Chapter 6: Plant Assets and Natural Resources

Property, Plant, and Equipment (PPE)

also known as plant assets, property assets or fixed assets

include the various tangible assets used by company to carry out its operations. these plant assets help produce revenues over a period of time by facilitating the production or supply of goods or services and the sale of these items to customers

Property, Plant, and Equipment (PPE)

these are TANGIBLE ASSETS held by a company for administratie purposes or for rental to others. these are assets necessary for day-to-day operations, NOT HELD FOR RESALE, and are expected to e used during MORE THAN ONE PERIOD

Property, Plant, and Equipment (PPE)

are reported as NON-CURRENT assets in the statement of financial position

true

ALL properties, plant and equipment are subject to depreciation, EXCEPT LAND

true or false

assets

Properties, plants, and equipment should be recognized as ___ when the following conditions are all present:

• it is probable the future economic benefits associated with the asset will flow into the enterprise

• the cost of the assets to the enterprise can be measured reliably

cost

PPE are measured at ___. this recognition principle is applied to all property, plant, and equipment costs at the time they were incurred. these costs include those incurred initially to acquire or construct an item of PPE and costs incurred subsequently to add to, replace a part of, or service the item

purchase price

the cost of PPE, which comprises its ____, including import duties and non-refundable purchase taxes after deducing trade and cash discount

asset retirement obligation

initial estimate of the costs of dismantling and removing the item and restoring the site in which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period

this is included in the cost of PPE

deducted

a cash discount whether taken or not is _____ from the invoice price for purposes of valuing the asset

building

if sidewalks, pavements, parking lots and driveways are part of the blue print for the construction of land improvements, they are charge to the _____ account

basket purchase or lump-sum purchase

at times, companies acquire more than one PPE for a single purchase price. the acquisition of two or more assets for a lump-sum cost is called ____. the acquisition cost is allocated among the assets purchased using their relative fair-market values

deferred payment or purchase on account

PPE are often purchased under deferred payment contracts. this means the purchaser issues a note payable for the amount due and pays it in several installments. the cost of the asset purchased is the cash price equivalent, and the difference between the cash price and the total payments is recorded as discount on notes payable. if the cash price equivalent is indeterminable, the asset and related liability are recorded at the present value of the cash payment (s) using the prevailing market rate of interest

issuance of equity securities

when companies acquire property assets by issuing equity securities, such as ordinary shares, the cost of the assets acquired is measured using the following order or priority:

1. fair value of the asset received

2. fair value of the shares issued

3. par value of the shared issued

if the equity shares of a company are traded in an active market, the fair value of the shares issued is the clear indication of the fair value of the asset acquired. an active market is a market for a security with a high trading volume

donations

a company may receive plant assets through donations. the cost of the asset received through donation is the fair value of the asset received, plus any incidental costs incurred. generally, the increase in asset from a donation should correspond to an increase in revenue. the rationale behind such is that the transaction is a nonreciprocal transfer or a transfer for which no assets are given in exchange

exchanges

sometimes, a company trades or exchanges one asset for another. for example, a company may trade in an old vehicle for a new one and pay cash for the difference in value. when an exchange has a commercial substance, there will be gain or loss equal to the difference between the fair value and the carrying value of the asset given. an exchange has commercial substance if the future cash flows change as a result of the transaction. the cost of the asset acquired is measured at the fair value of the asset, plus cash paid, if payor, or minus cash received, if recipient.

exchanges

when an exchange LACKS commercial substance, the cost of the asset acquired is measured at the carrying value of the asset given plus, cash paid. if payor, or minus cash received, if recipient. no gain or loss on exchange is recognized

subsequent expenditures

in addition to the initial cost of acquisition, companies incur ongoing expenditures associated with plant assets

it is capitalized only when it is probable that future economic benefits will flow into the enterprise in excess of the original assessed standard of performance

subsequent expenditures (capital expenditure)

____ that are material in amount should be capitalized when they:

• extend useful life

• increase capacity

• substantially improve output quality

• enable substantial reduction in operating cost

subsequent expenditures (Revenue expenditure)

____ should be expensed when they:

• maintain a given level of service

• benefit only the current period

additions

these are modifications or alterations which increase the physical size or capacity of an asset. these expenditures are capitalized.

ex.

the addition of an entirely new unit an an expansion, enlargement, or extension of an old asset

improvement of betterments

these are modifications or alterations which increase the service life of the capacity of an asset. these expenditures are capitalized and simply added to the cost of the existing asset

replacements

these involve substitution; however, the new asset is not necessarily better than the old asset.

