PPE Accounts and Characteristics
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Questions and Answers

What is the book value of the trucks after accounting for depreciation?

  • $50,000
  • $110,000
  • $90,000 (correct)
  • $60,000

The gain on the sale of the trucks in a transaction with no commercial substance is $40,000.

False (B)

What is the cash received from the sale of the trucks?

$10,000

The cost of the trucks is ______.

<p>$110,000</p> Signup and view all the answers

Match the following financial terms with their descriptions:

<p>Accumulated Depreciation = Total depreciation expense recognized against an asset Cash = Liquid asset used for transactions Gain on Sale = Profit realized from selling an asset for more than its book value New Asset = Asset received in exchange during a transaction</p> Signup and view all the answers

What should be debited when taking depreciation on an old asset during a trade-in?

<p>Accumulated depreciation (B)</p> Signup and view all the answers

Losses are recorded only when there is commercial substance involved.

<p>False (B)</p> Signup and view all the answers

What do you calculate to determine if there is a gain or loss on an asset trade-in?

<p>Book value minus fair value</p> Signup and view all the answers

To record cash involved in a transaction, you will either _____ or _____ cash.

<p>debit, credit</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Accumulated Depreciation = The total depreciation expense allocated to an asset over time Commercial Substance = A situation where a transaction significantly changes the value or economic position of the parties Book Value = The original cost of an asset minus accumulated depreciation Fair Value = The estimated market value of an asset in an exchange transaction</p> Signup and view all the answers

In a situation with no commercial substance, how is a gain handled?

<p>It is not recorded (C)</p> Signup and view all the answers

If a new asset is acquired without incurring any cash payments, it indicates that cash is not involved in the transaction.

<p>True (A)</p> Signup and view all the answers

What is the formula to calculate gain or loss from an asset's trade-in?

<p>Fair value of new asset - Book value of old asset</p> Signup and view all the answers

The cost of the old asset is credited to reflect its _____ when traded in.

<p>disposal</p> Signup and view all the answers

What entry is made to account for a loss in a trade transaction?

<p>Debit loss account (A)</p> Signup and view all the answers

Which of the following items are considered PPE accounts?

<p>Land (B), Machinery (D)</p> Signup and view all the answers

Accumulated depreciation is categorized as an asset account.

<p>False (B)</p> Signup and view all the answers

What is a characteristic of PPE accounts?

<p>Mostly physical and used in operations.</p> Signup and view all the answers

Land improvements include ______, paving, and lighting.

<p>fencing</p> Signup and view all the answers

When does depreciation of an asset begin?

<p>After all costs to make it operational are incurred (A)</p> Signup and view all the answers

Gains from a transaction with no commercial substance are always fully recognized.

<p>False (B)</p> Signup and view all the answers

Costs incurred to get an asset operational include purchase price, sales tax, and ______.

<p>shipping</p> Signup and view all the answers

Flashcards

No Commercial Substance

When an exchange doesn't significantly change the future cash flows of the company. In these exchanges, the gain is not fully recognized, but only the portion that is deemed 'realizable' within a specific time frame.

Gain Recognition in Exchanges without Commercial Substance

The amount of the gain recognized on an exchange with no commercial substance is calculated based on the difference between the fair value of the new asset acquired and the book value of the old asset being traded.

Book Value

The book value of an asset is determined by subtracting accumulated depreciation from its original cost.

Recording the New Asset

In an exchange with no commercial substance, the new asset received is recorded at the fair value of the old asset given up, adjusted by the amount of gain recognized.

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Gain on Exchange (Without Commercial Substance)

The difference between the fair value of the new asset received and the book value of the old asset given up in an exchange, without considering any gain recognized.

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PPE (Property, Plant, and Equipment)

An asset that is physical, used in operations, expensive, has a useful life greater than one year, and includes all costs needed to get it operational.

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Capitalizable Costs for PPE

Costs of getting a PPE asset ready for use, including purchase price, shipping, installation, testing fees, licensing, and transit insurance.

