Chapter 9: Reporting and Analyzing Long Lived Assets Flashcards
PPE are originally recorded at cost:
- Purchase price, including taxes and duties, less discounts or rebates.
- Expenditures necessary to bring asset to its intended location and make it ready for its intended use.
- Estimated cost of future obligations to dismantle, remove or restore the asset at the end of its useful life
Operating Expenditures:
benefit only a current period
are required to maintain an asset in its normal condition and often recur, although not always annually.
are expensed.
Capital Expenditures:
benefit future periods
include costs that increase the life of an asset or its productivity or efficiency.
are normally larger than operating expenditures and occur less frequently.
are capitalized (included in the asset account).
• The cost of land can include:
the cash purchase price
closing costs such as title, legal fees, and survey costs
costs incurred to prepare the land for its intended use such as clearing, grading, and filling.
The cost of land is NOT depreciated because it has an unlimited useful life
Land Improvements:
Are costs of structural additions to land.
decline in service potential, and require maintenance and replacement to keep their value.
Examples: driveways, fences, sidewalks and parking lots.
Land improvements are recorded separately from land and ARE depreciated.
When a building is purchased, costs include:
○ The purchase price,
○ closing costs,
all costs to make the building ready for its intended use (expenditures for remodeling rooms and offices, expenditures for replacing or repairing the roof, floors, electrical wiring, and plumbing).
The cost of equipment consists of:
○ the purchase price,
○ freight charges,
○ insurance during transit,
○ expenditures required in assembling, installing and testing the unit.
○ Annual costs such as licenses and insurance are operating expenditures.
• Purchase price + expenditures to get to use in business
Straight line depreciation:
is the most widely used method of depreciation
an equal amount of depreciation is expensed each year of the asset’s useful life as long as the cost of the asset, the useful life, and the residual value did not change.
annual depreciation=(cost -residual value)/ estimated useful life measured in years
The diminishing-balance method:
Produces a decreasing annual depreciation expense over an asset’s useful life
Depreciation is calculated based on the asset’s carrying amount, which diminishes each year as accumulated depreciation increases
Annual depreciation expense=carrying amount * the depreciation rate
Residual value is not included in the calculation
Depreciation rate = Straight-line rate x multiplier
The units-of-production method
the life of an asset is expressed in terms of the total units of production or the total use expected from the asset.
Production levels used to measure depreciation include units of output, machine hours, kilometers driven, or hours used.
Two steps to calculate depreciation:
Determine the depreciation amount per unit: (cost-residual value)/total estimated units of production.
Multiply the depreciation amount per unit by the units produced or used during the year to arrive at annual depreciation.
Journal entry to record an impairment loss:
Dr. Impairment Loss Cr. Accumulated Depreciation
Retirement of an asset:
recorded as a special case of a sale, one where no cash is received.
If the asset is retired before it is fully depreciated, there is a loss on disposal (= carrying amount at the date of retirement).
Even if the carrying amount is zero, a journal entry is still required to remove the accounts related to the retired asset.
If the company is still using a fully depreciated asset, the asset and its accumulated depreciation will continue to be reported on the statement of financial position, without further depreciation, until the asset is retired.
Income Statement:
Depreciation expense, gains and losses on disposal and impairment losses are included in the operating section.
Statement of Cash Flows:
Cash flows from the purchase and sale of long-lived assets are reported in the investing section
Return on Assets
profit/average total assets
asset turnover
net sales/average total assets
