Lecture 8 Flashcards
Long lived assets are usually refrred to as
PPE:
Tangingle long lived assets: are usually referred to as ‘Property, plant and equipment”
Characteritiics of tangible long lived asssets:
Characteritiics of tangible long lived asssets: Has a physical presence, expected to be used for more than a year, value comes primarily from use in operations
Recording cost of long lived assets at qcquisiiton:
what is it called
IFRS requires that the amount recorded in the asset account upon acquisition include all
(1) ordinary and
(2) necessary costs to:
– Get the asset to its intended location
– Get the asset ready for its intended use
it is called cpaitlzied costs and its a debit to assets
Examples of capitzlied expentures
Purchase price,closing costs,attorney fees,costs of clearing trees, draining out water, filling in holes with dirt, etc.
Difference between ordinary repairs /maintence and imprivment?
For ordinary repairs/maintence its counted as a expense in the income stamtent
for improvments its counted as a cptiled cost hthereofre its an increase in asset
Depreciable base,which includes:
– Historical cost of the asset
* What are all of the initial and subsequent capital expenditures?
what is economic life?
It’s different from physical life, we might think a plane can live for 15 years but were only plan on using it for 10, that its economic life to us
what is salvage value?
How much can we sell it for when we’re done usingit?
what is not depreciated?
LAND as it’s sueful life is infinite
Methods of allocation depreciation
Actictiy Based
Time based - (Striaght line method)
Time based - DEclinig balance
Activity based:
Depreication expense in a given year is calculated by:
((Cost - salvage) / Expected total units ) * Units in period
ExpectedTotalUnits=Cost per unit When does this make sense? When pattern of use is variable and theres is an easily identifiable measure of inputs and ouputs units
Straight line method
(Cost - salvage) / xpected life)
- When does this make sense?
- When benefits are fairly constant over the useful life
Activity based vs Time based
ctivity-Based
– Also called “units of production”
– Allocation of cost based on units of input or outpu
Depreciation is based on the actual usage or production levels of the asset.
t
* Example: Engine hours on an aircraft, miles on a truck, units of output on a machine, etc.
- Time-Based
– Allocation of cost based on passage of time
Depreciation is based on the passage of time, with the asset depreciating by a fixed amount each year.
– Possible methods we will discuss:
* Straight-line
* Declining Balance
Declining balance method d0es the carrying value change
Begnning of the year fr caryying value
Carrying value * (2/Estimaeduseful life)
carrying valu = cost - accumalted dpreicaion
Carrying value benginnning of the year
- Every single period, carrying value will change because acuatled depreicaion will change
what is salvage value also known as?
Residual alue
how to find depreicaiton per unit?
By unsing the units of preoduction
depreication per unit = cost - salvage value) / total units
when calculatin depreciation for units of production how does it differ?
first because you divide cost-resdual value by the total uiits you epxect. to produce
second because the year after you the carrying value from last year not the cost as in declining and straigh line
Special case #1: Changes to depreication assumption
Sometimes managers’ estimates change regarding (1) estimated useful life or (2) estimated salvage value.
– If that happens, new estimates are applied ____
Example: McFiddich Distilleries has a distilling machine that originally cost $10,000 with an estimated useful life of five years and a salvage value of $800. The company uses straight- line depreciation.
a) Indicate the depreciation expense in year 3 if, after two years, management decides the salvage value will actually only be $200.
b) Indicate the depreciation expense in year 3 if, after two years, management decides the machine will actually last for eight years (for this part, assume the salvage value remains at the original $800).
– If that happens, new estimates are applied forward
A)
Set up by first figuring out value remaining.
(10,000 – 800)/5 = $1,840 per year initially.
10,000 – 1,840 – 1,840 = $6,320 at the end of year two.
Salvage value is now 200 instead of 800, so for Year 3, depreciation expense is calculated as (6,320 – 200)/3 years remaining = $2,040 (instead of $1840 as in years past).
B)
Remaining life is 8 years instead of 5, so there are 6 more years instead of 3. Depreciation expense is (6,320 – 800)/6 = $920.
Special Case #2: Impairment of Assets
– Assume Southwest Airlines did a review and identified aircraft
with a net book value of $10,000,000 as potentially impaired.
– After further investigation, the Fair Value of the aircraft was determined to be $7,500,000.
– What journal entry would Southwest record to reflect the impairment?
Impairment Loss (+Loss, -SE) $2,500,000 A/D
- Aircraft Equipment (+xA) $2,500,000
How to price pric vs reisdual value on depricated asset
Price = cost - a/d
redisfual vlaue is the estimaed value for the company
What are some characteristics of intangible assets?
– Lack physical substance.
– Typically provide benefits by giving firms certain rights/privileges. – Often associated with value from ideas, services, and technology.
Accounting for intangibles is conceptually similar to accounting for tangible Property, Plant and Equipment…
- Decide which costs to capitalize
- Then determine how and when those costs will be matched to revenues on the Income Statement
Differnece between intangible asset and goodwill
Goodwill is a type of intangible asset that arises when a company acquires another business for more than the fair value of its net identifiable assets
Definition: Intangible assets are non-physical assets that have a useful life and are used in the operations of a business. They can be either identifiable or unidentifiable.
