Module 3: Property, Plant and Equipment Flashcards
Property, Plant and Equipment (PPE)
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.
Current Assets
Expected to be used within a period, e.g. inventories, trade debtors and bank/cash.
Recognising PPE
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.
Capitalisation
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
PPE Categories
- Property;
- Machinery;
- Motor vehicles; and
- Computer equipment
There will be a separate nominal ledger account for each class of PPE.
Cost model
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.
Depreciation
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.
What are the two main methods for calculating depreciation?
- Straight-line method
2. Diminishing-balance method
What is the journal entry when an entity recognises the depreciation charge on an item of PPE?
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.
What is accumulated depreciation?
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.
What is the depreciable amount?
The cost of an asset less its residual value
What is the residual value?
The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the
asset.
What is useful life?
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.
What is the straight line method?
Depreciation = (cost-residual value)/ useful life
The straight-line method results in a constant charge over the useful life.
In TC FA when do we recognise depreciation?
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).
How is PPE presented on the balance sheet?
It is presented at its carrying amount.
Carrying amount
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).
What is the depreciating balance method?
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.)
Straight line vs Depreciating balance?
The entity can choose the most appropriate depreciation method and will often have different methods for different
classes of asset.
What happens if there is a change in useful life or residual value?
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.
What are Additions and how do they impact the depreciation charge?
Additions are simply additional items of PPE capitalised during the period.
When calculating the depreciation charge for the period:
- Straight line method - additions will increase the depreciable amount
- Diminishing balance method - additions will increase the carrying amount.
What are Disposals?
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.
Gain or Loss on disposal
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
Gain/Loss on Disposal - JE
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).
Depreciation charge on disposal
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
VAT for PPE
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.
VAT for PPE - JE
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
