Ch 9.1 PPE Flashcards
3 charcteristics of PPE
1) They are tangible long lived resources under company control
2) companies use assets to produce g/s or OTHER revenue generation
3) assets are not sold to customers
main diff between current assets and nca
provide economic beefits over many years
synonynm for nca
fixed assets
at what value do companies record PPE on financial statmeents?
at cost!
what does cost of ppe include
1) the purchase price (+ certain non-refundable taxes and duties - discounts or rebates)
2) expenses needed to bring asset to location and get it ready for use
3) estimates of the cost of any future expenses related to dismantling, removing, or restoring asset at END of useful life
which costs do companies include in PPE
the costs that will beenfit only the current periods “operating expenditures”
In general, companies expense costs that will benefit only the current period. Such costs are operating expenditures. Companies capitalize (include) costs thatwill benefit future periods in a non-current asset account relating to property, plant, or equipment. These are capital expenditures.
In general, companies expense costs that will benefit only the current period. Such costs are operating expenditures. Companies capitalize (include) costs thatwill benefit future periods in a non-current asset account relating to property, plant, or equipment. These are capital expenditures.
operating expenditures
expenses that benefit only this period,
they are chraged against revenues as an expense acc
capital expenditures
expenses that benefit future periods, recorded as long lived assets
what are asset retirement costs
costs to ddismantle, remove, or restore a PPE at end of useful life
what do you do with asset retirmenet costs
you add them to the cost of the asset
what are 4 classificaitons of PPE
1) LAND
2) LAND IMPROVEMENTS
3) PROPERTY
4) EQUIPMENT
what is land
building site
what is land improvements
driveways parking lots fences and udnerground sprinklers
what is buidlings
stores, offices, plants, warehusoses
what is equioment
vehicles, computers, furnityure, machienry
what is included in the cost of land
all costs incurred to get the land ready for use
1) cash price
2) closing costs (survey, title search, legal)
3) cost for prepping land (Clearig, draining, excavvaating, grading)
4) Cost to demolish and remove things LESS proceeds from salvaged materials
Companies will treat recurring expenditures incurred after purchasing the land as operating expenses because they only benefit the current year.
such as the annual property taxes.
!!!
What is journal entry to record purchase of Land
Dr Land
Cr Cash
What are land improvements
structrual additions made to a property
q
do land improvements decline in value over time
yes! they need maintenacne and one day eventual replacement
Some people confuse the cost to get land ready for its intended use with land improvements. Land improvements usually occurafter the land is acquired, and wecan distinguish these improvementsfrom the land itself.
why is land and land improvements separate
bc land doesnt depreciate but land improvements do
2 scenarios of how a company can get a building
buy it
make it
what is the cost of building when building is bought
1) purchase price
2) costs to finalize transaction (legal fees etc)
3) costs required to make building ready for use
are buidling costs operating expense of capital expenses
Companies will capitalize all these costs to the Buildings account.
what is the cost of a building when it is constructed
1) contract price
2) pay for architect fees, ,buidlign permits, exactivon costs
In addition, when constructing a new building, a company may include interest costs relating to a loan obtained to finance a construction project in the cost of the building but only up to the date that the asset is ready for its intended use.
what is the cost of equipment
1) purchase price, and all costs that are necesary to get equipment ready for its use (frieght charges, slaes tax, cost of insurance during transit)
2) expenses incurred to assemble, install, and test the equipment
Companies record recurring expenditures such as the renewal of vehicle licences or ongoing insurance as operating expenditures (expensed not capitalized) when incurred. Two criteria apply when determining if such costs should be expensed:The frequency of the cost—one time or recurringThe benefit period—the life of the asset or one year
Companies record recurring expenditures such as the renewal of vehicle licences or ongoing insurance as operating expenditures (expensed not capitalized) when incurred. Two criteria apply when determining if such costs should be expensed:The frequency of the cost—one time or recurringThe benefit period—the life of the asset or one year
operating expenses
-what
-recurring?
-ex
- how is recorded in books
benefit only the current period
1)They maintain an asset in its normal operating condition and often recur
ex: Examples include repainting a building or replacing the tires on a truck.
2)Companies will record these costs in an expense account, such as Repairs and Maintenance Expense, rather than capitalizingthem (adding them to theasset account).
capital expenses
-what
-recurring?
