2. Property, Plant and Equipment Flashcards
What is PPE?
Property, plant and equipment (PPE) are tangible items that you can see and touch like buildings, machinery and land which an organisation uses in its business operations and over more than one accounting period.
What are the 3 key characteristics to meet PPE?
1) They have a physical substance.
2) They are used in an organisation’s business to produce or supply goods or services or for administrative purposes.
3) They are not intended for sale.
What are the measurement bases to value PPE?
Historical cost - initial purchase price/invoice
Fair value - What would market participants pay? (Market Value)
What is depreciation?
Depreciation is the process of matching the cost of PPE with the benefits it is expected to generate.
Depreciation spreads the cost of an asset over the period for which it is expected to generate benefits.
What factors must an accountant consider when calculating depreciation for an asset?
1) Depreciable Cost - Historical cost or Fair
Value
2) Residual Value amount that is expected to be recovered on the disposal or sale of the asset at the end of its useful life
3) Useful Life estimated period the item is expected to be available. (Expressed as Yrs or %)
Why are there different methods of depreciation?
An entity will choose the depreciation method which best reflects the pattern of benefits expected to be generated by the item of PPE.
What are the Depreciation Methods and formulas?
Straight-Line Method: results in a constant depreciation charge over the asset’s useful life.
FORMULA: (Depreciable Cost – Residual value) / Useful Life
Diminishing Balance Method: The diminishing balance method calculates depreciation based on a
percentage of the carrying amount of the asset each year. The carrying amount is the initial cost of the
asset less any accumulated depreciation on the asset to date.
FORMULA: Carrying Amount x %
What is the correct journal entry to account for a depreciation expense?
Dr SPL - depreciation expense
Cr PPE (Accumulated depreciation)
Why would the useful life or residual value of an asset change?
The useful life of an asset or its residual value may change due to technological changes or changes
in demand for the products generated by the asset.
How is the revised depreciation charge calculated following a change to useful life or residual value?
- Determine the cost of the asset
- Determine the accumulated depreciation balance at the date on
which the entity revises its estimate - Calculate the carrying amount of the asset before the change
- Calculate the remaining useful life
- Calculate the future depreciation charge = carrying amount divided by the remaining useful life
What is the correct journal entry to recognise the purchase of a PPE asset that includes VAT?
Dr PPE (Cost)
Dr VAT Account
Cr Bank
What do we mean by the disposal of PPE assets?
Disposal of PPE assets occurs when they are no longer useful or needed by the business. This can
result from obsolescence, wear and tear, or changes in operational requirements.
Gain/(loss) on disposal = Proceeds - Carrying Amount
What is the correct journal entry to account for a gain on disposal of PPE?
Dr Bank
Dr PPE – accumulated depreciation
Cr SPL – gain on disposal
Cr PPE (Cost)
What is the correct journal entry to account for a loss on disposal of PPE?
Dr Bank
Dr PPE – accumulated depreciation
Dr SPL – loss on disposal
Cr PPE (Cost)
How do we calculate depreciation charge on the remaining assets following a disposal?
When calculating the depreciation charge for a class of assets for the period, disposals will decrease
the depreciable cost for the straight-line method.
For the diminishing balance method, disposals will decrease the cost and decrease the accumulated
depreciation when calculating the carrying amount. Only then can depreciation be calculated.
