Chapter 9 (Week 5)

Question 1

Plant Assets

Answer 1

PPE, PE, fixed assets
They are resources that have three characteristics:
–> They have a physical substance (a definite shape and size)
–> They are used in the operations of a business
–> They aren’t intended for sale to customers

Question 2

Cost of plant assets

Answer 2

Consists of all expenditures necessary to acquire the asset and make it ready for its intended use

Question 3

Land

Answer 3

usually used as a site for a manufacturing plant or office building.

It isn’t amortised

Question 4

Land improvements

Answer 4

Structural additions with limited lives that are made to land
–> Their cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use
–> Their costs are depreciated over their useful life

Question 5

Buildings

Answer 5

Facilities used in operation

Question 6

Equipment

Answer 6

Includes assets used in operations

Question 7

Expenditures during useful life

Answer 7

During the useful life of a plant asset, a company may incur costs for ordinary repairs, additions or improvements

Question 8

Ordinary repairs

Answer 8

expenditures to maintain the operating efficiency and productive life of the unit - they are usually small amounts that occur frequently
Often referred to as revenue expenditures

Question 9

Additions and improvements

Answer 9

costs incurred to increase the operating efficiency, productive capacity or useful life of a plant asset - they are usually material in amount and occur infrequently
Often referred to as capital expenditures

Question 10

Materiality

Answer 10

refers to the impact of an item’s size on a company’s financial operations
For this concept, some items are “negligible”
If a purchase doesn’t influence a business’ decision, they don’t have to follow IFRS in reporting that item

Question 11

Depreciation

Answer 11

It’s the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner

Question 12

Book vs Fair Value

Answer 12

Book: cost - accumulated depreciation
Fair: actual value of the asset

Question 13

Obsolescence

Answer 13

The process of becoming out of date before the asset physically wears out
It doesn’t apply to land because its usefulness generally remains intact

Question 14

Factors in computing depreciation

Answer 14

Cost: all expenditures necessary to acquire the asset and make it ready for intended use
Useful Life: estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence
Residual value: estimate of the assets value at the end of its useful life

Question 15

Depreciable cost formula

Answer 15

Cost of the asset - Residual value

Question 16

Straight line depreciation method

Answer 16

Companies expense the same amount for each year of the asset’s useful life - it is measured by the passage of time

Depreciable cost: Cost - Residual value

Annual depreciation expense: Depreciable cost / Useful life

• Best for assets that generate revenue evenly

Question 17

Units of activity depreciation method

Answer 17

Companies depreciate an amount based on units produced by that asset

Depreciable cost per unit: Depreciable cost / Total units of activity

Annual Depreciation expense: Depreciable cost per unit x Units of Activity during the year

• Best for assets that wear out because of use

Question 18

Declining balance depreciation method

Answer 18

Companies depreciate an asset based on its declining book value

Annual depreciation expense: book value at the beginning of the year x declining balance rate

• Best for assets that generate revenue early in useful life

Question 19

Component depreciation

Answer 19

When a plant asset has parts with significantly useful lives they must be depreciated separately

Question 20

Depreciation and income taxes

Answer 20

Many companies use straight-line in their financial statements to maximise net income. At the same time, they use an accelerated-depreciation method on their tax returns to minimise their income taxes.

Question 21

Revaluation of plant assets gain

Answer 21

If Fair Value > Book Value:

Question 22

Revaluation of plant assets loss

Answer 22

If Fair Value < Book Value

Question 23

Retirement of plant assets

Answer 23

Arrived at the end of its useful life the asset is retired

What asset is still useful to the company?

Question 24

Loss on disposal

Answer 24

The asset is retired before the end of its useful life

Book value > Proceeds form Sale

Question 25

Gain or Loss on Disposal

Answer 25

ProceedsfromSale − BookValueoftheAsset

Question 26

Gain on disposal

Answer 26

Proceeds from sale > Book value

Question 27

Sale of Plant Assets

Answer 27

In this case the book value is compared to the cash received in the sale

Gain on sale: price of asset sold > book value
Loss on sale: price of asset sold < book value

Question 28

Natural resources

Answer 28

Standing timber and resources extracted from the ground
Companies generally use the units-of-activity method to compute depletion
The reason is that depletion generally is a function of the units extracted during the year

Question 29

Depletion

Answer 29

The process of allocating the cost of natural resources
To compute depletion the cost per unit is then multiplied by the number of units extracted

Question 30

Depletion cost per unit Formula

Answer 30

(Total Cost - Residual Value) / Total Estimated Units Available

Question 31

Intangible assets

Answer 31

Rights, privileges and competitive advantages that result from the ownership of long lived assets that don’t possess physical substance

Their cost must be amortised

Question 32

Amortisation

Answer 32

Allocation of cost to useful life

Amortisation expense is considered an operating expense

Question 33

Patent

Answer 33

An exclusive right issued by a patent office that enables the recipient to manufacture, sell, or otherwise control and invention for a specific number of years from the due of the grant

It is non renewable

Question 34

Copyrights

Answer 34

Give the owner the exclusive right to reproduce and sell an artistic or published work

Question 35

Trademarks and names

Answer 35

word, phrase, symbol that identifies a particular enterprise/product

Their cost is the acquisition cost - they don’t get amortised, they have indefinite lives

Question 36

Franchises and Licences

Answer 36

Their cost is any cost connected to their purchase and their acquisition

Franchise: a contractual agreement between a franchisor and a franchisee
–> The franchisor grants the franchisee the right to sell certain products, perform specific services or use certain trademarks or names

Licences: legal permissions granted by a government or organisation that allow a person or business to perform a specific activity or use a specific asset

Question 37

Goodwill

Answer 37

In that case, goodwill is the excess of cost over the fair value of the net assets (assets less liabilities) acquired.

Goodwill is not amortised because it is considered to have an indefinite life.

Question 38

Asset Turnover

Answer 38

Net Sales / Average Total Assets