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Theory of Accounting

mid test assignment


property, plant and equipment
*15A3-UPH_MEDAN*

A. DEFINITION OF PROPERTY, PLANT AND EQUIPMENT


Property, Plant, and Equipment (PP&E) is a non-current, tangible capital
asset shown on the balance sheet of a business and used to generate
revenues and profits. PP&E plays a key part in the financial planning and
analysis of a company’s operations and future expenditures, especially
with regards to capital expenditures.
The PP&E account is often denoted as net of accumulated depreciation.
This means that if a company does not purchase additional new equipment
(therefore, its capital expenditures are zero), then Net PP&E should slowly
decrease in value every year due to depreciation. This can be better
determined by a depreciation schedule.
PP&E is a tangible fixed-asset account item and is generally very illiquid.
A company can sell its equipment, but not as easily as it can sell
its inventory or investments such as bonds or stock shares. The value of
PP&E between companies will vary with the operations. For example, a
construction company will generally have a significantly higher property,
plant, and equipment balance than an accounting firm does.

B. CLASSIFICATION OF PROPERTY, PLANT, AND EQUIPMENT


Property, plant, and equipment basically include any of a company’s long-
term, fixed assets. PP&E assets are tangible, identifiable, and expected to
generate an economic return for the company for more than one year or
one operating cycle (whichever is longer). The account can include
machinery, equipment, vehicles, buildings, land, office space, office
equipment, and furnishings, among other things. Note that, of all these
asset classes, land is generally one of the only assets that does not typically
depreciate over time.
If a company produces machinery for sale, that machinery does not
classify as property, plant, and equipment. The machinery used to produce
the machinery for sales is PP&E, but the machinery manufactured for sale
is classified as inventory. The same goes for real estate companies that
hold building and land under their assets. Their office buildings and land
are PP&E, but the houses they sell are inventory.

C. FORMULA FOR PROPERTY,PLANT AND EQUIPMENT


Formula:
𝑵𝑬𝑻 𝑷𝑹𝑶𝑷𝑬𝑹𝑻𝒀, 𝑷𝑳𝑨𝑵𝑻 𝑨𝑵𝑫 𝑬𝑸𝑼𝑰𝑷𝑴𝑬𝑵𝑻
= 𝐺𝑅𝑂𝑆𝑆 𝑃𝑃𝐸 + 𝐶𝐴𝑃𝐼𝑇𝐴𝐿 𝐸𝑋𝑃𝐸𝑁𝐷𝐼𝑇𝑈𝑅𝐸𝑆
− 𝐴𝐶𝐶𝑈𝑀𝑈𝐿𝐴𝑇𝐸𝐷 𝐷𝐸𝑃𝑅𝐸𝐶𝐼𝐴𝑇𝐼𝑂𝑁
As the above formula shows, Capital Expenditures (often referred to a
CapEx for short) are what add to the net property, plant and equipment
balance on the balance sheet. When the company spends money investing
in either (1) updating and maintaining existing equipment, or (2)
purchasing new additional equipment, this adds to the total balance on the
balance sheet.
The other major component of the PP&E formula above is depreciation
and amortization. Depreciation reduces the value of property, plant, and
equipment on the balance sheet as the value of assets is lowered over time
due to wear and tear and the reduction of their useful life. The depreciation
expense is used to reduce the value of the net balance and it flows to the
income statement as an expense.
To illustrate:
In May 2017, Factory Corp. owned PP&E machinery with a gross value of
$5,000,000. Accumulated depreciation for the same machinery was at
$2,100,000. Due to the wear and tear of the machinery, the company
decided to purchase another $1,000,000 in new equipment. For this period,
the depreciation expense for all old and new equipment is $150,000.
Thus, the ending balance is $3,750,000. This is found by taking
$5,000,000 + $1,000,000 – $2,100,000 – $150,000.

