Lecture 14

Question 1

transactions that increase PPE

Answer 1

acquisitions of PPE by purchase
acquisitions of PPE by self-construction
expenditures for improvements & betterments

Question 2

transactions that decrease PPE

Answer 2

depreciation
disposal of PPE by sale/abandonment
permanent impairment of value

Question 3

what is included in acquisitions of PPE by purchase?

Answer 3

only PRE acquisition costs; DIRECTLY related costs

pre-acquisition appraisal
in-transit insurance
wages of employees involved in acquisition
installation & set-up costs
duty

Question 4

what is included in acquisitions of PPE by self-construction?

Answer 4

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

Question 5

ex. of journal entry for PPE by self-construction

Answer 5

PPE
      cash
      materials inventory
      wages payable
      accumulated depreciation
      interest payable

Question 6

firms can capitalize ___ costs on ___ ___ during the period of construction

Answer 6

interest, debt outstanding

Question 7

amount of interest that can be capitalized is based on…

Answer 7

the amount of the firm’s average investment in the self-constructed asset

Question 8

capitalization of borrowing costs ends…

Answer 8

when the asset is ready for its intended use

Question 9

ordinary repairs and maintenance

Answer 9

“revenue expenditures”
recorded as expenses in period in which occurred
results from normal operation of the asset

Question 10

additions and improvements

Answer 10

“capital expenditures”
expenditures that increase productive life, op efficiency
capitalized by increasing book value of asset

Question 11

capital expenditures increase ___

Answer 11

book value of the asset

lead to higher depreciation expense in the future

Question 12

what types of expenditures are included in work-in-process inventory?

Answer 12

ordinary repairs and maintenance for machinery used IN PRODUCTION

Question 13

when is depreciation expensed vs capitalized?

Answer 13

expensed for NON-MANUFACTURING plant/equip

capitalized as part of work-in-process for MANUFACTURING plant/equipment

Question 14

journal entry for capitalizing depreciation

Answer 14

work-in-process

accumulated depreciation

Question 15

straight line depreciation =

Answer 15

(orig cost - salv) * (1 / est useful life)

Question 16

units of production =

Answer 16

(orig cost - salv) * (productive output for yr / total est. productive output)

Question 17

sum-of-years digits =

Answer 17

(orig cost - salv) * (useful life remaining / sum of digits of total useful life)

sum of digits of total useful life = (n * (n + 1)) / 2

Question 18

sum of digits of total useful life =

Answer 18

(n * (n + 1)) / 2

n = estimated useful life

Question 19

X declining balance

Answer 19

(orig cost - accum depr) * (X * straight line %)

straight line annual % = 100% / useful years
X = 2 for double declining balance, 1.5

Question 20

what do you change when depreciation estimates change

Answer 20

changes happen PROSPECTIVELY

don’t change what’s been recorded in the past

Question 21

$20,000 truck has salvage value of $4000, est. useful life is 4 years

adjust estimate of useful life to total of 6 years

Answer 21

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

Question 22

prospective method

Answer 22

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)

Question 23

journal entry for disposal of PPE by sale

Answer 23

Cash
(loss on sale)
Accumulated Depr
            PPE
            (gain on sale)

Question 24

journal entry for disposal of PPE by abandonment

Answer 24

loss on abandonment
accumulated depr
PPE

Question 25

when do you evaluate asset impairments?

Answer 25

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

Question 26

steps for asset impairment

Answer 26

1. assess whether impairment is needed
   net book value > est undiscounted future CF’s
2. if yes, then recognize impairment holding loss
   net book value - fair market value = holding loss

Question 27

how to record impairment loss

Answer 27

impairment loss
PPE

• impairment loss flows into income from continuing operations

Question 28

accounting goodwill =

Answer 28

excess of acquisition price over fair (market) value of all separately identifiable assets and liabilities acquired

Question 29

accounting goodwill reflects what kind of assets?

Answer 29

non-identifiable assets such as synergies, human capital

Question 30

when is accounting goodwill recorded?

Answer 30

only when ENTIRE business is purchased; cannot be purchased as a stand-alon asset

Question 31

intangible assets =

Answer 31

long lived assets that are contractual rather than physical (ex. patents, trademarks, licenses, goodwill)

Question 32

2 ways to account for intangibles

Answer 32

definite life = acquisition costs capitalized then amortized (gradually expensed over life of asset) if purchased from EXTERNAL party

indefinite life = not amortized

Question 33

what if intangibles are internally developed?

Answer 33

they must be expensed IMMEDIATELY

ex. internal development, R&D costs, advertising and employee training