Chapter 6 - PPE Flashcards
Definition of Cos of PPE Assets
Sum of all costs incurred to bring the asset to its location and intended use.
Cost of Land
Purchase Price
Comissions
Survey and Legal Fees
Back Property taxes paid
Grading and Removing o Unwanted Buildings
Cost of Constructed Buildings
Architectural fees
Buildings Permits
Contractor’s charges
Materials
Labour and overhead
interest on funds borrowed
Cost of Purchased Buildings
Purchase Price
Broker’s comission
Taxes paid
Costs to repair and renovate
Cost of Equipment
Purchase Price (after discounts)
Transportation
Insurance in transit
Sales and other taxes
Purchase Comission
Installation and Testing
Land and Leasehold Improvements
Asset Account - It is depreciated
Land = Parking lots, driveways, signs, fences, paving, and sprinkler systems
Leasehold = Improvements to lease property
Lump-Sum (Basket) purchases of assets
Buy multiples assets with 1 payment
Should apply the relative-sales-value-method, by applying the costs proportionally to their value of market.
Capital Expenditure
Increases the capacity of the asset to produce or extend its useful life
Maintain or restore working order
Cost is recorded as an expense
Capital Expenses
Do not increase or extend capacity or useful life
Maintain or restore working order
Cost is recorded as an expense
Causes of Depreciation of PPE
physical wear and tear; obsolescence
What are the Depreciation Methods?
- Straight-line
- Units-of-production
- Diminishing-balance
What is the asset’s final carrying amount?
Residual Value
Straight-line (SL)
Best for assets that generate revenue evenly
Annual Depreciation Expense = Cost - Residual Value / Useful Life in Units of Procution
Units-of-Production (UOP)
Best for assets that wear out because of use
Depreciation per Unit = Cost - RV / Useful life in Units of Production
Depreciation per Unit x Activity for Period = Depreciation Expense
Double-Diminishing-Balance (DDB)
Best for assets that generate revenue early in useful life
DDB rate = Straight-line rate x 2
DDB rate x Carrying Amount (Cost - Accumulated Depreciation)
Final year Depreciation = Carrying Amount at the Begg. of the final year - Residual Value
- This is the amount needed to reduce the book value until its RV.
- First-year depreciation is based on asset’s full cost
How is the useful life is changed after the depreciation already began?
New Annual Depreciation = Remaining Depreciable Carrying Amount / New Estimated Remaining Useful life
Derecognition of PPE
Loss
Carrying Amount > Cash Received
DR CASH
DR Accumulated Depreciation
DR Loss on Disposal
CR PPE
Derecognition of PPE
Gain
Carrying Amount < Cash Received
DR CASH
DR Accumulated Depreciation
CR Gain on Disposal
CR PPE
Depreciation for Tax Purposes
The income tax act permits taxpayers to use accelerated depreciation (up to specified maximums) for tax purposes
Depreciation of PPE and its components
Some PPE has significant components and they should be depreciated separated.
Impairment
If Carrying Amount > Recoverable Amount
Can be caused by many factors such as obsolescence, physical damage, and loss in market value.
DR Loss on Impairment XX
CR Accumulated Depreciation XX
It can be reversed.
ASPE only allows the review of PPE when impairment is suspected. No reversal is allowed of the write-off.
Revaluation Model
1) Asset is recorded at cost when purchased
2) If the fair value of the asset is different, it should be considered.
Asset = Fair Value - Accumulated Depreciation - Accumulated Losses
Amortization Method of Intangible Assets with Finite Lives
- Amortization
- Usually, it uses the straight-line method
Amortization Method of Intangible Assets with Indefinite Lives
Tested for Loss in Value (impairment)
ex. Goodwill
Examples of Intangibles Assets
Patents
Copyrights
Trademarks and trade names
Franchises and Licenses
Goodwill
Patents
- Granted by the federal government
- Exclusive right to produce and sell an invention
- Last 20 years, but its useful life is expected to be less than 5 years
Copyrights
- Granted by the federal government
- Give holder exclusive rights to reproduce and sell a book, musical composition, film or other work of art
- Extended 50 years after creator’s life.
- Useful life no longer than 2 or 3 years
Trademarks and Trade Names
Distinctive identification of a product or service
- Also includes advertise slogans
Useful life may be set by contract
- Or indefinite life
Franchises and Licenses
- Granted by private business or government
- Give purchaser the right to sell a product or service with specified conditions
- Include restaurant chains and sports organizations
- Have indefinite life = not amortized
Goodwill
Only recorded when an entire company is purchased
- Purchase price of the company > market value of its net assets (Assets - Liabilities)
- Represents earning power of company purchased
- Not amortized (Just impaired)
To record:
DR Assets
DR Goodwill
CR Liabilities
CR Cash (Payable)
Asset Impairment
- Both Tangible and intangible assets must be tested yearly for impairment
- Occurs when expected future cash flows less than assets carrying amount
- Carrying amount adjusted to fair value
Research and Development
Research cost must be expensed when incurred
Development costs meeting certain criteria must be capitalized
Return on Assets (ROA)
ROA = Net Income + Interest Expense / Average Total Assets
Avg Total Assets = Begg. Total Assets + End. Total Assets / 2
Measures how profitable management has used the assets that shareholders and creditors have provided the company.
