AFM 191 - Chp. 3.1 Accounting for Tangible long-term assets Flashcards
Define an asset in ASPE standards
economic resource controlled by an entity as a result of past transaction or events and from which future economic benefits may be obtained - an asset is a resource, controlled by a company that will help the company obtain future economic benefits
What’s the following criteria that must be met for a company to record an asset
- it represents a future benefit that contributes directly or indirectly to future cash flows
- the company can control access to the benefit
- the transaction or event which provides the company with control of the benefit has already occurred.
Define an expense
a decrease in economic resources, through outflows or reduction of assets or incurrence of liabilities resulting from an entity’s ordinary revenue generating activities. - expenses represent those things the company spends money on in the normal course of business which don’t explicitly contribute future benefits.
Define current assets
economic resources that will be sold or used by a company within a year of the reporting period
define long-term assets
economic resources that will be used by a company to generate income over multiple years
define tangible long-term assets
long-term physical assets that companies use to generate revenue
Define depreciation/ammortization
an accounting method which allocates the depreciable cost of an asset over the asset’s estimated useful life
Why is land an exception to most long-term assets?
land doesn’t depreciate as it doesn’t have a limited useful life
Define a depreciable cost
total cost of an asset that is depreciated over the asset’s useful life less (minus) the estimated residual value of that asset.
total cost of an asset includes the cost of the asset and any cost directly attributable to the assets (costs to deliver and install the asset for its intended use)
Define an asset’s estimated residual value
the amount the company expects to receive when the asset is sold at the end of its useful life, net (minus) of any disposition costs such as marketing the asset to find a buyer or paying legal fees.
Define an asset’s estimated useful life
the period in which an asset is expected to contribute directly or indirectly to the future cash flows of a company
What’s the equation to finding the depreciable cost?
depreciable cost = total asset cost (cost to purchase the asset + costs directly attributable to an asset to get it ready for its intended use) - estimated residual value
Why are long-term assets not in the income statement?
because companies use long term assets to generate cash flows for future periods - as per the matching principles, their cost must be allocated to all periods where the asset is expected to contribute to the generation of revenue.
In the balance sheet, how are long-term assets recorded initially (PP&E)
initial record int eh balance sheet at the total asset cost
What’s the relationship between balance sheet and income statements in terms of a long-term asset?
the depreciable cost of a long-term asset is transferred from the balance sheet to the income statement as an expense over the asset’s useful life
eveyr period the amount record in the balance sheet decreaes and the depreciation expense increases
What is accumulated depreication and how is it recorded?
a contra asset account to calculte the asset’s net book value in the balance sheet, net of the total depreciation that has been recognized as depreciation expense in teh income statement
DR. Depreciation expense $X
CR. Accumulated depreciation $X
How the net long-term PP&E asset calculated and justify the formula
original cost of the PP&E - accumulated depreciation of the PP&E asset
this makes sense because as the long-term asset gets used over time, it will get closer to the residual value as it nears the end of tis useful life.
What’s the formulas for Net Book Value
Net Book Value (NBV) = asset cost - accumulated depreciation
0 = NBV - Residual value
NBV (when at end of useful life) = Residual value
What do we do when assets are sold for more or less than their residual value
we create an account called a gain or loss on asset disposal used to record the gains or less from selling assets for more or less than their residual values
this is not accounted for revenue or contra revenue (based on what the business sells, e.g. clothing)
How does the compay record if the asset is sold for less than the residual value and if it is sodl for more than the residual value
if sold for less, the company would record a loss on disposal
if sold for more than the residual value, the company would record a gain on disposal
What are the 3 depreciation methods under ASPE?
- straight-line method
- variable charge method
- decreasing charge method
Define the straight-line method and when it is used
a method of depreciation which charges the cost of the asset to the income statement evenly throughout its useful life
it’s used when long-term assets generate revenue evenly throughout their useful life
Define the Variable charge method and when it is used
a method of depreciation which charges the cost of the asset to the income statement based on the usage of the asset
it’s used when long-term assets wear out based on usage
define the decreasing charge method and when it is used
a method of depreciation which charges the cost of the asset to the income statement based on higher initial charges that decrease over its useful life
it’s used when long-term assets generate more revenue in the initial years, and less in the latter part of their useful life.
What’s the formula to calculate the annual depreciation expense using the straight-line method in years vs months
(asset’s depreciable cost)/asset’s estimated useful life (in years)
(asset’s depreciable costs)/Asset’s estimated useful life (in months)
What are the factors to be aware when it comes to tangible long-term assets
1 changes to estimated useful life and /or estimated residual value - these estimates should be reviewed regularly
2. depreciation for partial periods
3. disposing or selling a tangible long-term asset before the end of its useful life
4. leasehold improvements
How to calculate monthly depreciation expense
monthly depreciation expense* ([total days in the moths - date of purchase]/total days in the month)
How to calculate the gain or loss on asset disposal?
proceeds from sale/disposal - asset net book value
Define a leasehold improvement
money spent to make a rented tangible long-term asset useful for its specific intended use
What’s the difference between accumulated depreciation and depreciation expense
depreciation is on the income statement while the accumulated depreciation is on the balance sheet
