500- 2,500 = $5,000

4

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 Example
• To Illustrate, assume that a machine costing Br. 50,000
has no estimated residual value and an estimated useful
life of 10 years. Assume also that the machine has been
depreciated for 6 years by the straight-line method.
• At the beginning of the seventh year, an extra ordinary
repair of Br. 11,500 increases the according useful life of
the machine to 7 years (instead of four).

What is the annual depreciation for the remaining 7 years?

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 Cost of machine --------------------------------------------- Br.
50,000
Less: Accumulated Depreciation Balance:
Accumulated Depreciation for 6 years (Br.5, 000x6)
Br.30,000
Deduct: debit due to extra ordinary repairs 11,500
Balance of Accumulated depreciation ----- 18,500
Revised Book Value of machine after extra ordinary repair
31,500
Annual Depreciation (31,500 ÷ 7, years remaining useful life)
4,500

Computation of revised depreciable cost:

20,000
10:00 AM + 11,500 - 0 = 31,500 ÷ 7 years = 4,500
 Example two
• Assume that Haben Co. makes a Br. 10,000 major
repair to factory machinery. This capital
expenditure increases the remaining useful life of
the machine to 5 years.
• In addition, the salvage value is expected to be
Br. 4,000. The book value of the factory machine
prior to the major repair is Br. 100,000.
What is the new annual depreciation for the
remaining five years of useful life Under the
straight-line method?
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Book value prior to capita expenditure --------------- Br. 100,000
Add: Cost of capital expenditure ----------------------- 10,000
Book value after capital expenditure -------------------- 110,000
Less: New estimated salvage value -------------------- 4,000
Revised depreciable cost --------------------------------- 106,000
Remaining useful life -------------------------------------- ÷ 5 yrs.

Revised Annual depreciation Br. 21,200

Depreciation Expense -------------------------- 21,200

Accumulated depreciation ------------ 21,200

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Effects of Error in Distinguishing between capital and Revenue expenditure

 Treating a capital expenditure as revenue expenditure or vice

versa creates errors in the Financial Statement.
 Suppose a company makes an extraordinary repair to equipment
and erroneously expenses this cost. It is a capital expenditure
that should have been debited to an asset account. This
accounting error overstates expenses and understates net
income on the income statement. On the balance sheet, the
asset (equipment) account is understated and so is
owner’s equity.

 On the other hand, capitalizing the cost of an ordinary repair

creates the opposite error. Expenses will be understated and net
income will be overstated on the income statement. The balance
sheet reports overstated amounts for assets and owners equity.
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 Plant Asset Disposals
Plant asset ceases/stops to serve a Company’s
needs. At the time of disposal (removal of the asset
from operation), it is necessary to determine the
book value of the plant asset
The asset may have become worn out, obsolete, or
for some other reason no longer useful to the
business, can be disposed of in three ways:
– Retirement – the plant asset is scrapped or
discarded
– Sale – the plant asset is sold to another party
– Exchange – an existing plant asset is traded in
 1. Retirement (Discarding) Plant Asset
• Under plant asset are no longer useful to the
business and have no residual or market value,
they are discarded.
• Example: Assume that ABC Company retires its
computer printers, which cost Br. 32,000. The
accumulated depreciation on these printers is also
Br. 32,000; the entry to record this retirement is:
Accumulated depreciation – printing equip. -----
32,000
Printing equip -----------------------------------------
32,000
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Assume that moon light company discards its
equipment, which cost Br. 18,000, and has
accumulated depreciation of Br. 14,000 at the date of
retirement. The entry to record the retirement is as
follows:
Accumulated depreciation equip. ----- 14,000
Loss on disposal ----------------------------- 4,000
Equipment --------------------------------
18,000
No loss cost=Accumulated Depreciation BV=0
Loss cost >Accumulated Depreciation BV >0
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2. Selling of Plant Assets
In a disposal by sale, the book value of the asset is
compared to the proceeds received for the sale.
If Proceeds received > BV => Gain will occur
If Proceeds received < BV => Loss will occur
If Proceeds received = BV => no Gain no Loss will occur
Example:
Assume that on July 1, 2020 ABC Trading Company sells Office
Furniture for Br 16,000 cash. The Office- furniture originally cost
Br. 60,000 and as of Jan 1, 2020, had accumulated depreciation
of Br. 41,000. The yearly depreciation is Br. 16,000.
• Depreciation for the first six months of 2020 is Br. 8,000. The
entry to record depreciation expense and update
accumulated depreciation to July 1 is as follows:
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July 1, Depreciation expense ------------------- 8,000
Accumulated depreciation
--------------- 8,000
(To record depreciation expense for the 1st six months of
2014)

