Lecture 14 Flashcards
transactions that increase PPE
acquisitions of PPE by purchase
acquisitions of PPE by self-construction
expenditures for improvements & betterments
transactions that decrease PPE
depreciation
disposal of PPE by sale/abandonment
permanent impairment of value
what is included in acquisitions of PPE by purchase?
only PRE acquisition costs; DIRECTLY related costs
pre-acquisition appraisal in-transit insurance wages of employees involved in acquisition installation & set-up costs duty
what is included in acquisitions of PPE by self-construction?
same as by purchase, BUT includes interest
interests costs on debt outstanding during the period of construction. The amount of interest is related to the amount of the firm’s investment in the self-constructed asset
ex. of journal entry for PPE by self-construction
PPE
cash
materials inventory
wages payable
accumulated depreciation
interest payablefirms can capitalize ___ costs on ___ ___ during the period of construction
interest, debt outstanding
amount of interest that can be capitalized is based on…
the amount of the firm’s average investment in the self-constructed asset
capitalization of borrowing costs ends…
when the asset is ready for its intended use
ordinary repairs and maintenance
“revenue expenditures”
recorded as expenses in period in which occurred
results from normal operation of the asset
additions and improvements
“capital expenditures”
expenditures that increase productive life, op efficiency
capitalized by increasing book value of asset
capital expenditures increase ___
book value of the asset
lead to higher depreciation expense in the future
what types of expenditures are included in work-in-process inventory?
ordinary repairs and maintenance for machinery used IN PRODUCTION
when is depreciation expensed vs capitalized?
expensed for NON-MANUFACTURING plant/equip
capitalized as part of work-in-process for MANUFACTURING plant/equipment
journal entry for capitalizing depreciation
work-in-process
accumulated depreciation
straight line depreciation =
(orig cost - salv) * (1 / est useful life)
units of production =
(orig cost - salv) * (productive output for yr / total est. productive output)
sum-of-years digits =
(orig cost - salv) * (useful life remaining / sum of digits of total useful life)
sum of digits of total useful life = (n * (n + 1)) / 2
sum of digits of total useful life =
(n * (n + 1)) / 2
n = estimated useful life
X declining balance
(orig cost - accum depr) * (X * straight line %)
straight line annual % = 100% / useful years
X = 2 for double declining balance, 1.5
what do you change when depreciation estimates change
changes happen PROSPECTIVELY
don’t change what’s been recorded in the past
$20,000 truck has salvage value of $4000, est. useful life is 4 years
adjust estimate of useful life to total of 6 years
depr. = (20,000 - 4,000) / 4 = 4,000
depr. = (16,000 - 4,000) / 5 = 2,400
divide by 5 bc that’s the number of REMAINING years
prospective method
used to account for ALL CHANGES IN ESTIMATES used to derive the amounts reported in the financial statements
NOT USED if firm changes accounting method (straight line to accelerated)
journal entry for disposal of PPE by sale
Cash
(loss on sale)
Accumulated Depr
PPE
(gain on sale)journal entry for disposal of PPE by abandonment
loss on abandonment
accumulated depr
PPE
when do you evaluate asset impairments?
any time an event suggests carrying amount may NOT be recoverable
significant decrease in asset market price
adverse change in asset physical condition
adverse change in business climate/legal environment
steps for asset impairment
- assess whether impairment is needed
net book value > est undiscounted future CF’s - if yes, then recognize impairment holding loss
net book value - fair market value = holding loss
how to record impairment loss
impairment loss
PPE
- impairment loss flows into income from continuing operations
accounting goodwill =
excess of acquisition price over fair (market) value of all separately identifiable assets and liabilities acquired
accounting goodwill reflects what kind of assets?
non-identifiable assets such as synergies, human capital
when is accounting goodwill recorded?
only when ENTIRE business is purchased; cannot be purchased as a stand-alon asset
intangible assets =
long lived assets that are contractual rather than physical (ex. patents, trademarks, licenses, goodwill)
2 ways to account for intangibles
definite life = acquisition costs capitalized then amortized (gradually expensed over life of asset) if purchased from EXTERNAL party
indefinite life = not amortized
what if intangibles are internally developed?
they must be expensed IMMEDIATELY
ex. internal development, R&D costs, advertising and employee training
