Property Plant and Equipment Paper 2

Answer (C) is correct. Under the double-declining balance method, the full cost of the asset, or $100,000, is depreciated, but not below salvage value. Because the straight-line rate for a 10-year asset is 10% (100% x 10), the double-declining balance rate is 20% (10% x 2). The first year’s depreciation is $20,000 ($100,000 x 20%), leaving a carrying amount for the second year of $80,000 ($100,000 - $20,000). The second year’s depreciation is thus $16,000 ($80,000 x 20%).

Answer (B) is correct. These assets are known variously as property, plant, and equipment; fixed assets; or plant assets. 1. PPE are tangible. They have physical existence. 2. PPE may be either personal property (something movable, e.g., equipment) or real property (such as land or a building). 3. PPE are used in the ordinary operations of an entity and are not held primarily for investment, resale, or inclusion in another product. But they are often sold. 4. PPE are noncurrent. They are not expected to be used up within 1 year or the normal operating cycle of the business, whichever is longer. However, an asset need not be newly purchased to be properly described as property, plant, and equipment.

Answer (B) is correct. The straight-line depreciation that should have been charged to the equipment had it been properly capitalized is $30,000 [$100,000 x (3 / 10 years)]. Thus, after correction of the error, the carrying amount of the equipment will be $70,000 ($100,000 - $30,000).

Answer (C) is correct. Interest should be capitalized for (1) assets constructed or otherwise produced for an entity’s own use, including those constructed or produced by others; (2) assets intended for sale or lease that are constructed or produced as discrete projects (e.g., ships); and (3) certain equity-based investments. An asset constructed for an entity’s own use qualifies for capitalization of interest if (1) relevant expenditures have been made, (2) activities necessary to prepare the asset for its intended use are in progress, and (3) interest is being incurred. The investee must have activities in progress necessary to commence its planned principal operations and be expending funds to obtain qualifying assets for its operations.

Answer (D) is correct. Expenditures on capital assets that improve the asset’s performance or extend its useful life are capitalized as part of the asset’s cost. Accordingly, the building repairs are capitalized. The substitution of a better computer system is classified as an improvement, and the costs also should be capitalized. Moreover, the entity capitalizes the costs of a that (1) requires material outlays, (2) is separable from recurring expenses, and (3) provides probable future benefits. However, expenditures that merely maintain the asset at an acceptable level of productivity are expensed as they are incurred. Thus, the costs of painting the building are routine, minor outlays that should be expensed immediately.

Answer (D) is correct. Under double-declining balance method, the full cost of the asset, or $40,300 ($38,600 + $1,700), is depreciated, but not below salvage value. Because the straight-line rate for a 5-year asset is 20% (100% ÷ 5), the double-declining balance rate is 40% (20% × 2). The first year’s depreciation is $16,120 ($40,300 × 40%), leaving a carrying amount for the second year of $24,180 ($40,300 – $16,120). The second year’s depreciation is thus $9,672 ($24,180 × 40%).

Answer (C) is correct. The SYD method multiplies a constant depreciable base (cost minus residual value) by a declining fraction. The numerator is the number of years of the useful life minus the years elapsed (5 - 0 = 5). The denominator is the sum of the digits of the years in the asset’s useful life (1 + 2 + 3 + 4 + 5). The first year’s depreciation expense is therefore $16,667 [$50,000 x (5 / 15)].

Answer (B) is correct. An accelerated method reduces the carrying amount of the asset more rapidly in the early years of the useful life than does the straight-line method. Hence, the effect of an early sale is to increase the gain or decrease the loss that would have been recognized under the straight-line method.

Answer (D) is correct. Sum-of-the-years’-digits depreciation has the highest depreciation expense in the early years of an asset’s life, resulting in lower net income.

Answer (A) is correct. Group and composite depreciation methods use the straight-line technique for an aggregate of assets. The composite method is used for dissimilar assets.