Module 3 - Property Plant And Equipment

Question 1

Examples of PPE

Answer 1

Machinery / vehicles / buildings

Question 2

What is PPE

Answer 2

Property, Plant and Equipment

Question 3

Is PPE tangible?

Answer 3

Yes

Question 4

What can PPE also be referred to as?

Answer 4

Fixed assets

Question 5

Are companies expected to keep PPE for longer than one year?

Answer 5

Yes

Question 6

What will PPE be measured at?

Answer 6

It’s cost

It’s purchase price on the supplier invoice

Question 7

What is Capital Expenditure (CapEx)?

Answer 7

Expenditure which results in the acquisition of long term assets

Question 8

Commonly used examples of PPE

Answer 8

Property

Machines

Motor vehicles

Computer equipment

Question 9

What are the two models an entity can choose as its accounting policy and shall apply to an entire class of PPE?

Answer 9

Cost model

Revaluation model

Question 10

Once an item is fully depreciated (it’s cost and accumulated depreciation are equal) it should no longer be…

Answer 10

Depreciated

Question 11

What is depreciation (definition)

Answer 11

The systematic allocation of the cost of an asset (less it’s residual value) over its useful life

Accrual accounting dictates the expense relating to PPE is incurred systematically over its useful life

Question 12

What is different about land and depreciation

Answer 12

Land is very rarely depreciated - it is expected to have an indefinite useful life

Question 13

What are the two methods that can be used to calculate depreciation?

Answer 13

Straight-line method

Diminishing-balance method

Question 14

When an entity recognises the depreciation charge on an item of PPE, it will record the following journal entry:

Answer 14

Dr - Depreciation change (E) (increase)

  Cr    - PPE - acc dep’n (increases)

Question 15

What does accumulated depreciation act like in a journal entry?

Answer 15

Liability

Question 16

To calculate depreciation using the straight-line method, what is the equation we need?

Answer 16

(Cost - Residual Value) / Useful Life

Question 17

What is residual value also known as

Answer 17

The scrap value

Question 18

What is residual value of an asset?

Answer 18

The estimated amount that an entity would currently obtain from disposal of the asset

How much we think we can sell an asset for once no longer useful for the business

Question 19

What is useful life?

Answer 19

The period over which an asset is expected to be available for use by an entity

How long an asset is useful to the business

Question 20

What does the straight-line method result in?

Answer 20

A constant change (same every year) over the useful life

Question 21

What is recognised in the year of purchase (depreciation)

Answer 21

A full years depreciation charge

Question 22

What is recognised in the year of disposal (depreciation)

Answer 22

No depreciation charge in the year of disposal

Question 23

Carrying amount (definition)

Answer 23

The amount at which an asset is recognised after deducting any accumulated depreciation

Cost - accumulated depreciation

Question 24

How do we calculate depreciation using the diminishing-balance method

Answer 24

Multiple the carrying amount of the asset by a constant % per annum

Carrying amount x %

Question 25

What is incorporated into in the constant percentage (diminishing-balance method)

Answer 25

Depreciable amount Residual value Useful life

Question 26

When using diminishing balance how do you use scrap / residual value

Answer 26

You don’t - ignore it - potential red herring

Question 27

How do entity’s choose method of depreciation?

Answer 27

Entity’s will simply choose whichever is most appropriate Building - straight line Machinery - diminishing balance Entity’s will often have different methods for different classes of assets

Question 28

Equation when useful life or residual value changes

Answer 28

(Remaining carrying amount - new residual value) / new remaining useful life Both residual value and useful life won’t necessarily change at once

Question 29

What are additions?

Answer 29

Simply additional items of PPE capitalised during the period (increase in assets)

Question 30

How do additions impact when calculating depreciation charges?

Answer 30

Additions will increase the depreciable amount for the straight line method And will increase the carrying amount for the diminishing-balance method Therefore, depreciation will also increase

Question 31

What are Disposals?

Answer 31

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

Question 32

With Disposals - Gain or Loss If the carrying amount is less than the proceeds, what is recognised?

Answer 32

A gain (income) in the profit and loss account

Question 33

With Disposals - Gain or Loss If the carrying amount is more than the proceeds, what is recognised?

Answer 33

A loss (an expense) is recognised in the profit and loss account

Question 34

On disposal of an item of PPE, what must be removed?

Answer 34

Both the cost and the accumulated depreciation

Question 35

What should you assume the residual value is unless stated otherwise?

Answer 35

0

Question 36

Equation for depreciable amount

Answer 36

Cost of (e.g., machinery) - residual value

Question 37

When an entity disposes of an item of PPE at a gain, it will record the following journal entry:

Answer 37

1. Remove cost of asset from account (decrease in Asset - credit this account) 2. Remove the accumulated depreciation (acts like a liability - so when lowered, debit this account) 3. Record sales proceeds (increase in Asset so debit account) 4. Profit or Loss on Disposal a) sales proceeds > carrying amount = gain so credit b) sales proceeds < carrying amount = loss so debit

Question 38

How does depreciation charges work for different years?

Answer 38

A full years depreciation charge is recognised in the year of purchase and no depreciation charge is recognised in the year of disposal

Question 39

What does accumulated depreciation act like? In terms of DEAL and CLIP

Answer 39

A liability But it is not Just think of this for when to credit or debit

Question 40

When calculating the depreciation charge for the period for the straight-line method, disposals will?

Answer 40

Decrease the depreciable amount

Question 41

When calculating the depreciation charge for the period for the diminishing-balance method, disposals will?

Answer 41

Decrease the cost and decrease the accumulated depreciation when calculating carrying amount

Question 42

Property plant and equipment is recognised exclusive of what?

Answer 42

VAT Apart from one exception

Question 43

What is the exception with vehicles and value added tax?

Answer 43

Cars cannot claim back on VAT VAN = CAN

Question 44

PPE / Fixed tangible assets are tangible items that:

Answer 44

Are held for use in the production or supply of goods or services Are expected to be used during more than one period (one year)

Question 45

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

Answer 45

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

Question 46

When an entity recognised the depreciation charge on an item of PPE, it will record the following journal entry:

Answer 46

Question 47

Another equation that could be used to calculate depreciable charge

Answer 47

Depreciable amount x % of depreciable amount per annum

Question 48

PPE is presented on the balance sheet at?

Answer 48

Carrying amount