Depreciation Flashcards
(43 cards)
What is the definition of PPE?
Property Plant and Equipment are tangible assets held for use in the business for more than one accounting period and used in production, distribution, administration, or rental to others.
Give examples of PPE.
- Land
- Building
- Machinery
- Office Equipment (printers, computer, speaker, projector, AC)
- Vehicles
- Furniture
- Fixtures and fittings (whiteboards, light fittings, glass fittings, aluminum fittings)
What are the recognition criteria for PPE?
- It is probable that PPE will generate future economic benefits
- The cost of the PPE can be measured reliably
How should PPE be recorded in accounting?
All PPE should be recorded at cost.
What is the cost of PPE?
The cost includes the purchase price and other expenses necessary to prepare the asset for use.
What costs can be added to the cost of an asset?
- Site preparation cost
- Professional fees (e.g., lawyers, architects)
- Shipping costs
- Installation and assembly costs
- Testing costs
What expenditures cannot be added to the cost of non-current assets?
- Purchase of any asset for re-sale
- Repairing/Maintenance/Servicing costs
- Replacement of doors, windows, roofs, etc.
- Employee training for non-current assets
- Distribution costs and administrative expenses
Define depreciation.
Depreciation means spreading the net cost of the asset over its useful life.
What are the methods of depreciation?
- Straight Line Method
- Reducing Balance Method (Diminishing Balance Method)
What is the formula for annual depreciation in the straight line method?
Annual Depreciation = (Cost - Scrap Value) / Useful Life
What is Net Carrying Value (NCV)?
NCV = Cost of the asset - Accumulated depreciation
How does an increase in the estimated useful life of an asset affect depreciation expense?
It results in a reduction of depreciation expense and an increase in business profits.
What is the journal entry for depreciation expense?
Debit: Depreciation Expense a/c
Credit: Accumulated Depreciation a/c
What happens to depreciation when the asset value increases?
Depreciation will also increase.
What is the treatment of expenses related to depreciation in financial statements?
Depreciation is usually added to the cost of sales.
How do you determine if an expenditure is capital or revenue?
If the expenditure increases the asset’s life, capacity, efficiency, or quality, it is capital. Otherwise, it is revenue.
What is the formula for calculating NCV at the end of the 8th year using the reducing balance method?
NCV = Cost - Accumulated depreciation
What is the difference between disposal and scrap?
Disposal refers to selling an asset before its useful life ends; scrap refers to selling at the end of its useful life.
What is the estimated useful life of a vehicle purchased for $30,000 and sold for $7,000?
Estimated useful life is 4 years.
What is the estimated scrap value of the vehicle mentioned?
$6,000.
What is the impact of using the straight line method for depreciation on the financial statements?
It results in a consistent depreciation expense each year.
Fill in the blank: The cost incurred to bring the PPE to its intended location and working conditions is known as _______.
transportation costs
What is the term used for the selling of an asset at the end of its life?
Scrap
What is the term used for the point in the life cycle of an asset when it is disposed of?
Disposal
