Property, Plant, and Equipment

Question 1

Property, Plant, and Equipment

Answer 1

PPE are assets that produce revenue for the business, and so their cost is allocated over time through depreciation.

Question 2

PPE includes what?

Answer 2

Buildings
Machinery and Equipment
Land- only asset that is not depreciated
Land improvements- these have a finite life, so they are depreciable
Natural resources- oil well, coal mine. Instead of “depreciation” , these assets are “depleted”.

Question 3

Carrying amount

Answer 3

Historical cost (includes capitalized costs)
LESS: Accumulated depreciation
LESS: Any impairment losses
= Carrying amount

Question 4

Capitalized costs: two categories

Answer 4

Costs to get the asset ready to use

Costs to extend the asset’s useful life or increase productivity

Question 5

Costs to get the asset ready to use

Answer 5

Usually any cost necessary to bring the asset to its intended use and location, so it would include: sales tax, testing costs, shipping costs, etc.

Question 6

Costs to extend the asset’s useful life or increase productivity

Answer 6

If a cost just maintains the asset, like an oil change, this is a regular expense and is NOT capitalized

Question 7

Disposal of PPE Assets

Answer 7

When a PPE item is sold, a gain or loss is recognized based on the amount realized from the sale compared to the carrying amount of the asset sold.

Sample J/E

Cash
Accumulated Depreciation
Machinery
Gain on Sale

Question 8

Impairment Losses

Answer 8

An asset’s value should be written down if its fair value becomes less than carrying value. When an asset’s value is written down, this is an impairment loss.

J/E
Impairment Loss
Accumulated depreciation

Question 9

Impairment test

Answer 9

Is the carrying value greater than the sum of the future net cash flows from the asset?

If this is the case, then the carrying amount is considered to be “not recoverable”, and an impairment loss is recognized.

Question 10

Assets held in use

Answer 10

Impaired when carrying value is greater than fair value. Impairment loss is CV - FV

Question 11

Non-monetary Exchanges

Answer 11

When one asset is exchanged for another asset.

Question 12

Commercial Substance

Answer 12

If the asset acquired will significantly change the cash flows to the company, or if the asset acquired in the exchange is significantly different than the item exchanges.

Question 13

Lacks commercial substance

Answer 13

If the asset received in the exchange doesn’t really change anything.

Question 14

Accounting treatment for Exchanges with Commercial Substance

Answer 14

Valuation should be its fair value and gains/losses are recognized on the exchange. If neither asset’s fair value can be determined, then no gain or loss is recognized, and the new asset is recorded at the Book Value of the old asset plus cash paid or less cash received.

Question 15

Determining gain or loss on the exchange

Answer 15

When the transaction has commercial substance, you treat it as if the asset was sold for its fair value.

Question 16

Determining the value of the new asset

Answer 16

The rule is that the value assigned to the property received in the exchange is equal to the fair value given up. If no cash is involved then both parties value the incoming asset at the fair value of the asset they exchanged.
If cash is involved, then the giver of cash adds that to their fair value given up, and the receiver of cash subtracts the cash from their fair value given up.

Question 17

J/E for the non monetary exchange

Answer 17

Equipment (received)
Accumulated Depreciation
   Equipment (exchanged)
   Cash
   Gain on Exchange

Switch cash account depending on which side of the exchange you are on

Question 18

Exchanged without commercial substance

Answer 18

If there is a loss, record the loss and then record the new asset at its fair value.
If there is a gain but no cash is received, then no gain is recognized, but you record the new asset at the BV of the asset exchanged + any cash you paid.
If there is a gain and you received cash, recognize the gain in proportion to the cash received and the new asset is recorded at FV less the unrecognized portion of the gain.
IF the proportion of cash received to total consideration is more than 25%, record the gain in full and the asset acquired at FV.

Question 19

Assets held for sale criteria

Answer 19

Management has an active plan to sell the asset

The sale is highly probable within a year

The asset is available for sale in its current condition

The company is marketing the asset for sale

Question 20

How are Assets being held for sale or disposal kept on the books

Answer 20

Lower of the carrying amount or the fair value less any costs to sell.

No longer depreciated once listed as held for sale and listed under “other assets” on the balance sheet and not included with PPE.

If carrying value is greater than fair value less costs to sell, then a write down of the value is performed and a loss is recognized.

Question 21

Assets held for sale gain/loss

Answer 21

Fair value less cost to sell is the NRV

If CV > NRV then record a loss

If CV < NRV then record a gain but only to the extent of losses previously recognize on write-downs.

Question 22

Assets to be disposed of other than a sale

Answer 22

Continue to treat as a regular asset

It’s depreciated like normal

Apply impairment if applicable

Question 23

Depreciation methods

Answer 23

Non-accelerated methods

Straight line
Service hours method
Units of output

Accelerated methods

Sum of years digits
Double declining

Question 24

Straight line depreciation

Answer 24

(Cost - salvage value) / number of years

Question 25

Service hours method

Answer 25

(Cost - salvage / total service hours) * hours used

Question 26

Units of output

Answer 26

(Cost - salvage / total units) * units produced

Question 27

Sum of years digits

Answer 27

(# years remaining * (cost - salvage)) / sum of the years

Question 28

Double declining

Answer 28

2 * straight line rate * (cost - acc depreciation)

Question 29

Acquisition costs

Answer 29

Costs to acquire natural resources such as a land or a cost to lease a property

Question 30

Exploration costs

Answer 30

Costs to locate the natural resources

Question 31

Successful efforts

Answer 31

Only costs of successful exploration are capitalized. Unsuccessful are expensed

Question 32

Full cost

Answer 32

All exploration costs are capitalized

Question 33

Depletion

Answer 33

Allocation of the natural resource to inventory. Depletion is denoted to inventory and credited to a contra account for the natural resource asset.

Question 34

Fixed Assets GAAP/IFRS Differences

Answer 34

Under GAAP, you cannot reverse impairment of assets. Under IFRS reversal of impairment is permitted if circumstances change but not on goodwill

Under IFRS, an annual review of the estimated useful life and depreciation method is required. Under GAAP this is only required if circumstances change or there is a reason to re-evaluate.

IFRS uses component depreciation: different components of an asset that has different useful lives should be depreciated by their respective useful lives