The upgrade work took a total of two days where new components were added to the machine. This will enable Yucca to increase production without the need to purchase a new machine. Required Explain whether the additional expenditure should be capitalised as part of PPE or expensed to the statement of profit or loss for the year ended 28 February 20X3.
Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. In other words, depreciation applies the accruals concept to the capitalised cost of a non-current asset and matches this cost to the period that it relates to. Depreciation methods There are many methods of depreciating a non-current asset with the most common being:.
Required Prepare the extracts of the statement of financial position and statement of profit or loss for the year ended 31 March 20X2.
Useful life and residual value IAS 16 requires that estimates of useful life and residual value be reviewed at the end of each reporting period. If either changes significantly, the change should be accounted for over the useful life remaining. This is referred to as a prospective adjustment rather than a retrospective adjustment.
Required Demonstrate how the machine should be accounted for in the years ended 31 March 20X1, 20X2 and 20X3 and prepare extracts of the statement of profit or loss and statement of financial position for each year. Depreciation of significant parts Some assets may comprise more than one significant part ie where the cost of each part is significant in relation to the total cost of the item.
Where this is the case, each of those parts must be depreciated separately over their own individual useful lives. The separate components of the property are made up as follows:. Required Calculate the annual depreciation charge for the property for the year ended 31 March 20X2. If the revaluation model is adopted, this should be applied to all assets in the entire class ie if you revalue a building, you must revalue all land and buildings in that class of asset.
Revaluations must also be carried out with sufficient regularity so that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Accounting for a revaluation There are a series of accounting adjustments that must be undertaken when revaluing a non-current asset. These adjustments are indicated below. The initial revaluation You may find it useful in the exam to first determine if there is a gain or loss on the revaluation with a simple calculation to compare:.
However, the gain should be recognised in the statement of profit or loss to the extent that it reverses a revaluation decrease ie a revaluation loss of the same asset which had previously been recognised in profit or loss.
The asset had a useful life at that date of 40 years. Depreciation helps a company avoid a significant cash outlay in the year the asset is purchased. Tangible assets are depreciated for accounting purposes whereas intangible assets are amortized. Depreciation also helps spread the asset's cost out over a number of years allowing the company to earn revenue from the asset. While most fixed assets depreciate over time and are not easily converted to cash, some assets such as real estate can increase in value over time, providing a company with a possible option for raising cash.
From this amount, subtract accumulated depreciation. Companies that are expanding may decide to purchase fixed assets to invest in the long-term future of the company. These purchases are called capital expenditures and significantly impact the financial position of a company. Whether a portion of available cash is used, or the asset is financed by debt or equity , how the asset is financed has an impact on the financial viability of the company.
It's important to know where a company is allocating its capital, whether the company is making capital expenditures, and how the company plans to raise the capital for its projects. If new equity is issued, the stock price might decline due to the dilution of the shares.
If cash is used, the company may be unable to pay dividends in future quarters. If the company obtains financing from a bank or private equity firm, the company will have debt-servicing costs associated with the additional long-term debt. They are most often fixed assets. Corporate Finance. Tools for Fundamental Analysis. List of Partners vendors.
Property, plant, and equipment are tangible assets , meaning they are physical in nature or can be touched; as a result, they are not easily converted into cash.
Property, plant, and equipment are also called fixed assets, meaning they are physical assets that a company cannot easily liquidate or sell. Examples of property, plant, and equipment include the following:. Current assets are short-term, meaning they are items that are likely to be converted into cash within one year, such as inventory. Intangible assets are nonphysical assets, such as patents and copyrights. They are considered to be noncurrent assets because they provide value to a company but cannot be readily converted to cash within a year.
Long-term investments, such as bonds and notes, are also considered noncurrent assets because a company usually holds these assets on its balance sheet for more than one fiscal year. Next, subtract accumulated depreciation from the result. As a formula, it would be:. A fixed asset is a sizable investment in a company's future. Of course, selling property, plant, and equipment to fund business operations is a signal that a company might be in financial trouble.
It is important to note that regardless of the reason why a company has sold some of its property, plant, or equipment, it's likely the company didn't realize a profit from the sale. For example, when purchasing a building for retail operations, the historical cost could include the purchase price, transaction fees, and any improvements made to the building to bring it to its destined use. Depreciation is the process of allocating the cost of a tangible asset over its useful life and is used to account for declines in value.
The total amount of a company's cost allocated to depreciation expense over time is called accumulated depreciation. However, land is not depreciated because of its potential to appreciate in value. Instead, it is represented at its current market value. Loan officer. Find jobs. Company reviews.
Find salaries. Upload your resume. Sign in. Career Development. What is a contra asset account? Types of contra asset accounts. Accumulated depreciation Accumulated depletion Obsolete inventory reserves Allowance for doubtful accounts Trade accounts receivable Discount on notes receivable. Accumulated depreciation. Accumulated depletion. Obsolete inventory reserves.
Allowance for doubtful accounts. Trade accounts receivable. Discount on notes receivable.
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