Long-Term Assets

Front 1

Long term assets are used in the operation of business that

Back 1

provide benefits beyond the current accounting period

Front 2

Long-term assets include what? (4)

Back 2

Land
Buildings and equipment
Natural Resources
Intangible Assets

Front 3

How do each of these long-term assets effect the income statement?
1. Land
2. Buildings and Equipment
3. Natural Resources
4. Intangible Assets

Back 3

1. Land - No Impact on Income Statement
2. Buildings and Equipment - Affect IS through depreciation
3. Natural Resources - Affect IS through depletion
4. Intangible Assets - Affect IS through amortization

Front 4

What is included in acquisition cost for land?

Back 4

All the costs necessary to acquire and ready the asset for use. Includes:
Cost of land;
brokerage fees;
survey fees;
back taxes;
cost of demolition;
clearing or grading

Front 5

Why does land not get depreciated?

Back 5

Because land can be used without decreasing its service potential

Front 6

What is included in acquisition cost for buildings?

Back 6

Purchase price, brokerage commissions, real estate sales and taxes, amounts spent for repair, renovation, and remodeling to ready the building for its planned use.

Also includes interest on loans during the period win which the assets are being readied for their intended use.

Front 7

What is included in acquisition cost for equipment?

Back 7

INcludes the purchase price (less any discount), plus transportation charges, sales and other taxes, commissions, installation and preliminary testing costs

Front 8

How are acquisition costs affected by basket purchases?

Back 8

You need to determine a separate cost for each asset in the basket, the cost of the entire basket must be allocated in proportion to the fair value of each component.

Front 9

What is the definition of depreciation?

Back 9

The systematic allocation of the depreciable amount of an asset over it's useful life.

Front 10

What is the depreciable amount?

Back 10

The depreciable amount is the cost of an asset or other amount substituted for cost in the financial statements less its residual value

Front 11

What is depreciation NOT?

Back 11

Depreciation is NOT valuation. It does not refer to the physical deterioration or the decrease in the market value of assets.

Front 12

When should each component of property, plant, and equipment be depreciated separately?

Back 12

If its cost is significant in relation to the total cost of the item.

Front 13

What is the useful life of assets?

Back 13

The asset's expected utility to the enterprise. The useful life may be shorter than the economic life because an enterprise's asset management policy may involve the disposal of assets after a specified time or after consumption of a certain proportion of economic benefits embodied in the asset.

Front 14

What is the depreciable life? What are the limiting factors to depreciable life?

Back 14

The time period or an estimate for total production or usage.

Physical deterioration and obsolescence are limiting factors to depreciable life.

Front 15

Depreciation charges reflect how asset _____ are charges to _____, but it does not reflect a decline in ______. _______ is the asset cost that has not been allocated as an expense.

Back 15

costs;
expenses;
fair market value;
net book value

Front 16

Equation for straight line depreciation expense

Back 16

(Acquisition Cost - Residual Value) / Years of Estimated Useful Life

Front 17

Equation for depreciation based on units

Back 17

Dep Exp for each unit of service = (Acquisition Cost - Estimated residual value) / Estimate Units of Service.

Which this decimal, you multiple by the number of units produced in the period in question to get your dep exp.

Front 18

Equation for double declining balance method

Back 18

Dep Exp = Declining balance rate * (Acquisition Cost - Accum Dep)

So calculate the straight line rate (which is 1/useful life)
Double it and multiply by the book value.

**No residual value taken into consideration

Front 19

How do you capitalize a cost versus expensing the cost?

Back 19

Capitalizing a cost is when you allocate the cost to the value of the asset itself. The cost is "recognized" via depreciation expense.

Expensing is normal and reduces cash / debits an expense account.

Front 20

Are maintenance expenditures capitalized or are they revenue expenditures?

Back 20

Since they do not improve the service potential, they are treated as revenue expenditures

Front 21

Are improvement expenditures capitalized or are they revenue expenditures?

Back 21

If the expenditure increases the service potential (e.g. improvements), meaning they either increase the capacity or extend the useful life, then they are treated as capital expenditures and correct the cost of the asset, its life and/or the depreciation charge.

Front 22

How do you revise the value of deprecation for a capital expenditure?

Back 22

(1) Acquisition Cost - Accum Dep = Book Value
(2) Book Value + Improvement = Revised Book Value
(3) Revised Book Value - Revised residual value = Depreciable Amouny
(4) Depreciable Amount / Remaining Useful life (original life - what expired + additional life) = Depreciation Expense

Front 23

How do you measure the gains or losses of retirement of plant and equipment?

