Lesson 12 (PPE)

Question 1

What are the 4 accountable events in the life cycle of PPE ?

Answer 1

1. account for the acquisition of PPE
2. account for any capital expenditures made during the life of the asset
3. account for the depreciation of buildings and equipment
4. account of the sale of disposal of PPE

Question 1

at what amounts should PPE be recorded when it is purchased ?

Answer 1

recorded at cost (historical cost concept)

Question 2

Examples of costs incurred in getting the asset ready for use ?

Answer 2

1. sales tax
2. freight (shipping) costs
3. installation costs
4. repair costs
5. incurred prior to use
6. assembly costs
7. fees such as closing costs and recording fees

Question 3

all costs incurred are recorded where ?

Answer 3

balance sheet (as part of the cost of the asset)

Question 4

All of these costs incurred in getting the asset ready for use are recorded on the balance sheet as part of the cost of the asset
what is this ?

Answer 4

capitalization

Question 5

when is a cost capitalized ?

Answer 5

when it is recorded as part of an asset on the balance sheet rather than as an expense on the income statement

Question 6

recurring, ongoing costs such as repairs after the asset is in use, maintenance and insurance are expensed when ?

Answer 6

as incurred

Question 7

once an asset is in use, only those costs that significantly improve the asset or substantially extend its life are ?

Answer 7

capitalized

Question 8

when a company purchases more than one asset for one, lump sum amount
what is this ?

Answer 8

a lump sum

Question 9

what are the two expenditures during the life of the asset ?

Answer 9

1. capital expenditures
2. revenue expenditures

Question 10

costs incurred to increase the asset
*operating efficiency of the asset
*productive capacity of the asset, or
*the expected useful life of the asset
which expenditure is this ?

Answer 10

capital expenditures

Question 11

are capital expenditures capitalized ?

Answer 11

yes

Question 12

expenditures made to keep an asset in good working order
which expenditure is this ?

Answer 12

revenue

Question 13

are revenue expenditures capitalized ?

Answer 13

no, they are expensed immediately

Question 14

the systematic allocation of the cost of a plant asset (buildings and equipment) to expense over its useful life
what is this ?

Answer 14

depreciation

Question 15

does land depreciate ?

Answer 15

no, since its usefulness and revenue producing ability generally remain intact)

Question 16

accumulated depreciation is classified as a ?

Answer 16

contra asset account
so it decreases the asset account

Question 17

over time, what happens to the book value of an asset ?

Answer 17

the book value decreases each year bc of accumulated depreciations gets larger each year

Question 18

what are the four common depreciation methods ?

Answer 18

1. straight line
2. sum of the years’ -digits
3. double-declining balance
4. units of production

Question 19

what are the 3 factors in calculating depreciation ?

Answer 19

1. cost (all expenditures necessary to acquire the asset and make it ready for intended use)
2. useful life (estimate of the length of time in years the asset will be used in business operations)
3. residual value (estimate of the company things the asset can be sold for at the end of its useful life)

Question 20

every time you depreciate an asset, once it is fully depreciated, its ending book value must equal ?

Answer 20

its residual value

Question 21

In straight line depreciation, depreciation is ?

Answer 21

the same for each year of the assets useful life &
assumes an equal using up of the asset over time

Question 22

an accelerated depreciation method records depreciation how ?

Answer 22

more depreciation in the early years of an assets life and less depreciation in the later years

Question 23

what depreciation methods are accelerated depreciation ?

Answer 23

1. sum of the years digits
2. double declining balance

Question 24

the numerator in first year of sum of the years digits depreciation model will be decreased by ?

Answer 24

one every year

Question 25

the numerator in the sum of the years digits depreciation is the sum of the digits of the life so if the life was 5, then the SYD would be ?

Answer 25

5 +4 +3 + 2 + 1

Question 26

Sum of the years digits assumes what about depreciation ?

Answer 26

the asset used up more in the early years of its life and less in the later years

Question 27

annual depreciation for double declining balance depreciation is based on ?

Answer 27

a declining book value (cost - accumulated depreciation

Question 28

book value at the beginning of the first year for double declining balance depreciation is the cost of what ?

Answer 28

the cost of the asset, since the balance in accumulated depreciation at the beginning of the assets useful life is 0

Question 29

what is not part of the double declining balance depreciation equation ?

Answer 29

residual value

Question 30

double declining balance depreciation assumes the asset is used up ?

Answer 30

more in the early years of its life and less in the later years

Question 31

which type of depreciation method, straight line or an accelerated method, will show more depreciation over the life of the asset ?

Answer 31

they show the exact same amount of depreciation over the life of the asset

Question 32

This is the first year an asset is being depreciation, Which method will show the highest net income ?

Answer 32

Straight line -straight line will always show a smaller amount of depreciation expense than accelerated method, smaller expense = higher NI

Question 33

This is the first year an asset is being depreciation, Which method will give an income tax advantage ?

Answer 33

Accelerated methods -first year as asset is depreciated, accelerated method will show larger amount of depreciation expense, larger expense = smaller NI which = less you have to pay for income taxes

Question 34

This is the first year an asset is being depreciation, Which method will show the highest total assets on the year end balance sheet ?

Answer 34

Straight line -by showing lower depreciation expense, also shows lower amount of accumulated depreciation which decreases assets, so lower reduction of assets = higher amount of total assets

Question 35

This is the last year an asset is being depreciation, Which method will show the highest net income ?

Answer 35

Accelerated methods

Question 36

This is the last year an asset is being depreciation, Which method will give an income tax advantage ?

Answer 36

Straight line

Question 37

This is the last year an asset is being depreciation, Which method show the highest total assets on the year end balance sheet ?

Answer 37

Both will show the same

Question 38

Units of production differs from the other methods of depreciation bc ?

Answer 38

it is not based on time it is based on the actual usage of the asset

Question 39

Why don't we use units of production depreciation all the time ?

Answer 39

the estimates involved can be very difficult to develop for most plant assets

Question 40

What does the pattern for depreciation look like for units of production depreciation ?

Answer 40

there is no pattern bc the amount depreciation recorded each year is dependent on how much the asset is used that year

Question 41

What is depreciation based on ?

Answer 41

estimates

Question 42

*revenue account *recorded on the income statement *increases net income what is this ?

Answer 42

gain on sale

Question 42

*expense account *recorded on the income statement *decreases net income what is this ?

Answer 42

loss on sale