7 PPE & Intangible Assets Flashcards
What is PPE?
- Tangible
- Long-term (more than 1 year)
- Held for USE (not sale) in business for:
-Production
-Supply of goods & service
-Rental
-Administrative purposes
Initial measurement formula for purchased asset
From date asset is purchased - asset ready for use as intended by management
Initial measurement = Purchase price + Directly attributable costs + Initial estimate of cost at end of life
Subsequent Measurement of purchased asset (When to Capitalize or Expense?)
From time when asset ready for use - end of asset life
Capitalize (Added to PPE)
- When extends useful life
- Record by adding overhaul cost to to Asset (+)
Expense to income statement
- Relating to day to day servicing
- Record by expensing cost (-)
Depreciation = (cost-residual value) / estimated useful life
Carrying amount formula?
Carrying amount = depreciable amount + residual value (aka salvage/ scrap value)
Journal entry?
ABC depreciated machine purchased earlier fr $40,000 for 4 years using straight-line method
Dr Depreciation Expense 10,000
Accumulated Depreciation (Contra-Asset) 10,000
3 Depreciation methods
- Straight line method - constant allocation - assets used evenly over useful life
- Units of production method - assets that wear out cause of use
- Diminishing balance / accelerated allocation method / declining method - assets that generate more benefits in early part of useful life sg delivery van
How to calculate depreciation for partial year? Eg depreciation for 1 year = $12,000
Purchased PPE on 31 Aug 20X1
Purchased amt x fraction of year = 12,000 x 4/12 (Sep-Dec) = 4,0000
When there are changes in depreciation, use book value to compute depreciation at date of change.
Formula for Book Value (carrying amt)?
Book value (Carrying amt)= Cost - accumulated depreciation - accumulated impairment
New depreciation = (book value - new residual value) / new useful life
Difference between depreciation & impairment
Depreciation: gradual allocation of the cost of a fixed asset (like machinery or vehicles) over its useful life
Impairment: sudden and significant reduction in the value of an asset, often because it can no longer generate the expected benefits (eg External events (like market changes) or internal issues (like damage) make the asset worth less than its book value)
2 revaluation models
1. Cost model
2. Revaluation model
- Cost model: Initial cost + subsequent cost capitalized
- Revaluation model (carried at revalued amt) : FV - subsequent acc depreciation - subsequent acc impairment loss
(Info must be relevant and reliable)
Journal entries for Increase/ Decrease in Carrying amt
Increase in CA:
Dr Asset
Cr Revaluation reserve (part of shareholder’s equity)
Decrease in CA:
Dr Loss on Revaluation (P/L)
Cr Asset
Is derecognition debit or credit? When to derecognize?
Credit. (regonize is debit)
Derecognize when:
- fully depreciated asset written off
- scrapping of PPE before fully depreciated
- sale or disposal of PPE
Journal entry to derecognize (eg disposal of PPE that has been impaired and disposed off at a loss)
Dr Cash
Dr Accumulated depreciation
Dr Accumulated impairment
Dr Loss on disposal (income decrease so dr)
Cr PPE
Return on Assets ratio formula
ROA = Net income / total assets
Ability to turn assets into profits
Low ratio to industry means competitors are operating more efficiently
Fixed asset turnover ratio formula
Fixed asset turnover = Revenue / average fixed asset
How efficient it generates sales from each dollar of fixed asset
Increasing ratio - more productive
