Module 3: Property, Plant and Equipment

Question 1

Property, Plant and Equipment (PPE)

Answer 1

Property, plant and equipment (‘PPE’) are tangible items that:
• Are held for use in the production or supply of goods or services; and
• Are expected to be used during more than one period e.g. > 12 months.

Also referred to as fixed assets.

Question 2

Current Assets

Answer 2

Expected to be used within a period, e.g. inventories, trade debtors and bank/cash.

Question 3

Recognising PPE

Answer 3

The cost of an item of PPE shall be recognised if, and only if:

• It is probable that future economic benefits associated with the item will flow to the entity; and
• The cost of the item can be measured reliably

i. e. a machine:
i. it will help produce inventory which can be sold;
ii. its cost is stated on the supplier invoice.

Question 4

Capitalisation

Answer 4

PPE is measured at coast and its initial recognition is referred to as capitalisation, recording the JE:

Dr Property, plant and equipment – cost (asset)
Cr Bank (asset)
being capitalisation of PPE

This journal entry:
• Creates PPE (an asset) as this is an economic resource (i.e., probable future economic benefits); and
• Decreases bank (also, an asset) as this decreases an economic resource

Question 5

PPE Categories

Answer 5

• Property;
• Machinery;
• Motor vehicles; and
• Computer equipment

There will be a separate nominal ledger account for each class of PPE.

Question 6

Cost model

Answer 6

Under the cost model, after recognition of an asset, an item of PPE shall be carried at its cost less any accumulated
depreciation.

Once an item is fully depreciated (i.e., its cost and accumulated depreciation are equal), it should no longer be
depreciated.

Question 7

Depreciation

Answer 7

Depreciation, an expense, is the systematic allocation of the cost of an asset (less its residual value) over its useful
life (dictated by accrual accounting).

Land is not often depreciated as it is expected to have an indefinite useful life.

Depreciation is recorded in the Profit and Loss account.

Question 8

What are the two main methods for calculating depreciation?

Answer 8

1. Straight-line method

2. Diminishing-balance method

Question 9

What is the journal entry when an entity recognises the depreciation charge on an item of PPE?

Answer 9

Dr P&L – depreciation charge (expense)
Cr Property, plant and equipment – accumulated depreciation (reduction in asset value)
being depreciation charge on PPE.

The journal entry:
• Creates a depreciation charge (an expense); and
• Decreases PPE (an asset) through the creation of accumulated depreciation as this decreases an economic
resource.

Question 10

What is accumulated depreciation?

Answer 10

Accumulated depreciation is a credit balance in the nominal ledger and is the total of all depreciation charges on that
category of asset to date.

Question 11

What is the depreciable amount?

Answer 11

The cost of an asset less its residual value

Question 12

What is the residual value?

Answer 12

The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the
asset.

Question 13

What is useful life?

Answer 13

Useful life is the period over which an asset is expected to be available for use by an entity. It may be expressed as a number of years or percentage of the depreciable amount per annum.

Question 14

What is the straight line method?

Answer 14

Depreciation = (cost-residual value)/ useful life

The straight-line method results in a constant charge over the useful life.

Question 15

In TC FA when do we recognise depreciation?

Answer 15

On this course, we will recognise a full year’s depreciation charge in the year of purchase (regardless of the
month of purchase) and no depreciation charge in the year of disposal (regardless of the month of disposal).

Question 16

How is PPE presented on the balance sheet?

Answer 16

It is presented at its carrying amount.

Question 17

Carrying amount

Answer 17

Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (i.e.,
cost less accumulated depreciation).

CA = Cost - Acc. dep.
This is also known as the net book value (NBV).

Question 18

What is the depreciating balance method?

Answer 18

To calculate depreciation using the diminishing-balance method, we multiply the carrying amount of the asset by a
constant percentage per annum.

Depreciable amount, residual value and useful life are all incorporated in the constant percentage (N.B. they might be given in the exam but can be ignored.)

Question 19

Straight line vs Depreciating balance?

Answer 19

The entity can choose the most appropriate depreciation method and will often have different methods for different
classes of asset.

Question 20

What happens if there is a change in useful life or residual value?

Answer 20

If either the useful life or residual value of an asset is changed, its depreciation charge should change to reflect this.
For both changes, the remaining depreciable amount should be depreciated over the remaining useful life.

Question 21

What are Additions and how do they impact the depreciation charge?

Answer 21

Additions are simply additional items of PPE capitalised during the period.

When calculating the depreciation charge for the period:

1. Straight line method - additions will increase the depreciable amount
2. Diminishing balance method - additions will increase the carrying amount.

Question 22

What are Disposals?

Answer 22

Disposals are items of PPE that are sold or scrapped during the period and so must be removed from the nominal
ledger.

The carrying amount should be compared to proceeds to determine a gain or loss on disposal.

Question 23

Gain or Loss on disposal

Answer 23

On disposal of an item of PPE, the carrying amount should be compared to proceeds:

• If the carrying amount is less than the proceeds, a gain (income) is recognised in the profit and loss account;
CA < Proceeds - gain

• If the carrying amount is more than the proceeds, a loss (an expense) is recognised in the profit and loss
account.
CA > Proceeds - loss

On disposal of an item of PPE, both the cost and the accumulated depreciation must be removed

Question 24

Gain/Loss on Disposal - JE

Answer 24

Dr Bank (asset)
Dr Property, plant and equipment – accumulated depreciation (reduction in asset value)
Dr/Cr P&L – loss/gain on disposal (expense/income)
Cr Property, plant and equipment – cost (asset)

Gain on disposal - credit (income)
Loss on disposal - debit (expense).

Question 25

Depreciation charge on disposal

Answer 25

Disposals will decrease the depreciable amount for the
straight-line method.

For the diminishing-balance method, disposals will decrease the cost and decrease the accumulated
depreciation when calculating carrying amount. Only then can depreciation be calculated

Question 26

VAT for PPE

Answer 26

Property, plant and equipment is recognised exclusive of value added tax (‘VAT’) (i.e., the net amount is
capitalised).

There is one exception to this rule - cars.

VAT can be recovered if:
1. it is supplied to a registered person.
2. it is used solely for business purposes.
For company cars only, the gross amount is capitalised.

Question 27

VAT for PPE - JE

Answer 27

When a VAT-registered company purchases of an item of PPE (excluding company cars), it will record the following
journal entry:

Dr PPE – cost (net)
Dr VAT account
Cr Bank (gross)
being cash purchase of asset