Back 23

Difference between the selling price and the net book value (net carrying amount) of the asset being sold

Front 24

When is an asset considered impaired?

Back 24

An asset is considered impaired when it ceases to have economic value to the company AT LEAST as large as the carrying value (book value) of the asset.

Front 25

Which accounting standards boards require that companies review their assets for possible impairments?

Back 25

IFRS and FASB (GAAP)

Front 26

What is the first step in reviewing assets for possible impairments?

Back 26

Performing a recoverability test.

Compare the total expected future cash flow (EFCF) with the carrying amount. If the EFCF < CA, then the asset is impaired. IF there is an active market for the the asset, then the market price (fair value) is used as the EFCF.

Front 27

How do GAAP and IFRS differ when it comes to determining if an asset is impaired?

Back 27

IFRS uses a trigger value which is the (1) higher of asset's fair value (less costs to sell) or
(2) its usage value

GAAP uses undiscounted cash flows

Front 28

The differences between how GAAP and IFRS determine whether assets are impaired mean what?

Back 28

Typically that international companies will recognize impairment losses earlier than US Companies.

Front 29

What is impairment loss (GAAP)?

What is impairment loss (IFRS)?

Back 29

GAAP: Difference between EFCF (or market price) and book value (carrying value)

IFRS: Difference between trigger value and book value

Front 30

If we have both a value for EFCF and fair market value, which one do we use to determine the impairment loss?

Back 30

Market Value....difference between market value and net book value. The evidence of impairment is noted by the discrepancy between the EFCF and the net book value.

Front 31

When would a reversal occur?

Back 31

When external and internal sources of information indicate that an impairment loss recognized for an asset (other than goodwill) may not longer exist or may have decreased

Front 32

When an impairment reversal is recognized, the adjusted _________ of the asset may not exceed the ________ of the asset that would have been determined had no impairment loss been previously recognized.

Back 32

carrying value
carrying value

Front 33

Even if no impairment loss is reversed, what needs to be reviewed and adjusted if there is an indication that impairment may no longer exist?

Back 33

(1) Asset's remaining useful life
(2) Depreciation (amortization) Method
(3) Residual Value

Front 34

What is the difference between IFRS and GAAP when it comes to reversals?

Back 34

IFRS: impairments of long-lived assets that are not being held for sale can be fully reversed, except for losses on goodwill

GAAP: reversals for long-lived assets (including definite-lived tangibles) to be held and used, as well as any impairment recorded for indefinite-lived tangibles and goodwill are PROHIBITED

Front 35

When it comes to impairment, there are two models accepted by IFRS, and only 1 by US GAAP. Which are which?

Back 35

IFRS allows for cost model and revaluation model. GAAP only cost model.

Front 36

What is the revaluation model that IFRS allows for impairment?

Back 36

If fair value of the asset can be determined, IFRS allows to inrease the value of the tangible asset. Changes in market valuation will be done using a reverse account (or revaluation loss if needed)

Front 37

Under the revaluation model of IFRS, if an item of PPE is revalued, then _____________________ has to be revalued

Back 37

the entire class of PPE to which the asset belongs

Front 38

Examples of separate classes of PPE?

Back 38

land, machinery, motor vehicles, office equipment

Front 39

Under the revaluation model of IFRS, Items in a class of PPE are revlaued ______ to avoid selective revaluation of assets.

Back 39

simultaneously

Front 40

Under the revaluation model of IFRS, if an asset is revalued up, the increase is credit directly to _____ under the heading _________.

An increase is recognized in the P&L only to the extent that ________________.

Back 40

equity;
revaluation surplus;


it reverses a revaluation decrease of the same asset previously recognized in P&L

Front 41

When it comes to depreciation in the context of the revaluation model, what do you do?

Back 41

(1) Determine the increase in value (acquisition cost - accum dep = existing book value) Market value - existing book value = increase in value.
(2) Eliminate existing depreciation by debiting accum dep and crediting asset
(3) Revalue the asset by debiting asset at increase in value and crediting the revaluation reserve account
(4) Recalculate depreciation expense by taking the new market value/number of useful years remaining

Front 42

If the carrying amount of the asset decreases, then....

Back 42

the decrease must be recognized on P&L...but first you should eliminate any revaluation surplus existing in equity

Front 43

When asset is derecognized, revaluation surplus is moved to....

Back 43

retained earnings

Front 44

How can revaluation surplus be transferred to retained earning when the asset is being used?

Back 44

The difference in depreciation charge arising from using original cost versus revalued amount.