Chapter 9: Long Lived Assets

Question 1

What is property, plant and equipment?

Answer 1

Long lived assets that the company owns and uses for the production and sale of goods or services to consumers

Question 2

What are some characteristics of PPE?

Answer 2

• They exist physically (tangible assets)
• They are owned and used in normal operations, not an investment
• They are not offered for sale as part of normal operations, not inventory
• They are expected to be used for more than a year, long term

Question 3

What are the classes of assets?

Answer 3

1) Land (e.g. building site)

2) Land improvements (e.g. driveways, parking lots, fences, sprinkler system)

3) Buildings (e.g. office buildings, factories, warehouses )

4) Equipment (e.g. office furniture, computer equipment, factory machinery )

Question 4

What are capital or betterment assets?

Answer 4

Includes all amounts spent to get the asset in place and ready for use

• Recorded as an increase to the asset account
• Improves / increases the value of the asset
• May increase output, lower operating costs, extend useful life, or improve quality of output

Question 5

What are operating costs / repairs and maintenance?

Answer 5

Costs related to the ordinary maintenance. It is recorded as an expense in the period

e.g. tune-up on a vehicle, painting a wall inside a building

Question 6

What are lump sum purchases?

Answer 6

A group of assets purchased in one transaction

e.g. building, land, and land improvements

Question 7

How do you calculate carrying amount/ book value / net book value of an asset?

Answer 7

Purchase price of the asset minus accumulated depreciation

Question 8

What is the depreciation method used for income tax purposes?

Answer 8

The CRA requires the declining balance method of depreciation o be used for income tax purposes

Question 9

What is capital cost allowance?

Answer 9

The term CRA uses. Residual value is ignored, 50% is allowed in the first year, and depreciation rates are pre-determined

Question 10

What are capital additions?

Answer 10

Expenses made, that add to the asset’s operating efficiency, productivity or expected useful life

• Debit the appropriate asset account. Depreciation is recalculated using new capital value and remaining useful life

Question 11

What is the impairment loss of long term assets?

Answer 11

If the carrying amount (net book value) is greater than the market value, the asset has suffered an impairment loss and should be adjusted.

• This is not reversible, even if the market value increases

Question 12

Does the historical cost of an asset change?

Answer 12

The historical cost of an asset does not change - but the net book value or remaining life may change

Question 13

Costs of natural resources consists of…

Answer 13

Acquisition, exploration, and development. It is amortized similar to units of production

Question 14

How do you calculate amortization rate for natural resources?

Answer 14

Cost of resource divided by estimated total units

Question 15

How do you calculate amortization expense for natural resources ?

Answer 15

Amortization rate x Total units

Question 16

What do intangible assets include?

Answer 16

Patents, copyright/trademark, and goodwill

Question 17

What are patents?

Answer 17

Exclusive rights to produce and sell goods with one or more unique features

• Continue to be in effect for 20 years
• Patents may be purchased for others or granted by government
• Includes purchase price and legal fees
• Amortized over to years of the patent’s expected life

Question 18

What are copyrights and trademarks?

Answer 18

Exclusive rights to publish and sell a literary, at rustic, or musical composition

• Continues to be in effect for 50 years beyond author’s death
• Includes all costs to create the work and legal fees
• These assets are not amortized, however they are evaluated annually for impairment

Question 19

What is goodwill?

Answer 19

An asset of the business that is created from favourable factors (e.g. location, product, reputation)

• Can only be recorded if it is objectively determined by a transaction (such as the purchase of a business)
• Includes all costs to create the work and legal fees
• Goodwill is not amortized, however must be evaluated annually for impairment

Question 20

What is the asset turnover and how is it calculated?

Answer 20

The asset turnover indicates how efficiently a company uses its assets; how many dollars of sales are generated by each dollar that is invested in assets

Net Sales / Average Total Assets = Asset Turnover

Question 21

What is the ‘return on assets’?

Answer 21

The return of assets measures overall profitability. A high return on assets indicate a more profitable company

Profit / Average Total Assets = Return on Assets

Question 22

What is depreciation?

Answer 22

The allocation of the cost of a long-lived asset to expense over its useful life in a rational and systematic manner