PPE

Question 1

Revenue expenditure

Answer 1

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.

Question 2

Capital expenditures

Answer 2

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.

Question 3

Property, plant and equipment

PPE

Answer 3

Fixed assets. Includes land, buildings, equipment and machinery, land improvements and leasehold improvements.

Question 4

Intangible assets

Answer 4

They lack physical substance and include patents, copyrights, leaseholds, drilling rights, and trademarks.

Question 5

Two important features of PPE

Answer 5

1) Used in business operations to help generate revenue.

2) PPE have useful lives extending over more than one accounting period.

Question 6

How are PPE recorded?

Answer 6

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.

Question 7

What’s included in the cost of land?

Answer 7

Total amount paid for land, including real estate commissions, fees for insuring the title, legal fees, accrued property taxes, surveying, clearing, grading, draining, landscaping.

Question 8

What are land improvements?

Answer 8

Assets that increase the usefulness of land but have a limited useful life and are subject to depreciation.

Question 9

What are leasehold improvements?

Answer 9

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.

Question 10

What’s included in the cost of machinery and equipment?

Answer 10

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.

Question 11

Lump-sum purchase

Answer 11

Aka basket purchase.

The purchase of PPE in a group with a single transaction for a lump-sum price. Allocated based on relative values.

Question 12

What is depreciation?

Answer 12

The process of allocating an asset’s cost to expense over its useful life.

Question 13

What is book value?

Answer 13

Original cost of the asset less accumulated depreciation.

Question 14

Residual value

Answer 14

Estimate of the amount expected to be received from selling the asset at the end of its useful life.

Question 15

Useful life

Answer 15

Aka service life.

The length of time an asset is productively used in operations.

Question 16

Straight-line depreciation

Answer 16

Charges the same amount to expense for each period of the assets useful life.

Question 17

What is the formula for straight-line depreciation

Answer 17

Cost - Estimated residual value / Estimated useful life

Question 18

What is inadequacy?

Answer 18

The capacity of PPE doesn’t meet the company’s productive demands.

Question 19

What is obsolescence?

Answer 19

An asset is no longer useful in producing goods or services with a competitive advantage, due to new inventions and improvements.

Question 20

What is the units-of-production depreciation method?

Answer 20

Expenses an amount based on an assets usage.

Question 21

What is the formula for units-of-production?

Answer 21

Cost - estimated residual value / estimated units produced during useful life = depreciation per unit.

Question 22

What is the declining-balance method if depreciation?

Answer 22

An asset is depreciated more at the beginning of its useful life, and less in later years.

Question 23

What is the formula for declining-balance depreciation?

Answer 23

2/estimated useful life. This percentage is multiplied by the beginning-of-period book value.

Question 24

How is partial-year depreciation calculated to the nearest whole month?

Answer 24

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.

Question 25

How is partial-year depreciation calculated using the half-year convention?

Answer 25

Six months’ depreciation is recorded for the partial year, regardless of when during the period the asset was acquired or disposed of.

Question 26

When is revised depreciation calculated?

Answer 26

If an asset’s useful life and/or residual value changes, or there is a subsequent capital expenditure.

Question 27

What is referred to as a ‘change in an accounting estimate’?

Answer 27

When estimates of useful life or residual value of an asset are revised.

Question 28

What must happen when a subsequent capital expenditure results from a replacement of a PPE component?

Answer 28

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.