Chapter 9 Flashcards
When you purchased your building, you paid for
the real estate broker fee. Should this fee be added to be part of the building?
Yes
How do we normally valuate PPE
historical cost
What are capitalization costs?
Costs necessary to acquire the asset and get it ready for use
Over the life of the asset, a company incurs minor maintenance and repair costs. Should they be capitalized?
No
Over the life of the asset, a company incurs major maintenance and renovation costs. Should they be capitalized?
Yes
How is the capital asset presented?
At the depreciated historical cost
Equation for net amount of PPE?
PPE - gross amount - accumulated depreciation
What is impairment loss?
When the depreciated historical cost is greater than net recoverable amount
Impairment loss = carrying amount - recoverable amount
Is depreciation a valuation or a cost allocation process for PPE?
Cost allocation
Depreciation expense equation using straight line method?
(Cost of asset - residual value)/Useful life
Equation for Depreciation expense using units of activity method?
(Cost - residual value)/Estimated uneful life in units all multiplied by units produced
Calculate depreciation expense with a change in useful life
Book value at end of year before change: PPE - accumulated depreciation
expense = (book value - residual value)/new useful life
Equation for acceleratied or declining balance method?
(Cost - accumulated depreciation at beginning of period) * depreciation rate
Equation for double declining balance rate
2 * (1/useful life)
Assume that the residual value of the P.P.E. (Property, Plant, and Equipment) is zero. P.P.E. was purchased at the beginning of the fiscal year. During the first year use of the P.P.E., the depreciation expense under the double declining balance method is 2 times the depreciation expense
under the straight line depreciation method. Is this statement correct?
Yes
Which gives higher net earnings between straight line and double declining in the first year of depreciation?
Straight line
Which gives higher book value between straight line and double declining in the first year of depreciation?
Straight line
Equation for book value?
PPE - Acumulated depreciation
Journal entry for the sale of an asset?
(Dr) Cash, Accumulated depreciation
(Cr) PPE, Gain on the sale
Journal entry if a comany was unable to sell an asset?
(Dr) Accumulated depreciation, Loss on the disposal of PPE
(Cr) PPE
When do we not amortize (lower book value)
When the asset does not have a useful life
What is goodwill?
An asset representing the future economic benefits arising from the purchase of a business that are not individually identified and separately recognized
Does goodwill have a useful life?
No, so no depreciation
What is considered to be goodwill?
The price that a company pays above what the net assets are worth
Equation for goodwill
Purchase price - fair value of net identifiable assets
