Question

How do you calculate useful life for depreciable PPE assets when the quiz question doesn't give you depreciation expense amount and building and equipment have different useful life and different ranges of life?

Answer 1

Answer:

In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset become zero or negligible.

Property, Plant & Equipment is a non-current, tangible capital assets shown on the balance sheet of a business and used to generate revenues and profits. Property, Plant & Equipment plays a key part in the financial planning & analysis of a company's operations and future expenditures, especially with regards to capital expenditures.

The Property, Plant & Equipment account is often denoted as net of accumulated depreciation. This means that if a company does not purchase additional new equipment, then net PP&E should slowly decrease in value every year due to depreciation. This can be better determined by a depreciation.

PP&E basically includes 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.

The account can include machinery, equipment, vehicles, buildings, land, office space, office equipment, and furnishing, among other things.

PP&E formula:

Net PP&E = Gross PP&E + Capital expenditures - Accumulated depreciation.

• Recognition & measurement of PP&E:

1. It is probable that future economic benefits associated with the asset will flow to the entity over a period of more than one year.
2. The cost of the asset can be measured reliably.

• The initial cost of a PP&E item may include:

1. Its purchase price, any import duties, non refundable taxes, sales discounts, and rebates.
2. Any costs directly attributable to bringing the asset to the location and condition necessary for it to be operational.

Depreciation of PP&E:

The major component of the PP&E formula above is depreciation and amortization. Depreciation reduces the value of property, plant, & 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 net balance and it flows to the income statement as an expense.

How to calculate depreciation ?

There three methods commonly used to calculate depreciation. They are:

• Straight line method.
• Unit of production method.
• Double-declining balance method.

Three main inputs are required to calculate depreciation:

1. Useful life: This is the time period over which the organisation considers the fixed asset to be productive. Beyond its useful life, the fixed asset is no longer cost-effective to continue the operation of the asset.
2. Salvage value: Post the useful life of the fixed asset, the company may consider selling it at a reduced amount. This is known as the salvage value of the asset.
3. The cost of asset: This includes taxes, shipping, and preparation / setup expenses.

Already know the purpose of depreciation, is to match the cost of the fixed asset over its productive life to the revenues the business earns from the asset.

It is very difficult to directly link the cost of the asset to revenues, hence, the cost is usually assigned to the number of years the asset is productive.

At last i can say that the useful life of the fixed asset, the cost is moved from balance sheet to income statement. Alternatively, it is just an allocation process as per matching principle instead of a technique which determines the fair market value of the fixed asset.