-are they big
beneift more than one period
-do not recurr freuqenelty and are usully big
-These costssignificantly improve the asset by extending its useful life or by improving its productivity.
two parties in leasing
Lessor
Lessee
Lessor
owns the asset and agrees to allow other party to rent
Lessee
rents the asset for a period of time
3 benefits of leasing
1- little or 0 down payment
2- reduced risk of obsoleensence (do not own good)
3- income tax advantages (lease payments are tax deductible)
We account for lease transactions according to their economic substance. This ensures that there is a faithful representation of the transaction in the accounting records,
We account for lease transactions according to their economic substance. This ensures that there is a faithful representation of the transaction in the accounting records,
if lessor transfers risk and reward to lessee, even tho legal title not passed, who will record the transaction ?
LESSEE as an asset purchase, they will note that it was financed by a loan from the lessor
they will record it as a “right of use asset”
what
what is a right of use asset
A leased asset recorded as property, plant, and equipment because the right to use the asset has been obtained by the lessee, usually because the lease extends beyond one year.
how is the related loan coming from a right of use asset recroded?
as a lease liability
The lessee will also record depreciation expense on the right-of-use asset and interest expense on the lease liability
The lessee will also record depreciation expense on the right-of-use asset and interest expense on the lease liability
Under International Financial Reporting Standards (IFRS), companies capitalize almost all leases beyond one year in this manner.Under IFRS, there are two exceptions to the accounting treatment described above. The first is for leases with a term of less than 12 months, known as short-term leases. The second exception is for leases of low-value assets such as personal computers, small items of office furniture, and phones. If either of these exceptions applies, then the lessee does not record a right-of-use asset or a lease liability. Instead, the lessee records the lease payments as a period expense (Rent Expense).ASPE Under Accounting Standards for Private Enterprises (ASPE), there are two types of leases: capital leases and operating leases. Capital leases are leases in which the benefits and risks of ownership of the leased asset have been transferred to the lessee. Companies account for capital lease assets and liabilities in the same manner as IFRS. If the lease does not transfer the risks and rewards of ownership to the lessee, the lease is anoperating lease. Under an operating lease, companies do not record an asset or liability; rather, they record each lease payment as rent (lease) expense on the statement of income. Because no lease liability is recorded under an operating lease, this is commonly known as off–balance sheet financing, which simply means that an asset and liability have not been recorded when the lease began.
Under International Financial Reporting Standards (IFRS), companies capitalize almost all leases beyond one year in this manner.Under IFRS, there are two exceptions to the accounting treatment described above. The first is for leases with a term of less than 12 months, known as short-term leases. The second exception is for leases of low-value assets such as personal computers, small items of office furniture, and phones. If either of these exceptions applies, then the lessee does not record a right-of-use asset or a lease liability. Instead, the lessee records the lease payments as a period expense (Rent Expense).ASPE Under Accounting Standards for Private Enterprises (ASPE), there are two types of leases: capital leases and operating leases. Capital leases are leases in which the benefits and risks of ownership of the leased asset have been transferred to the lessee. Companies account for capital lease assets and liabilities in the same manner as IFRS. If the lease does not transfer the risks and rewards of ownership to the lessee, the lease is anoperating lease. Under an operating lease, companies do not record an asset or liability; rather, they record each lease payment as rent (lease) expense on the statement of income. Because no lease liability is recorded under an operating lease, this is commonly known as off–balance sheet financing, which simply means that an asset and liability have not been recorded when the lease began.
Companies often incur costs when they renovate leased property. Companies will debit these costs to a separate asset account called Leasehold Improvements. Since the leasehold improvements become “attached” to a leased property, they belong to the lessor (the landlord, not the tenant)at the end of the lease. Because the benefits of these improvements to the lessee will end when the lease expires, the lessee will depreciate improvements over the shorter of the remaining life of the lease (including any renewal options) or the useful life of the improvements
Companies often incur costs when they renovate leased property. Companies will debit these costs to a separate asset account called Leasehold Improvements. Since the leasehold improvements become “attached” to a leased property, they belong to the lessor (the landlord, not the tenant)at the end of the lease. Because the benefits of these improvements to the lessee will end when the lease expires, the lessee will depreciate improvements over the shorter of the remaining life of the lease (including any renewal options) or the useful life of the improvements
