PPE and Intangibles Flashcards
plant assets
resources that have
- physical substance (a definite size and shape),
- are used in the operations of a business,
- are not intended for sale to customers,
- are expected to provide service to the company for a number of years.
cost of plant assets
In general, companies record plant assets at cost.
Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use
cost of land
All necessary costs incurred in making land ready for its intended use increase (debit) the Land account.
Including cash purchase price, closing costs such as title and attorney’s fees, real estate brokers’ commissions, accrued property taxes and other liens assumed by the purchaser, and clearing, leveling, demo of existing structures
land improvements
Includes all expenditures necessary to make the improvements )eg driveways, parking lots, fences, landscaping, and lighting) ready for their intended use. Limited useful lives, Expense (depreciate) the cost of land improvements over their useful lives.
Cost for buildings
includes all costs related directly to purchase (eg purchase price, closing cost like attorney’s fees, title insurance, real estate broker’s commission, remodeling and replacing or repairing roof, floors, electric wiring and plumbing) or construction (eg contract price plus payments for architectets’ fees, building permits and excavation costs)
Cost for equipment
include all costs incurred in acquiring the equipment and preparing it for use (eg cash purchase price, sales taxes, freight charges, insurance during transit paid by the purchaser, expenditures required in assembling, installing and testing the unit)
Depreciation
process of allocating expense the cost of a plant asset over its useful (service) life in a rational and systematic manner, therefore it is a process of cost allocation not asset valuation. Applies to land improvements, buildings and equipment but not land. because the revenue-producing ability of asset will decline over the asset’s useful life, depreciable cost = cost less residual value
seful life
estimate of the expected life based on need for repair, service life and vulnerability to obdolescence
Residual value
estimate of the asset’s value at the end of its useful life
depreciation methods
- straight-line method: expense is same amount for each year
- units-of-activity method: estimate total units of activity to calculate depreciation cost per unit, expenses varies based on units of activity
- declining-balance method: accelerated method, decreasing annual depreciation expense over the asset’s useful life
Component depreciation
IFRS requires that any significant parts of a plant asset that have significantly different estimated useful lives should be separately depreciated
Revaluation
if revaluation is used it must be applied to all assets in a class of assets and assets experiencing rapid price changes must be revalued on an annual basis.
Ordinary repairs
expenditures to maintain the operating efficiency and productive life of the unit
Additions and improvements
costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.
Plant asset disposal
- sale = equipment is sold to another party
- retirement = equipment is scrapped or discarded: no cash is received
- exchange = existing equipment is traded for new equipment
