Property, Plant & Equipment Flashcards
Property, Plant and Equipment Definition
- Property- Includes land and buildings like offices, warehouses, retail spaces, and factories
- Plant- Plant refers to industrial facilities and machinery used in manufacturing.
- Equipment- Encompasses tools, vehicles, office equipment, computers, and other apparatus necessary for business operations.
Property Plant and Equipment: Initial Measurement
Capitalized- Costs incurred to get the asset in a state of ready-to-use
Expensed- Costs incurred after the asset is in a state of ready-to-use
Land Initial Measurment
+Purchase price
+Broker Commissions
+Title & Recording Fees
+ Legal Fees
+ Surveying Charges
+ Any existing obligations assumed by the buyer
+ Price paid to demolish an old building/ price paid to graze the land.
- proceeds from the sale of scrap recovered from demolition of an existing building
= Total Cost
Journal Entry: Acquisition of land
Land Debit
Cash Credit
Liability Credit
Purchased Building: Initial Measurement
+Purchase price
+ Alteration & improvement Cost
+ Architects Fees
+ Deferred repairs (Repair charges neglected by the previous owner)
+ Excavation Cost
+ Delinquent Taxes
= Total Cost
Journal Entry: Acquisition of Building
Building Debit
Cash Credit
Purchased Equipment: Initial Measurement
+ Purchase Price
+ Transportation
+ Sales & Excise Tax
+ Legal Fees
+ Delinquent Taxes
+ Title Costs
+ In-transit Insurance
+ Surveying Charges
+ Installation Cost
= Total Cost
Journal Entry
Equipment Debit
Cash Credit
Self Constructed PPE: Initial Measurement
Direct Materials= Raw materials are directly used in the construction of the asset.
Direct Labor= Wages and salaries paid to employees who are directly involved in the construction process.
Variable & Fixed Overhead- Overhead such as utilities or indirect labor used in construction.
Construction Period Interest
Capitalized Interest
- Interest costs incurred during the construction period.
This is calculated as lower of:
- Weighted Avg. accumulated expenditure * interest rate
- Actual Interest Cost
Non-Capitalized Interest
- However the following interest costs are not capitalized:
* Interest before commencement of Construction
* Interest after completion of construction
* Amount borrowed in excess of amount spent.
* Interest on a loan taken to purchase an asset.
* Interest on loan to manufacture inventory sold in the ordinary course of business.
Basket Purchases: Initial Measurement
- Basket purchases refer to the acquisition of multiple assets for a single lump sum price. For example: Land & Buildings are acquired together.
- In basket purchases, a lump sum price is allocated among the acquired assets based on their relative FMV.
Price allocated to asset #1= (FMV of Asset 1
—————-
FMV of Asset1
+FMV of asset #2)
* Total consideration.
Journal Entry: Basket Purchase
Land Debit
Building Debit
Cash Credit
Repairs & Maintenance
- Repairs and maintenance are normal. Routine Maintenance expenses are incurred to keep an asset in its existing state or to restore it to its original operating condition.
- These expenses are considered operating or revenue expenses and are expensed in the period in which they are incurred.
- Repairs related to the factory machine are charged to Cost of Good Sold.
Repairs related to Office Machine are charged to General and Administrative Expenses. - Repairs related to selling equipment are charged to selling expenses.
- Repairs and maintenance are recorded as follows:
Repairs & Maintenance Debit
Cash Credit
Betterments
- Expenses that enhance the asset or increase its useful life result in a betterment or improvement of the asset, extending its useful life or increasing its efficiency, capacity or quality.
- These expenses are considered capital expenditures and are capitalized. They are added to the carrying value of the asset and are depreciated over the enhanced useful life of the asset.
