Chapter 7 Plant Property Equipment & Intangible Assets

Question 1

What is PPE?

Answer 1

1) Tangible
2) Long term

PPE has to be held for use in the business

Question 2

What are the criteria for recognising Plant Property Equipment?

Answer 2

It is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured directly.

Question 3

How are PPE measured?

Answer 3

PPEs are measured on two requirements

1) Initial measurement
2) Subsequent measurement

Question 4

How are PPE initially measured?

Answer 4

Initial measurement criteria include:

1) Purchase Price

2) Directly Attributable Costs
- Transport cost, site preparation cost, testing cost, handling and delivery fees

3) Initial estimate of cost at end of life
- dismantling costs, restoration costs

Question 5

What is the journal entry for the following event:

Purchased machine for $9,000, installation cost $1,000.

Answer 5

DR Machine 10,000 [9K + 1K]
CR Cash 10,000

Balance Sheet
Non-Current Asset
Machine 10K

Question 6

What is the concept of subsequent measurement?

Answer 6

Subsequent measurement is cost incurred after initial recognition of the asset
It can be either capitalised or expensed

Question 7

When is subsequent measurement expensed and when is it capitalised

Answer 7

Expensed:

1) Only serves to maintain the asset for operational use
2) Related to day to day servicing

Capitalised:

1) Adds additional years to the assets useful life
2) Increases productivity or efficiency of the asset

Question 8

What is depreciation?

Answer 8

Depreciation is the systemic allocation of cost of an asset less its residual value over its estimated useful life.

Question 9

When does depreciation start?

Answer 9

Depreciation starts the moment that the asset is available for use.

Question 10

Transaction
Super Fast Ltd depreciated the machine purchased earlier (for $40,000) over 4 years using straight line method

What is the journal entry?

Answer 10

DR Depreciation Expense on machinery 10K
CR Accumulated depreciation on machinery. 10K

P&L
Depreciation expense 10K

Balance Sheet
Non Current Asset
Machine 40K
Accumulated Depreciation (10K)
Total Non Current Asset 30K

Question 11

How to calculate depreciation

Answer 11

1) Cost of purchase
2) Estimated Useful Life
3) Estimated Residual Value

Question 12

What are the three general methods of depreciation, why are each of them used?

Answer 12

1) Straight Line Method
- For assets that are evenly used throughout its useful life

2) Units of production method
- For assets that wear out the more it is used

3) Declining Balance Method
- For assets that generate more benefits in early stages of its useful life

Question 13

How do you calculate depreciation for partial year?

Answer 13

1) Calculate the depreciation for the full year

2) Pro rate the depreciation

Question 14

What causes changes in depreciation estimates?

Answer 14

1) Change in estimated useful life,

For example, if the asset has capital expenditure applied and its useful life is extended.

1) Remaining book value + CAPEX cost = New Book value
2) (New Book Value - New Residual Cost) / Useful Life

Question 15

What are the two measurement model for PPE?

Answer 15

1) Cost model
- Carried at cost less any accumulated depreciation and accumulated impairment losses

2) Revaluation model
- Carried at revalued amount being its fair value at the date of revaluation minus any subsequent accumulated depreciation & accumulated impairment loss.

Question 16

How do you measure an increase in the carrying amount

Answer 16

DR Machine 5K
CR Revaluation Reserve 5K

                              B/S Non Current Assets                                         Equity Machine                        15K                              Revaluation Reserve 20K (cumulative amount)

                               P&L Other comprehensive income Gain on revaluation 5K (specific year's movement)

Question 17

When are assets impaired?

Answer 17

When there is evidence of a lack of recoverability of the carrying amount of an asset. ONLY need to check for impairment when an impairment event has occured.

Assets are impaired when their carry amount > recoverable amount.

Question 18

How do you determine recoverable value?

Answer 18

Recoverable value is the GREATER of

1) Value in use (present value of future CFs)
2) Fair Value less cost of disposal (Market value - cost to sell)

Question 19

How do you determine carry amount?

Answer 19

If there is NO prior impairment,

Carry amount = cost - accumulated depreciation

If there IS prior impairment

Carry amount = cost - accumulated impairment - accumulated depreciation

Question 20

What is derecognition?

Answer 20

The removal of PPE from the company’s books

• Occurs when the asset is no longer required by the company
• Possible scenarios include:
  1) fully depreciated asset
  2) scrapping of PPE before fully depreciated
  3) Sale or disposal of PPE

Question 21

How do you record a gain on disposal of PPE?

Answer 21

DR Cash 
DR Accumulated Depreciation
DR Accumulated impairment (if any)
      CR Gain on disposal
       CR PPE

Question 22

How do you record a loss on disposal?

Answer 22

DR Cash
DR Accum Depreciation
DR Accum impairment (if any) 
DR Loss on disposal of PPE 
      CR PPE

Question 23

What are intangible assets, are there any criteria to match?

Answer 23

Intangible assets are identifiable non monetary assets without physical substances

There are three criteria to be met to consider an asset as intangible

1) Identifiable
2) Control over asset
3) Economic Benefits

Question 24

What are the general types of intangible assets, which are recognised?

Answer 24

1) Purchased Goodwill (Identifiable)
- Excess paid for purchasing another company over sum of fair value of assets - liabilities

2) Internally generated Goodwill (NOT Recognised)
- Unidentifiable

3) Brand, mast heads etc (NOT Recognised)
- Cost cannot be distinguished from business as a whole

Question 25

What is the journal entry for recording amortisation of intangible asset?

Answer 25

DR Amortization expense

CR Accumulated amortization