Question

Chapter 11: Plant Assets and Intangible Assets

1. To what types of long-lived assets do the following expenses apply: depreciation, depletion, and amortization?

2.) Describe how to measure the cost of a plant asset. Would an ordinary cost of repairing the asset after it is placed in service be included in the asset’s cost?

3.) When assets are purchased as a group for a single price and no individual asset cost is given, how is each asset’s cost determined?

4.) Explain the concept of accelerated depreciation. Which of the depreciation methods results in the most depreciation in the first year of the asset’s life?

5.) Describe how to compute depreciation for less than a full year and how to account for depreciation for less than a full month.

Answer 1

1)

Depreciation : Depreciation is applied to almost all types of tangible assets where depreciation is charged on the basis of useful life with a systematic method.

Amortization : Amortization is applied for intangible assets like software, content rights and goodwill.

Depletion : Depletion is generally applied for "Natural resources". It is a pretty rare concept as only some companies acquire natural resources as assets but for such assets, instead of depreciation, depletion is usually applied. Depletion is the way companies allocate the cost of natural resources to financial periods.

2) Cost of plant generally includes all the costs incurred to purchase the asset like purchase price and taxes and also the costs which are incurred to bring the asset to it's present location and working condition like installation charges. All the common costs which are usually included in cost of plan have been listed as below :

Particulars	Amount
Purchase Price	XX
Add : Taxes paid (whose credit has not been availed)	XX
Add : Custom duty paid for purchase of plant	XX
Add : Installation charges	XX
Add : All costs incurred to bring asset to it's present location	XX
Add : All costs incurred to bring asset to a working condition	XX
Total	XXXX

Ordinary cost of repairing the asset after it is placed in service is not to be included in the cost of asset. It is to be expensed off in the Income statement. Ordinary repairs are only performed to maintain the asset in its ordinary condition for a limited period of time.

3) When assets are purchased as a group for a single price, it is known as lump-sum purchase of asset. In such a case individual asset cost is determined by allocating the cost of the purchase among different types of assets on the basis of their relative market values.

4) Accelerated depreciation is basically a method of depreciation by which the asset loses book value faster than the traditional method and is generally used by companies to allows greater deductions in earlier years of the asset in order to minimize taxable income.

Double-declining Balance method is one of the accelerated depreciation methods which results in large amounts of depreciation in early years and smaller amounts in later years.

5) First of all let's understand why do we need to account for depreciation for less than a year or less than a month. Depreciation concept follows the matching principle which means that if the asset is owned for less than a full year, it does not help generate revenues for all twelve months and hence the amount of depreciation expense should be reduced accordingly. The same concept applies for less than a full month.

Now that we have understood the reason, let's understand how to record depreciation expense for less than a year or a month with the help of a practical example :

Cost of Asset = 36,000

Purchase date = 1/10/2019

Useful life = 3 years or 36 months

Accounting year = Calender Year : Jan to December 2019

Here asset has been used for 3 months and hence depreciation for current year 2019 will be : 36,000*(1/3)*(3/12) = 3,000.

Similarly if the asset had been purchased on 15th December, 2019

Depreciation would be : 36,000*(0.5 months/36 months) = 500