Chapter 10 Flashcards
(25 cards)
Property, Plant, & Equipment
separate category on classified balance sheet
follows long term investments
physical assets deployed in the productive operation of the business, like land, buildings, and equipment
does not include idle facilities
listed according to expected life
land, buildings, equipment
capital expenditures
Ordinary and necessary costs incurred to place an item of property, plant, or equipment in its condition for intended use; such amounts are included in the asset account
expenditures may arise that are not “ordinary and necessary
they need to be expensed as incurred
ex: repair
Interest paid to finance purchase of PPE
expensed
Interest paid to finance construction
interest related to the period of time during which active construction is ongoing is capitalized
Acquiring land
certain costs are ordinary and necessary and should be assigned to Land
include the cost of the land, title fees, legal fees, survey costs, and zoning fees. Also included are site preparation costs like grading and draining, or the cost to raze an old structure
land improvements
asset category includes the cost of parking lots, sidewalks, landscaping, irrigation systems, and similar expenditures
why separate? to account for deprecation
lump-sum purchase
A single price paid for a package of assets; the purchase price must be allocated to each of the components
Materiality
businesses simply choose to expense small costs as incurred - ex: trash can
depreciation
process of “allocation” not “valuation
service life
The period of time that a depreciable asset will be in use by an entity; the time interval over which the asset will be depreciated
Physical deterioration
“Wear and tear” will eventually cause most assets to simply wear out and become useless. Thus, physical deterioration serves to establish an outer limit on the service life of an asset.
Obsolescence
The shortening of service life due to technological advances that cause an asset to become out of date and less desirable
Inadequacy
An economic determinant of service life which is relevant when an asset is no longer fast enough or large enough to fill the competitive and productive needs of a company
depreciation method
straight-line
units-of-output, and
double-declining balance
simply the pattern by which the cost is allocated to each of the periods involved in the service life
Cost
The dollar amount assigned to a particular asset, usually the ordinary and necessary amount expended to get an asset in place and in condition for its intended use.
Service life
The useful life of an asset to an enterprise, usually relating to the anticipated period of productive use of the item.
Salvage value
residual value
This is the amount expected to be realized at the end of an asset’s service life; for example, the anticipated future sales proceeds for used equipment.
Depreciable base
cost - salvage value
amount of cost that will be allocated to the service life
Book value
Net book value
refers to the balance sheet amount at a point in time that reveals the cost minus the amount of accumulated depreciation
straight-line approach
annual depreciation is calculated by dividing the depreciable base by the service life
A simple depreciation method by which the depreciable base is spread uniformly over the service life
included in each years income statement
Fractional period depreciation
method of straight line
record depreciation when items are purchased during the year
units-of-output
allocates the depreciable base over the units of output rather than years of use
logical to use this approach in those situations where the life is best measured by identifiable units of machine “consumption.”
double-declining balance
accelerated depreciation
results in relatively large amounts of depreciation in early years of asset life and smaller amounts in later years
if quality of service declines over time or if repair cost will rise over time to offset the declining depreciation amount