Depreciation
- Depreciation is used to allocate the cost of a tangible fixed asset over its useful life and is used to account for declines in value. It represents how much of an assets value has been used up and it reduces the value of the asset over time
Balance Sheet presentation
Original Cost XXX
Les Acc Dep (xxx)
Net Book Value (goes down) XXX
Journal entry
Depreciation Debit
Acc. Dep. Credit
Depreciation Method: Straight Line Method
SLM Depreciation= (HC-SV)/ Useful Life
SLM %= 1/useful life
Depreciation: Double Declining
DDB Dep= ((HC-AD)/ Useful life)*2
DDB %= (1/useful life)* 2
Depreciation Sum of years digit
SYD= (HC-SV) * Number of years remaining/Sum of Years
SYD %= Number of years/ Sum of years
Depreciation Units of Production
UOP= (HC-SV) * units this year/ total estimated units
UOP%= Units this year/ Total Estimated units
Depreciation Method: Appraisal or inventory method
Beginning PPE (Carrying Value) XXX
Add: Purchases XXX
Less Disposals (XXX)
Less Ending PPE (Appraised Value) (XXX)
Depreciation Expenses XXX
Depreciation- Depletion
Depletion- Depletion Base * (Units Extracted this year/ Total estimated units)
Component Deprciation
- Component Depreciation is an approach to depreciation where individual parts or components of an asset are depreciated separately based on their respective useful lives.
- This approach is commonly used for assets that have significant components with different useful lives.
Group Depreciation (Similar Assets)
- Group depreciation refers to a method where similar assets with similar useful lives are grouped and depreciated as a single asset.
- This is a common method when dealing with assets that are not significant individually but are in significant numbers, life chairs in an office, small tools in a workshop, etc.
Composite Depreciation (Dissimilar asset)
- Composite depreciation is a method used when a company has a group of dissimilar assets with different useful lives, but wants to calculate depreciation as if the assets were one single asset.
- In the composite depreciation method, the assets continue to be depreciated at the group rate over life even after an individual assets life has ended.
- Example: Building furnished with furniture & Electrical Installations
Impairment
- Impairment refers to a situation where the carrying value of an asset exceeds its recoverable amount, meaning that the asset is worth less on the market than its value on the balance sheet.
Circumstances that indicate impairment are as follows:
- Decline in demand
- Inability to keep up with technology
- Net operating loss
- Negative Cash flow
- Change in regulatory or legal environment
Impairment: Held of Use
- Impairment of assets held for use is calculated using the 2-step approach.
#1- Test for impairment: Compare the carrying value (CV) of the asset to its non-discounted future cash flows.
Carrying value < non-discounted future cashflows: Asset is impaired, no further action required
Carrying value> Non-discounted future cashflows: Asset is impaired- proceed to Step #2
Step #2- Measure and record the impairment loss: The impairment loss is the difference between the carrying value and its Fair value. Impairment loss is calculated as follows:
impairment loss= Carrying Value- Fair Value
Impairment loss will be recorded as follows:
Impairment loss Debit
Asset Credit
- Note: Reversal of impairment losses recognized on assets held-for- use is not allowed.
Impairment- Held for Sale
1- Test for impairment: Compare the carrying value of the asset its net realizable value (FV- cost to sell)
- Impairment of assets held for sale is calculated with the 2 step approach
Carrying value < net realizable value: Asset is not impaired, no further action required.
Carrying Value > net realizable value : asset is impaired go to step #2
Step #2
Measure and record the impairment loss: The impairment loss is the difference between the carrying value of the asset and its Net Realizable value. Impairment loss is calculated as follows:
Impairment loss= Carrying value- Net realizable value.
_-Impairment loss will be recorded as follows:
Impairment Loss Debit
asset Credit
Note- Reversal of impairment losses are recognized on assets held for sale is allowed to the extent of previously written down losses.
Asset retirement obligation
Asset Retirement Obligation refers to a legal obligation associated with the retirement of a tangible long-lived asset.
- It requires a company to recognize a liability for the costs related to the eventual dismantling, removal or disposal of a tangible asset at the end of its useful life.
Accounting for asset retirement obligation
Initial measurement
Asset Debit
Cash Credit
Asset retirement obligation Credit
Subsequent Measurement
Accretion Expense Debit
Asset Retirement Obligation Credit
Final Disposal
Asset Retirement Obligation Debit
Cash CreditD
Disposal
- Disposal of an asset involves removing it from the company’s balance sheet. This can occur for various reasons, such as the sale of the asset, or scrapping it due to obsolescence.
Journal Entry Disposal
Cash Debit
ACC DEP. Debit
Loss on Disposal Debit
Asset Credit
Gain on disposal Credit
