Class notes-Ch9 Flashcards
what are PPE (2 classificaitons)
-long lived resoources that are:
a) controlled by company
b) tangible
c) used in the operations of a business
d) are not intended for sale to customers
-provide economic benefits over many years
is ownership requried of ppe to report it in the sofp?
not really! if it is controlled by the company it is reported on sofp (leased assets)
at what price is the ppe recorded?
recorded at their cost!! but things are included in cost
what does the cost of ppe include
1) purchase price (including non refundable taxes and duties- discounts or rebates)
2) expenditures neccessary to bring asset to its intended location and for its inteneded use
3) estimated cost of future expenses needed to dismantle it/remove it/resotre it at end of its useful life
what are the classes of ppe
land, land improvements, builidings, equipment
what does the cost of land include
1) purchase price
2) closing costs (costs of various paperwork)
3) additional costs needed to prepare land for its intended use (-any proceeds from salvage)
what is salvage
any amount of benefits that can be recieved from the land
what is the life of land
unlimited life!!
is land deprecaited
no!! because land can not be used up so no depreciation
is land and land improvement the same class of ppe
no!! separate
what is land improvements clas
cost of structural additiions made to aproperty (fencing, paving, sidewalks)
-> does not include cosots of getting the land ready for use
why is land improvements a separate class
because these improvements decline in service potential over time!! there is depreciation
builidings class ppe
all expenses related to purchase or construction of a buildiing
building class 2 scenarios- what are the costs included in each scenario?
1) building is purchase:
-purchase price
-closing costs (legal fees)
-costs ready to make building ready for its intended use
2) buildiing is constructed
-contract price
-architect fee
-builidng permits
-excavation cost
-INTEREST COSTS DURING CONSTRUCTION
where do you include interest costs gained during construction?
in builidng cost!!!! not INTEREST EXPENSE!!
Equipment PPE class
-what are costs included
purchase price
freight charges, sales tax, cost of insurance
assembling
installing / testing
different between operating expenses and capital expense
operating expenes: benefit only the current period, and required to maintain asset in normal operating condition
capital expenses: capitalized as asset (increases the cost of the asset), increases the life of an asset, its productivity, or efficiency
advantages of leasing
-little or no down payment
-less risk of obsolescence
-cash outlays for asset
-100% financing
-income tax advantages
what is the lessor
owner of asset for lease (landlord)
what is the lessee
party leasing asset from the owenr
IFRS lease rules
-who is lease an asset for
-EXCEPTIONS:
when is lease treated as a period expense (2 scenarios)
-since risk and reward transferred to lessee even if legal title not passed, its reported as right of use asset (liabilities also transferred)
-lease terms of <12 mos, leases for low value assets
ASPE lease rules
-what are the two types of leases
capital lease
operating lease
1: capital lease
ASPE: two types of elases
all benefits and risks of ownership are transferred from lessor to lease
lessee required to record leased asset and related liability at present value of minimuum lease pauyments
LEGAL TITLE STAYS WITH THE LESSOR, BUT THE LESSEE IS REQURIED TO RECORD THE LEASED EQUIPMENT!!
REPORTED ON SOFP
2: operatin glease
aspe two types of leases:
benefits and risks not transferred to lessee
lease rental payments recorded as expense by lessee and as revenue by lessor
ONLY ON SOI
WHAT IS DEPRECIATION
ALLOCATING cost of ppe over the assets useful life
-> it is a process of alllocating cost to an asset NOT DETERMINING AN ASSETS CURRENT VALUE!!
->THIS IS A NON-CASH EXPENSE!! does not use or provide cash
what are factors in calculating depreciation
1) cost
purchase price +costs required to get asset ready for use +estimated asset retirement costs
2) useful ife
time period that the asset is expected to be available for use OR the number of units that the asset is expected to orduce/units of output expected
3) residual value
estimated amount to be received from the disposal at the end of the assets useful life
3 ways to calculate depreciation
1) straight line
2) diminishing balance
3) untis of productionw
what is the best deprecaiton method
the method that best reflects the pattern of use of the economic benefits from that asset
how to calculate straight line rate
100% / # useful life in years = % per year
how to use the straight line method
cost- residual value= depreciable amount
depreciable amount / useful life= depreciation expense
what is the diminishing balance method
produces a decreasing annual depreciation expense over an assets useful life
-> deprecaition is calculate based on carryign amount, and that declines yearly
Annual depreciation expense is calculated by multiplying the carryina mount at the befinninf year by the depreiation rate
is residual value included in diniminghing balance method
no!!!
