AFM 191 - Chp. 3.1 Accounting for Tangible long-term assets

Question 1

Define an asset in ASPE standards

Answer 1

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

Question 2

What’s the following criteria that must be met for a company to record an asset

Answer 2

1. it represents a future benefit that contributes directly or indirectly to future cash flows
2. the company can control access to the benefit
3. the transaction or event which provides the company with control of the benefit has already occurred.

Question 3

Define an expense

Answer 3

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.

Question 4

Define current assets

Answer 4

economic resources that will be sold or used by a company within a year of the reporting period

Question 5

define long-term assets

Answer 5

economic resources that will be used by a company to generate income over multiple years

Question 6

define tangible long-term assets

Answer 6

long-term physical assets that companies use to generate revenue

Question 7

Define depreciation/ammortization

Answer 7

an accounting method which allocates the depreciable cost of an asset over the asset’s estimated useful life

Question 8

Why is land an exception to most long-term assets?

Answer 8

land doesn’t depreciate as it doesn’t have a limited useful life

Question 9

Define a depreciable cost

Answer 9

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)

Question 10

Define an asset’s estimated residual value

Answer 10

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.

Question 11

Define an asset’s estimated useful life

Answer 11

the period in which an asset is expected to contribute directly or indirectly to the future cash flows of a company

Question 12

What’s the equation to finding the depreciable cost?

Answer 12

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

Question 13

Why are long-term assets not in the income statement?

Answer 13

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.

Question 14

In the balance sheet, how are long-term assets recorded initially (PP&E)

Answer 14

initial record int eh balance sheet at the total asset cost

Question 15

What’s the relationship between balance sheet and income statements in terms of a long-term asset?

Answer 15

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

Question 16

What is accumulated depreication and how is it recorded?

Answer 16

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

Question 17

How the net long-term PP&E asset calculated and justify the formula

Answer 17

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.

Question 18

What’s the formulas for Net Book Value

Answer 18

Net Book Value (NBV) = asset cost - accumulated depreciation

0 = NBV - Residual value

NBV (when at end of useful life) = Residual value

Question 19

What do we do when assets are sold for more or less than their residual value

Answer 19

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)

Question 20

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

Answer 20

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

Question 21

What are the 3 depreciation methods under ASPE?

Answer 21

1. straight-line method
2. variable charge method
3. decreasing charge method

Question 22

Define the straight-line method and when it is used

Answer 22

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

Question 23

Define the Variable charge method and when it is used

Answer 23

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

Question 24

define the decreasing charge method and when it is used

Answer 24

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.

Question 25

What’s the formula to calculate the annual depreciation expense using the straight-line method in years vs months

Answer 25

(asset’s depreciable cost)/asset’s estimated useful life (in years)

(asset’s depreciable costs)/Asset’s estimated useful life (in months)

Question 26

What are the factors to be aware when it comes to tangible long-term assets

Answer 26

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

Question 27

How to calculate monthly depreciation expense

Answer 27

monthly depreciation expense* ([total days in the moths - date of purchase]/total days in the month)

Question 28

How to calculate the gain or loss on asset disposal?

Answer 28

proceeds from sale/disposal - asset net book value

Question 29

Define a leasehold improvement

Answer 29

money spent to make a rented tangible long-term asset useful for its specific intended use

Question 30

What’s the difference between accumulated depreciation and depreciation expense

Answer 30

depreciation is on the income statement while the accumulated depreciation is on the balance sheet