Chapter 7 Plant Property Equipment & Intangible Assets Flashcards
(25 cards)
What is PPE?
1) Tangible
2) Long term
PPE has to be held for use in the business
What are the criteria for recognising Plant Property Equipment?
It is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured directly.
How are PPE measured?
PPEs are measured on two requirements
1) Initial measurement
2) Subsequent measurement
How are PPE initially measured?
Initial measurement criteria include:
1) Purchase Price
2) Directly Attributable Costs
- Transport cost, site preparation cost, testing cost, handling and delivery fees
3) Initial estimate of cost at end of life
- dismantling costs, restoration costs
What is the journal entry for the following event:
Purchased machine for $9,000, installation cost $1,000.
DR Machine 10,000 [9K + 1K]
CR Cash 10,000
Balance Sheet
Non-Current Asset
Machine 10K
What is the concept of subsequent measurement?
Subsequent measurement is cost incurred after initial recognition of the asset
It can be either capitalised or expensed
When is subsequent measurement expensed and when is it capitalised
Expensed:
1) Only serves to maintain the asset for operational use
2) Related to day to day servicing
Capitalised:
1) Adds additional years to the assets useful life
2) Increases productivity or efficiency of the asset
What is depreciation?
Depreciation is the systemic allocation of cost of an asset less its residual value over its estimated useful life.
When does depreciation start?
Depreciation starts the moment that the asset is available for use.
Transaction
Super Fast Ltd depreciated the machine purchased earlier (for $40,000) over 4 years using straight line method
What is the journal entry?
DR Depreciation Expense on machinery 10K
CR Accumulated depreciation on machinery. 10K
P&L
Depreciation expense 10K
Balance Sheet Non Current Asset Machine 40K Accumulated Depreciation (10K) Total Non Current Asset 30K
How to calculate depreciation
1) Cost of purchase
2) Estimated Useful Life
3) Estimated Residual Value
What are the three general methods of depreciation, why are each of them used?
1) Straight Line Method
- For assets that are evenly used throughout its useful life
2) Units of production method
- For assets that wear out the more it is used
3) Declining Balance Method
- For assets that generate more benefits in early stages of its useful life
How do you calculate depreciation for partial year?
1) Calculate the depreciation for the full year
2) Pro rate the depreciation
What causes changes in depreciation estimates?
1) Change in estimated useful life,
For example, if the asset has capital expenditure applied and its useful life is extended.
1) Remaining book value + CAPEX cost = New Book value
2) (New Book Value - New Residual Cost) / Useful Life
What are the two measurement model for PPE?
1) Cost model
- Carried at cost less any accumulated depreciation and accumulated impairment losses
2) Revaluation model
- Carried at revalued amount being its fair value at the date of revaluation minus any subsequent accumulated depreciation & accumulated impairment loss.
How do you measure an increase in the carrying amount
DR Machine 5K
CR Revaluation Reserve 5K
B/S Non Current Assets Equity Machine 15K Revaluation Reserve 20K (cumulative amount)
P&L Other comprehensive income Gain on revaluation 5K (specific year's movement)
When are assets impaired?
When there is evidence of a lack of recoverability of the carrying amount of an asset. ONLY need to check for impairment when an impairment event has occured.
Assets are impaired when their carry amount > recoverable amount.
How do you determine recoverable value?
Recoverable value is the GREATER of
1) Value in use (present value of future CFs)
2) Fair Value less cost of disposal (Market value - cost to sell)
How do you determine carry amount?
If there is NO prior impairment,
Carry amount = cost - accumulated depreciation
If there IS prior impairment
Carry amount = cost - accumulated impairment - accumulated depreciation
What is derecognition?
The removal of PPE from the company’s books
- Occurs when the asset is no longer required by the company
- Possible scenarios include:
1) fully depreciated asset
2) scrapping of PPE before fully depreciated
3) Sale or disposal of PPE
How do you record a gain on disposal of PPE?
DR Cash
DR Accumulated Depreciation
DR Accumulated impairment (if any)
CR Gain on disposal
CR PPEHow do you record a loss on disposal?
DR Cash
DR Accum Depreciation
DR Accum impairment (if any)
DR Loss on disposal of PPE
CR PPEWhat are intangible assets, are there any criteria to match?
Intangible assets are identifiable non monetary assets without physical substances
There are three criteria to be met to consider an asset as intangible
1) Identifiable
2) Control over asset
3) Economic Benefits
What are the general types of intangible assets, which are recognised?
1) Purchased Goodwill (Identifiable)
- Excess paid for purchasing another company over sum of fair value of assets - liabilities
2) Internally generated Goodwill (NOT Recognised)
- Unidentifiable
3) Brand, mast heads etc (NOT Recognised)
- Cost cannot be distinguished from business as a whole
