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Questions and Answers
What is the book value of the trucks after accounting for depreciation?
What is the book value of the trucks after accounting for depreciation?
The gain on the sale of the trucks in a transaction with no commercial substance is $40,000.
The gain on the sale of the trucks in a transaction with no commercial substance is $40,000.
False
What is the cash received from the sale of the trucks?
What is the cash received from the sale of the trucks?
$10,000
The cost of the trucks is ______.
The cost of the trucks is ______.
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Match the following financial terms with their descriptions:
Match the following financial terms with their descriptions:
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What should be debited when taking depreciation on an old asset during a trade-in?
What should be debited when taking depreciation on an old asset during a trade-in?
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Losses are recorded only when there is commercial substance involved.
Losses are recorded only when there is commercial substance involved.
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What do you calculate to determine if there is a gain or loss on an asset trade-in?
What do you calculate to determine if there is a gain or loss on an asset trade-in?
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To record cash involved in a transaction, you will either _____ or _____ cash.
To record cash involved in a transaction, you will either _____ or _____ cash.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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In a situation with no commercial substance, how is a gain handled?
In a situation with no commercial substance, how is a gain handled?
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If a new asset is acquired without incurring any cash payments, it indicates that cash is not involved in the transaction.
If a new asset is acquired without incurring any cash payments, it indicates that cash is not involved in the transaction.
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What is the formula to calculate gain or loss from an asset's trade-in?
What is the formula to calculate gain or loss from an asset's trade-in?
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The cost of the old asset is credited to reflect its _____ when traded in.
The cost of the old asset is credited to reflect its _____ when traded in.
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What entry is made to account for a loss in a trade transaction?
What entry is made to account for a loss in a trade transaction?
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Which of the following items are considered PPE accounts?
Which of the following items are considered PPE accounts?
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Accumulated depreciation is categorized as an asset account.
Accumulated depreciation is categorized as an asset account.
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What is a characteristic of PPE accounts?
What is a characteristic of PPE accounts?
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Land improvements include ______, paving, and lighting.
Land improvements include ______, paving, and lighting.
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When does depreciation of an asset begin?
When does depreciation of an asset begin?
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Gains from a transaction with no commercial substance are always fully recognized.
Gains from a transaction with no commercial substance are always fully recognized.
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Costs incurred to get an asset operational include purchase price, sales tax, and ______.
Costs incurred to get an asset operational include purchase price, sales tax, and ______.
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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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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.