The entry to record the sale and the gain on disposal is

as follows:
July 1. Cash --------------------------------- 16,000
Accumulated. Dep. ------------- 49,000
Office furn. ------------------------------ 60,000
Gain on Disposal ----------------------- 5,000
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(To record sale of office furniture at a gain)
 Loss on Disposal
• Assume that instead of selling the office furniture for
Br. 16,000, ABC trading sells it for Br. 9,000.
– In this case, a loss of Br. 2,000 is computed as
follows:
The entry to record the sale and the loss on disposal is as
follow:
July 1. Cash -------------------------- 9,000
Accumulated dep.-------- 49,000
Loss on disposal ---------- 2,000
Office furniture --------------------------- 60,000
(To record sales of office furniture at a loss)
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 No gain no Loss on Disposal
• Assume that instead of selling the office furniture for
Br. 16,000, ABC trading sells it for Br. 11,000.
– In this case, no gain no loss is computed
The entry to record the sale and the no gain no loss on
disposal is as follow:
July 1. Cash -------------------------- 11,000
Accumulated dep.-------- 49,000
Office furniture --------------------------- 60,000
(To record sales of office furniture at a no gain no loss)

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 Exchange of Plant 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
• To illustrate, Ramos Co. exchanges some of its equipment for land held by
Brodhead Inc. It is likely that the timing and amount of the cash flows
arising from the land will differ significantly from the cash flows arising from the
equipment
• As a result, both Ramos and Brodhead are in different economic positions.
• Therefore, the exchange has commercial substance, and the companies
recognize a gain or loss in the exchange. Because most exchanges have
commercial substance (even when similar assets are exchanged), we illustrate
only
10:00 AM this type of situation, for both a loss and a gain.
In a disposal by exchange, the book
value of the asset is compared to the
fair market value of the asset
If fair market value > BV => Gain will
occur
If fair market value < BV => Loss will
occur
If fair market value = BV => no Gain
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no Loss will occur
Loss Treatment
• To illustrate an exchange that results in a loss,
assume that 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 $ €64,000 less $ €22,000 accumulated
depreciation).
• Roland’s purchasing agent, experienced in the
second-hand market, indicates that the used trucks
have a fair value of €$ 26,000.
• In addition to the trucks, Roland must pay €17,000
for the semi-truck.
• Roland
10:00 AM computes the cost of the semi-truck as
 Fair value of used trucks € $ 26,000
Cash paid $ 17,000
Cost of semi-truck € $ 43,000
• Roland incurs a loss on disposal of plant assets of
€16,000 on this exchange. The reason is that the
book value of the used trucks is greater than the
fair value of these trucks. The computation is as
follows.
Book value of used trucks (€$ 64,000 - $ €22,000) €
$42,000
Fair value of used trucks $
26,000
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• In recording an exchange at a loss, three steps are
required: (1) Eliminate the cost and Acc.Dep of the
asset given up,
(2) Record the cost of the asset acquired, and
(3) Recognize the loss on disposal of plant assets.
Roland Company thus records the exchange on the loss
as follows
Equipment (new) 43,000
Accumulated Depreciation—Equipment 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old)
64,000
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Cash
Gain Treatment
• To illustrate a gain situation, assume that 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 €28,000). The fair value of
the old delivery equipment is €19,000.
• The cost of the new asset is the fair value of the old
asset exchanged plus any cash paid (or other
consideration given up). The cost of the new delivery
equipment is €22,000, computed as follows.
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 Fair value of old delivery equipment € $ 19,000
Cash paid $ 3,000
Cost of new delivery equipment $ 22,000
• A gain results when the fair value of the old
delivery equipment is greater than its book
value. For Mark Express, there is a gain of
€7,000 on disposal of plant assets, computed
as follows.
Fair value of old delivery equipment € $
19,000
Book value of old delivery equipment (€40,000 - €28,000) $
12,000
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 Mark Express Delivery records the exchange as
follows.
Equipment (new) 22,000
Accumulated Depreciation—Equipment (old) 28,000
Equipment (old) 40,000
Gain on Disposal of Plant Assets 7,000
Cash 3,000
(To record exchange of old delivery equipment for new delivery
equipment)
In recording an exchange at a gain, the following three steps are involved:
(1)Eliminate the cost and Acc.Dep of the asset given up
(2)Record the cost of the asset acquired, and
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 Natural Resources
• Common natural resources consist of standing timber and
underground deposits of oil, gas, minerals or other
natural resources
• Standing timber is considered a biological asset under
IFRS. In the years before they are harvested, the recorded
value of biological assets is adjusted to fair value each
period
• The allocation of the cost of natural resources to expense in a
rational and systematic manner over the resource’s useful life is
called depletion
• Generally, use the units-of-activity method to compute
depletion
• The reason is that depletion generally is a function of the
units
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extracted during the year
 Depletion Cost Per Unit = Total Cost -
•Salvage
Total Estimated Units
Periodic Depletion Expense = Depletion Cost Per Unit X Number of
Units Extracted & Sold

