Ch 8 Long term Assets

Question 1

5 types of long term assets

Answer 1

1) property, plant, and equipment
2) right-of-use assets
3) intangible assets
4) goodwill
5) biological assets

Question 2

Property, plant and equipment characteristics

Answer 2

• is purchased to help generate revenues in future periods.
• has physical form
• can be resold but are not purchased for that purpose
  example: a building

Question 3

right-of-use assets characteristics

Answer 3

• are leased to help generate revenues in future periods
• leased for a year or more
  example: computers are leased rather than purchased

Question 4

intangible assets characteristics

Answer 4

• is purchased to help generate revenues in future periods
• lacks physical form
• is separable (that is, it could be sold or licensed or even rented)
  example: trademark

Question 5

Goodwill characteristics

Answer 5

• results from a business combination.
  will contribute to the generation of revenues in future periods.
• cannot be separated from the business and sold.

Question 6

Biological assets characteristics

Answer 6

• are assets whose biological transformation is being managed.
• are assets that are harvested and processed into inventory or that have their produce harvested and processed into inventory.
  example: trees or cattle

Question 7

depreciation (and amortization)

Answer 7

refers to the allocation of the cost of an asset to the periods in which the future economic benefits it embodies are being consumed.

Question 8

things that users of financial statements might want to know about long tern assets

Answer 8

1) age of them and the potential cash outflow required to replace therm
2) any significant negative changes in the expected use of the long term assets
3) extent to which they have been pledges as a security to creditors
4) extent to which the company has chosen to lease its long term assets rather than purchase them

Question 9

2 models that are used to evaluate the value of long term assets

Answer 9

1) the cost model (allowed under IFRS and ASPE)
2) revaluation model (allowed only under IFRS)

Question 10

acquisition cost

Answer 10

an asset’s original cost

Question 11

following the cost model of valuing long term assets, assets are presented on the balance sheet at ____________ aka _________

Answer 11

1) carrying amount
2) net book value

Question 12

net book value or carrying amount are ___________ (formula)

Answer 12

cost - (accumulated depreciation + accumulated impairment loss)

Question 13

Depreciation

Answer 13

the costs of PP&E are allocated to the periods in which the asset’s future economic benefits are being consumed, which normally equates to the periods in which the asset is expected to help generate revenues.

Question 14

Carrying amount is

Answer 14

1) the portion of the asset’s cost that has yet to be expensed
2) not what the asset’s worth
3) cost - (accumulated depreciation + accumulated impairment loss)

Question 15

“which costs associated with the purchase of the assets should be capitalized on”
what does “capitalized” mean in this sentence

Answer 15

included as a part of the asset’s cost

Question 16

what is the general guideline regarding the costs that should be capitalized?

Answer 16

any costs related to the purchase should be capitalized

Question 17

example of what is included in the cost as something that is capitalized

Answer 17

1) taxes, import duties
2) shipping and transportation costs
3) site preparation, instalment, set-up
4) purchase price

Question 18

basket or lump-sum purchase

Answer 18

• paying single price for multiple assets
• example: paying for an office building but purchasing the land as well as it is included in the price
• those price should be separated in the statements, because the land won’t depreciate while the building will

Question 19

Relative fair value

Answer 19

the value of each single asset in a basket purchase that is often appraised to determine

Question 20

how do we record the costs that arise after the purchase of an asset (maintenance and repairs)? Do we capitalize them or do we expense them?

Answer 20

It depends. If the costs create a future economic benefit then they should be capitalized, if not - expensed

Question 21

What are the questions that management should consider when deciding if they should capitalize or expense costs related to long term assets?

Answer 21

1) will this prolong the useful life of this asset (beyond the original estimate)?
2) will they reduce the asset’s operating costs?
3) will they improve the asset’s output in terms of either quantity or quality?
if the answer is “yes” to any of these questions, then a future economic benefit has been created and the costs should be capitalized

Question 22

under the revaluation model, PP&E are carried at their ________ less any subsequent ________ and any subsequent _________

Answer 22

1) fair value as determined at points in time known as the revaluation dates
2) accumulated depreciation
3) impairment losses

Question 23

if something is being reevaluated under the revaluation model then ___________ should also be reevaluated

Answer 23

everything in that class of assets (all buildings, not just a particular one)

Question 24

3 piece of info needed to depreciate PP&E

Answer 24

1) cost
2) estimated residual life - what is left when the useful life is expensed, something that cannot be depreciated
3) estimated useful life - how long it’s going to be useful for (can be measured in time units (years) or usage such as km, watts, etc.)