D. PROVISION OF PROPERTY, PLANT AND EQUIPMENT


The provision of Property, Plant and Equipment is controlled under IAS
16. The objective of IAS 16 is to prescribe the accounting treatment for
property, plant, and equipment. The principal issues are the recognition of
assets, the determination of their carrying amounts, and the depreciation
charges and impairment losses to be recognized in relation to them.
IAS 16 applies to the accounting for property, plant and equipment, except
where another standard requires or permits differing accounting
treatments, for example:
 assets classified as held for sale in accordance with IFRS 5 Non-
current Assets Held for Sale and Discontinued Operations,
 biological assets related to agricultural activity accounted for
under IAS 41 Agriculture
 exploration and evaluation assets recognized in accordance
with IFRS 6 Exploration for and Evaluation of Mineral Resources
 mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources.

The standard does apply to property, plant, and equipment used to develop
or maintain the last three categories of assets. [IAS 16.3]

The cost model in IAS 16 also applies to investment property accounted


for using the cost model under IAS 40 Investment Property. [IAS 16.5]

The standard does apply to bearer plants but it does not apply to the
produce on bearer plants. [IAS 16.3]

E. RECOGNITION AND MEASUREMENT OF PROPERTY, PLANT


AND EQUIPMENT
1. Recognition
According to [IAS 16.7], PP&E should be recognized by a company
only if:
a. It is probable that future economic benefits associated with the
asset will flow to the entity over a period of more than one year;
and
b. The cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and


equipment costs at the time they are incurred. These costs include
costs incurred initially to acquire or construct an item of property,
plant and equipment and costs incurred subsequently to add to, replace
part of, or service it.

IAS 16 does not prescribe the unit of measure for recognition – what
constitutes an item of property, plant, and equipment. [IAS 16.9] Note,
however, that if the cost model is used (see below) each part of an
item of property, plant, and equipment with a cost that is significant in
relation to the total cost of the item must be depreciated separately.
[IAS 16.43]

IAS 16 recognizes that parts of some items of property, plant, and


equipment may require replacement at regular intervals. The carrying
amount of an item of property, plant, and equipment will include the
cost of replacing the part of such an item when that cost is incurred if
the recognition criteria (future benefits and measurement reliability)
are met. The carrying amount of those parts that are replaced is
derecognized in accordance with the de-recognition provisions of IAS
16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment


(for example, an aircraft) may require regular major inspections for
faults regardless of whether parts of the item are replaced. When each
major inspection is performed, its cost is recognized in the carrying
amount of the item of property, plant, and equipment as a replacement
if the recognition criteria are satisfied. If necessary, the estimated cost
of a future similar inspection may be used as an indication of what the
cost of the existing inspection component was when the item was
acquired or constructed. [IAS 16.14]

2. Initial Measurement

An item of property, plant and equipment should initially be recorded


at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset
to working condition for its intended use.

The initial costs of a PP&E item may include:

a. Its purchase price, any import duties, non-refundable taxes, sales


discounts, and rebates;
b. Any costs directly attributable to bringing the asset to the location
and condition necessary for it to be operational, such as costs of
site preparation, delivery and handling, installation, related
professional fees for architects and engineers; and
c. An estimated value of the costs of dismantling and removing the
asset and restoring the site on which it is located. This is
commonly referred to as an asset retirement obligation (ARO).
(See IAS 37 Provisions, Contingent Liabilities and Contingent
Assets). [IAS 16.16-17]

If payment for an item of property, plant, and equipment is deferred,


interest at a market rate must be recognized or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar


or dissimilar in nature), the cost will be measured at the fair value
unless (a) the exchange transaction lacks commercial substance or (b)
the fair value of neither the asset received nor the asset given up is
reliably measurable. If the acquired item is not measured at fair value,
its cost is measured at the carrying amount of the asset given up. [IAS
16.24]
3. Measurement Subsequent to Initial Recognition
IAS 16 permits two accounting models:
a. Cost model. The asset is carried at cost less accumulated
depreciation and impairment. [IAS 16.30]
b. Revaluation model. The asset is carried at a revalued amount,
being its fair value at the date of revaluation less subsequent
depreciation and impairment, provided that fair value can be
measured reliably. [IAS 16.31]

