chapter 9 Flashcards
what is property, plant and equipment?
long lived resources that are controlled by the company, are tangible, used in the operation of a business and are not intended for sale to customers
how are property, plant and equipment recorded?
at cost
what are the 3 things the cost of property, plant and equipment include?
purchase price, including non-refundable taxes and duties, minus discounts or rebates
expenditures necessary to bring the asset to its intended location and make it ready for its intended use
estimated cost of future expenditures to dismantle, remove or restore that asset at the end of its useful life
what does the cost of land include?
purchase price
closing costs such as survey, title search and legal fees
additional costs to prepare land for its intended use minus any proceeds from salvage or removal of buildings
is land depreciated?
no it has an unlimited life
what are land improvements?
the costs of structural additions to make a property (paving, fencing and sidewalks)
how do land improvements change over time?
they decline in service potential over time
how are land improvements recorded and depreciated?
they are recorded separately from land and depreciated over time
does land improvements include cost of getting the land ready to use?
no getting land ready to use is included in the cost of the land
how are buildings recorded?
all expenditures related to the purchase or construction of a building
what are the costs included when a building is purchased?
purchase price
closing costs (legal fees)
costs required to make building ready for intended use (amortized)
what are the costs of constructing a building?
contract price
architects fees
building permits
excavation cost
interest costs during construction
how does the interest costs of a building change after it is completed?
it becomes interest expense
what do equipment costs include?
purchase price
freight charges, sales tax, or cost of insurance during transit
assembling
installing and testing
what are the 2 expenditures during the useful life of equipment?
operating expenditures
capital expenditures
what are operating expenses?
they only benefit the current period and they are required to maintain asset in normal operation condition
what is an example of operating expenses of equipment?
an oil change of a car
what are capital expenditures?
capitalized as an asset (increases the cost of the asset) or increases the life of an asset, its productivity or efficiency
what is an example of a capital expenditure?
rebuilding the engine of a car, that cost is amortized across the life of the equipment
what are the 5 advantages of leasing?
little or no down payment
reduced risk of obsolescence (not needed to sell it later)
cash outlays for an asset over time instead of upfront
100% financing
income tax advantages
what is the lessor?
the owner of the asset for lease such as a landlord
what is the lessee?
party leasing the asset from owner
what are 3 IFRS lease rules?
lease is considered to be an asset purchase financed with a loan provided by the lessor
risks and rewards of ownership transfer to lessee even if legal title has not passed
lessee is required to report leased agreement as a right-of-use asset and the related liability
what are the 2 exceptions where a lease is treated as a period expense?
lease terms of less than 12 months
leases for low-value assets
what are the 2 kinds of leases under ASPE?
capital lease
operating lease
what is a capital lease?
when substantially all benefits and risks of ownership are transferred from lessor to lessee and the lessee is required to recopied leased assets and related liability at present value of minimum lease payments
what financial statement does the capital leases show up on?
balance sheet as a non-current liability
what is an operating lease?
the benefits and risks of ownership not transferred to lessee, lease (rental) payments recorded as expense by lessee and as revenue by lessor
what financial statement does operating lease show up on?
income statement
what is depreciation?
systematic allocation of the cost of property, plant and equipment over the assets useful life
does the process of cost allocation determine as assets current value?
no
does depreciation use or provide cash to replace the asset?
no
what are the 3 factors in calculating depreciation?
cost
useful life
residual value
what is cost?
purchase price plus cost required to get the asset ready for use plus estimated asset retirement costs
what os useful life?
the time period that the asset is expected to be available for use or the number of units that the asset is expected to produce
what is residual value?
estimated amount to be received from the disposal at the end of the assets useful life
what are the 3 depreciation method?
straight line
diminishing balance
units of production
what method of depreciation is allowed for income tax purposes?
none
how does management choose the method for depreciation?
the method that bests reflects the pattern of use of the economic benefits from that asset
when is the units of production method useful?
for factory machinery vehicles, airplanes or any asset who’s usage varies over time
what are the 4 reasons that revisions is needed for depreciation?
if change in estimated useful life or residual value
capital expenditures or additions during useful life
impairment
change in the pattern in which the asses economic benefits are consumed
when you make a revision to depreciation, what period does it take place in?
it can change in current or future periods but not in prior years
what is an example of impairment?
if there is a large chemical spill on land causing damage to it
when is impairment recorded?
when the impairment is done
how often are indicators of impairment determined?
they must be done on a regular basis, and if they are present then an impairment test must be done
how do you journalize impairment loss?
debit impairment loss
credit the respective assts accumulated depreciation
what are long-lived tangible assets that are consumed over time called?
wasting assets
what is the depreciation of natural resources called?
depletion
what method of depreciation is used for depletion?
units of production method as production can vary from year to year
what is the amount of assets after depletion is called?
reserves of the asset
can reserves fall overtime?
yes, this causes impairment
can significant components of an asset be depreciated over time?
yes
what is an example of significant components being depreciated over time?
for a jet plane the body can depreciated at a different rate than the engines
is the revaluation model allows under IFRS?
yes but on a limited basis
what are the 4 steps when selling an asset?
record year to date depreciation expense
calculate carrying value
compare proceeds to the carrying value of asset to determine gain or loss
remove record of the asst from the books
what are intangible assets?
assets they do not have physical substance
how do you record intangible assets?
very similar as tangible assets and are recorded at cost including all costs to make assets ready for use
how is the cost of intangible assets amortized?
if it has a finite life the cost must be systematically allocated over its useful life
if there is 2 useful lives for an intangible asset what one is used?
the shorter useful life
can impairment tests write down the value of them?
yes
can intangible assets with infinite useful lives be amortized?
no, same as land
what are 3 examples of intangible assets with finite lives?
patents
copyrights
research and development costs
what are patents?
exclusive rights to produce for 20 years
what are copyrights?
protection for the life of the creator + 50 years (why we use shakespear in school plays)
what are research and development costs?
all research costs are expensed and development costs are capitalized only if associated with an identifiable feasible product
what are 3 intangible assets with indefinite lives?
trademarks and trade names
franchises
licences
what are trademarks and trade names?
word, phrase, jingle, symbols that distinguishes or identifies a particular business or product
what are franchises?
contractual arrangements to sell products or services
what are licences?
grand the holder operating rights
what is goodwill?
asset representing future economic benefits arising from the purchase of a business
how do you find goodwill?
the excess cost over fair market value of net identifiable assets (less liabilities) acquired and represents the extra value relating to a business when it Is purchased
what portion of a business does goodwill identify?
the whole business
can goodwill be amortized?
no it cannot
is goodwill subjected to annual impairment tests?
yes
what financial statement is good will reported on?
on the statement of financial position and it is the last asset in the concurrent asset section
where are gains or losses on disposal reported?
on the statement of income in the operating expense section
what does the return on assets ratio measure?
overall profitability
what is the return on assets ratio?
return on assets= net income/ average total assets
what is the average total assets?
beginning assets+end assets / 2
what is good for the return on assets ratio?
higher is better because it indicates that for every dollar invested in assets, more net income is being generated
what does asset turnover measure?
measures how efficiently a company uses its assets
what is the formula for asset turnover?
sales/ average total assets
what is better for asset turnover ratio?
higher is better because it indicates that for every dollar invested in assets, more sales are being generated
what is the formula for profit margin?
net income/ revenues
what is the formula for return on assets?
profit margin X asset turnover
what is the only model allowed for vaulting PPE?
only cost model
are reversals of impairment losses allowed under ASPE?
no
when are goodwill tests done under IFRS?
annually
when are goodwill tests done under ASPE?
only when events and circumstances change
