FAR 2D - PP&E Flashcards
(24 cards)
What is the formula for Double-Declining Balance (DDB) Depreciation?
ESTV: Degressive Abschreibung oder degressiver Abschreibungssatz
2 × (Straight-Line Depreciation Rate) × (Beginning Book Value).
DDB ignores salvage value, but stops wieh book value = salvage value
ESTV Abschreibungstabelle: Degressive Abschreibung oder degressiver Abschreibungssatz
Example An asset costs $10,000 with a useful life of 5 years.
1st Year Depreciation: Depreciation = 2 × (1 / 5) × 10,000 = 4,000
2nd Year Depreciation: Depreciation = 2 × (1 / 5) × 6,000 = 2,400
How do you calculate depreciation using the Sum-of-the-Years-Digits Method?
(Remaining Life / Sum of the Years) × (Cost - Salvage Value).
Example: An asset costs $20,000, has a salvage value of $2,000, and a useful life of 5 years.
Sum of Years: 1 + 2 + 3 + 4 + 5 = 15
Depreciation for the 1st year: Depreciation = (5 / 15) × (20,000 - 2,000) = 6,000
Depreciation for the 2nd year:
Depreciation = (4 / 15) × (20,000 - 2,000) = 4,800
What is the formula for Straight-Line Depreciation?
(Cost - Salvage Value) / Useful Life.
When can interest be capitalized during construction?
Interest is capitalized during the construction of qualifying assets, using the weighted average interest rate on accumulated expenditures.
What costs are included in the capitalization of land?
Purchase price, legal fees, demolition costs, and site preparation costs.
What is the key difference between Group and Composite Depreciation?
Group depreciation applies to homogeneous assets, while composite depreciation applies to heterogeneous assets.
Homogeneous: Identical trucks, identical computers.
Heterogeneous: Equipment in factory with different machines and lifespans
How do you conduct the recoverability test for impairment on PP&E?
Compare the carrying amount with undiscounted future cash flows. If carrying amount > future cash flows, impairment occurs.
How is an impairment loss calculated?
Impairment Loss = Carrying Value - Fair Value (discounted cash flows).
How are donated assets measured and recorded?
Donated assets are measured at fair value and recorded as revenue, except when donated by a government.
When does interest capitalization cease for a self-constructed asset?
Interest capitalization stops once the asset is ready for use or sale.
Can impairment losses for assets held for sale be reversed?
Yes, impairments for assets held for sale can be reversed, but only up to the original carrying value.
How do you calculate new depreciation when switching to the straight-line method?
New Depreciation = (Remaining Book Value - Salvage Value) / Remaining Useful Life.
Example: An asset has a remaining book value of $30,000, a salvage value of $5,000, and 3 years of remaining useful life.
New Depreciation: Depreciation = (30,000 - 5,000) / 3 = 8,333.33 per year
How do you measure a long-lived asset classified as held for sale?
Measure at the lower of carrying amount or fair value less cost to sell.
What is the general rule for capitalizing vs expensing costs related to PPE?
Capitalize costs that result in future economic benefits (e.g., extending useful life); expense routine repairs.
When can interest be capitalized for self-constructed assets?
Interest can be capitalized for self-constructed assets during the construction period using the weighted average interest rate.
How are individual asset disposals handled under group/composite depreciation?
No gain or loss is recognized on individual disposals. The carrying value is reduced by the proceeds received.
Which depreciation methods ignore salvage value?
Only Double Declining Balance Method (DDB)
Salvage value is ignored in the calculation until the book value approaches the salvage value.
How are proceeds from asset disposals handled in composite depreciation?
The net carrying value is reduced by the cash proceeds received, with no gain or loss recognized.
How is interest capitalized for construction projects?
Interest is capitalized by applying the interest rate to accumulated expenditures during the construction period.
What is the formula for capitalized interest on construction projects?
Capitalized Interest = (Interest Rate) × (Weighted Average Accumulated Expenditures).
Example:
A company has two loans:
Loan 1: $100,000 at 6% interest
Loan 2: $200,000 at 8% interest
The company spent $250,000 on construction, with accumulated expenditures of $120,000.
Weighted Average Interest Rate: (100,000 × 6% + 200,000 × 8%) / (100,000 + 200,000) = 7.33%
Capitalized Interest: Capitalized Interest = 7.33% × 120,000 = $8,796
📦How should the cost be allocated for a lump-sum purchase of dissimilar assets?
✅ Allocate the total amount paid to each asset based on its relative fair value.
When disposing of an asset under group or composite depreciation, how do you record the journal entry, and is there a gain or loss?
🔄 No Gain or Loss Recorded:
Group or composite depreciation assumes gains and losses average out over time.
Individual disposals do not recognize gains or losses.
💳 Journal Entry:
💵 Debit: Accumulated Depreciation (full amount on asset)
💰 Debit: Cash (if proceeds are received)
🏷️ Credit: Asset Account (original cost)
📌 Key Concept:
The difference between cost and accumulated depreciation is adjusted directly in the Accumulated Depreciation account (so accumulated depreciation is like the plug).
How do you determine the interest rate for capitalizing interest when there is no specific borrowing?
- 📊 Use the weighted-average interest rate of all general borrowings outstanding during the construction period.
- 🧮 Formula: (Total Interest on all Debt) ÷ (Total Principal of all Debt)
- 🏗️ Apply this rate to the average accumulated expenditures for the qualifying asset.
- 🚫 Do not use individual loan rates unless the loan is specifically tied to the asset (specific borrowing).
What is a key difference between IFRS and U.S. GAAP in valuing Property, Plant, and Equipment?
🏗️ Under IFRS, entities may choose between the cost model and the revaluation model for PP&E.
- 💵 Under U.S. GAAP, only the cost model is permitted.
- 📈 Revaluation increases under IFRS go to OCI, while decreases hit the income statement (unless reversing a previous increase).