The Revaluation Model


Under the revaluation model, revaluations should be carried out
regularly, so that the carrying amount of an asset does not differ
materially from its fair value at the balance sheet date. [IAS 16.31]
If an item is revalued, the entire class of assets to which that asset
belongs should be revalued. [IAS 16.36]
Revalued assets are depreciated in the same way as under the cost
model (see below).
If a revaluation results in an increase in value, it should be credited
to other comprehensive income and accumulated in equity under
the heading "revaluation surplus" unless it represents the reversal
of a revaluation decrease of the same asset previously recognised
as an expense, in which case it should be recognised in profit or
loss. [IAS 16.39]
A decrease arising as a result of a revaluation should be recognised
as an expense to the extent that it exceeds any amount previously
credited to the revaluation surplus relating to the same asset. [IAS
16.40]
When a revalued asset is disposed of, any revaluation surplus may
be transferred directly to retained earnings, or it may be left in
equity under the heading revaluation surplus. The transfer to
retained earnings should not be made through profit or loss. [IAS
16.41]
Depreciation (Cost and Revaluation Models)
For all depreciable assets:
The depreciable amount (cost less residual value) should be
allocated on a systematic basis over the asset's useful life [IAS
16.50].
The residual value and the useful life of an asset should be
reviewed at least at each financial year-end and, if expectations
differ from previous estimates, any change is accounted for
prospectively as a change in estimate under IAS 8. [IAS 16.51]
The depreciation method used should reflect the pattern in which
the asset's economic benefits are consumed by the entity [IAS
16.60]; a depreciation method that is based on revenue that is
generated by an activity that includes the use of an asset is not
appropriate. [IAS 16.62A]
Note: The clarification regarding the revenue-based depreciation
method was introduced by Clarification of Acceptable Methods of
Depreciation and Amortisation, which applies to annual periods
beginning on or after 1 January 2016.
The depreciation method should be reviewed at least annually and,
if the pattern of consumption of benefits has changed, the
depreciation method should be changed prospectively as a change
in estimate under IAS 8. [IAS 16.61] Expected future reductions in
selling prices could be indicative of a higher rate of consumption of
the future economic benefits embodied in an asset. [IAS 16.56]
Note: The guidance on expected future reductions in selling prices
was introduced by Clarification of Acceptable Methods of
Depreciation and Amortisation, which applies to annual periods
beginning on or after 1 January 2016.
Depreciation should be charged to profit or loss, unless it is
included in the carrying amount of another asset [IAS 16.48].
Depreciation begins when the asset is available for use and
continues until the asset is derecognised, even if it is idle. [IAS
16.55]
Recoverability of the Carrying Amount
IAS 16 Property, Plant and Equipment requires impairment testing
and, if necessary, recognition for property, plant, and equipment.
An item of property, plant, or equipment shall not be carried at
more than recoverable amount. Recoverable amount is the higher
of an asset's fair value less costs to sell and its value in use.
Any claim for compensation from third parties for impairment is
included in profit or loss when the claim becomes receivable. [IAS
16.65]
De-recognition (Retirements and Disposals)
An asset should be removed from the statement of financial
position on disposal or when it is withdrawn from use and no
future economic benefits are expected from its disposal. The gain
or loss on disposal is the difference between the proceeds and the
carrying amount and should be recognised in profit and loss. [IAS
16.67-71]
If an entity rents some assets and then ceases to rent them, the
assets should be transferred to inventories at their carrying amounts
as they become held for sale in the ordinary course of business.
[IAS 16.68A]
Disclosure
Information about each class of property, plant and equipment
For each class of property, plant, and equipment, disclose: [IAS
16.73]
 basis for measuring carrying amount
 depreciation method(s) used
 useful lives or depreciation rates
 gross carrying amount and accumulated depreciation and
impairment losses
 reconciliation of the carrying amount at the beginning and the
end of the period, showing:
o additions
o disposals
o acquisitions through business combinations
o revaluation increases or decreases
o impairment losses
o reversals of impairment losses
o depreciation
o net foreign exchange differences on translation
o other movement

Additional Disclosures

The following disclosures are also required: [IAS 16.74]

 restrictions on title and items pledged as security for liabilities


 expenditures to construct property, plant, and equipment during
the period
 contractual commitments to acquire property, plant, and
equipment
 compensation from third parties for items of property, plant, and
equipment that were impaired, lost or given up that is included
in profit or loss.

