AC 224 (chapter 9) Flashcards
What are plant assets?
Have physical substance, used in operations, not intended for sale, expected to be useful for several years
What does ‘ready for use’ mean?
An asset can be used by an employee/customer as intended, properly, and safely
How is the cost of plant assets recorded?
Amount at which the asset is recorded on the balance sheet, including all costs to procure and prepare for use
What principle do companies follow regarding the value of plant assets?
Historical cost principle
What is the cost of land comprised of?
Cash purchase price, closing costs, broker commissions, accrued taxes, costs to prepare land for use
Is land depreciated?
No, land is not a plant asset and is not depreciated
What are land improvements?
Structural additions with limited lives, such as driveways, parking lots, fences
How are land improvements treated in accounting?
Depreciated over their useful life
What costs are included in the cost of buildings?
Cash purchase price, closing costs, remodeling, replacing existing parts
How is the cost of equipment defined?
Assets used in operations, including costs to make the equipment ready for use
What are ordinary repairs?
Expenditures to maintain operating efficiency, expensed as incurred
What are capitalized expenditures?
Expenditures that benefit the asset over multiple periods, added to asset cost and depreciated
What is depreciation?
Process of allocating the cost of a plant asset over its useful life
How does depreciation affect net income?
Decreases net income through depreciation expense
What is accumulated depreciation?
Contra-asset that decreases total assets
Are salvage value and useful life estimates based on historical data?
Yes, they are based on historical data and management forecasts
What is the Straight-Line Method of depreciation?
Depreciation expense = (Cost - Salvage Value) / Estimated Useful Life
How is depreciation expense treated if an asset is placed into use mid-year?
Pro-rated based on the percentage of the year the asset was in use
What is the Units-of-Activity Method of depreciation?
Depreciable Cost per Unit = (Cost - Salvage Value) / Estimated Units to Produce
What is the Double Declining Balance Method?
Depreciation Rate = 2 / Estimated Useful Life; Depreciation Expense = DDB Rate x Net Book Value at the beginning of the year
Does depreciation expense increase or decrease in the first year under the Double Declining Balance method?
Highest in the first year and declines each year thereafter
What is the relationship between depreciation and revenue generation?
Assumes asset generates most revenue in first few years, then loses value quickly
Is salvage value considered when calculating depreciation expense using the Double Declining Balance method?
No, salvage value is ignored
What happens to the asset’s value over time according to the accelerated depreciation method?
The value is highest in the first year and then declines each year thereafter.
