Week 6 Lecture Flashcards
What is PPE
tangible long-term assets used in production, rental or administration for longer than one period. PPE are non-current assets
In which case can PPE be classified as inventory
if it is being used for resale
What are the 3 main acquisition methods for PPE
Purchase
Construction
Business combination
What types of costs are included in PPE’s initial cost
Initial costs can be, purchase price, direct costs(labour, installation), testing and any other relevants costs, decommissioning costs
Differentiate between capitalising and expensing a cost
Capitalised costs increase the value of a non-current asset whereas expenses are recognised immediately and only maintain an assets current condition
What is depreciation and why is it applied to PPE
Depreciation allocate’s the cost of PPE over its useful life to match the expenses with the useful economic life UEL of the asset
What are the two main methods of depreciation
Straight line method (evenly spread distribution over useful life), Reducing balance method (higher depreciation in earlier years)
What is the only form of PPE that doesn’t depreciate
Freehold land
What is the equation for depreciable amount
depreciable amount = Initial/purchase cost - residual value
Annual depreciation charge eqaution
(Initial cost - residual value)/useful life
How is the End of year Netbook value calculated
Netbook value (start of year) - Annual depreciation charge
When is the reducing balance method preferred over the straight line method?
It is preferred for assets that experience more wear and use early in their lifespan. e.g vehicles
Where are annual depreciation and accumulated depreciation recorded in financial statements
Annual depreciation is recorded as an expense in the statement of P/L whilst Accumulated depreciation is shown as a reduction in PPE’s Net book value in the balance sheet/ SoFP
What is Net book value in PPE accounting (for a specific moment in time)
initial asset cost - accumulated depreciation. this represents the PPE’s current value
Accumulated depreciation formula
Start of year Accumulated depreciation + Annual depreciation charge
What is the impact of higher depreciation on profits and NBV
Higher depreciation reduces profits and the NBV of assets
What are the steps for disposing of PPE
disposal involves removing PPE from financial records, calculating any profit or loss as the difference between sales proceeds and NBV then placing the new value on the SoP/L
P/L on disposal of PPE formula =
Profit/Loss = Sales proceeds - NBV
What Dr/Cr entries are made when disposing of PPE
Dr Cash
Cr PPE
Dr Accumulated depreciation
Dr/Cr Disposal account for any P/L
What does IASI 16 say
Items are assets if:
Costs can be reliably measured
The entity will receive future economic benefit
Annual depreciation formula for Reducing balance method
Start of year value x Depreciation rate
End of year value for reducing balance method
Start of year value - annual depreciation rate
