Property, Plant & Equipment

Question 1

How is a PPE Revaluation Increase Recognised?

Answer 1

It’s credited to Equity via Other Comprehensive Income as a Revaluation Surplus.

Question 2

How is a PPE Revaluation Increase Recognised if it’s a reversal of a previous decrease?

Answer 2

As an income in the profit and loss.

Question 3

How is a PPE Revaluation Decrease recognised?

Answer 3

As an expense in profit and loss

Question 4

How is a PPE Revaluation Decrease recognised if its a reversal of a previous increase?

Answer 4

Debited to Revaluation Surplus via Other Comprehensive Income

Question 5

When is a Revaluation Surplus Realised?

Answer 5

When the asset is disposed of or over it’s remaining useful life

Question 6

Where is Revaluation Surplus Realised to when an asset is disposed?

Answer 6

To Retained Earnings directly in the Statement of Changes to Equity

Question 7

What is Depreciable Amount?

Answer 7

Cost less the Residual Value

Question 8

Name the 4 depreciation methods

Answer 8

Straight Line, Diminishing Balance, Production Units, Sum of Digits

Question 9

Where is Depreciation recognised?

Answer 9

In the Profit or Loss section of the Statement of Profit or Loss

Question 10

Name 2 models of PPE Subsequent Measurement

Answer 10

Cost Model: Cost less accumulated depreciation and accumulated impairment losses
Revaluation Model: Revalued amount less accumulated depreciation and accumulated impairment losses since last revaluation

Question 11

Where is a Gain or Loss on Derecognition recognised?

Answer 11

Profit or Loss section in the Statement of Profit or Loss

Question 12

Define Residual Value

Answer 12

The estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal

Question 13

A R300K engine can be used for 30000 hours max, 7800 hours were undertaken, work out the depreciation value

Answer 13

R300 000 x 7800/30 000 = R78 000

Question 14

A R700K Helicopter can be used for 10 years max, calculate the value of depreciation at the end of year 1

Answer 14

R700 000 x 1/10 = R70 000

Question 15

How is the day to day maintenance of an asset recognised?

Answer 15

As an expense in the Profit or Loss section of the Statement of Profit or Loss

Question 16

What costs are capitalised to PPE?

Answer 16

All costs incurred to bring the item of PPE to location and working condition for intended use.
Import Duties, Non-Refundable purchase taxes

Question 17

How are the depreciation costs of Components of PPE recognised?

Answer 17

It should be established on initial recognition whether the components are significant enough to be depreciated separately.

Question 18

How is PPE Depreciation recognised?

Answer 18

It’s recognised as a Depreciation expense in the Profit or Loss section on the Statement of Profit or Loss. Depreciation is Debited in the Profit or Loss section.

Question 19

How is PPE Accumulated Depreciation recognised?

Answer 19

Accumulated Depreciation is Credited on the Statement of Financial Position as a contra-asset item.

Question 20

Is VAT payable by a registered vendor included in the cost of PPE?

Answer 20

No VAT is refundable as input tax.

Question 21

Name 4 costs directly attributable to bringing the asset to the location and condition necessary for it to operate in the way management intended…

Answer 21

1. Employee Benefits arising directly from the construction or acquisition of the item of PPE
2. Cost of site preparation
3. Initial delivery and handling costs
4. Installation and Assembly costs
5. Cost of Testing whether the asset is functioning properly

Question 22

Is the cost of opening a new facility included in the asset cost

Answer 22

No

Question 23

Is the cost of introducing a new product or service (including advertising and promotional activities) included in the cots of the asset?

Answer 23

No

Question 24

I the costs of conducting business in a new location or with a new class of customer (including staff training) included in the cost of the asset?

Answer 24

No

Question 25

What condition is required to include the the costs of dismantling and removing the PPE item and restoring the site on which it is located in the cost of the PPE item?

Answer 25

The entity must have a present legal or constructive obligation to dismantle and remove the item.

Question 26

How will the value of the costs of dismantling the PPE item in future be determined now?

