Chapter 4 - PPE Flashcards
PPE is _____ asset that is held for ______, usually for ______
Tangible; Operations; More than one period
PPE is for use in ______, NOT for ______
Operations; Resale
Fixed asset consists of ______ and ______ assets
Operating; Non-operating (investments)
“Operating assets” consist of _____ and ______ assets.
Tangible (PPE); Intangible
(PPE)
Debit: _____
Credit ____
Debit:
Beginning Balance
Acquisition Cost
Credit:
Depreciation (cost allocation)
Ending Balance (valuation)
Under “Acquisition Cost,” what are the 6 factors to consider? (LIIINS)
- Lump-sum purchase
- Incidental costs
- Issuance of shares
- Interest during construction (borrowing cost)
- Non-monetary exchange
- Subsequent expenditures
_______ to prepare asset for intended use is generally _______
Direct costs; Capitalized
Usage of PPE in operations is considered as ______
Depreciation expense
In a “Lump-sum Purchase,” the company allocates ______ among the various assets on basis of their _______.
Total cost; Relative fair values
If two assets are purchased at lump-sum and fair value of only one asset is ______, then the company must allocate the lump-sum price to the asset first by ____
Known; Fair value
What are the 3 types of “Incidental Costs”? (LBE)
(Cost of…)
- Land
- Building
- Equipment
“Cost of land” consists of: (CRAI)
- Closing costs (title, attorney’s fees, recording fees)
- Ready for intended use costs (grading, filing, draining, etc.)
- Assumption of any liens, mortgages, encumbrances
- Improvements on land with indefinite life
“Cost of building” consists of: (REA)
- Remodeling/reconditioning costs
- Excavation costs (for specific building)
- Architectural costs/permit costs
“Cost of equipment” consists of: (FAT)
- Freight-in/handling costs
2. Assembly, installation, conducting Trial runs
Companies sometimes acquire PPE by ________, such as ordinary stocks
Issuing securities
If stock is actively traded, then the _______ of the stock is fair indication of _________
Market price; Cost of the property acquired
(Capitalization period) Capitalization starts when expenses/interest costs are _______, and ends when _________
Being incurred; Asset is ready for intended use
What are 2 types of “Qualifying Assets”? (COSL)
- Company’s Own use assets
2. Sale or Lease assets that are constructed as discrete projects (ship or real estate development)
(Non-monetary Exchange) In general, accounting for non-monetary transactions should be based on ______of assets. Thus, companies should ________ recognize any _________ on the exchange.
Fair values; Immediately; Gain or loss
Non-monetary transactions are immediately recognized when they have ________
Commercial substance
An exchange has “commercial substance” if ________ change as a result of the transaction. It means that _____ and _______ of cash flows arising from exchanged assets will be significantly different.
Future cash flows; Timing; Amount
If an exchange has “commercial substance,” then ____ value is used.
Exception: (FE)
Fair
Exception:
- Fair value is unknown
- Exchange for facilitation of sales
If an exchange DOES NOT have “commercial substance,” then _____ value is used. HOWEVER, exceptions are:
Book;
Exceptions:
- Conservatism
- Receiving boot
(Subsequent expenditures) Subsequent expenditures are recognized as an asset when the ________ from expenditures is ______ and ________ with sufficient certainty.
Future economic benefit; Probable; Measurable
Evidence of future economic benefit depends on ______ in the value of the asset.
Increase
“Increase” of value of the asset includes: (QQS) (Capital expenditure)
- Quantity of product produced
- Quality of product produced
- Service life of the asset
If expenditures merely ______ the value of the asset, then it should be recorded as ______
Maintains; Expense (revenue expenditure)
“Subsequent expenditure” consists of: (AIRR)
- Additions
- Improvements
- Replacements
- Repairs
If replacement will only increase the ______of the asset, companies record it as increase of ________ of the asset.