Question 25

Depreciable Amount (formula)

Answer 25

Depreciable amount = Cost - estimated residual life

Question 26

Depreciable Amount (definition)

Answer 26

This is the portion of the asset’s cost that should be expensed over the periods in which its future economic benefits are being consumed

Question 27

3 most common deprecation methods

Answer 27

1) straight line method
2) units of production method
3) diminishing balance method

Question 28

Straight line method of depreciation

Answer 28

depreciating the same amount every year
the most common method (used by over 50% of Canadian companies)

Question 29

units-of-production method

Answer 29

aka units-of-activity method and the usage method
depends on how much the asset was used in the accounting period the depreciation is recorded for
example: there is a certain amount of depreciation for each km that a truck was driven for, depending on how much it was used during an accounting period it will be depreciated accordingly

Question 30

Diminishing balance method

Answer 30

aka the declining balance method
it’s an accelerated method of depreciation which means that the depreciation costs will be the highest during the first years of usage of the asset and less and less as time goes by

Question 31

calculation using straight line depreciation method

Answer 31

Depreciation = (Cost - Estimated Residual Life)/ Estimated Useful Life (in years)
or
Depreciation expense = depreciation rate * depreciable amount

Question 32

calculation using units-of-production method of depreciation

Answer 32

1) Depreciation expense per unit = (Cost - Estimated Residual Life)/Estimated Useful Life (in units)

2) then, multiply by the number of units produced during the period

Question 33

double diminishing method of depreciation

Answer 33

1) determine the rate of depreciation (double the straight line rate)
2) apply the rate to the asset’s carrying amount
3) ensure the ending carrying amount is the asset’ estimated residual value
to make that possible the last year’s depreciation expense can be mace whatever it needs to be for the asset’s carrying amount to be equal to the asset’s estimated residual value

Question 34

depreciation journal entry

Answer 34

DR Depreciation expense
CR Accumulated depreciation, Equipment

Question 35

the effect of depreciation on fin statements

Answer 35

1) Statement of income: Expenses are increased and net income would be decreased.
2) Statement of financial position: The asset’s carrying amount is decreased, thereby reducing total assets. Shareholders’ equity is also reduced since depreciation expense reduces net income and, in turn, retained earnings.
3) Statement of cash flows: No effect because depreciation is a non-cash transaction

Question 36

Depreciation expense for partial periods

Answer 36

Depreciation expense for partial period = Annual depreciation expense * ((#of full months)/12)

Question 37

Capital cost allowance

Answer 37

a type of tax deduction that is similar to depreciation expense (the accelerated method) but unlike depreciation expenses management doesn’t have much say in how it’s determined

Question 38

impaired asset

Answer 38

The characteristic of an asset whose expected future economic benefits are estimated to be less than its carrying amount as a result of a change in circumstance. This results in its carrying amount being reduced accordingly.

Question 39

recoverable amount

Answer 39

the greater of these 2:
1) expected future cash flows from the use of the asset
2) fair value less selling costs

Question 40

Impairment loss

Answer 40

carrying amount less recoverable amount

Question 41

impairment loss journal entry

Answer 41

Loss on impairment XXX
Acc. impairment loss, Equipment XXX

Question 42

stranded assets

Answer 42

an asset which loses economic value well ahead of its anticipated useful life, whether that is a result of changes in legislation, market forces, disruptive innovation, societal norms, or environmental shocks.

Question 43

2 steps necessary when PP&E are derecognized

Answer 43

1) The asset should be depreciated up to the date of derecognition.
2) The asset and the related accumulated depreciation should be removed from the company’s records and any resulting
gain or loss should be determined.

Question 44

gain on disposal journal entry

Answer 44

Cash 6,000
Acc. Depreciation, Equipment 45,000
Equipment 50,000
Gain on Disposal of Equipment 1,000

Question 45

scrapped asset journal entry

Answer 45

Acc. Dep. Equip. 45000
Loss on Disposal of Equip. 5000
Equipment 50000

Question 46

types of intangible assets

Answer 46

1) Intellectual Property
a. Trademarks
b. Patents
c. Copyrights
d. Trade secrets
2) Licences
3) Customer lists
4) Franchise rights
5) Computer software
6) Development costs

Question 47

Amortization

Answer 47

The depreciation of intangible assets that are not natural resources

Question 48

intangible assets with finite useful lives should be tested for impairment ___________________________.
intangible assets with indefinite useful lives must be tested for impairment __________

Answer 48

1) whenever the company becomes aware of something that may indicate a possible impairment.
2) annually

Question 49

amortization journal entry

Answer 49

Amortization expense XXX
Acc. Amortization, Patents XXX

Question 50

Carrying amount of intangible assets

Answer 50

costs - accumulated amortization

Question 51

differences between PP&E and intangible assets

Answer 51

1) depreciation methods chosen
2) no residual life for intangible
3) intangible assets can have a finite or indefinite useful lives, in PP&E only land has an indefinite useful life

Question 52

Average Age %

Answer 52

(Total Acc. Dep.)/(Total PP&E - Land)

This ratio provides the user with information on the extent to which a company’s PP&E assets have been depreciated.

Question 53

Average Age

Answer 53

Total Acc. Dep/ Dep. Exp.

This ratio provides the user with information on how long a company has been using its PP&E.

Question 54

Fixed Asset Turnover

Answer 54

(Sales Revenue)/(Average Net PP&E)
This ratio provides the user with information on how effective the company has been in generating sales relative to its investment in PP&E

• misleading ratio - be careful!