Answer 26

The cost of dismantling the PPE item in future will be estimated at a future value and the Present Value must be calculated and included on the cost of the PPE. The cost will be logged as ‘Provision for Dismantling and Removal Costs’
The PV cost must be capitalised to the value of the asset. DR Office Building (SFP), CR Provision for Dismantling and Removal Costs)

Question 27

The PV Cost of Dismantling PPE in future must be capitalised over the life of the building, how will this be done? Show it from year 1 to year 2

Answer 27

Y1: Office Building cost + R15 169 (PV cost of dismantling)+ Finance Cost for the year: R15 269 x 9% = R1365.
Y2 = Finance Cost (P/L) (R15 169 + R 1365) X 9%
DR to P/L expense as ‘Provision for Dismantling and Removal Costs’ and CR to SFP

Question 28

Subsequent Measurement of PPE: In terms of the Cost Model how will the PPE cost be carried forward after initial recognition?

Answer 28

Cost Less Accumulated Depreciation and Cost Less Accumulated Impairment Losses

Question 29

In terms of the Revaluation Model, how will the PPE cost be carried forward after initial recognition?

Answer 29

At Fair Value on the date of revaluation less accumulated depreciation and impairment losses since the Revaluation Date.

Question 30

What is the Residual Amount of a PPE item?

Answer 30

The Cost of the asset less residual value. The residual value is the estimated amount that the entity would currently obtain from disposal of the asset after deducting the disposal costs if the asset were already of the age and in the condition expected at the end of its useful life.

Question 31

What are the 3 aspects that should be considered when when deciding the amount of depreciation?

Answer 31

1. Useful Life
2. Expected Residual Value
3. Depreciation Method

Question 32

A PPE item has been is in use for 2 years. Its estimate useful life is 5 years. How will the amount of accumulated depreciation and depreciation be changed if its estimated at the beginning of year 3 that the useful life is now 4 years remaining instead of 3?

Answer 32

1. Work out the depreciation cost over the initial 5 years useful life first. (450000/5) x 2 years = 180000. R450 000 - 180 000 = R 270 000 carrying amount at beginning of year 3.
   Divide R270 000 by the new remaining years if useful life = 270 000/3+1 = R67 500. The new year on year depreciation cost will be R67 000 for the remaining 4 years.

Question 33

If the land on which the entity’s building resides is revaluated and the value has increased, will the value of the building increase by the same %

Answer 33

No, the land and the buildings are treated separately even if they were acquired as a unit.

Question 34

On which date is depreciation allocated to an asset?

Answer 34

The date on which the asset is available for use.

Question 35

Depreciation of an asset must cease only when the asset is derecognised. Depreciation does not cease when an asset becomes temporarily idle or even when retired from active use. In what circumstance will depreciation of an asset be zero?

Answer 35

If the depreciation method, unit-of-production is used, the depreciation may be at zero when the asset is temporarily idle and no units are being produced.

Question 36

When is the Straight Line depreciation method used?

Answer 36

When the income produced by an asset is a function of time rather than of usage and where repair and maintenance charges as well as the benefits are fairly constant.

Question 37

When is the Diminishing Balance depreciation method used?

Answer 37

This depreciation method is when the amount of depreciation allocated declines on an annual basis when there is uncertainty about the amount of income that will be derived from the asset. It’s also appropriate when the effectiveness of the asset is expected to decline gradually.

Question 38

The Units of Production depreciation method results in a charge based on the expected use or output of the assets called production units. What are 2 advantages of using this method?

Answer 38

1. It provides the best approximation of the consumption of economic benefits contained in an asset.
2. Has the advantage of preventing depreciation of assets while they have not been brought in use.

Question 39

Show how equipment to the value of R300 000 is depreciated over 3 years using a 25% rate and the diminishing balance method

Answer 39

Y1: R300 000 x 25% = R75 000
Y2:R225 000 x 25% = R56 250
Y3:R168 750 x 25% = RR42 187

Question 40

When can Depreciation be capitalised as part of the cost of another asset?

Answer 40

Where inventories are are manufactured using the PPE item or when it is used to in the construction of other assets.

