long term assets Flashcards
what does long term assets consist of?
Property, plant and equipment (PP&E), also referred to as fixed assets, are all non-current assets that
have physical substance and
are used in operations (i.e., not held as an investment or for resale).
Intangible assets are all non-current assets that
do not have physical substance and
are not financial assets.
how is the expense related to the use of natural resources accounted for?
depletion method
which long term assets are not depreciated overtime?
land and goodwill
when can expenditure on an existing long term asset be capitalized and when is it expensed instead?
The key question in determining what costs can be capitalized is:
Does the cost incurred improve the asset’s ability to generate revenue, i.e., increase its useful life, capacity, or efficiency?
Yes: The cost is capitalized as an asset and depreciated over time.
No: The cost is recognized as an expense (income statement) as incurred.
what is the sum capitalized when a long term asset is purchased?
The capitalized costs include
the purchase price of the asset; and
any ancillary costs incurred in setting the asset up for its intended use, including the interest cost incurred during construction on any debt used to finance the asset.
which ancillary cost can be capitalized for each type of long term asset?
The cost items eligible for capitalization depend on the nature of the asset.
Land: purchase price, commissions, survey and legal costs, removal of old buildings.
Land improvements: fencing, paving, security systems, lighting.
Buildings: purchase price, commissions, sales and other taxes, repairs and renovation for intended use.
Machinery and equipment: purchase price, insurance in transit, freight cost, sales taxes, installation.
how is work in process reported in a PPE schedule?
usually reported separately from the PPE that gets netted as it is not depreciable yet. part of it is moved into normal ppe every year as work gets completed.
can costs be capitalized when developing intangibles?
With few exceptions, most costs incurred in developing intangible assets internally, such as marketing or research and development costs, are not capitalized.
IFRS: Development costs may be capitalized only once ‘technical and commercial feasibility’ has been established.
US GAAP: All research and development costs are expensed as incurred.
As a result, most intangibles shown on the balance sheet are assets purchased from an outside party
how is purchase price allocated across intangibles during an acquisition?
In a business combination, the purchase price paid by the acquirer is first allocated to the fair market value of the target company’s identifiable tangible and intangible assets and liabilities.
Any unallocated residual is capitalized as goodwill.
what is the purpose of depreciation? is the net BS value of an asset its market value?
The objective of depreciation is cost allocation, not asset valuation.
The balance sheet value of PP&E and intangibles is just the remaining, not yet depreciated amount of capitalized costs and is thus not designed to reflect the resale (market) value of the asset.
what are depreciation methods? how is dep. expense calculated under each of them?
straight line: Costs are allocated evenly over the useful life. yearly dep. expense= depreciable basis/ useful life
units of production: Depreciation expense follows from the asset’s current output (or usage) as a percentage of its expected total output (or usage) over its entire useful life yearly dep. expense= (current units of production/total units)*depreciable basis.
sum of the yer digits: Depreciation is a fraction of the depreciable basis. The fraction is the remaining useful life at the beginning of the period divided by the sum of the remaining useful lives at the beginning of all periods (the ‘sum-of-the-years’-digits’). yearly dep. expense= (remaining usuful life/sum of the years digits)*depreciable basis.
declining balance method: yearly dep. expense= (multiplier/useful life)*net carrying value for the year. this method is replaced as soon as straight line depreciation on the remaining depreciable basis yields an higher expense value. It ignores salvage values and depreciation might be a plug number if the normally calculated expense would bring balance under salvage value.
how do you treat depreciation when an asset is sold?
First, we need to recognize depreciation on the asset through the disposal date. (This may require partial-period depreciation if the asset is not sold at year-end.)
Second, we remove the asset from the balance sheet and recognize any gain or loss incurred as a result of the disposal. In particular, we
reduce the balances of the acquisition cost and accumulated depreciation accounts to zero;
record the proceeds (payment) received from the buyer (if applicable); and
compute and record any gain or loss on the sale ( income statement), equal to the net carrying amount of the asset less any sale proceeds.
how do you rescale PPE when assuming a different useful life?
just take the part of PPE you want to rescale (carrying value/raw balance) and multiply it by the ratio of new assumed useful life over the estimated actual useful life.
how do you estimate total useful life of assets?
divide book value of assets by annual depreciation. (normalized if needed)
