chpt. 9

Question 1

P.P.E

Answer 1

Property, Plant, Equipment

Question 2

Criteria for PPE

Answer 2

1. Tangible (need to be able to see it)
2. Plan to use it longer than 1 yr
3. Note for sale –> plan to use it

Question 3

Capitalization

Answer 3

spend money on something and you can benefit from it for a long period of time, record it as an asset first and then later slowly write off the cost and record it as an expense

Question 4

Expensing

Answer 4

Record it as an expense right away

Question 5

How to determine the cost of PPE

Answer 5

include items in cost of PPE that you will only have to pay for once! (Ex: for a car you would take into account the initial cash amount, sales tax, painting and lettering, but NOT registration for 1 yr, insurance for 1 yr, gas)

Question 6

Straight Line Depreciation Method

Answer 6

Assumes you benefit equally each year (not always the best/mot accurate):
Deprecation Exp = (Historical Cost- Residual Value) / useful life in yrs
*take into consideration partial years

Question 7

Units of Activity/ Production

Answer 7

i) Rate per unit = H.C - R.V / useful life in units
ii) deprecation Exp = (# of units produced by the PPE in the current year) x (rate per unit)
*book value should never drop below residual value

Question 8

Double-Declining Method

Answer 8

Deprecation Exp = (Historical Cost - Accumulated Deprecation) x ( 1/useful life in yrs) x 2
*take into consideration partial years!

Question 9

land

Answer 9

land will not depreciate (no limited useful life)

Question 10

Natural Resources

Answer 10

Ex: gold, minerals, oil, forests…
these will need to be depreciated
–> Accumulated Depletion
(use the units of Activity method)

Question 11

Intangible Assets

Answer 11

Ex: copyright, franchise, trademarks
–> use Amortization Expense
Journal entry:
Amortization Expense XX
Intangible Assets XX
(use the straight line method b/c it allocates amount equally)

Question 12

Assets Turnover

Answer 12

Assets Turnover = Net Sales/Avg. Total Assets