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Chapter 4-6 (Final Exam Accounting 1 - Part 1) > Chapter 6 - PPE > Flashcards

Chapter 6 - PPE Flashcards

1
Q

Definition of Cos of PPE Assets

A

Sum of all costs incurred to bring the asset to its location and intended use.

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2
Q

Cost of Land

A

Purchase Price
Comissions
Survey and Legal Fees
Back Property taxes paid
Grading and Removing o Unwanted Buildings

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3
Q

Cost of Constructed Buildings

A

Architectural fees
Buildings Permits
Contractor’s charges
Materials
Labour and overhead
interest on funds borrowed

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4
Q

Cost of Purchased Buildings

A

Purchase Price
Broker’s comission
Taxes paid
Costs to repair and renovate

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5
Q

Cost of Equipment

A

Purchase Price (after discounts)
Transportation
Insurance in transit
Sales and other taxes
Purchase Comission
Installation and Testing

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6
Q

Land and Leasehold Improvements

A

Asset Account - It is depreciated

Land = Parking lots, driveways, signs, fences, paving, and sprinkler systems

Leasehold = Improvements to lease property

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7
Q

Lump-Sum (Basket) purchases of assets

A

Buy multiples assets with 1 payment

Should apply the relative-sales-value-method, by applying the costs proportionally to their value of market.

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8
Q

Capital Expenditure

A

Increases the capacity of the asset to produce or extend its useful life
Maintain or restore working order
Cost is recorded as an expense

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9
Q

Capital Expenses

A

Do not increase or extend capacity or useful life
Maintain or restore working order
Cost is recorded as an expense

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10
Q

Causes of Depreciation of PPE

A

physical wear and tear; obsolescence

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11
Q

What are the Depreciation Methods?

A
  • Straight-line
  • Units-of-production
  • Diminishing-balance
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12
Q

What is the asset’s final carrying amount?

A

Residual Value

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13
Q

Straight-line (SL)

A

Best for assets that generate revenue evenly

Annual Depreciation Expense = Cost - Residual Value / Useful Life in Units of Procution

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14
Q

Units-of-Production (UOP)

A

Best for assets that wear out because of use

Depreciation per Unit = Cost - RV / Useful life in Units of Production

Depreciation per Unit x Activity for Period = Depreciation Expense

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15
Q

Double-Diminishing-Balance (DDB)

A

Best for assets that generate revenue early in useful life

DDB rate = Straight-line rate x 2

DDB rate x Carrying Amount (Cost - Accumulated Depreciation)

Final year Depreciation = Carrying Amount at the Begg. of the final year - Residual Value

  • This is the amount needed to reduce the book value until its RV.
  • First-year depreciation is based on asset’s full cost
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16
Q

How is the useful life is changed after the depreciation already began?

A

New Annual Depreciation = Remaining Depreciable Carrying Amount / New Estimated Remaining Useful life

17
Q

Derecognition of PPE

Loss

A

Carrying Amount > Cash Received

DR CASH
DR Accumulated Depreciation
DR Loss on Disposal
CR PPE

18
Q

Derecognition of PPE

Gain

A

Carrying Amount < Cash Received

DR CASH
DR Accumulated Depreciation
CR Gain on Disposal
CR PPE

19
Q

Depreciation for Tax Purposes

A

The income tax act permits taxpayers to use accelerated depreciation (up to specified maximums) for tax purposes

20
Q

Depreciation of PPE and its components

A

Some PPE has significant components and they should be depreciated separated.

21
Q

Impairment

A

If Carrying Amount > Recoverable Amount

Can be caused by many factors such as obsolescence, physical damage, and loss in market value.

DR Loss on Impairment XX
CR Accumulated Depreciation XX

It can be reversed.

ASPE only allows the review of PPE when impairment is suspected. No reversal is allowed of the write-off.

22
Q

Revaluation Model

A

1) Asset is recorded at cost when purchased
2) If the fair value of the asset is different, it should be considered.

Asset = Fair Value - Accumulated Depreciation - Accumulated Losses

23
Q

Amortization Method of Intangible Assets with Finite Lives

A
  • Amortization
  • Usually, it uses the straight-line method
24
Q

Amortization Method of Intangible Assets with Indefinite Lives

A

Tested for Loss in Value (impairment)

ex. Goodwill

25
Q

Examples of Intangibles Assets

A

Patents
Copyrights
Trademarks and trade names
Franchises and Licenses
Goodwill

26
Q

Patents

A
  • Granted by the federal government
  • Exclusive right to produce and sell an invention
  • Last 20 years, but its useful life is expected to be less than 5 years
27
Q

Copyrights

A
  • Granted by the federal government
  • Give holder exclusive rights to reproduce and sell a book, musical composition, film or other work of art
  • Extended 50 years after creator’s life.
  • Useful life no longer than 2 or 3 years
28
Q

Trademarks and Trade Names

A

Distinctive identification of a product or service
- Also includes advertise slogans
Useful life may be set by contract
- Or indefinite life

29
Q

Franchises and Licenses

A
  • Granted by private business or government
  • Give purchaser the right to sell a product or service with specified conditions
  • Include restaurant chains and sports organizations
  • Have indefinite life = not amortized
30
Q

Goodwill

A

Only recorded when an entire company is purchased
- Purchase price of the company > market value of its net assets (Assets - Liabilities)
- Represents earning power of company purchased
- Not amortized (Just impaired)

To record:

DR Assets
DR Goodwill
CR Liabilities
CR Cash (Payable)

31
Q

Asset Impairment

A
  • Both Tangible and intangible assets must be tested yearly for impairment
  • Occurs when expected future cash flows less than assets carrying amount
  • Carrying amount adjusted to fair value
32
Q

Research and Development

A

Research cost must be expensed when incurred
Development costs meeting certain criteria must be capitalized

33
Q

Return on Assets (ROA)

A

ROA = Net Income + Interest Expense / Average Total Assets

Avg Total Assets = Begg. Total Assets + End. Total Assets / 2

Measures how profitable management has used the assets that shareholders and creditors have provided the company.

Chapter 4-6 (Final Exam Accounting 1 - Part 1) (3 decks)

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