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Land Improvements

Permanent improvements to land that increase its value and have a useful life beyond one year, such as landscaping, fencing, paving, and lighting.

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Commercial Substance

A transaction where the economic value of an asset changes for both parties involved.

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Loss on Sale of PPE

Recorded when an asset is sold for less than its book value.

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Gain on Sale of PPE

Recorded when an asset is sold for more than its book value, but only recognized if the transaction has commercial substance.

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Boot

When cash is received in a sale of PPE with no commercial substance, the gain is partially recognized.

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Take depreciation to date of sale

The process of updating accounting records to reflect the disposal of an asset, such as a machine or a truck.

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Gain or Loss on Asset Exchange

The difference between the asset's carrying value (book value) and its fair market value at the time of exchange.

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Book Value (carrying value)

The value of an asset as reflected in the company's accounting records. It's calculated by subtracting accumulated depreciation from the original cost of the asset.

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Sale Price

The amount a company agrees to pay for a new asset, often with a reduction in price for trading in an old asset.

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Trade-in Allowance

The amount a company receives for trading in an old asset as part of purchasing a new one.

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Gain/Loss on Disposal

The difference between the sale price (trade-in value) and the book value of the old asset.

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No Commercial Substance - Asset Exchange

In an asset exchange, if there is NO commercial substance, the gain is NOT recognized; instead, the cost of the new asset is reduced by that amount. If there's a loss, it's always recognized.

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Accounting for Gains/Losses on Asset Exchanges

Reflecting the change in an asset's fair value during an exchange, accounting rules dictate how gains and losses are recognized during an asset exchange, depending on whether the transaction has commercial substance.

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Fair Value

The market value of an asset at a given point in time, as determined by market forces.

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Study Notes

PPE Accounts (Assets)

  • PPE stands for Property, Plant, and Equipment
  • These are long-term tangible assets used in operations
  • Examples include land, buildings, land improvements, machinery, vehicles, equipment, furniture, fixtures, and computers
  • Accumulated depreciation is a contra-asset account

Characteristics of PPE

  • Primarily physical
  • Used in operations
  • High cost, with a threshold dependent on the business
  • Useful life exceeding one year

Cost of PPE

  • Includes all necessary costs to make the asset operational
  • Explicit costs like purchase price, sales tax, shipping, installation, and testing fees are included
  • Implicit costs (like insurance for transit after operation begins) are recorded separately

Land and Buildings

  • Land improvements (e.g., landscaping, fencing, paving, lighting) are recorded separately from land
  • Assets are not depreciated until all costs to make them operational are complete.

Transactions: Commercial Substance vs. No Commercial Substance

  • Commercial substance: Gain or loss is recognised based on the transaction
  • No commercial substance: Gain or loss is not recognised immediately. Instead, some cash received is recognised and the asset cost is adjusted.

Journal Entries (Illustrative Example)

  • Journal entries are used to record transactions related to PPE
  • Entries include debiting and crediting accounts like accumulated depreciation, new assets, and cash.
  • Example: Recording the loss from a sale of old equipment with no commercial substance.

Commercial Substance Loss or Gain Issues

  • Gain (loss) if the asset is sold at a different value compared to its book value
  • If no commercial substance, don't recognise the gain. Reduce cost of the new asset by any applicable gain.
  • If gains and losses are associated with non-commercial transactions, these are adjusted to fair value.

Example Entries and Calculations (Illustrative)

  • Various calculations presented showing how to account for trade-ins, depreciation deductions, and gain/loss amounts when recording PPE transactions.

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Related Documents

ACC 305 Ch 9 Notes PDF

Description

Explore the fundamentals of Property, Plant, and Equipment (PPE) in this quiz. Understand the definitions, characteristics, and costs associated with PPE assets used in business operations. Test your knowledge on land, buildings, and commercial transactions related to PPE.

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