formula for diminishing balance method
carrying amount at the beginning of the year x Depreciation rate = depreciaiton expense
depreciation rate= (Straight line rate x Multiplier)
carrying amount= cost- deprecaition expense
units of production method
useful life in relation to total units producable
cost-residual value= depreciable amt
depreciable amt/estim total units of prod= depr rate per unit
depr rate per unit * units of production during year= depr expense
comparing the different depreciation methods- Straight line depreciation
-describe it
-WHAT IS JE
SL depreciation:
-simplest, the depreciation expense is constant over the useful life of the asset
-Depreciaiton expense= (cost-residual value)/useful life
NOTE: (cost-residual value)=depreciable amount
JE:
Dr Depreciation Expense
Cr Accumulated Depreciation
comparing the different depreciation methods- diminishing balance depreciaiton
DB depreciation:
Depreication Expense= (cost-accumulated depreciation) * STRAIGHT LINE DEPRECIATION RATE * MULTIPLIER
NOTE: BEGINNING OF YEAR CARRYING VALUE=(cost-accumulated depreciation)
BASICALLY as the years go on, plug in depreciation expense into accumulated depreciation (REference old formulas)
comparing the different depreciation methods- units of production depreciaiton
cost-residual value= depreciable amount
depreciable amount / estimated total units of production = depreciation rate per unit
depreciation rate per unit * units of production during the year = depreciation expense
when do we revise depreciaition?
when do we make these changes
-change in estim useful life/resid value
-capital expense/addition during useful life
-impairment
-change in how economic beenfit of asset is consumed
the changes are made to future eyars not past
what are some issues that can arise with depreciation
a need to revise depreciation!!!
a need to record asset impairments
accounting for natural resources
when is revising depreication needed?
1) change in estiamted useful life or residual value
2) capital expenditures (additions) during useful life
3) impairment
4) change in the pattern in which the assets economic benefits are consumed
how are revisions in depreciation made?
accounted for as a change in the ESTIMATES!!!
->changes are made in current years and future years!! do not touch past predictions baby girlllll
what is asset impairments
when carry amount of asset> fair value
this difference is a loss that must be recorded
-you must test for impairment regularly
when do asset impairments happen
-example
-Journal entry
when carryign amount of asset EXCEEDS its fair value- difference is amount of loss
EX: when there is a decline in market value of a good, there will probably be impairment loss
JE: dr Impairment Loss
cr accumulated depreciat
issue: accounting for natural resources
long lived tanfible assets that are consumed PHYSICALLY over time!!!
-> this is called wasting assets
THE DEPRECIATION OF NATURAL RESOURCES IS CLALED DEPLETION!!!!!
What depreciation method is used when accounting for natural resources
UNITS OF PRODUCTION METHOD!!! CUZ PRODUCTION CAN VARY YEAR OVER YEAR
-> reserve values are the fair value of the resource (impariment will arise if reserve value<carrying amount)
other issues in depreciaiton
-sometimes individual significant components depreciated separately
-depreciaiton and income tax
- cost vs revaluation model
HOW TO CALUCLATE GAIN/loss of an asset after sale
cost- accumulated depreciation= carrying amount
proceeds- carrying amount= gain/loss
-> what is the JE for loss on disposal
Dr Cash/ or AR (PROCEEDS)
Dr Accumulated depreciation
Dr loss on dispoal
CR specific property, plant, or equipment account
DR acc depr to empty that account
-> what is the JE for gain on disposal
Dr Cash/ or AR (PROCEEDS)
Dr Accumulated depreciation
CR gain on disposal
CR specific property, plant, or equipment account
what are intangible assets
- do not have phsycial substance
- (rights/privelegs/comp adv)
-> intellectual property in a product process - must be identifiable
-> can be separated from the company and sold
what is NOT an intangible asset
GOODWILL!!!!!!
depreciation of intangible assets is called
ammortization
what is ammortization done over
the LESSER of estimated useful life and legal life!!!!!!
if useful like is 40 years but legal life is 10 years, must be ammortized over 10 years!
if an intangible assets has an unlimited/indefintie life YOU…
DO NOT AMMORTIZE IT!!!!
INTANGIBLE ASSETS WITH FINITE LIVES
PATENTS COPYRIGHTS, R&D COSTS
WHAT ARE PATENTS
right to produce smthg for 20 yrs
what are copyrgihts
protection for the life of the creator +50
r&d costs
all costs are expenses, dev costs can be capitalized only if asocaitied with identifiable feasible product
expensed vs capitalized
operating expenses vs cost of PPE
trademakrs and trade names
intangible w indefinite lives
frnacheises
intangible w indef life (contractual agreement to sell g/s)
licenses
grant holder operating rights (intbaigble w indef life)
what is goodwill
-excess of cost over fair market value of net assets (asset-liabiilties) of business acquired
-inseparable from business!!!!!!!
-not amortized but tested for impairment
what goes on soi
depreciaiton
ammortization
gains and losses
impairment loss
return on assets meaning
higher better, measures profitabilit
net income/avg total assets
asset turnover
asset turnoover= sales/avg total assets
higher better, means for every $ in assets more sales
return on assets alt formula
profit margin * asset tutnorevr
dev costs
goodwill
disclosure
under ifrs
capitalize and ammortize over useful life
impair tests done yearly
must provide recognition of the
opening and closing carrying amounts
of each class of non-current assets
dev costs
goodwill
disclosure
under aspe
Can choose to expense or
capitalize and amortize over
useful life
Impairment tests are
performed only when events
and circumstances change.
Reconciliation not required