Question 41

What is the difference between Gross Replacement Cost and Net Replacement Cost?`

Answer 41

Gross Replacement Cost: The replacement cost of a similar new unused asset.
Net Replacement Cost: Cost of a similar asset of the same age or condition

Question 42

Work out the Net replacement cost for equipment that was acquired for R100 000 with an estimated useful life of 19 years. At the end of 2 years a revaluation obtained Gross Replacement cost of R150 000.
Work out the Net Replacement cost and the Revaluation Surplus.

Answer 42

Total Original Useful Life: 10 years
Remaining Useful Life: 8 years
Net Replacement Cost: 150 000 x 8/10 = R120 000
Revaluation Surplus:
Original Price Carrying Amount R100 000 x 8/10 = R80 000.
Net Replacement Cost - Carrying Amount = R40 000 Revaluation Surplus

Question 43

Explain the method to account for Accumulated Depreciation at Revaluation

Answer 43

Use the Elimination Method.

1. Deduct the Accumulated Depreciation from the Cost to come to a Carrying Amount at the beginning of period.
2. Work out the difference between the revaluation Net Replacement cost and the Carrying Amount, this will be the Revaluation Surplus.
3. Work out the Depreciation for the current year by dividing the Net Replacement Cost by the remaining years left for the Depreciation.
4. Add the Revaluation Surplus and the Carrying Amount, deduct the depreciation for the year , this will give the Carrying Amount at the end of the year.

Question 44

Where is Revaluation Surplus accounted for?

Answer 44

Other Comprehensive Income Credit and on the Statement of Changes to Equity.

Question 45

How is a Revaluation Deficit handled?

Answer 45

Its debited as an expense in the Profit or Loss section.

Question 46

What happens if equipment is Devalued and Subsequently Revalued?

Answer 46

The Revaluation Deficit is captured as an expense (DR) in the P/L and then CR in the SFP against the asset, to devalue the asset.
When the asset is Revalued with a surplus amount, the new Revaluation Surplus must be credited on the P/L to lower the previous deficit and the asset must be DEBITED in the SFP with the increase in asset value.

Question 47

When does Depreciation on an item of PPE cease?

Answer 47

At the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized.

Question 48

List the PPE Accounting policy info that must be disclosed in the notes

Answer 48

1. Measurement Basis in establishing the gross carrying amount for each class of PPE
2. Depreciation Method for each class of PPE
3. Useful Lives of Depreciation Rates for each class of PPE
4. Information regarding revaluations

Question 49

List Profit or Loss and Other Comprehensive Income and notes for each class of asset that must be disclosed.

Answer 49

1. Depreciation recognised as an expense or shown as part of the cost of other assets
2. The effect of Material Changes on the estimate of:
   - Useful Lives
   - Residual Values
   - Dismantling, removal or restoration costs
   - Depreciation Method
   - Amount of Compensation received from 3rd parties for the Impairment, Giving Up, or Loss of items of PPE

Question 50

List the items that must be disclosed for the Statement of Financial Position and the notes.

Answer 50

1. Gross Carrying Amount and Accumulated Depreciation (including impairment loss) at the beginning of the period.
2. A reconciliation of the movements of the carrying amount at the beginning and end of period.

Question 51

List items that must be included in the detailed reconciliation

Answer 51

1. Carrying Amount at beginning and end of period
2. Acquisitions through business combinations
3. Increases or Decreases in value arising from revaluations
4. Impairments as well as reversals of impairment losses
5. Depreciation
6. Net exchange differences for currency changes

Question 52

List the Comparative Amounts in respect of reconciliation that must be disclosed

Answer 52

1. Amount incurred on PPE still under construction on which no Depreciation has been provided
2. Statement that PPE serves as security for Liabilities (amount of PPE pledged as security, amount of restrictions on title

Question 53

List the additional information regarding Assets That Have Been Revalued that must be disclosed

Answer 53

Statement of Financial Position, Statement of Profit or Loss and notes:

1. Effective Date of revaluation
2. Whether the Revaluation was done independently
3. Carrying amount of each class of revalued PPE
4. Revaluation Surplus, including movement, limitations on distributions to shareholders.(whether the revaluation surplus is viewed as distributable or not}