PPE Flashcards
Revenue expenditure
Costs that maintain an asset but do not materially increase the asset’s life or productive capabilities. They are recorded as expenses, on the income statement. Ex. Supplies, lubricant, fuel, electric power.
Capital expenditures
Costs of PPE that provide material benefits extending beyond the current period. They are debited to PPE accounts, and recorded on the balance sheet. Ex. Roofing replacement, plant expansion, major overhauls of machinery and equipment.
Property, plant and equipment
PPE
Fixed assets. Includes land, buildings, equipment and machinery, land improvements and leasehold improvements.
Intangible assets
They lack physical substance and include patents, copyrights, leaseholds, drilling rights, and trademarks.
Two important features of PPE
1) Used in business operations to help generate revenue.
2) PPE have useful lives extending over more than one accounting period.
How are PPE recorded?
PPE are recorded at cost, which includes all normal and reasonable expenditures necessary to get the asset in place and ready for use.
Ex. Includes invoice price, less cash discount for early payment, plus freight, unpacking, assembling costs, non-refundable sales tax, installation and testing of machine.
What’s included in the cost of land?
Total amount paid for land, including real estate commissions, fees for insuring the title, legal fees, accrued property taxes, surveying, clearing, grading, draining, landscaping.
What are land improvements?
Assets that increase the usefulness of land but have a limited useful life and are subject to depreciation.
What are leasehold improvements?
An asset resulting from alterations or improvements made to the leased property. They revert to the lessor at the end of the lease. Ex partitions, painting, storefronts.
What’s included in the cost of machinery and equipment?
All costs normal and necessary to purchase and prepare it for its use. Includes purchase price, less discounts, plus non-refundable sales tax, transportation charges, insurance while in transit, installing, assembling, and testing.
Lump-sum purchase
Aka basket purchase.
The purchase of PPE in a group with a single transaction for a lump-sum price. Allocated based on relative values.
What is depreciation?
The process of allocating an asset’s cost to expense over its useful life.
What is book value?
Original cost of the asset less accumulated depreciation.
Residual value
Estimate of the amount expected to be received from selling the asset at the end of its useful life.
Useful life
Aka service life.
The length of time an asset is productively used in operations.
Straight-line depreciation
Charges the same amount to expense for each period of the assets useful life.
What is the formula for straight-line depreciation
Cost - Estimated residual value / Estimated useful life
What is inadequacy?
The capacity of PPE doesn’t meet the company’s productive demands.
What is obsolescence?
An asset is no longer useful in producing goods or services with a competitive advantage, due to new inventions and improvements.
What is the units-of-production depreciation method?
Expenses an amount based on an assets usage.
What is the formula for units-of-production?
Cost - estimated residual value / estimated units produced during useful life = depreciation per unit.
What is the declining-balance method if depreciation?
An asset is depreciated more at the beginning of its useful life, and less in later years.
What is the formula for declining-balance depreciation?
2/estimated useful life. This percentage is multiplied by the beginning-of-period book value.
How is partial-year depreciation calculated to the nearest whole month?
If an asset was used for more than half a month, depreciation is calculated for the whole month.
The full year depreciation is multiplied by a fraction, representing how many months out of the year it was used.
How is partial-year depreciation calculated using the half-year convention?
Six months’ depreciation is recorded for the partial year, regardless of when during the period the asset was acquired or disposed of.
When is revised depreciation calculated?
If an asset’s useful life and/or residual value changes, or there is a subsequent capital expenditure.
What is referred to as a ‘change in an accounting estimate’?
When estimates of useful life or residual value of an asset are revised.
What must happen when a subsequent capital expenditure results from a replacement of a PPE component?
The cost and accumulated depreciation of the component must be removed from the records, and any resulting loss or gain must be recorded. Partial period depreciation must also be recorded if necessary.
