Accounting - PPE

if a cost substantially adds value to the asset, should it be capitalized or expensed?

capitalized- meaning it should be recorded as a capital expenditure on the balance sheet

capital expenditure

costs incurred to increase the operating efficiency, productive capacity or the expected useful life of the asset; usually large amounts that rarely occur; record the cost on the balance sheet; increase PPE and decrease cash; investing cash outflow

how do you record depreciation expense at the end of the year for the adjusted entry?

debit Depreciation Expense credit Accumulated Depreciation

useful life

estimate of the length of time in years the asset will be used in business operations

residual value

estimate that the company thinks the asset can be sold for at the end of its useful life; also referred to as salvage value

if a cost is incurred to maintain the asset in its current condition, should it be capitalized or expensed?

expensed- meaning it should be recorded as a revenue expenditure on the income statement

units of production (UOP) method

is not based on an estimate of time, but is based on actual usage; best adheres to the matching concept; most difficult method to use

a cost is CAPITALIZED when...

it's recorded as part of an asset on the balance sheet rather than an expense on the income statement; or when an asset is in use and the those costs significantly improve the asset or extend the life

a cost is NOT CAPITALIZED when...

it's recurring, ongoing costs such as repairs after the asset is in use, maintenance and insurance are expenses as incurred

what PPE does not depreciate?

land

Asset TO ratio

measures a company's efficiency in using its assets to generates sales; it is a measure of the dollars of sales produced by each dollar invested in assets; = Net Sales Revenue / Average Total Assets; higher the better

return on assets (ROA)

measures the overall profitability of assets by determining the amount of income generated from each dollar invested in assets; a return on assets of 15% means that 15 cents of profit was earned for each dollar invested in assets; higher the better

straight-line method

method in which the depreciation expense is the SAME AMOUNT each year of the asset's life; assumes an equal using up of the asset over time

revenue expenditure

ordinary repairs to the asset; usually small amounts and often occur; no effect on useful life; record the cost on the income statement; increase repair expense and decreases net income, cash and retained earnings; operating cash outflow

Property-Plant-Equipment (PPE)

plant assets or long-lived assets that HAVE PHYSICAL SUBSTANCE (land, building, equipment)

Units of Production formula equals

= (Cost - Residual Value) / Total Estimated Usage = Depreciable Cost per Unit ---> = Depreciable Cost per Unit x Actual Usage for Current Year = Depreciation Expense

Average Total Assets

= (Total Assets at Beg. Yr + Total Assets at End Yr) / 2

Double Declining Depreciation Expense formula equals

= Book Value at beg. of year x (2 / Life)

return on assets (ROA) formula

= Net Income / Avg. Total Assets

Straight-line Depreciation Expense formula equals

= [Cost - Residual Value] / Life (in yrs.)

PPE important formula

Cost of Asset - Accumulated Depreciation = Book Value

PPE follows what accounting principle?

Historical Cost Concept -- because the assets are recorded at the cost incurred

depreciation follows what accounting principle?

Matching Concept -- because buildings and equipment will be used for many years in the revenue generation process. The matching concept requires that part of the assets cost be expensed in each year the asset is used in order to provide for the proper matching of expenses with revenues.

cost

all expenditures necessary to acquire the asset and make it ready for intended use

The four accountable events of PPE

acquisition of PPE, capital expenditures made during the life of the asset, depreciation of PPE, and sale of PPE

capitalization

all costs incurred when getting the asset ready for use are recorded on the balance sheet as part of the cost to the asset

double declining (accelerated) method

records MORE depreciation in the early years of an asset's life and LESS depreciation in the later years; thus shows declining amount of depreciation each year

repair expense

revenue expenditures are not capitalize, but they are expensed immediately

the list of costs incurred while getting the asset ready for use include...

sales tax, freight (shipping) costs, installation costs, assembly costs, repair costs incurred prior to use, fees such as closing costs and recording fees

when fully depreciating an asset, what MUST the book value ALWAYS equal and never go lower than?

the Residual (salvage) value

Over time, what happens to the book value of an asset?

the book value decreases each year because the accumulated depreciation gets larger each year

record GAIN ON SALE (revenue account) when...

the cash from the sale of an asset exceeds the book value

record LOSS ON SALE (expense account) when...

the cash from the sale of an asset is less than the book value

depreciation

the systematic allocation of the cost of a plant asset to expense over its useful life; the amount of the asset that is "used up"; record adjusted entry at end of year; it is a non-cash expense

lump-sum (basket) purchase

when a company purchases more than one asset for one, this is the lump-sum amount