7 Lecture

1. Which of the following assets are typically considered as Property, Plant & Equipment (PP&E)? A) Investments in stocks B) Accounts receivables C) Land D) Cash and cash equivalents

Answer: C) Land

2. How should a company account for the cost of improvements to its PP&E? A) As an expense in the period incurred B) As an addition to the cost of the PP&E asset C) As a separate line item in the income statement D) As a reduction in the carrying amount of the PP&E asset

Answer: B) As an addition to the cost of the PP&E asset

3. Which of the following would NOT be considered as borrowing costs? A) Interest on loans used to finance the construction of a new factory B) Fees paid to arrange a loan for the acquisition of PP&E C) Interest on a bank overdraft used to purchase inventory D) Interest on a loan used to purchase a building that will be leased out to tenants

Answer: C) Interest on a bank overdraft used to purchase inventory

4. How should a company account for borrowing costs related to qualifying assets? A) As an expense in the period incurred B) As a reduction in the carrying amount of the qualifying asset C) As a separate line item in the income statement D) As an addition to the cost of the qualifying asset

Answer: D) As an addition to the cost of the qualifying asset

5. What is the purpose of depreciating PP&E assets? A) To report the market value of the assets B) To allocate the cost of the assets over their useful lives C) To reduce the carrying amount of the assets D) To increase the marketability of the assets

Answer: B) To allocate the cost of the assets over their useful lives

6. Which of the following depreciation methods results in a higher depreciation expense in the early years of an asset's life? A) Straight-line method B) Double-declining balance method C) Units-of-production method D) Sum-of-the-years'-digits method

Answer: B) Double-declining balance method

7. How should a company account for the disposal of a PP&E asset? A) Record the sale price as revenue and reduce the carrying amount of the asset B) Record the sale price as revenue and leave the carrying amount of the asset unchanged C) Record a gain or loss on disposal in the income statement D) Ignore the disposal and continue to depreciate the asset

Answer: C) Record a gain or loss on disposal in the income statement

8. How should a company account for borrowing costs that do not relate to qualifying assets? A) As an expense in the period incurred B) As a reduction in the carrying amount of the qualifying asset C) As a separate line item in the income statement D) As an addition to the cost of the qualifying asset

Answer: A) As an expense in the period incurred

9. How should a company account for repairs and maintenance costs to its PP&E? A) As an expense in the period incurred B) As an addition to the cost of the PP&E asset C) As a reduction in the carrying amount of the PP&E asset D) As a separate line item in the income statement

Answer: A) As an expense in the period incurred

10. Which of the following is NOT a factor that determines the amount of borrowing costs that can be capitalized? A) The amount of interest incurred on the borrowing B) The

1. What is the difference between Property, Plant & Equipment (PP&E) and intangible assets?

Answer: PP&E are tangible assets that a company owns and uses in its operations, such as buildings, machinery, and vehicles, while intangible assets are non-physical assets, such as patents, trademarks, and goodwill.

2. What are the three criteria that an asset must meet to qualify for capitalization of borrowing costs?

Answer: An asset must meet the following criteria to qualify for capitalization of borrowing costs: a) It takes a substantial period of time to get ready for its intended use or sale; b) Activities that are necessary to prepare the asset for its intended use or sale are in progress; and c) The borrowing costs are directly attributable to the asset.

3. What is the difference between straight-line depreciation and accelerated depreciation?

Answer: Straight-line depreciation allocates an equal amount of an asset's cost over its useful life, while accelerated depreciation methods allocate more of the asset's cost to the early years of its life and less in the later years.

4. What is the difference between the cost model and revaluation model for measuring Property, Plant & Equipment?

Answer: The cost model measures PP&E at their historical cost less accumulated depreciation, while the revaluation model measures PP&E at their fair value less accumulated depreciation.

5. What is the purpose of impairment testing for PP&E assets?

Answer: Impairment testing determines whether the carrying amount of a PP&E asset exceeds its recoverable amount and, if so, the company must recognize an impairment loss.

6. What are some examples of borrowing costs that can be capitalized?

Answer: Examples of borrowing costs that can be capitalized include interest on loans used to finance the construction of a new factory, fees paid to arrange a loan for the acquisition of PP&E, and interest on a loan used to purchase a building that will be leased out to tenants.

7. What is the difference between tangible and intangible assets in relation to depreciation?

Answer: Tangible assets, such as PP&E, are depreciated over their useful lives based on wear and tear or obsolescence, while intangible assets, such as patents or copyrights, are amortized over their useful lives based on the expected future benefits from the asset.

8. What is the purpose of the impairment loss reversal test for PP&E assets?

Answer: The impairment loss reversal test determines whether an impairment loss recognized in a previous period for a PP&E asset can be reversed if there has been a change in circumstances or an improvement in the asset's recoverable amount.

9. What are some factors that can affect the useful life of a PP&E asset?

Answer: Factors that can affect the useful life of a PP&E asset include physical wear and tear, technological obsolescence, changes in legal or regulatory requirements, and changes in the way the asset is used in the company's operations.

10. What is the difference between tangible and intangible assets in relation to borrowing costs?

Answer: Tangible assets, such as PP&E, are eligible for the capitalization of borrowing costs if they meet certain criteria, while intangible assets are generally not eligible for the capitalization of borrowing costs.

Property, Plant & Equipment (PP&E) are long-term assets that a company owns and uses in its operations. They include tangible assets such as buildings, machinery, and vehicles. PP&E assets are typically recorded on a company's balance sheet at their historical cost less accumulated depreciation. The cost model and the revaluation model are the two methods that a company can use to measure PP&E. The cost model measures PP&E at their historical cost less accumulated depreciation, while the revaluation model measures PP&E at their fair value less accumulated depreciation. The revaluation model can be used if a company has evidence that the fair value of its PP&E assets has significantly increased since their acquisition. Depreciation is the process of allocating the cost of a PP&E asset over its useful life. There are different depreciation methods, including straight-line, accelerated, and units of production. Straight-line depreciation allocates an equal amount of an asset's cost over its useful life, while accelerated depreciation methods allocate more of the asset's cost to the early years of its life and less in the later years. Impairment testing is an important consideration for PP&E assets. Impairment testing determines whether the carrying amount of a PP&E asset exceeds its recoverable amount and, if so, the company must recognize an impairment loss. The recoverable amount is the higher of an asset's fair value less selling costs and its value in use. Borrowing costs can be capitalized if they meet certain criteria. An asset must meet the following criteria to qualify for capitalization of borrowing costs: a) It takes a substantial period of time to get ready for its intended use or sale; b) Activities that are necessary to prepare the asset for its intended use or sale are in progress; and c) The borrowing costs are directly attributable to the asset. Examples of borrowing costs that can be capitalized include interest on loans used to finance the construction of a new factory, fees paid to arrange a loan for the acquisition of PP&E, and interest on a loan used to purchase a building that will be leased out to tenants. In conclusion, PP&E assets are an important component of a company's long-term assets. Companies must carefully consider the depreciation method they use, impairment testing, and whether borrowing costs can be capitalized for these assets. These considerations can have a significant impact on a company's financial statements and can impact how investors view the company's financial health.