8 - Property Plant and Equipment (PP&E)

Question 1

Acquisition Costs (intended use)

Answer 1

• include all costs of acquisition or construction as well as preparation for use:
  
  • purchase price
  • legal fees
  • delinquent taxes
  • title insurance
  • transportation (freight in)
  • installation
  • test runs
  • sales taxes
• cost of land includes:
  
  • purcahse price (including existing building that needs to be demolished)
  • surverying
  • clearing, grading, landscaping
  • costs of razing or demolishing old building
  • proceeds from sales of any scrap (old bricks) are subtracted from land cost.

Question 2

Costs incurred after Acquisition

Answer 2

• Repairs and maintenance (restore asset)
  
  • BIGGER: additions, new capacity, new functions

asset x

cash x

• BETTER: improving efficiency

asset x

cash x

• LONGER: ext. of assets life (inreaseses c.v.)
  accum. dep. x

cash x

• Refurbishment
  
  • Identifiable - account for as if sold the old part and are replacing with a new part.

accum. dep. x

loss x

asset x

asset x

cash x

• not identifiable
  
  • A) enhances the asset (similar to addition/ betterment)

asset x

cash x

• B) Increases the asset’s useful life (sim. to ext.)
  accum. dep. x

cash x

Question 3

Sum of the Years digits (SYD)

Answer 3

Question 4

Double declining balance (DDB)

Answer 4

Question 5

Depreciating Group or composite

Answer 5

• assume cash received = carrying value
• assume no gain/loss
• plug accum. dep.

cash 20

accum. dep. 80 (plug)

loss none

asset 100

gain none

• for composite : use weight average method for different type of items.

Question 6

Impairment of long-lived assets Held for sale

Answer 6

1. ) c.v. > expected future cash flows = impairment exists
2. ) c.v. - f.v. = $loss (FV= MV or PV)

600-525=75

loss on impairment 75

accum. dep. 75

Question 7

Impairment for held for sale (disposal)

Answer 7

• when assets are no longer in use they are reclassified on bs. moved to “held for sale” under OTHER ASSETS.
• valued at lower of CV or NRV

loss on planned disposition 700

equipment to be disposed of

(other assets) 1500 (NRV)

accum. dep. 3800

equipment 6000

Question 8

Disposal of fixed assets

Answer 8

cash 2500

loss on sale 500

accum. dep. 7000

machinery and equipment 10000

Question 9

Nonmonetary exchanges (trade an asset for an asset)

Answer 9

• exchanges w commercial substance (valuating new asset
  
  • FMV given up + cash paid - cash received
  • FMV of asset received
  • BV given up + cash paid - cash received
    
    • can use any of these methods
    • recognize all gains and losses
    • use first one if you can
    • old asset at cv
• _exchanges lacking commercial substanc_e
  
  • FMV given up + cash paid - cash received
  • FMV of asset received
  • BV given up + cash paid - cash received​
    
    • use lower of three
    • recognize all losses and defer all gains (except gains with boot
      
      • if boot is 25% or more then treat like monetary and realize all gain

Question 10

Depletion

Answer 10

• Depletion = (depletion base/ total volume at beg. year) x units extracted.
• depletion base:
  
  • initial period: cost + add. costs + restoration costs - salvage/residual value
  • subsequent years will be CV (original - depletion from previous years)