Module 3 - Property Plant And Equipment Flashcards
Examples of PPE
Machinery / vehicles / buildings
What is PPE
Property, Plant and Equipment
Is PPE tangible?
Yes
What can PPE also be referred to as?
Fixed assets
Are companies expected to keep PPE for longer than one year?
Yes
What will PPE be measured at?
It’s cost
It’s purchase price on the supplier invoice
What is Capital Expenditure (CapEx)?
Expenditure which results in the acquisition of long term assets
Commonly used examples of PPE
Property
Machines
Motor vehicles
Computer equipment
What are the two models an entity can choose as its accounting policy and shall apply to an entire class of PPE?
Cost model
Revaluation model
Once an item is fully depreciated (it’s cost and accumulated depreciation are equal) it should no longer be…
Depreciated
What is depreciation (definition)
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
What is different about land and depreciation
Land is very rarely depreciated - it is expected to have an indefinite useful life
What are the two methods that can be used to calculate depreciation?
Straight-line method
Diminishing-balance method
When an entity recognises the depreciation charge on an item of PPE, it will record the following journal entry:
Dr - Depreciation change (E) (increase)
Cr - PPE - acc dep’n (increases)
What does accumulated depreciation act like in a journal entry?
Liability
To calculate depreciation using the straight-line method, what is the equation we need?
(Cost - Residual Value) / Useful Life
What is residual value also known as
The scrap value
What is residual value of an asset?
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
What is useful life?
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
What does the straight-line method result in?
A constant change (same every year) over the useful life
What is recognised in the year of purchase (depreciation)
A full years depreciation charge
What is recognised in the year of disposal (depreciation)
No depreciation charge in the year of disposal
Carrying amount (definition)
The amount at which an asset is recognised after deducting any accumulated depreciation
Cost - accumulated depreciation
How do we calculate depreciation using the diminishing-balance method
Multiple the carrying amount of the asset by a constant % per annum
Carrying amount x %
What is incorporated into in the constant percentage (diminishing-balance method)
Depreciable amount
Residual value
Useful life
When using diminishing balance how do you use scrap / residual value
You don’t - ignore it - potential red herring
How do entity’s choose method of depreciation?
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
Equation when useful life or residual value changes
(Remaining carrying amount - new residual value) / new remaining useful life
Both residual value and useful life won’t necessarily change at once
What are additions?
Simply additional items of PPE capitalised during the period (increase in assets)
How do additions impact when calculating depreciation charges?
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
What are Disposals?
Items of PPE that are sold or scrapped during the period and so must be removed from the nominal ledger
With Disposals - Gain or Loss
If the carrying amount is less than the proceeds, what is recognised?
A gain (income) in the profit and loss account
With Disposals - Gain or Loss
If the carrying amount is more than the proceeds, what is recognised?
A loss (an expense) is recognised in the profit and loss account
On disposal of an item of PPE, what must be removed?
Both the cost and the accumulated depreciation
What should you assume the residual value is unless stated otherwise?
0
Equation for depreciable amount
Cost of (e.g., machinery) - residual value
When an entity disposes of an item of PPE at a gain, it will record the following journal entry:
- Remove cost of asset from account (decrease in Asset - credit this account)
- Remove the accumulated depreciation (acts like a liability - so when lowered, debit this account)
- Record sales proceeds (increase in Asset so debit account)
- Profit or Loss on Disposal
a) sales proceeds > carrying amount = gain so credit
b) sales proceeds < carrying amount = loss so debit
How does depreciation charges work for different years?
A full years depreciation charge is recognised in the year of purchase and no depreciation charge is recognised in the year of disposal
What does accumulated depreciation act like? In terms of DEAL and CLIP
A liability
But it is not
Just think of this for when to credit or debit
When calculating the depreciation charge for the period for the straight-line method, disposals will?
Decrease the depreciable amount
When calculating the depreciation charge for the period for the diminishing-balance method, disposals will?
Decrease the cost and decrease the accumulated depreciation when calculating carrying amount
Property plant and equipment is recognised exclusive of what?
VAT
Apart from one exception
What is the exception with vehicles and value added tax?
Cars cannot claim back on VAT
VAN = CAN
PPE / Fixed tangible assets are tangible items that:
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)
The cost of an item of PPE shall be recognised if, and only if:
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
When an entity recognised the depreciation charge on an item of PPE, it will record the following journal entry:
Another equation that could be used to calculate depreciable charge
Depreciable amount x % of depreciable amount per annum
PPE is presented on the balance sheet at?
Carrying amount
