Lecture 6 - Property, plant, equipment and intangibles Flashcards
Define Long-Term Assets and mention the 2 types
-Assets that provide an entity with economic benefits that extend beyond a single financial period, thereby generation revenue for the duration of its useful life
PPE and intangible assets
Define PPE
-Sometimes calles fixed assets are long-lived assets that are tangible - land, building equipment
Describe the 4 step process of accounting for PPE
1) Determine the cost of PPE on initial recognition
2) Capitalize or expense subsequent costs
3) Measure + record depreciation
4) Record PPE disposal
What is done in case of Lump-Sum (or Basket) Purchases of assets?
And what is this method called?
-The total cost is divided among the assets based on their relative market values (fair values)
Method is called: Relative-Sales-Value-Method
What is done to the cost subsequent to the initial recognition of PPE (2) and where is it reported?
1) Expensed immediately (Income Statement) - if only restored to working order but no value added
2) Capitalized (added) into carrying amount of an item of PPE (Balance Sheet) - if it adds value or extends its useful life
*This is therefore a major accounting decision on when to do what
What is the carrying amount of PPE and where is it reported?
= Cost - Accumulated Depreciation
-PPE recorded on the Balance Sheet for the carrying amount
Where is depreciation recorded and what type of PPE does not depreciate?
-Income statement
-Freehold land - but lease hold land does
What 3 elements must we know to measure depreciation?
1) Cost - known amount
2) Useful life - estimated
3) Residual value - estimated = the expected cash value of an asset at the end of its useful life
Mention the 3 types of depreciation
1) Constant allocation - Straight Line
2) Actual usages - Units of Production
3) Accelerated allocation - Double Declining Balance
Explain the Straight-Line Depreciation Method (2)
-Equal amount of depreciation assigned each period
-Depreciable cost divided by useful life to determine annual depreciation
Explain the Unit-Of-Production depreciation method (3)
-Fixed amount of depreciation is assigned to each unit of output produced by the asset
-Depreciable cost is divided by useful life (in units of production instead of years) to determine fixed amount per unit
-Per-unit amount is then multiplied by number of units produced each period to compute depreciation expense
Explain the Double-Declining-Balance DDB depreciation method (5)
+ How is it calculated
-Writes off a larger amount of cost near the start of the asset’s useful life
-Most frequently used accelerated depreciation method
-Multiplies asset’s declining carrying amount (at the beginning of the year) by a constant percentage i.e. 2 times the straight-line depreciation
-Residual value is initially ignored
Calculate the percentage rate of the straight-line method eg. 10% and then double it eg. 20% and then subtract it from the carrying amount
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Depreciation Methods:
Which are best in which situations?
1) Straight-line
Best for PPE assets that generate revenue evenly over time
2) Units-of-production
Best for assets that wear out because of use
3) Double-declining-balance
Best for assets that generate more revenue earlier in their useful life
Impairment:
1) How often must it be tested?
3) When is an asset impaired
4) What must be done in that case?
1) PPE + intangible assets must be tested annually
2) When its carrying amount is higher than its recoverable amount*
3) The carrying amount must be adjusted downwards
*Recoverable amount is the higher of fair value less cost to sell and value-in-use (present value of the future cash flows).
PPE disposals:
1) What should be done before the disposal?
2) Mention the 2 kinds, what they are and what should be recorded
The depreciation should be brought up to date:
-Update the asset’s final carrying amount
-Record the expense up to the date of disposal
1) Fully Depreciated PPE:
-As reached its end of its estimated useful life
-Can continue to use asset but no more depreciation will be recorded
-Remove the asset’s cost and accumulated depreciation from the books then the asset is disposed of: Debit accumulated depreciation of full amount and credit the specific asset account of the same.
2) Not Fully Depreciated PPE:
-If disposed before time
-Debit accumulated depreciation
-Debit ‘loss on disposal of equipment’ the carrying amount
-Credit equipment the depreciation + carrying amount
