D. PROPERTY, PLANT, AND EQUIPMENT 01

Question 1

_{D. PROPERTY, PLANT, AND EQUIPMENT}

What are PPE assets?

Answer 1

PPE are assets that _produce revenue for the busines_s, and so their _cost is allocated over time through depreciation._

PPE includes:

• Buildings
• Machinery and Equipment
• Land- only asset that is NOT depreciated
• Land improvements- these have a finite life, so they are depreciable
• Natural resources- oil well, coal mine. Instead of “depreciation”, these assets are “depleted”.

Question 2

_{D. PROPERTY, PLANT, AND EQUIPMENT}

Capitalized costs

Answer 2

Capitalized costs

These are costs that are included in the asset account instead of being expensed. There are basically two categories:

Costs to get the asset ready to use

• Usually any cost necessary to bring the asset to its intended use and location, so it would include: sales tax, testing costs, shipping costs, etc.

Costs to extend the asset’s useful life or increase productivity

• If a cost just maintains the asset, like an oil change, this is a regular expense and is NOT capitalized

Example:

If ABC buys a piece of land for $100,000, and spends $10,000 on surveying fees, $20,000 to raze an old building on the land, then ABC would list the land on its books at $130,000. None of this would be depreciated, it would continue to sit on the books at $130,000.

However, if ABC built a new building on the land, the building would be depreciated.

Question 3

_{D. PROPERTY, PLANT, AND EQUIPMENT}

Carrying Amount (also known as Book Value)

Answer 3

Carrying Amount (or BV)

When determining the carrying amount of PPE, the basic factors are:

Historical cost (includes capitalized costs)

Less: Accumulated depreciation

Less: Any impairment losses

= Carrying amount (or BV)

Question 4

_{D. PROPERTY, PLANT, AND EQUIPMENT}

Impairment Losses

Answer 4

Impairment Losses

• An asset’s value should be written down if its carrying value becomes greater than fair value.
• CV > FV
• When an asset’s value is written down, this is an impairment loss.

The test for impairment is: Is the carrying value greater than the sum of the future net cash flows from the asset?

• CV > Net Future Cashflows

(the sum of the cash flows will usually be given to you in a problem)

• If this is the case, then the carrying amount is considered to be “not recoverable”, and an impairment loss is recognized.

Assets held in use:

• impaired when: CV > FV
• impairment loss is CV - FV

Example:

ABC has an asset with a carrying value of $200,000. Management does an analysis and determines that the net future cash flows of the asset equal $180,000, and the current fair value of the asset is $150,000. In this case, the asset fails the carrying value > future cash flows test, so the loss = carrying value - fair value, which is $200,000 - $150,000 = $50,000 impairment loss.

The journal entry is:

Impairment loss $50,000

Accumulated depreciation $50,000

Note: The loss takes the carrying value down to $150,000, and this is the new base for depreciation going forward.

Another note: Impairment losses on assets held for use are recognized as a component of income from continuing operations.

Question 5

_{D. PROPERTY, PLANT, AND EQUIPMENT}

Disposal of PPE Assets

Answer 5

Disposal of PPE Assets

When a PPE item is sold, a gain or loss is recognized based on the amount realized from the sale compared to the carrying amount of the asset sold.

Sale Price - CV = gain or (loss)

Example:

ABC sold machinery for $100,000. ABC purchased the machinery for $200,000, and it had accumulated depreciation of $140,000. On this transaction, ABC would recognize a gain of $40,000 since the carrying value of the machinery was $60,000 (200,000 - accumulated depreciation of 140,000).

The journal entry would be:

Steps:

• Remove asset
• Recognize Cash received, and
• Gain or loss

Cash 100,000

Accumulated depreciation 140,000

Machinery 200,000

Gain on sale 40,000

If the sale would have been for $50,000, it would look like this:

Cash 50,000

Accumulated depreciation 140,000

Loss on sale 10,000

Machinery 200,000

Question 6

_{D. PROPERTY, PLANT, AND EQUIPMENT}

Assets to be disposed of other than a sale

Answer 6

• Continue to treat as a regular asset
• It’s depreciated like normal
• Apply impairment if applicable