Ch 8 Long term Assets Flashcards
5 types of long term assets
1) property, plant, and equipment
2) right-of-use assets
3) intangible assets
4) goodwill
5) biological assets
Property, plant and equipment characteristics
- is purchased to help generate revenues in future periods.
- has physical form
- can be resold but are not purchased for that purpose
example: a building
right-of-use assets characteristics
- are leased to help generate revenues in future periods
- leased for a year or more
example: computers are leased rather than purchased
intangible assets characteristics
- is purchased to help generate revenues in future periods
- lacks physical form
- is separable (that is, it could be sold or licensed or even rented)
example: trademark
Goodwill characteristics
- results from a business combination.
will contribute to the generation of revenues in future periods. - cannot be separated from the business and sold.
Biological assets characteristics
- are assets whose biological transformation is being managed.
- are assets that are harvested and processed into inventory or that have their produce harvested and processed into inventory.
example: trees or cattle
depreciation (and amortization)
refers to the allocation of the cost of an asset to the periods in which the future economic benefits it embodies are being consumed.
things that users of financial statements might want to know about long tern assets
1) age of them and the potential cash outflow required to replace therm
2) any significant negative changes in the expected use of the long term assets
3) extent to which they have been pledges as a security to creditors
4) extent to which the company has chosen to lease its long term assets rather than purchase them
2 models that are used to evaluate the value of long term assets
1) the cost model (allowed under IFRS and ASPE)
2) revaluation model (allowed only under IFRS)
acquisition cost
an asset’s original cost
following the cost model of valuing long term assets, assets are presented on the balance sheet at ____________ aka _________
1) carrying amount
2) net book value
net book value or carrying amount are ___________ (formula)
cost - (accumulated depreciation + accumulated impairment loss)
Depreciation
the costs of PP&E are allocated to the periods in which the asset’s future economic benefits are being consumed, which normally equates to the periods in which the asset is expected to help generate revenues.
Carrying amount is
1) the portion of the asset’s cost that has yet to be expensed
2) not what the asset’s worth
3) cost - (accumulated depreciation + accumulated impairment loss)
“which costs associated with the purchase of the assets should be capitalized on”
what does “capitalized” mean in this sentence
included as a part of the asset’s cost
what is the general guideline regarding the costs that should be capitalized?
any costs related to the purchase should be capitalized
example of what is included in the cost as something that is capitalized
1) taxes, import duties
2) shipping and transportation costs
3) site preparation, instalment, set-up
4) purchase price
basket or lump-sum purchase
- paying single price for multiple assets
- example: paying for an office building but purchasing the land as well as it is included in the price
- those price should be separated in the statements, because the land won’t depreciate while the building will
Relative fair value
the value of each single asset in a basket purchase that is often appraised to determine
how do we record the costs that arise after the purchase of an asset (maintenance and repairs)? Do we capitalize them or do we expense them?
It depends. If the costs create a future economic benefit then they should be capitalized, if not - expensed
What are the questions that management should consider when deciding if they should capitalize or expense costs related to long term assets?
1) will this prolong the useful life of this asset (beyond the original estimate)?
2) will they reduce the asset’s operating costs?
3) will they improve the asset’s output in terms of either quantity or quality?
if the answer is “yes” to any of these questions, then a future economic benefit has been created and the costs should be capitalized
under the revaluation model, PP&E are carried at their ________ less any subsequent ________ and any subsequent _________
1) fair value as determined at points in time known as the revaluation dates
2) accumulated depreciation
3) impairment losses
if something is being reevaluated under the revaluation model then ___________ should also be reevaluated
everything in that class of assets (all buildings, not just a particular one)
3 piece of info needed to depreciate PP&E
1) cost
2) estimated residual life - what is left when the useful life is expensed, something that cannot be depreciated
3) estimated useful life - how long it’s going to be useful for (can be measured in time units (years) or usage such as km, watts, etc.)
