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chapter
10
Property, Plant, and
Equipment
goals discussion
goals achievement
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multiple choice
problems
check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Know those costs that are properly included in an asset's cost, and those that should be expensed as incurred.
Identify the appropriate treatment of interest cost on purchased and constructed assets.
Know how to apportion the cost of a lump-sum purchase to the specific assets acquired.
State why some long-lived assets may be expensed in the period acquired.
Explain the concepts of materiality and cost/benefit considerations.
Who is a lessee, and who is a lessor?
Cite some possible advantages of a lease.
Distinguish between an operating lease and a capital lease.
How should one account for an operating lease?
How should one account for a capital lease?
Carefully define depreciation.
Distinguish between service life and physical life.
What key factors affect the determination of service life?
Define book value, salvage value, depreciable base, and other concepts that are applicable to depreciation calculations.
Apply the straight-line method of depreciation, including situations involving partial periods.
Apply the units-of-output method of depreciation.
Apply the declining-balance method of depreciation, including situations involving partial periods.
Apply the sum-of-the-years'-digits method of depreciation, including situations involving partial periods.
Discuss the rationale behind the selection of depreciation methods.
How are changes in estimates (e.g., useful life) dealt with in the basic depreciation computations?
Must you use the same depreciation method for tax and financial reporting purposes?
What is the modified accelerated cost recovery system, and how does it relate to depreciation methods generally employed for financial reporting purposes?
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| accelerated depreciation methods | Several alternative depreciation approaches that result in relatively more depreciation in early years of use, and smaller amounts during later years |
| capital expenditures | Ordinary and necessary costs incurred to place an item of property, plant, or equipment in its condition for intended use; such amounts are included in the asset account |
| capital lease | A lease that effectively transfers the risks and rewards of ownership to the lessee |
| change in accounting estimate | A revision of assumptions used in a related accounting calculation (e.g., change in estimated useful life of an asset); handled prospectively by revising current and future periods |
| declining balance depreciation method | An accelerated depreciation method by which a constant rate (that is a multiple of the straight-line rate) is multiplied by each period's beginning (constantly declining) book value |
| depreciable base | Cost minus salvage value; the amount of cost that will be allocated to the service life |
| double-declining balance depreciation | An accelerated depreciation method by which a constant rate (that is 200% of the straight-line rate) is multiplied by each period's beginning (constantly declining) book value |
| land improvements | Includes the cost of parking lots, sidewalks, landscaping, irrigation systems, and similar expenditures that are incurred to better land |
| lease/lessee and lessor | Periodic payment from the user (lessee) of an asset to an owner (lessor) of the asset |
| lump-sum purchase | A single price paid for a package of assets; the purchase price must be allocated to each of the components |
| materiality | A matter of accounting judgment; when amounts involved are slight, expediency may dictate waiving the technically correct alternative in lieu of a simpler approach |
| Modified Accelerated Cost Recovery | A "depreciation" approach common to the tax code; generally permits more rapid "recovery" of asset cost than GAAP approaches; MACRS - pronounced "makers" |
| operating lease | A lease where the lessee makes periodic payments for periodic use of an asset, but does not assume the ultimate risks and rewards of owning the asset |
| residual value | Amount expected be realized at the end of an asset's service life; "salvage value" |
| service life | The period of time that a depreciable asset will be in use by an entity; the time interval over which the asset will be depreciated |
| straight-line depreciation | A simple depreciation method by which the depreciable base is spread uniformly over the service life |
| sum-of-the-years'-digits method | Accelerated depreciation method where the depreciable base is spread over the asset life, with each year's portion being a unique but declining fraction tied to the overall asset life |
| units of output depreciation | A depreciation approach where the depreciable base is allocated to the expected total units of output; mileage, hours, etc. |