Question

• List the depreciation methods used for plant assets
• Explain how plant assets are disposed
  
  
  
• Identify the basic issues related to reporting intangible assets
  
  
  
• How/What method(s) is/are used to record long lived assets record?

Answer 1

1.Depreciation methods used for plant assets

a) straight line depreciation

This is one of the simplest method of charging depreciation. Here same amount is expensed as depreciation over the useful life of the asset. The amount can be calculated by using the following formula

(Cost of the asset - salvage value ) / useful life

b) double declining balance method

Here larger amounts are expensed in earlier years as opposed to other methods of depreciation . This is based on the fact that the asset is more productive and loses more of its value in the earlier years. The formula for calculation is

2*straight line depreciation rate * asset cost

c) production units method

This method depreciate asset based on the number of units produced or the number of hours worked.

Depreciation expense =[(asset cost-salvage value ) /total number of units produced] * number of units produced in a particular year

d) sum of the years method

Here larger amounts is depreciated in earlier years. In this method the remaining life of the asset is divided by the sum of the years and then multiplied by the deprecating base to determine the depreciation expense  

Formula : (remaining life /sum of the years digit) *(Cost of the asset - salvage value)

2. Disposal of the plant asset

A plant asset can be disposed of by

Selling it

Discarding it as worthless

Trading it on a new asset or exchange

° Sale of the asset : When an asset is sold we will get cash and the amount received should be debited to cash or bank account. There would be accumulated depreciation and this account should be closed by debiting the accumulated depreciation as we no longer use the asset. And the book value asset should be written off by crediting the asset account. Sometimes there would be loss or gain on sale of the asset which should also be recorded.

° discarding it as worthless

If a plant asset is of no further use in the business and cannot be sold or traded, then the plant is discarded as worthless. If the plant has no book value then the original cost of the asset will be credited and the accumulated depreciation account will be debited. Then there will be no gain or loss. If the plant has book value then the business incurres a loss.

° exchange of plant asset

The asset can be exchanged on the purchase of other assets either similar or dissimilar assets. In either case the purchase price is reduced by the trade in allowance of the old asset. If the trade in allowance we received is greater than the carrying value of the asset exchanged then there will be a gain and if trade in allowance is lower then there will be a loss.

BASIC ISSUES RELATED TO THE REPORTING OF INTANGIBLE ASSET

identification : one of the major challenges faced is the identification. Intangible assets are not physical assets that can be easily recognised. There may be clashes of perceptions and what seems like an asset to one may be a liability to another.

Valuation : valuation of intangible asset is also a problem as it is highly illiquid compared to other assets. Global standards have shifted to fair value model from cost model. Still the difficulty is there. We cannot recognise internally generated asset as we cannot value it properly and there are high chances of manipulation.

Identifying comparables: when there is an acquisition of a target company we have to report the target company 's all assets amd that includes intangible assets too. Accepted valuation methods uses market data as a basis for analysis and comparison. But in case of intangible asset it is too difficult to get market data as very little market data is available to public  

HOW LONG LIVED ASSETS ARE RECORDED

Examples of Long lived assets plants and machinery, buildings, buildings and intangibles like goodwill. It should be shown in the balance sheet under the head non current asset and intangibles like goodwill under the head intangible assets. Assets like buildings should be depreciated over its useful life and land has no depreciation. These depreciation is accounted in accumulated depreciation account. Fir intangibles with definite life it us amortised and those of indefinite life it should be tested for impairment every year. Depreciation and amortisation is expensed in the income statement. At the time of acquisition it is recorded in the original cost of the asset. Tjis costs is the total of purchase costs and other directly attributable costs like installation costs, transportation costs etc.