Ch. 9 - Reporting and Analyzing Non-Current Assets Flashcards
(29 cards)
What are operating expenditures (OPEX)?
It is an expenditure that provides a benefit realized in the current year. It is required to maintain asset in normal operating condition.
Ex. Spending money for oil change for your truck (it allows you to keep driving your truck and it’s something that you constantly have to do for maintenance)
What are capital expenditures (CAPEX) ?
It is an expenditure that provides benefit for longer than one year. Capitalized as an asset (increases cost of asset). It increases asset’s life, productivity, or efficiency.
Basically “bettering” the asset.
Example: Spending money for changing the engine of truck, lets you use it for more years –> increases estimated life.
What are the property, plant, and equipment classes? (list)
- Land
- Land Improvements
- Buildings
- Equipments
PPE Classes: Land
Cost of land includes:
1. Purchase price
2. closing costs (closing the deals, legal fees)
3. additional cost to prepare land for use (grade out land before you put anything on top)
–> Unlimited life and cannot be depreciated
PPE Classes: Land Improvements
Cost of structural additions made to property (paving, fencing, sidewalks). It declines in service over time (limited time) which is why they are depreciated over its useful life.
PPE Classes: Buildings
Expenditures related to purchase or construction of a building.
Extra: construction loans are the only type of loans you can capitalize, otherwise it is an interest/expense.
PPE classes: Equipment
cost include:
- purchase price
- freight charges and insurance during transit paid by purchaser
- assembly
-installation and testing
What is cost determination? (list)
Recorded at cost includes:
- Total Acquisition cost
- Cost to prepare the asset for intended use
- Estimated asset retirement costs
Cost determination: total acquisition cost
- purchase price
- non-refundable taxes
- duties; less discounts and rebates
Cost determination: cost to prepare the asset for intended use
Expenditures to transport asset to required location to ready asset for intended use
Cost determination: estimated asset retirement costs
Estimated cost of future obligation to dismantle, remove, or restore the asset at end of useful life.
Depreciation and list
It is a systematic allocation of cost of PPE over its useful life.
It is process of cost allocation and NOT asset valuation.
–> It determines carrying amount of an asset, does NOT determine fair value of an asset.
a) Cost
b) Useful life
c) Residual value - aka Salvage
(depreciation) cost
- Acquisition cost
2 cost to ready asset for use - estimated asset retirement costs
(depreciation) useful life
estimated period or time an asset is available for use (years)
OR
estimated number of units that asset will produce (mileage, flight hours)
(depreciation) residual value - salvage
Estimated value to be received from asset disposal at the end of its useful life
Depreciation Methods (list)
Straight-line best for buildings
Diminishing-balance
Unit-of-Production
Depreciation Method: Straight-Line Method
Depreciation is constant for each period of asset’s useful life
Depreciation expense = (cost - residual value) / estimated useful life
Depreciation rate
Depreciation Rate = 100% / estimated useful life
Depreciation Method: Diminishing-Balance
Produces a decreasing depreciation expense over the useful life of an asset. Depreciation is calculated based on asset’s carrying amount, which declines each year as accumulated depreciation.
Depreciation rate = (100%/estimated useful life)(multiplier)
Depreciation expense = (carrying amount)(deprecation rate)
Depreciation Method: unit-of-production
Useful life is expressed in terms of total units or production activity expected from the asset.
Useful for factory machinery, vehicles, airplanes, or any asset whose usage varies over time.
Depreciation expense per unit = (cost-residual value)/estimated total units Depreciation expense = (# units consumed)(depreciation expense per unit)
how does PPE Derecognition work? (just list it)
- Update depreciation
- Calculate carrying amount
- Calculate gain or loss on disposal
- Record disposal
PPE Derecognition: update depreciation
Depreciation for the fraction of the year to the date of disposal must be recorded
DR Depreciation Expense
CR Accumulated Depreciation
PPE Derecognition: calculate carrying amount
Carrying amount = cost - accumulated depreciation
PPE Derecognition: calculate gain or loss on disposal
Gain/ Loss = Proceeds - Carrying amount
PPE Derecognition: record disposal
Remove cost of asset and accumulated depreciation.
Record proceeds (if there’s any) and gain/loss on disposition (if any)
