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Financial Accounting > Module 3 - Property Plant And Equipment > Flashcards

Module 3 - Property Plant And Equipment Flashcards

1
Q

Examples of PPE

A

Machinery / vehicles / buildings

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2
Q

What is PPE

A

Property, Plant and Equipment

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3
Q

Is PPE tangible?

A

Yes

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4
Q

What can PPE also be referred to as?

A

Fixed assets

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5
Q

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

A

Yes

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6
Q

What will PPE be measured at?

A

It’s cost

It’s purchase price on the supplier invoice

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7
Q

What is Capital Expenditure (CapEx)?

A

Expenditure which results in the acquisition of long term assets

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8
Q

Commonly used examples of PPE

A

Property

Machines

Motor vehicles

Computer equipment

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9
Q

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

A

Cost model

Revaluation model

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10
Q

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

A

Depreciated

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11
Q

What is depreciation (definition)

A

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

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12
Q

What is different about land and depreciation

A

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

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13
Q

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

A

Straight-line method

Diminishing-balance method

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14
Q

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

A

Dr - Depreciation change (E) (increase)

  Cr    - PPE - acc dep’n (increases)
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15
Q

What does accumulated depreciation act like in a journal entry?

A

Liability

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16
Q

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

A

(Cost - Residual Value) / Useful Life

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17
Q

What is residual value also known as

A

The scrap value

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18
Q

What is residual value of an asset?

A

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

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19
Q

What is useful life?

A

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

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20
Q

What does the straight-line method result in?

A

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

21
Q

What is recognised in the year of purchase (depreciation)

A

A full years depreciation charge

22
Q

What is recognised in the year of disposal (depreciation)

A

No depreciation charge in the year of disposal

23
Q

Carrying amount (definition)

A

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

Cost - accumulated depreciation

24
Q

How do we calculate depreciation using the diminishing-balance method

A

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

Carrying amount x %

25
Q

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

A

Depreciable amount

Residual value

Useful life

26
Q

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

A

You don’t - ignore it - potential red herring

27
Q

How do entity’s choose method of depreciation?

A

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

28
Q

Equation when useful life or residual value changes

A

(Remaining carrying amount - new residual value) / new remaining useful life

Both residual value and useful life won’t necessarily change at once

29
Q

What are additions?

A

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

30
Q

How do additions impact when calculating depreciation charges?

A

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

31
Q

What are Disposals?

A

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

32
Q

With Disposals - Gain or Loss

If the carrying amount is less than the proceeds, what is recognised?

A

A gain (income) in the profit and loss account

33
Q

With Disposals - Gain or Loss

If the carrying amount is more than the proceeds, what is recognised?

A

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

34
Q

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

A

Both the cost and the accumulated depreciation

35
Q

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

A

0

36
Q

Equation for depreciable amount

A

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

37
Q

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

A
  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
38
Q

How does depreciation charges work for different years?

A

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

39
Q

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

A

A liability

But it is not

Just think of this for when to credit or debit

40
Q

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

A

Decrease the depreciable amount

41
Q

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

A

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

42
Q

Property plant and equipment is recognised exclusive of what?

A

VAT

Apart from one exception

43
Q

What is the exception with vehicles and value added tax?

A

Cars cannot claim back on VAT

VAN = CAN

44
Q

PPE / Fixed tangible assets are tangible items that:

A

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)

45
Q

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

A

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

46
Q

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

A
47
Q

Another equation that could be used to calculate depreciable charge

A

Depreciable amount x % of depreciable amount per annum

48
Q

PPE is presented on the balance sheet at?

A

Carrying amount

Financial Accounting (7 decks)

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