Lesson 12 (PPE) Flashcards
What are the 4 accountable events in the life cycle of PPE ?
- account for the acquisition of PPE
- account for any capital expenditures made during the life of the asset
- account for the depreciation of buildings and equipment
- account of the sale of disposal of PPE
at what amounts should PPE be recorded when it is purchased ?
recorded at cost (historical cost concept)
Examples of costs incurred in getting the asset ready for use ?
- sales tax
- freight (shipping) costs
- installation costs
- repair costs
- incurred prior to use
- assembly costs
- fees such as closing costs and recording fees
all costs incurred are recorded where ?
balance sheet (as part of the cost of the asset)
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 ?
capitalization
when is a cost capitalized ?
when it is recorded as part of an asset on the balance sheet rather than as an expense on the income statement
recurring, ongoing costs such as repairs after the asset is in use, maintenance and insurance are expensed when ?
as incurred
once an asset is in use, only those costs that significantly improve the asset or substantially extend its life are ?
capitalized
when a company purchases more than one asset for one, lump sum amount
what is this ?
a lump sum
what are the two expenditures during the life of the asset ?
- capital expenditures
- revenue expenditures
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 ?
capital expenditures
are capital expenditures capitalized ?
yes
expenditures made to keep an asset in good working order
which expenditure is this ?
revenue
are revenue expenditures capitalized ?
no, they are expensed immediately
the systematic allocation of the cost of a plant asset (buildings and equipment) to expense over its useful life
what is this ?
depreciation
does land depreciate ?
no, since its usefulness and revenue producing ability generally remain intact)
accumulated depreciation is classified as a ?
contra asset account
so it decreases the asset account
over time, what happens to the book value of an asset ?
the book value decreases each year bc of accumulated depreciations gets larger each year
what are the four common depreciation methods ?
- straight line
- sum of the years’ -digits
- double-declining balance
- units of production
what are the 3 factors in calculating depreciation ?
- cost (all expenditures necessary to acquire the asset and make it ready for intended use)
- useful life (estimate of the length of time in years the asset will be used in business operations)
- residual value (estimate of the company things the asset can be sold for at the end of its useful life)
every time you depreciate an asset, once it is fully depreciated, its ending book value must equal ?
its residual value
In straight line depreciation, depreciation is ?
the same for each year of the assets useful life &
assumes an equal using up of the asset over time
an accelerated depreciation method records depreciation how ?
more depreciation in the early years of an assets life and less depreciation in the later years
what depreciation methods are accelerated depreciation ?
- sum of the years digits
- double declining balance
the numerator in first year of sum of the years digits depreciation model will be decreased by ?
one every year
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 ?
5 +4 +3 + 2 + 1
Sum of the years digits assumes what about depreciation ?
the asset used up more in the early years of its life and less in the later years
annual depreciation for double declining balance depreciation is based on ?
a declining book value (cost - accumulated depreciation
book value at the beginning of the first year for double declining balance depreciation is the cost of what ?
the cost of the asset, since the balance in accumulated depreciation at the beginning of the assets useful life is 0
what is not part of the double declining balance depreciation equation ?
residual value
double declining balance depreciation assumes the asset is used up ?
more in the early years of its life and less in the later years
which type of depreciation method, straight line or an accelerated method, will show more depreciation over the life of the asset ?
they show the exact same amount of depreciation over the life of the asset
This is the first year an asset is being depreciation,
Which method will show the highest net income ?
Straight line
-straight line will always show a smaller amount of depreciation expense than accelerated method, smaller expense = higher NI
This is the first year an asset is being depreciation,
Which method will give an income tax advantage ?
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
This is the first year an asset is being depreciation,
Which method will show the highest total assets on the year end balance sheet ?
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
This is the last year an asset is being depreciation,
Which method will show the highest net income ?
Accelerated methods
This is the last year an asset is being depreciation,
Which method will give an income tax advantage ?
Straight line
This is the last year an asset is being depreciation,
Which method show the highest total assets on the year end balance sheet ?
Both will show the same
Units of production differs from the other methods of depreciation bc ?
it is not based on time
it is based on the actual usage of the asset
Why don’t we use units of production depreciation all the time ?
the estimates involved can be very difficult to develop for most plant assets
What does the pattern for depreciation look like for units of production depreciation ?
there is no pattern bc the amount depreciation recorded each year is dependent on how much the asset is used that year
What is depreciation based on ?
estimates
*revenue account
*recorded on the income statement
*increases net income
what is this ?
gain on sale
*expense account
*recorded on the income statement
*decreases net income
what is this ?
loss on sale
