PPE

Question 1

What is an NRV?

Answer 1

A net realizable value is the estimated proceeds from the sale of a fixed asset less the estimated disposal costs (eg commissions) incurred to complete the sale.

Question 2

What is the meaning of a fair value?

Answer 2

This is simply the price received to sell an asset or transfer a liability from an orderly transaction between market participants on a specific date.

Question 3

How do you calculate Recognized gain?

Answer 3

Cash received/cash received + FV of asset received * Total gain

Question 4

When does the recipient recognizes a proportional amount of gain?

Answer 4

If the non monetary exchange lacks commercial substance and cash is received in the process, the recipient recognizes a proportional amount of the gain. However, if the cash proceeds is greater than 25% of the total consideration received then all gain is recognized.

Question 5

What is a double-declining balance depreciation (DDB)?

Answer 5

This is an accelerate method mostly used when the depreciation is higher during the early years of an asset’s life and decreases each year.

Question 6

How do you calculate the annual depreciation expense under the double-declining balance depreciation method?

Answer 6

Carrying value * 2/useful life.

To solve for carrying value the formula is cost - accumulated depreciation.

Question 7

How do you calculate the depreciation expense per unit?

Answer 7

Depreciation expense per unit = cost - salvage value/ total units in asset’s life.

Question 8

How do you calculate depreciation expense for the year if you have the depreciation expense per unit?

Answer 8

Depreciation expense per unit * Units produced during the year

Question 9

What transactions do you capitalize as part of land & building, when acquire this asset?

Answer 9

Land = includes delinquent taxes, clearing, grading and razing(demolishing) and existing structures on the land, less any scrap proceeds.

Building = includes excavation, architects’ fees, construction costs and capitalized interest.

Question 10

What is an Asset retirement Obligation(ARO)?

Answer 10

An ARO represents a future liability associated with the retirement of an asset used in operations. The ARO is typically recorded at the fair value of the liability with a corresponding increase to the cost of the asset. A periodic accretion expense is always recorded to increase the liability to its future value (FV).

Note: An ARO is recorded at fair value(FV) of the liability. The FV usually equals the present value(ie. the discounted cash flows)

Question 11

When does an impairment occurs?

Answer 11

An impairment(i.e decline in value or usefulness) of a long-lived asset used in operations occurs when the carrying value(CV) of an asset is not recoverable and a write-off is deemed necessary. This simply means a long-lived asset is impaired when its CV exceeds its fair value(FV).

Question 12

What expenditures makes an asset ready for use?

Answer 12

Shipping (freight-in), Purchasing, Installation, Taxes & Test Runs.
Acronym = SPITT

Question 13

What expenditures makes an asset ready for use?

Answer 13

Shipping (freight-in), Purchasing, Installation, Taxes & Test Runs.
Acronym = SPITT

Question 14

What is a straight-line depreciation method?

Answer 14

This is a method applied when long-term assets are used consistently. This method allocates depreciation expense evenly so that the same amount of the depreciable base is allocated each year.
The formula is Cost - Salvage Value/Years of life.

Question 15

What are the information that is typically included in the notes of the financial statements regarding PPE per GAAP?

Answer 15

The required disclosures for PPE are:

1. Method(s) used in computing depreciation.
2. Depreciation expense for the period.
3. Accumulated depreciation by major classes or in total.
4. Carrying value of depreciable assets by nature or function.

Question 16

How do you calculate the ending ARO balance?

Answer 16

Beginning Balance + New Obligations + Accretion Expense = Ending Balance

Question 17

What is the meaning of CAPITALIZED when accounting for PPE?

Answer 17

This is simply the recording of expenditure (ie, money spent) as an asset. In order words any expenditures to make an asset ready for use must be capitalized as part of the asset’s accounting costs.

Question 18

What is the meaning of CAPITALIZED when accounting for PPE?

Answer 18

This is simply the recording of expenditure (ie, money spent) as an asset. In order words any expenditures to make an asset ready for use must be capitalized as part of the asset’s accounting costs.

Question 19

How do you calculate depletion?

Answer 19

Step 1 = Finding the volume
Step 2 = Calculate cost per unit (Cost-salvage value/volume
Step 3 = Cost per unit * units extracted = Depletion in Inventory.
Final Step = Cost per unit * Units sold

Question 20

How do you calculate a partial year depreciation expense?

Answer 20

Partial year depreciation expense = Annual depreciation expense * fraction of year.

Question 21

What is the meaning of commercial substance when dealing with asset acquisition?

Answer 21

An asset is considered to have commercial substance if it’s expected that an entity’s future cash will change as a result of a business transaction.

Question 22

How do you calculate a gain recognition?

Answer 22

Gain recognized = cash received/cash received + FV of asset received.

Question 23

How do you calculate weighted average accumulated expenditures?

Answer 23

Expenditure * months outstanding/capitalization period

Question 24

What expenditures should be capitalized?

Answer 24

Any expenditures to enhance (ie. add capabilities, improve efficiency) an existing asset or to extend its useful life are considered capital improvements and are capitalized (ie, added to the asset’s value).

Question 25

How do you calculate accretion expense?

Answer 25

Accretion expense = ARO liability * credit adjusted risk-free interest rate