Depreciable Amount (formula)
Depreciable amount = Cost - estimated residual life
Depreciable Amount (definition)
This is the portion of the asset’s cost that should be expensed over the periods in which its future economic benefits are being consumed
3 most common deprecation methods
1) straight line method
2) units of production method
3) diminishing balance method
Straight line method of depreciation
depreciating the same amount every year
the most common method (used by over 50% of Canadian companies)
units-of-production method
aka units-of-activity method and the usage method
depends on how much the asset was used in the accounting period the depreciation is recorded for
example: there is a certain amount of depreciation for each km that a truck was driven for, depending on how much it was used during an accounting period it will be depreciated accordingly
Diminishing balance method
aka the declining balance method
it’s an accelerated method of depreciation which means that the depreciation costs will be the highest during the first years of usage of the asset and less and less as time goes by
calculation using straight line depreciation method
Depreciation = (Cost - Estimated Residual Life)/ Estimated Useful Life (in years)
or
Depreciation expense = depreciation rate * depreciable amount
calculation using units-of-production method of depreciation
1) Depreciation expense per unit = (Cost - Estimated Residual Life)/Estimated Useful Life (in units)
2) then, multiply by the number of units produced during the period
double diminishing method of depreciation
1) determine the rate of depreciation (double the straight line rate)
2) apply the rate to the asset’s carrying amount
3) ensure the ending carrying amount is the asset’ estimated residual value
to make that possible the last year’s depreciation expense can be mace whatever it needs to be for the asset’s carrying amount to be equal to the asset’s estimated residual value
depreciation journal entry
DR Depreciation expense
CR Accumulated depreciation, Equipment
the effect of depreciation on fin statements
1) Statement of income: Expenses are increased and net income would be decreased.
2) Statement of financial position: The asset’s carrying amount is decreased, thereby reducing total assets. Shareholders’ equity is also reduced since depreciation expense reduces net income and, in turn, retained earnings.
3) Statement of cash flows: No effect because depreciation is a non-cash transaction
Depreciation expense for partial periods
Depreciation expense for partial period = Annual depreciation expense * ((#of full months)/12)
Capital cost allowance
a type of tax deduction that is similar to depreciation expense (the accelerated method) but unlike depreciation expenses management doesn’t have much say in how it’s determined
impaired asset
The characteristic of an asset whose expected future economic benefits are estimated to be less than its carrying amount as a result of a change in circumstance. This results in its carrying amount being reduced accordingly.
recoverable amount
the greater of these 2:
1) expected future cash flows from the use of the asset
2) fair value less selling costs
Impairment loss
carrying amount less recoverable amount
impairment loss journal entry
Loss on impairment XXX
Acc. impairment loss, Equipment XXX
stranded assets
an asset which loses economic value well ahead of its anticipated useful life, whether that is a result of changes in legislation, market forces, disruptive innovation, societal norms, or environmental shocks.
2 steps necessary when PP&E are derecognized
1) The asset should be depreciated up to the date of derecognition.
2) The asset and the related accumulated depreciation should be removed from the company’s records and any resulting
gain or loss should be determined.
gain on disposal journal entry
Cash 6,000
Acc. Depreciation, Equipment 45,000
Equipment 50,000
Gain on Disposal of Equipment 1,000
scrapped asset journal entry
Acc. Dep. Equip. 45000
Loss on Disposal of Equip. 5000
Equipment 50000
types of intangible assets
1) Intellectual Property
a. Trademarks
b. Patents
c. Copyrights
d. Trade secrets
2) Licences
3) Customer lists
4) Franchise rights
5) Computer software
6) Development costs
Amortization
The depreciation of intangible assets that are not natural resources
intangible assets with finite useful lives should be tested for impairment ___________________________.
intangible assets with indefinite useful lives must be tested for impairment __________
1) whenever the company becomes aware of something that may indicate a possible impairment.
2) annually
amortization journal entry
Amortization expense XXX
Acc. Amortization, Patents XXX
Carrying amount of intangible assets
costs - accumulated amortization
differences between PP&E and intangible assets
1) depreciation methods chosen
2) no residual life for intangible
3) intangible assets can have a finite or indefinite useful lives, in PP&E only land has an indefinite useful life
Average Age %
(Total Acc. Dep.)/(Total PP&E - Land)
This ratio provides the user with information on the extent to which a company’s PP&E assets have been depreciated.
Average Age
Total Acc. Dep/ Dep. Exp.
This ratio provides the user with information on how long a company has been using its PP&E.
Fixed Asset Turnover
(Sales Revenue)/(Average Net PP&E)
This ratio provides the user with information on how effective the company has been in generating sales relative to its investment in PP&E
- misleading ratio - be careful!