____ are classified into the following:

• replacement of an old asset with a new one — the cost of replacement is capitalized

• replacement of major parts (extraordinary repairs) — capitalized expenditure

• replacement of minor parts (ordinary repairs) — to be recorded as expense

rearrangement

this is the relocation or reinstallation of an asset. the cost of ____ is expensed unless it is probable that future economic benefits associated with the asset will flow into the enterprise

cost model

the asset is carried at cost less accumulated depreciation and impairment

revaluation model

the asset is carried at a revalued amount, which is its fair value at the date of revaluation less subsequent depreciation, provided that the fair value can be measured reliably

true

an impairment loss must be recognized whenever the carrying amount exceeds its recoverable amount

an enterprise should assess at each reporting date whether or not there is any indication that an asset may be impaired

true or false

revaluations

under the revaluation model, ____ should be carried out regularly so that the carrying amount of an asset does not differ materially from its fair value at the statement of financial position date.

if an item is revalued, the entire class of assets to which that asset belongs should be revalued

revalued assets are depreciated in the same way as they would under the cost model

depreciation

all plant assets, except land, decrease in value and usefulness due to the passage of time.

matching principle dictates that this cost expiration, which is also called ___, should be periodically matched against revenue

depreciation

is the allocation of an asset’s cost to the expenses, in a systematic and rational manner, over the periods that are expected will benefit from the use of the asset

physical depreciation

this is related to the physical wear and tear and deterioration of an asset as it is used over time

functional or economic depreciation

this is related to market conditions that cause an asset to become obsolete and inadequate. the asset may be perfect in physical condition, but other similar assets could be introduced in the market that are factor and more efficient. therefore, it becomes impracticable to continue using the asset, and its early disposal becomes a necessity

depreciable base/depreciable cost

the cost of an asset minus the estimated recidual value

scrap value/residual value/salvage value

the amount estimated to be recovered when an asset is retired from use

estimated useful life

the expected economic or service life of an asset, which can be expressed in terms of the following:

• time periods in years or months

• working hours or service hours

• units of output or production

straight line method

this method of depreciation considers a function of time rather a function of usage. this method yields equal amounts of depreciation expense at the end of every accounting period

activity method

the ____ of depreciation bases depreciation on usage rather than time. the more activity during the year, the more depreciation is recorded; the less activity, the less depreciation is recorded. this method could be further classified into the working hours method and the output or production method

decreasing charge or accelerated method

this depreciation method yields a high depreciation expense during the early years of an asset’s life and a low depreciation expense during the latter years. the rationale behind such is that an asset is most useful and productive during its earlier years; hence, more depreciation should be charged. the most common accelerated methods are the sum-of-the-years’ digits method and the double declining balance method

derecognized

an item of PPE should be ____ from the statement of financial position upon disposal or when the asset is permanently withdrawn from use and no future economic benefit is expected from its disposal

a company may retire plan assets voluntarily or dispose of them by sale, exchange, involuntarily conversion or abandonment

greater;less

gains and losses from retirement or disposals should be recognized in the income statement as follows:

• loss on sale if the carrying value of the PPE sold is ___ than the cash proceeds from sale

• gain on sale if the carrying value of the PPE sold is ___ than the cash proceeds from sale

natural resources

____ also known as wasting assets, are material objects of economic value and utility to man produced by nature.

these include oil, gas, minerals, timber, coal, ore and precious metals life gold and solver. they are physically exhausted over a period of time and are irreplaceable

depletion

____ is a systematic allocation of cost or other basic value of a wasting asset over the period the natural resources is extracted or produced. it is the removal, extraction, or exhaustion of natural resource

inventoriable or product cost

depletion expense is considered as an _____

depletion base

this includes the acquisition cost, development costs, exploration and evaluation cost, and restoration cost

salvage value

this is the amount expected to be derived from the sale of property after extraction activities

estimated useful life

this is the life of wasting asset in terms of output extracted or mind

straight line method; output method

the depreciation of the tangible equipment used in the development of a wasting asset is computed over the life of the equipment or the life of the wasting asset, whichever is shorter

• use the ______ if the tangible equipment depreciated over the life of the equipment

• use the ______ if the tangible equipment depreciated over the life of the wasting asset

investment properties

Land held for a currently undetermined use and for the long-term capital appreciation are classified as ___

inventory

land held for current sale by a real estate developer

Investment property

a property held to earn rentals, capital appreciation or both.