Service life; Accumulated Depreciation
“Depreciation” applies to: (PT)
PPE (Tangible assets)
“Amortization” applies to: (IPC)
Intangible assets (patent, copyright)
“Depletion” applies to: (N)
Natural resources
What are the 3 factors of “Depreciation”? (OSS)
- Original cost
- Service life
- Salvage value (residual value)
What are the 3 assumptions/methods for “Depreciation” pattern? (ASA)
- Activity method/Units-of-production approach (proportion to usage)
- Straight-line method (proportion to time)
- Accelerated method (inverse proportion to time)
“Activity method” assumes that depreciation is a function ______. It is only appropriate when units of output/service can be
Usage; Measured
“Straight-line method” assumes that depreciation is a function of ____
Time
“Accelerated method” provides _______ expense in ______ years than later periods (PPE is more actively used in the beginning)
Higher depreciation; Earlier
(Depreciation) What are the 2 types of “Accelerated method”? (DS)
- Double Declining Balance Method - Depreciation rate that is 200% of the straight-line method
- Sum of Years’ Digits Method
“Component Depreciation” is required by _____, and requires each part of PPE that is significant to the _____ of the asset must be depreciated _______
IFRS; Total cost; Separately
“Composite (or Group) Method” is a process of depreciating the ______ of assets using a ___________ that is computed by ________ method
Entire class; Single depreciation rate; Straight-line
(Depreciation) For partial periods, the accepted approaches for depreciation are: (NFHND)
- No depreciation in acquisition and a full year’s depreciation in disposition
- Full year’s depreciation in acquisition and no depreciation in disposition
- Half-year convention
- Nearest full month basis
- Daily basis
(Valuation) What are the 2 models for PPE valuation? (CR)
- Cost model (impairment - conservatism)
2. Revaluation model (Fair value model)
(Valuation) What are the 2 types of “cost model” valuation? (UI)
- US GAAP
2. IFRS
(Valuation) Under “US GAAP,” what are the 2 types of valuation methods? (HUD)
- Held for use - Recoverability test; Measurement; at least Annually; Impairment loss reported as component of income from continuing operation; New cost basis; Restoration NOT permitted
- Held for disposal - Treated like inventory (report at LCN); restoration is permitted
(Valuation) Under “IFRS,” valuation is conducted at _____, and restoration is/is not permitted.
Year’s end; IS
(Valuation) Under “Revaluation model,” a class of fixed assets is revalued to ____
Fair value
(Valuation) “Revaluation Surplus” is reported as ________, NOT net income
Other comprehensive income (OCI)
(Valuation) “Revaluation Loss” is reported in ______
Net income
If PPE is purchased using stock issuance, then the value of PPE is determined by ______, NOT the CSG of PPE
Fair value of the stock’s trading price
“Interest During Construction” is also called ______
Borrowing Cost
(Qualifying assets) For “Interest During Construction,” the 2 types of asset allowed are:
- Asset for company’s own use
2. Asset for sale or lease that are constructed as discrete project(e.g., ship or real estate development)
Avoidable Interest = ?
(Weighted average accumulated expenditure) X Interest (specific interest rate for construction & other weighted interest rate)
(Non-monetary exchange) If two exchanged assets have different characteristics (timing, amount, risk), then there is _________. If same characteristics, then _____
Commercial substance; NO commercial substance
“Boot” is to receive ____. (NOT give).
Difference in cash
(Boot) If cash received is 25% or more of the total value, then it is journalized as ____
Same as “cash exchange”
(Boot) Gain = ?
(FV - BV) X (Cash/FV)
“Cash” may be both _____ value and ______ value.
Fair; Book
“Land” ______ depreciate.
DOES NOT
(Depreciation) Under “Activity” assumption, depreciation is calculated as:
(Original cost - Salvage value) X (actual use/estimated total use)
(Depreciation) Under “Straight-Line” assumption, depreciation is calculated as:
(Original cost - Salvage value) X (1/number of years)
(Depreciation) Under Declining Purchase Method under “Accelerated method” assumption, what are the 2 types of methods? (FD)
- Fixed % method
2. Double Declining Balance method
(Depreciation) When using “Composite Method,” the depreciation method to apply is _______
Straight Line Depreciation
(Valuation) For US GAAP Method’s “Recoverability Test (for determining whether there was loss),” _______ used is _______.
Future cash flows (as recoverable cash); UNdiscounted
(Valuation) For US GAAP Method’s “Measurement Test (for determining actual loss),” ______ used is _____
Impairment loss; NRV
(Valuation) For US GAAP Method, restoration is/is not permitted, because there is a new _______
Is NOT; Cost basis
(Valuation) For PPE assets “Held for Disposal,” assets are treated like _____, so it should be valuated based on ____. Restoration is/is not permitted.
Inventory; LCN; IS
(Valuation) Under IFRS, _____ value is compared with ______ amount (value in use, which is ______ future cash flow VS. ____)
Book; Recoverability; DISCOUNTED; NRV
(Valuation) Under “Revaluation Model,” _____ is used. The “surplus” is journalized as ______, and “loss” is journalized as _____
NRV; OCI; Net Income
