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Property Plant & Equipment (PPE): Capitalisation vs Expensing, Depreciation Methods This topic deals with the accounting treatment of tangible assets used in business operations. It is tested in the FAR exam to ensure candidates can apply the correct accounting principles to record, report, and depreciate PPE.
This topic measures the candidate's ability to apply accounting standards (GAAP) to record and report PPE, demonstrating their understanding of the underlying principles and their ability to make professional judgments in a real-world setting.
Property Plant & Equipment (PPE) is a key asset class that requires careful accounting treatment. This topic covers the capitalisation vs expensing debate and the various depreciation methods used to record the cost of PPE over its useful life.
Frequency: 10-15% Difficulty Rating: 6/10 Question Type: Multiple Choice, Short Answer, and Long Answer
intermediate
The most common trap is failing to apply the correct depreciation method and ignoring the useful life of assets.
What is the capitalisation threshold for assets? A) $1,000 B) $2,000 C) $5,000 D) $10,000 Correct Answer: B) $2,000 Explanation: The capitalisation threshold is $2,000, as per GAAP.
What are the three common depreciation methods used for PPE? A) Straight-Line Method, Units-of-Production Method, and Double Declining Balance Method B) Accelerated Depreciation Method, Straight-Line Method, and Units-of-Production Method C) Depreciation by Asset Type, Straight-Line Method, and Units-of-Production Method D) Depreciation by Location, Straight-Line Method, and Units-of-Production Method Correct Answer: A) Straight-Line Method, Units-of-Production Method, and Double Declining Balance Method Explanation: The three common depreciation methods used for PPE are the Straight-Line Method, Units-of-Production Method, and Double Declining Balance Method.
A company purchases a machine for $50,000. The machine has a useful life of 5 years and is expected to produce 100,000 units. Calculate the depreciation expense using the Units-of-Production Method. Correct Answer: $10,000 Explanation: The depreciation expense is calculated as follows: Depreciation Expense = (Cost - Residual Value) / Total Units x Actual Units Produced = ($50,000 - $0) / 100,000 x 20,000 = $10,000
A company purchases a building for $500,000. The building has a useful life of 20 years and is expected to produce rental income. Calculate the depreciation expense using the Straight-Line Method. Correct Answer: $25,000 Explanation: The depreciation expense is calculated as follows: Depreciation Expense = Cost / Useful Life = $500,000 / 20 = $25,000
This topic is often confused with the topic of Intangible Assets. While both topics deal with asset accounting, the key difference lies in the classification of assets. PPE are tangible assets with a physical existence, whereas intangible assets are non-physical assets such as patents, copyrights, and trademarks.
When faced with a depreciation question, always check the useful life of the asset and choose the correct depreciation method.
A company purchases a computer for $2,000. What is the accounting treatment for this asset? Answer: The computer should be capitalised and depreciated over its useful life.
A company purchases a machine for $50,000. The machine has a useful life of 5 years and is expected to produce 100,000 units. Calculate the depreciation expense using the Units-of-Production Method. Answer: The depreciation expense is calculated as follows: Depreciation Expense = (Cost - Residual Value) / Total Units x Actual Units Produced = ($50,000 - $0) / 100,000 x 20,000 = $10,000
A company purchases a building for $500,000. The building has a useful life of 20 years and is expected to produce rental income. However, the company also expects to renovate the building after 10 years. How should the company account for this renovation? Answer: The company should depreciate the building over its useful life of 20 years. However, the renovation should be treated as a separate asset and depreciated over its useful life.
What is the capitalisation threshold for assets? A) $1,000 B) $2,000 C) $5,000 D) $10,000 Correct Answer: B) $2,000
What are the three common depreciation methods used for PPE? A) Straight-Line Method, Units-of-Production Method, and Double Declining Balance Method B) Accelerated Depreciation Method, Straight-Line Method, and Units-of-Production Method C) Depreciation by Asset Type, Straight-Line Method, and Units-of-Production Method D) Depreciation by Location, Straight-Line Method, and Units-of-Production Method Correct Answer: A) Straight-Line Method, Units-of-Production Method, and Double Declining Balance Method
A company purchases a machine for $50,000. The machine has a useful life of 5 years and is expected to produce 100,000 units. Calculate the depreciation expense using the Units-of-Production Method. A) $5,000 B) $10,000 C) $15,000 D) $20,000 Correct Answer: B) $10,000
A company purchases a building for $500,000. The building has a useful life of 20 years and is expected to produce rental income. Calculate the depreciation expense using the Straight-Line Method. A) $10,000 B) $20,000 C) $25,000 D) $30,000 Correct Answer: C) $25,000
What is the accounting treatment for a company that purchases a computer for $1,000? A) Capitalise and depreciate B) Expense immediately C) Capitalise and do not depreciate D) Do not capitalise Correct Answer: B) Expense immediately
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