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The entry to record depletion expense for the
first year of operation is:
Dec. 31 Depletion expense ------- 4,000,000
Accumulated depletion -------------------- 4,000,000
Accumulated depletion, a contra asset account similar to
accumulated depreciation, is deducted from the cost of the
natural resources in the balance sheet as follows:
Coal Mines ------------------------------------ Br. 50,000,000
Less: Accumulated depletion ----------- 4,000,000
Br. 46,000,000

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 Intangible Assets
− Intangible assets are rights, privileges, and
competitive advantages that result from the
ownership of long-lived assets that do not possess
physical substance.
− Evidence of intangibles may exist in the form of
contracts or licenses. Intangibles may arise from the
following sources:
1. Government grants, such as patents, copyrights, licenses,
trademarks, and trade names.
2. Acquisition of another business, in which the purchase
price includes a payment for goodwill.
3. Private monopolistic arrangements arising from contractual
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agreements, such as franchises and leases.
 Accounting for Intangible Assets
• Companies record intangible assets at cost. Intangibles are
categorized as having either a limited life or an indefinite life.
• If an intangible has a limited life, the company allocates its cost
over the asset’s useful life using a process similar to
depreciation.
• The process of allocating the cost of intangibles is referred to as
amortization.
• The cost of intangible assets with indefinite lives should not be
amortized.
• To record amortization of an intangible asset, a company increases
(debits) Amortization Expense and decreases (credits) the
specific intangible asset.
• (Unlike depreciation, no contra account, such as Accumulated
Amortization,
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The following are some common intangibles.
1. Patent right
– A patent is an exclusive right issued by a patent office
that enables the recipient to manufacture, sell, or
otherwise control an invention for a specified number of
years from the date of the grant.
– These “legal lives” sometimes vary across countries, but
the legal life in many countries is 20 years. A patent is
non-renewable.
– But, companies can extend the legal life of a patent by
obtaining new patents for improvements or other
changes in the basic design.
– The initial cost of a patent is the cash or cash
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2. Copy right
– Governments grant copyrights, which give the
owner the exclusive right to reproduce and sell an
artistic or published work.
– Copyrights extend for the life of the creator plus a
specified number of years which can vary by
country but is commonly 70 years. The cost of a
copyright is the cost of acquiring and defending it.
– The cost may be only the small fee paid to a
copyright office. Or, it may amount to much more
if an infringement suit is involved.
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3. Trade mark and Trade Names
– A trademark or trade name is a word, phrase, or symbol
that identifies a particular enterprise or product.
– They also generally enhance the sale of the product.
– The creator or original user may obtain exclusive legal right
to the trademark or trade name by registering it with a
patent office or similar governmental agency.
– Such registration provides a specified number of years of
protection, which can vary by country but is commonly 20
years.
– The registration may be renewed indefinitely as long as the
trademark
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4. Franchise and Licenses
– A franchise is a contractual arrangement between a
franchisor and a franchisee. The franchisor grants the
franchisee the right to sell certain products, provide
specific services, or use certain trademarks or trade
names, usually within a designated geographic area.
– Another type of franchise is that entered into between a
governmental body (commonly municipalities) and a
company.
– This franchise permits the company to use public
property in performing its services. Such operating rights
are referred to as licenses.
– Franchises and licenses may by granted for a definite
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5. Goodwill
• Usually, the largest intangible asset that appears on a company’s
statement of financial position is goodwill.
• Goodwill represents the value of all favourable attributes that relate
to a company that are not attributable to any other specific asset.
• These include exceptional management, desirable location, good
customer relations, skilled employees, high-quality products, and
harmonious relations with labour unions.
• Goodwill is unique: Unlike assets such as investments and plant
assets, which can be sold individually in the marketplace, goodwill
can be identified only with the business as a whole.
• Therefore, 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.
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 END OF
CHAPTER
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