ACCY231 WK8 L15 Property, Plant, and Equipment

Question 1

What is property, plant, and equipment (PPE)?

Answer 1

PPE are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and are expected to be used during more than one period.

Question 2

What are five examples of PPE?

Answer 2

1. Land
2. Buildings
3. Machinery
4. Motor Vehicles
5. Office Equipment

Question 3

What is the recognition criteria for initial recognition of PPE?

Answer 3

PPE is recognised on the financial statements of the entity initially at cost if:
1. It is probable that the future economic benefits associatedf with the item will flow to the entity; and
2. The cost of the item can be measured reliably.

Question 4

What is the measurement base used at initial recognition of PPE?

Answer 4

Cost.

Question 5

What are the three components of cost?

Answer 5

1. Purchase price
2. Directly attributable costs
3. The initial estimate of the costs of dismantling and removing the item, or restoring the site on which it is located

Question 6

What date should PPE be recognised?

Answer 6

The acquisition date where the entity obtains control of the asset.

Question 7

What are some examples of costs that should be included in the cost of an asset?

Answer 7

1. Costs of employee benefits arising directly from the costruction or acquisition of the item of PPE
2. Costs of site preparation
3. Initial delivery and handling costs
4. Installation and assembly costs
5. Costs of testing whether the asset is functioning properly
6. Professional fees

Question 8

What are some examples of costs that should not be included in the cost of an asset?

Answer 8

1. Costs of opening a new facility
2. Costs of introducing a new product or service
3. Costs of conducting business in a new location
4. Administration and other general overhead costs
5. Costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity
6. Initial operating losses
7. Costs of relocating or reorganising parts

Question 9

Illustrative Example 1: Journal Entries for Initial Measurement of PPE

Answer 9

a

Question 10

What are the two measurement models allowed after initial measurement?

Answer 10

1. Cost Model
2. Revaluation (Fair Value) Model

Question 11

What is the cost model?

Answer 11

The cost model requires that assets are carried at cost less any accumulated depreciation and impairment losses.

Question 12

What is depreciation?

Answer 12

The systematic allocation of the depreciable amount of an asset over its useful life.

Question 13

What is the depreciable amount an asset?

Answer 13

The cost of an asset, or other amount substituted for cost, less its residual value.

Question 14

What is the residual value of an asset?

Answer 14

The estimated amount an entity would currently obtain from disposal of the asset if the asset were already of age and in the condition expected at the end of its useful life less the estimated costs of disposal.

Question 15

What is the useful life of an asset

Answer 15

The period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by an entity.

Question 16

What are the two main depreciation methods?

Answer 16

1. Straight-line method
2. Diminishing-balance method

Question 17

When is the straight-line method of depreciation?

Answer 17

The straight-line method of depreciation is used when the benefits are expected to be received evenly over the useful life of the asset.

Question 18

Illustrative Example 2: Straight-line Depreciation Method and Journal Entries

Answer 18

a

Question 19

When is the diminishing-balance method used?

Answer 19

The diminishing-balance method of depreciation is used when the pattern of benefits is such that more benefits are received in the earlier years of the asset’s life, resulting in a higher depreciation expense expense.
You only need to know how to apply the diminishing-balance method, not how to calculate the diminishing-balance rate.

Question 20

Illustrative Example 3: Diminishing-balance Depreciation Method and Journal Entries

Answer 20

a

Question 21

What are two other methods of depreciation?

Answer 21

1. Units of production method
2. Significant parts method

Question 22

What is the revaluation model?

Answer 22

Under the revaluation model, the asset is measured at fair value and must be revalued with sufficient regularity.

Question 23

What happens when there is a revaluation increase under the revaluation model?

Answer 23

The asset account is debited and the gain is recognised as a gain on revaluation of asset in other comprehensive income by crediting the account gain on revaluation of income.
The gain on revaluation of the asset previously recognised in other comprehesive income is accumulated in, or transferred to, equity (similar to the closing entries to transfer revenue and expense accounts to the profit or loss account), the specific equity account being asset revaluation surplus. Gain on revaluation of the asset is debited and asset revaluation surplus is credited.

Question 23

Illustrative Example 4: Revaluation Model and a Revaluation Increase

Answer 23

a

Question 24

What happens when there is a revaluation decrease under the revaluation model?

Answer 24

Accumulated depreciation must first be written off by debiting accumulated depreciation on the asset and crediting the asset by the same amount to reduce the recorded amount of the asset to its previous fair value.
Then the asset must be written down to the new fair value by crediting the asset by the amount of the revaluation decrease and this decrease is recognised by debiting loss on revaluation of asset in the profit or loss by the same amount.

Question 25

Illustrative Example 4: Revaluation Model and a Revaluation Decrease

Answer 25

a

Question 26

What happens when there is a revaluation decrease subsequent to a revaluation increase under the revaluation model?

Answer 26

a

Question 27

What happens when there is a revaluation increase subsequent to a revaluation decrease under the revaluation model?

Answer 27

a

Question 28

What are the two situation in which an asset should be derecognised?

Answer 28

1. On disposal
2. Where no future economic benefits are expected to flow from the asset

Question 29

What must an entity account for at the sale of an asset?

Answer 29

1. The depreciation from the beginning of the period to the date of sale
2. The sale and any gain or loss on the sale

Question 30

Illustrative Example 6: Derecognition of an Asset at Sale

Answer 30

a

Question 31

What accounting standard covers property, plant, and equipment (PPE)?

Answer 31

NZ IAS 16 Property Plant and Equipment