Question

Write a 260- to 350-word summary of this week's readings.

Describe major concepts you learned.

Explain how you can apply what you learned to your current or future workplace.

3.1 Determine what constitutes a property, plant, or equipment asset.

3.2 Calculate depreciation under various methods.

3.3 Explain the accounting issues related to fixed assets and intangibles.

3.4 Discuss asset impairment and the required accounting for impairments.

Answer 1

3.1

Property, plant, and equipment (PP&E) are long-term assets vital to business operations and not easily converted into cash. Property, plant, and equipment are tangible assets, meaning they are physical in nature or can be touched. The total value of PP&E can range from very low to extremely high compared to total assets. It is important to note when calculating equity.

Property, plant, and equipment (PP&E) includes tangible items that are expected to be used in more than one reporting period and that are used in production, for rental, or for administration. This can include items acquired for safety or environmental reasons. In certain asset-intensive industries, PP&E is the largest class of assets.

PP&E items are commonly grouped into classes, which are groups of assets having a similar nature and use. Examples of PP&E classes are buildings, furniture and fixtures, land, machinery, and motor vehicles. Items grouped within a class are typically depreciated using a common depreciation calculation.

3.2

1. Straight line method- simplest method. Determine the salvage value of the fixed asset, deduct from the cost and divide the remaining balance by the estimated number of years for the life of the asset to get the annual depreciation.Divide by 12 months to get the monthly depreciation.
2. Declining balance method-the only difference with item 1 is that you double the percentage of depreciation For example, as per straight line method, the useful life of the asset is five years, thus, the annual rate will be 20%. Using the accelerated method, the annual rate would be 40%.
3. Sum of the Years Digits-Add the estimated years of the fixed asset and by factoring the years, the depreciation is computed. As in example per item 1 above, the estimated life is 5 years, thus, 5+4+3+2+1=15. Deduct the salvage value of the fixed asset. To compute, cost=28,000.00, salvage value=3,000.00. First year, 28,000.00–3,000.00 x 5/15=8,250.00, and so on.
4. Units of production method- it is based on the estimated quantity of units the fixed asset will produce over its useful life. Salvage value is deducted from the cost. Compute the unit depreciation by dividing the net fixed asset cost by the estimated quantity of production. To illustrate: Cost 28,000.00 less salvage value of 3,000.00, net 25,000.00. Estimated quantity of production is 50,000, thus unit depreciation rate will be=25,000.00/50,000= 0.50. Production in the first year year is 12,000 units, thus multiply by 0.50, would result to 6,000.00 depreciation expense. The same unit rate will be applied for the remaining years of the asset.

3.3

Fixed assets range from tangible equipment and computers to intangible computer software programs and copyrights or trademarks. Regardless of the type or category of a fixed asset, all contribute to business productivity and profitability, all have a useful life of more than one year and all eventually become used up or wear out over time. Just as a business’s inventory items have a product life cycle, so do its tangible and intangible fixed capital assets. The life cycle begins with acquisition, continues with consumption and maintenance and ends with disposal. Key accounting issues arising during this time focus mainly on financial reporting and asset valuation

3.4

An asset is impaired to reflect its fair value or realisable value. For instance, at the point of invoicing, a receivable may be recognised at its full value but if it is not realised within the normal or extended credit period, then it's recorded value would need to be written down (or impaired) to reflect its recovery value

Impairment could be temporary (to reflect uncertainty in the timing and quantum of recovery) or could be permanent (to reflect a permanent reduction in value