2020 Cma P1 A5 Ppe

Recording Fixed Assets
at Acquisition
Initial Recorded Amount
Recorded at all of the costs necessary to
get the asset “ready and available for use”:
• Shipping
• Installation
• Labor, overhead, materials for self-
constructed assets
• Preliminary testing
• Razing a building is allocated to land
Basket Purchases
Cost paid is allocated to individual assets
based on relative fair market value.
Depreciation
of Fixed Assets
Depreciation
“The systematic and rational allocation
of the costs of a fixed asset over its
expected useful life.”
It is matching of revenues and expenses.

Depreciation Expense Journal Entry
No matter which method of depreciation is
used. The journal entry is the same.
Dr Depreciation expense as calculated

Cr Accumulated depreciation as calculated
Accumulated Depreciation
Accumulated Depreciation records the
depreciation for an asset.
It is a valuation account.
Fixed assets $100,000

Less: Accumulated depreciation (23,750)
Net Book Value (Carrying Value) $76,250
Information for Depreciation
Estimated Useful Life
Estimated Salvage Value
Depreciable Amount
= Cost – Estimated Salvage Value
Depreciation Methods
1. Straight-line
2. Double declining balance
3. Sum-of-the-years’-digits
4. Units of production
5. Group and composite depreciation
1. Straight Line
Depreciable Amount
Estimated Useful Life
2. Double Declining Balance
Use a rate that is two times (double) the
percentage that would be recognized
under the straight-line method.
Double declining rate

* BV of asset at the beginning of the year
= Depreciation Expense
3. Sum-of-the-Years’-Digits
Sum of the Years’ Digits = n(n + 1) / 2
The sum of the years’ digits to use for the

denominator for an asset with a five-year
useful life will be: 5(5 + 1) / 2 = 15
Proof: 1 + 2 + 3 + 4 + 5 = 15.
Depreciable Amount * Fraction

SYD Annual Depreciation
A 5 year asset will be depreciated as
follows:
Year 1: Depreciable Amount * 5/15
Overall 15/15 (100%) is depreciated
4. Units of Production Method
Determine the number of units the asset
will be able to produce over its useful life.
Each period recognize depreciation

expense equal to the % of total capacity
produced during the period.
5. Group and Composite Depn.
Group depreciation used for similar assets.
Composite deprn used for dissimilar assets.
A weighted average useful life and a

depreciation rate are applied to the group.
No gain or loss is recognized on disposal of

group depreciated asset.
Which Method is Best
The one that best matches revenues and
expenses is the best.
Decision should not be made by looking at

the income statement, or anything else.
IFRS Depreciation Note
If individual components of a large fixed
asset have different usage patterns and
useful lives, the individual components
should be depreciated separately.
Depreciation for Tax
Purposes
Tax Authority in the U.S.
In the U.S., the Internal Revenue Service
prescribes the method of depreciation to
be used on a company’s tax return, and the
method is specific for tax purposes.
MACRS Depreciation
MACRS, or Modified Accelerated Cost Recovery
System, is the most common type of
depreciation required by the U.S. tax laws.
The depreciable base for tax purposes is
always 100% of the cost of the asset and the
other costs required to make it ready for
use.
Half-year convention is used for the year of
acquisition and the year of disposal.
MACRS Tables
The IRS provides MACRS tables that give the
percentage of the original cost to be
depreciated each year.
There are several tables, each incorporating a
given convention, and the half-year
convention is the most commonly used.
Therefore, when calculating annual depreciation
amounts using the MACRS tables, the
percentages should be used as given.
For example, for an asset that is being depreciated over three
years using MACRS and the half-year convention, here are the
percentages given in the tables:
Year 1 33.33%
Year 2 44.45%
Year 3 14.81%
Year 4 7.41%
Total 100.0%
Example: The amount of depreciation to be taken for each year
for an asset with an original cost of $90,000 that is being
depreciated as three-year property using MACRS and the half-
year convention will be as follows:
Year 1 33.33% $29,997
Year 2 44.45% 40,005
Year 3 14.81% 13,329
Year 4 7.41% 6,669
Totals 100.00% $90,000
Straight-Line Depreciation
Straight-line depreciation can be used for
tax purposes.
The depreciable base for tax purposes is
always 100% of the asset’s cost.
The IRS usually requires monthly
depreciation for tax purposes.
Impairment
of Fixed Assets
Impairment of Fixed Assets
Done to prevent overstating fixed assets
Compare:
1. The undiscounted sum of the future
cash flows expected to be generated
through the use and eventual sale of the
asset
2. Book value of the asset
Write Down of Impaired Assets
If book value > future cash flows the asset
is impaired and it is written down to its
fair value.
The amount written down is reported as a
loss during that period.
Dr Impairment loss amount
Cr Accumulated depreciation amount
Impairment under IFRS
1. Carrying value compared to recoverable
amount
2. The recoverable amount is either the 1)
fair value of the asset if sold minus any
costs of sale, or 2) the discounted future
cash flows it will generate
3. Loss is on the income statement unless it
is a write down from a previous upward
revaluation of the fixed asset
Revaluing PPE Under IFRS
Under IFRS, a company may increase the
carrying the value of its fixed assets if the fair
value of that class of assets is materially different
from its carrying value.
The increase in the value is recognized in Other
Comprehensive Income and carried in the
equity section of the balance sheet as a
Revaluation Surplus.
Disposal of Fixed Assets
Disposals of Fixed Assets
Dr Cash amount received
Dr Accumulated deprn amt. on books
Dr/CrLoss/Gain on disposal balance
Cr Fixed assets original cost of asset
Involuntary Disposal
Costs of clean up or removal of old asset
are added to the book value of the old
asset in determining gain or loss on
disposal.
Gain may result because of insurance.

Disposal by Donation
Recognize a donation expense for the fair
value of the asset.
Gain or loss for difference between fair

value and book value is also recognized.
Donation Journal Entry
Dr Donation expense FV of donated asset
Dr Loss on donation (if loss)balancing
Cr AssetBV of donated asset
Cr Gain on donation (if a gain) balancing

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Recording Fixed Assets

It is matching of revenues and expenses.

Dr Depreciation expense as calculated

Fixed assets $100,000

Double declining rate

The sum of the years’ digits to use for the

Depreciable Amount * Fraction

Each period recognize depreciation

A weighted average useful life and a

No gain or loss is recognized on disposal of

Decision should not be made by looking at

Gain may result because of insurance.

Gain or loss for difference between fair

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