IAS 16 also encourages, but does not require, a number of


additional disclosures. [IAS 16.79]

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts,


certain additional disclosures are required: [IAS 16.77]

 the effective date of the revaluation


 whether an independent valuer was involved
 for each revalued class of property, the carrying amount that
would have been recognised had the assets been carried under
the cost model
 the revaluation surplus, including changes during the period and
any restrictions on the distribution of the balance to
shareholders.

F. REPAIRS AND REPLACEMENT OF PROPERTY, PLANT AND


EQUIPMENT
The nature of PP&E assets is that some of these assets need to be regularly
fixed or replaced to prevent equipment failures or to adopt a more
sophisticated technology. For example, it is normal for companies to repair
or replace old factories or automobiles with new assets when necessary.
The general rule in accounting for repairs and replacements is that repairs
and maintenance work are expensed while replacements of assets are
capitalized. Repairs are easy to record; it is simply a debit to repair or
maintenance expense and a credit to cash. Replacements, however, are a
bit more complicated. For replacements, the old cost of the asset is de-
recognized from the company’s books and the cost of the new replacement
is recorded / recognized.

DESCRIPTION OF GAMES

The game includes 3 rounds such as:

1. Spinner,
2. Karma
3. Ular Tangga
Firstly, the spinner will be spin to determine the player’s number who will
participate and answer the question. Each question has their own point. For those
can answer the question will get the score based on the point. Then, the player
can run the “avatar” on Ular Tangga . If the player is lucky, they can boost their
score through the stairs. Otherwise, the player will lose their score if they meet
the snake.

QUESTION PLAN

1. Which of the following items qualifies as property, plant and equipment?


a. A machine bought for use during a single accounting period
b. Computer software bought for use in more than one accounting period
c. A machine bought for resale to a customer
d. A machine bought for use in more than one accounting period

2. The "carrying amount" of an item of property, plant and equipment generally


refers to:
a. The depreciable amount of the item
b. The replacement cost of the item
c. The amount at which the item is recognised in the financial statements
d. The cost of the item
3. Which of the following would not be included in the cost of an item of property,
plant and equipment?
a. Site preparation costs
b. Testing costs
c. Refundable value added tax
d. Delivery and installation charges

4. On 31 December 2014, a company acquires land for £500,000. The land is


revalued at £530,000 on 31 December 2015 and £460,000 on 31 December
2016.
The company prepares financial statements to 31 December each year and uses
the revaluation model in relation to land.
The correct accounting treatment of each revaluation in the statement of
comprehensive income is :
a. (2013) Income £30,000 ; (2014) Expense £70,000
b. (2013) Other comprehensive income £30,000 ; (2014) Expense £70,000
c. (2013) Other comprehensive income £30,000 ; (2014) Negative other
comprehensive income £70,000
d. (2013) Other comprehensive income £30,000 ; (2014) Negative other
comprehensive income £30,000 Expense £40,000
2013 £30,000 is credited to revaluation reserve and shown in OCI. 2014 £30,000 is debited to
revaluation reserve and shown as negative OCI. A £40,000 expense is recognised in the
calculation of profit or loss for the year.

5. A company has the following general borrowings outstanding throughout the


whole of an accounting year: 6.5% Bank loan of £400,000 8% Bank loan of
£800,000 If a qualifying asset costing £50,000 is funded out of these general
borrowings, the capitalisation rate that should be used is:
a. 7.25%
b. 6.5%
c. 8%
d. 7.5%
Total borrowings are £1,200,000. Total interest is £90,000 (£26,000 + £64,000). This is
equivalent to 7.5% of £1,200,000.

