Ch. 16

Question 1

PP & E (Property, Plant and Equipment) Assets

Answer 1

• Land - Not depreciated
• Buildings
• Equipment
• Are viewed as long term assets
• Are Capitalized - placed on the balance sheet, not expensed all at once

Question 2

Other Assets Added to PP & E

Answer 2

• Sales Tax
• Setup Costs
• Freight
• Key - The capitalized asset should include all costs necessary to get the assets ready for its intended use

Question 3

Items that should not be capitalized

Answer 3

• Items that are recurring in nature are generally not capitalized

Question 4

Capital Expenditure

Answer 4

• The expenditure’s benefits extend beyond the current period (Long term)
• PP & E, Intangible Assets
• Capitalized Cost

Question 5

Revenue Expenditure

Answer 5

• The expenditure’s benefits do not extend beyond the current period (Short term)
• Salary of an Office worker
• Expense is created

Question 6

PP & E Matching Principal

Answer 6

• Accrual accounting tries to match the benefits (revenues generated) with the expense that created the benefits

Question 7

Depreciation Expense

Answer 7

• Reduces Net Income
• Not a cash flow
• A credit to A/D reduces total assets
• A/D - Contra Asset - Not closed - balance sheet account

Question 8

Depreciation

Answer 8

• The recording of depreciation is not an attempt to measure fair market value. Depreciation is just the systematic allocation of the cost of a asset over the life of the asset (book value not equal to FMV)

Question 9

Factors impacting the depreciation calculation

Answer 9

• Capitalized cost of the asset (not an estimate)
• Estimated Useful Life
• Estimated Salvage Value
• Depreciable Cost = Capitalized Cost of the asset - Salvage value of the asset

Question 10

Straight Line Depreciation

Answer 10

= Capitalized Cost - Salvage Value/Estimated Useful life of the asset
- Matching Principal - Straight line Depr. assumes the benefits received each period are the same, so the depr. expense each period should be the same

Question 11

Double Declining Balance (DDB)

Answer 11

• Accelerated depreciation method
• More Depreciation is taken in the earlier years of the asset’s life
• Matching Principal - DDB assumes more benefits will be received in the earlier years of an asset’s life. Since more benefits are produced in the earlier years of an asset’s life, more depreciation expense should be matched with the earlier years
  = (1/Life) x 2= Depreciation rate

Question 12

Natural Resource Examples

Answer 12

• Coal
• Gold Mine
• Oil

Question 13

Formula for Depletion (Natural Resources)

Answer 13

= Cost - Salvage Value/ Estimated units of Natural Resources

- Depletion creates inventory

Question 14

Intangible Assets

Answer 14

• Have no physical substance
• Goodwill
• Patents
• Copyrights
• An intangible asset should be amortized over the shorter of an intangible asset’s economic life or an intangible asset’s legal life
• Matching Principal - The patent creates benefits. The benefits are matched with the cost of the intangible asset (over the useful life of the asset)

Question 15

Impairment Issues

Answer 15

• An impairment adjustment will need to be made to account for the decrease i the value of a long term asset

Question 16

Reporting Investing Activities

Answer 16

Trading Securities:
- Valued on the balance sheet at FMV (current asset)
- Assumed to be sold within the near future (intent of management)
- Unrealized gains & losses will impact net income (shown on the income statement)
Available for sale securities
- Valued on the balance sheet at FMV (investment assets)
- Securities assumed to not be sold in the near future (intent of management)
- Unrealized gains & losses will not impact net income
Held-to-Maturity Securities
- Intent of management - Hold to maturity
- Valued on the balance sheet at amortized cost
- Investment asset, Can move to current asset based on maturity date

Question 17

IFRS - Long Term Assets

Answer 17

• IFRS will allow impairments to be reversed (based on the IFRS conditions). GAAP rules will not allow that
• IFRS will allow long term assets to bevalued at FMV