Chapter 9 Long Lived Assets

Question 1

What does IFRS stand for?

Answer 1

International Reporting Financial Standards

Question 2

What are the two models companies can choose between to account for long-live assets?

Answer 2

1. Cost Model
2. Revaluation Model

Question 3

Define cost model

Answer 3

The cost model records long-lived assets at cost of acquisition. After acquisition, depreciation is recorded each period and the assets are carried at cost less accumulated depreciation.

Question 4

What are three types of long lived assets?

Answer 4

1. Property, plant and equipment
2. Natural resources
3. Intangible assets and goodwill

Question 5

Define Fixed Assets; land, building and equipment or capital costs.

Answer 5

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

Question 6

Fixed assets (Property, plant and equipment) have what three characteristics?

Answer 6

1. Physical substance (a definite size and shape).
2. They are held for use in the production or supply of goods or services, for rental to others or for administrative purposes.
3. They are not intended for sale to cusomters

Question 7

How are current and fixed assets different?

Answer 7

Fixed assets are expected to provide services to a company for a number of years.

Question 8

What does the cost of an item include for depreciation purposes?

Answer 8

1. Purchase price, plus non-refundable taxes, less any discounts or rebates
2. The expenditures necessary to bring the asset to the required location and make it ready for its intended use. (Shipping & Install)
3. Any obligations to dismantle, remove or restore the asset what it is retired.

Question 9

Define operating expenditures.

Answer 9

Costs that benefit only the current period are expensed.

Question 10

Define capital expenditures.

Answer 10

Costs that benefit future periods are included in a long-lived asset account.

Question 11

Fixed assets (Property, plant and equipment) are divided into what four classes?

Answer 11

1. Land
2. Land Improvements (structural additions such a driveways, sidewalks, fences, etc.)
3. Buildings (replacing roof, floors, wiring, plumbing)
4. Equipment (computers, machinery, vehicles, etc)

Question 12

The cost of land or buidlings includes what three components and excludes what?

Answer 12

Includes:
1. The purchase price
2. The closing costs (surveying, legal fees, etc.)
3. The costs of preparing the land/building for intended use (land - remove of old buildings, clearing, draining, filling, etc., building - repairing roof, floors, wiring, etc)

Excludes:
1. Annual Insurance Policies

Question 13

What makes land a unique fixed asset?

Answer 13

Land does not depreciate as it has an unlimited useful life.

Question 14

Define basket purchase (lump sum purchase).

Answer 14

Property, plant and equipment purchased together for a single price.

Question 15

Define depreciation.

Answer 15

The systematic allocation of the cost of a long-lived asset over its useful life.

Question 16

How is depreciation recorded?

Answer 16

Income statement - it is listed as an operating expense

Balance Sheet - it is listed as a contra account to the related long-lived asset account

Cost minus accumulated depreciation is the carrying amount of the depeciable asset.

Question 17

What three factors affect the calculation of depreciation?

Answer 17

1. Cost
2. Useful Life
3. Residual Value

Question 18

What are three ways of determining depreciation and how often should the method be evaluated?

Answer 18

1. Straight-line
2. Diminishing-balance
3. Units-of-production

Once a year and if changed, it must disclosed in the notes of the financial statement.

Question 19

How to calculate each of the depreciation methods?

Answer 19

1. Straight-line:
   (residual value - assets cost)/assets useful life = annual depreciation expense
2. Diminishing-balance* **:
   carrying amount at the beginning of the year x the depreciation rate = annual depreciation expense
3. Units-of-production:
   Total units of production / (cost - residual value) = ? x the actual units of production during the year = annual depreciation expense

• common practice is to double the straight line rate
  **residual value is not included in the depreciation rate or the depreciation expense, but it limits the total depreciation that can be recorded.

Question 20

How is partial-period depreciation calculated?

Answer 20

Annual depreciation expense x (the number of months used/12 months) = partial-period depreciation

The months not used in this period are added onto the end of the deprecation period.

Question 21

Explain the factors that cause changes in period depreciation

Answer 21

Depreciation needs to be revised if there are:
1. expenditures during the assets’ useful life
2. impairment in the value of an asset
3. change in the asset’s fair value when using the revaluation model
4. changes in the appropriate depreciation, method, or in the assets, estimated useful life or residual value

Question 22

How do you calculate revised depreciation for property, plant and equipment?

Answer 22

Fair value - accumulated depreciation - any impairment losses = revise depreciation

Question 23

How to calculate an impairment loss?

Answer 23

(Cost of asset - accumulated depreciation) - recoverable amount = impairment loss

Question 24

What are some factors that would indicate an impairment loss?

Answer 24

1. Obsolescence
2. Equipment where that is reduced demand or the market has become highly competitive
3. Bankruptcy of a supplier of replacement parts for equipment

Question 25

What determines a plant, property and equipment impairment?

Answer 25

If the asset’s carrying amount exceeds its recoverable value

Question 26

Define recoverable value

Answer 26

The higher of the asset’s fair value, less costs to sell and its value in use.

Question 27

Define the revaluation model

Answer 27

The carrying amount of property, plant and equipment is its fair value less any subsequent accumulated depreciation less any subsequent impairment losses.

Question 28

Determine how to calculate annual depletion expense

Answer 28

Cost - Residual Value = Depletion Base

Then

Total cost of natural resource - (Residual value / total # of units estimated to be in the resource) = Depletion amount per unit of product

Then

Depletion amount per unit of product x # of units extract = Annual depletion expense

Question 29

How is left over inventory determined on the income sheet?

Answer 29

Left over inventory is marked as inventory, reported in $.
Sold/used inventory is marked as expense, reported in $.