6. If investment property is measured using the fair value model, a gain arising
from a change in the fair value of an investment property must be:
a. Recognised in the calculation of profit or loss
b. Recognised as other comprehensive income
c. Credited to a revaluation reserve
d. Recognised in balance sheet

7. On 1 January 2015, a company which prepares financial statements to 31


December acquires an item of equipment and receives a government grant of
20% of the item's cost. The item cost £30,000 and has an expected useful life of
seven years with a residual value of approximately £4,000.
The item is depreciated on the diminishing balance basis at a rate of 25% per
annum.
The amount of the grant that should be recognised as income in the year to 31
December 2016 is:
a. £6,000
b. £857
c. £1,500
d. £1,298

WDV at the end of 2015 is £22,500 (75% of £30,000), so depreciation in 2016 is £5,625 (25% of
£22,500). This is equal to 21.63% of the item's depreciable amount, so income of £1,298 (21.63% of
£6,000) is recognised in the year to 31 December 2016.

8. When an asset is sold or disposed of, where is the gain or loss recognised?
a. Asset disposal account
b. Profit and loss
c. Revaluation reserve
d. Depreciation
9. Under IAS 16, if an asset is not used then…
a. Depreciation is paused
b. Depreciation for the entire period does not apply
c. Depreciation continues
d. Depreciation is ignored
10. What is the amount an asset could achieve if sold between knowledgeable,
willing parties in an arms length transaction?
a. Current value
b. Net present value
c. Written down value
d. Fair value
11. If an asset increases in value, the increase is noted as…
a. An increase in net profit in the SOCI
b. An increase in revaluation surplus in the SOFP and other comprehensive
income in the SOCI
c. An increase in retained earnings in SOFP
d. An increase in “other profit” in SOCI
12. Under IAS 16, which two subsequent accounting treatments are allowed
subsequently to initial recognition?
a. Cost model and present value model
b. Cost model and revaluation model
c. Fair value model and revaluation model
d. Fair value model and cost model
13. What is the amount an asset is recognised at in the Statement of Financial
Position less any accumulated depreciation or impairment losses?
a. Carrying amount
b. Residual value
c. Impairment amount
d. Fair value
14. How should an asset be initially recognised in the financial statements?
a. Measure at market value
b. Measure at cost
c. Measure at net realisable value
d. Measure at fair value
15. What is an impairment loss?
a. The amount by which the carrying amount of an asset exceeds the
recoverable amount
b. The amount by which the market value of an asset exceeds the net present
value
c. The difference between the fair value of an asset and the net realisable value
of the asset
d. The amount by which the carrying amount of an asset exceeds the book value
16. Which of the following is covered by IAS 16 – Property, Plant and Equipment?
a. Assets held for sale
b. Biological assets related to development activity
c. Exploration assets
d. Office buildings
17. A company purchases land with an office building. The building has a useful life
of 20 years. How should the land be depreciated?
a. Depreciate over 20 years
b. Depreciate over useful life of the land
c. Don’t depreciate the land
d. Depreciate every year
Land has indefinite/unlimited useful life
18. When an item of property, plant and equipment is revalued, what should be
revalued?
a. A selection of assets decided by management
b. The whole class of assets to which it belongs
c. The individual asset
d. A selection of assets picked at random
The whole class of assets to which it belongs should be revalued. This prevents a mixture of cost
and values appearing in the financial statements. It also prevents management from picking only
the best assets to revalue.

19. Which of the following is not an asset that falls under the scope of IAS 16?
a. Tangible assets
b. Assets held for the production or supply of goods or services
c. Assets held for sale in the normal course of business
d. Assets expected to be used for more than one period
Assets, which are held for sale in the normal course of business, are accounted for using IAS 2 –
Inventories
When it is probably that future economic benefits associated with an asset will flow to the entity,
and the costs can be reliably measured, it should be recognised as an asset.

20. Under IAS 16, how often should the useful life of an asset be reviewed?
a. At least at each financial year end
b. Every six months
c. At management’s discretion
d. Every year