Week 3 - PPE Flashcards

(27 cards)

1
Q

Component accounting

A

requires a company to identify and depreciate significant components with different useful lives separately

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2
Q

Two important applications of the component method

A
  • Asset retirement obligations

- Major inspections and overhaul

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3
Q

Asset retirement obligations

A
  • when at the end of the useful life something must be paid to get rid of the asset
  • e.g. offshore drilling platform (oil companies get a concession to drill under the condition that they remove the platform and the end of life)
  • decommissioning cost of the oil rig is treated as a separate component of the asset → allocated to the period of the oil rig in use
  • projected cost of decommissioning is capitalized as a component of the asset at the start of the useful life // opposite entry is a provision, which is a liability
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4
Q

Major inspections and overhaul

A
  • e.g. Airplanes have a major overhaul every few years

- overhaul is capitalized as a component of an asset and depreciated over the period until the next overhaul

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5
Q

Which depreciation method do most companies use?

A

Staight line depreciation

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6
Q

Which depreciation method has an accelerated allocation?

A

Double declining balance (DDB)

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7
Q

Which depreciation method never reaches zero?

A

DDB

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8
Q

Which depreciation method is used for income tax purposes?

A

DDB. It provides the most depreciation and thus the largest tax deduction in the early life of the asset. The company can invest the tax savings to earn a return on the investment.

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9
Q

Which depreciation method creates a smooth net income?

A

Units of production depreciation. Depreciation expenses rise and fall with the sales pattern.

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10
Q

Limitations of the units of production depreciation

A
  • does not take into account that a machine is underutilized

- results in a more bumpy pattern of depreciation charges

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11
Q

Units-of-production depreciation per unit of output formula

A

cost-residual value/ useful life in units of production

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12
Q

Straight line depreciation formula

A

(cost-residual value)/ useful life

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13
Q

DDB formula

A

BV/(2/useful life)

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14
Q

Criteria to be taken into account when determining an assets useful life

A
  • expected usage of the asset
  • expected physical wear and tear
  • technical or commercial obsolescence
  • legal or similar limits on the use of the asset
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15
Q

Recoverable amount of an impaired asset

A

is the higher of the value in use and the fair value less cost to sell

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16
Q

What is a cash-generating unit?

A

Smallest group of assets that generate flows that are largely independent of other assets

17
Q

Is depreciation connected to market value?

18
Q

What happens when depreciation is recorded?

A
  • the carrying amount of the asset is reduced (by accumulated depreciation) and the corresponding expense results in a reduction in equity.
19
Q

What fixed asset is never depreciated?

20
Q

List some intangible assets

A

goodwill, software, patents, development costs, brands

21
Q

Relative-sales-value method

A
  • business purchases several assets as a group or basket

- TC are divided among the assets according to their relative sales values

22
Q

capital expenditures

A

expenditures that increase the asset’s capacity or extend its useful life; these costs are capitalized so added to the asset account and not expensed immediately

23
Q

Formula for carrying amount of PPE

A

Cost of asset - accumulated depreciation

24
Q

asset turnover formula

A

sales/ average assets

  • how many sales a business can generate from its assets
25
return on assets
net profit/ average assets
26
PPE is recognized in financial statements when
1. It is probable that future economic benefits associated with the time will flow to the entity 2. The cost of the item can be measured reliably
27
Basic rule for determining the cost of an asset
- the cost of any asset is the sum of all the costs incurred to bring the asset to its intended use