Chapter 7 - PPE and Intangibles Flashcards
What type of asset are both PPE and intangibles?
Long-term assets.
Give examples of intangibles.
Patents and trademarks, goodwill, slogans, and databases.
Explain the following sentence: “The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use.”.
When a company buys an asset, it’s not just the cost of the asset that they have to think about; it’s also acquisition costs, transportation costs, maintenance costs, and such.
Explain the “relative sales value” method.
The total cost of purchased assets is divided among the assets according to their relative/market sales value.
Where is PPE reported?
On the balance sheet.
How do you calculate PPE?
PPE = Cost - Accumulated depreciation
What does “estimated residual value” mean?
The amount of money a company expects it will receive for an asset that’s at the end of its useful life.
How do you calculate “depreciable amount”?
Depreciable amount = Asset’s cost - Estimated residual value
Explain the “straight-line” depreciation method.
An equal amount of depreciation is recognized each year.
How do you calculate depreciation expenses using the “straight-line” method?
Straight-line depreciation per year =(Cost - Residual value) / Useful life (years)
Explain the “units of production” depreciation method.
A fixed amount of depreciation is assigned to each unit of output/service that the asset produces.
How do you calculate depreciation expenses using the “units of production” method?
Units of production per unit of output = (Cost - Residual value) / Useful life (units of production)
Explain the “double declining balance” depreciation method.
Computes annual depreciation by multiplying the asset’s net value with a constant percentage.
How do you calculate depreciation expenses using the “double declining balance” method?
Annual double declining balance depreciation rate = (1 / Useful life*) * 2
- = years
True or false: depreciation increases both the asset and equity.
False
When is an asset impaired?
When its carrying amount is higher than its recoverable amount.
What does “fully depreciated asset” mean?
An asset that has reached the end of its estimated useful life.
What does “asset turnover ratio” mean?
How many sales a company can generate from its assets.
How do you calculate “asset turnover ratio”?
Asset turnover ratio = Net sales / Average assets
What does “return on assets” mean?
How much profit a company can generate from its assets.
How do you calculate “return on assets”?
Return on assets = Net profit / Average assets
Explain the term “goodwill”.
“An intangible asset representing the value of a company’s reputation, customer relationships, and brand recognition.”.
True or false: PPE is meant to be used for more than one period (fiscal year).
True
How is PPE measured?
At the cost of purchase and cost of production.
According to the cash-basis accounting method, 1. when is revenue recognized and 2. when are expenses recognized?
- when cash is received/earned
- when cash is paid
According to the accrual-basis accounting method, 1. when is revenue recognized and 2. when are expenses recognized?
- when the performance obligation is satisfied
- when assets are consumed or liabilities are incurred
What does “useful life” mean?
The length of service expected from using the asset (an estimate).
When an asset is impaired, is it debited or credited? Why?
It’s debited because impairment represents a reduction in the asset’s value.
How do you calculate depreciation expenses?
Depreciation expenses = Depreciation per unit * Units produced
True or false: an asset can be depreciated below its residual value.
False
Is “accumulated depreciation” a contra account or a companion account?
A contra account.
How do you calculate an asset’s carrying amount?
Carrying amount = Balance of the companion account - Balance of the contra account
Where is an asset’s carrying amount reported?
On the balance sheet.
What does the term “capital expenditure” mean?
If an asset is improved, cost is added to the asset account (i.e. cost is capitalized).
What does the term “expenses of the period” mean?
If an asset is kept in its normal operation conditions, cost is treated as an expense (i.e. cost is expensed).
Disposal of PPE occurs when?
When the asset is sold, traded, or discarded.
Intangibles can be divided into two categories; what are they?
- finite lives
- indefinite lives
