8 PP&E & Depletable Resources

Question 1

Is interest incurred during the construction of an asset capitalized as part of the asset’s initial cost?

Answer 1

Yes

Question 2

What assets qualify for interest capitalization?

Answer 2

• assets constructed by the entity for it’s own use
• assets constructed by others for the entity for which deposits or progress payments have been made
• assets constructed for sale or lease, such as real estate developments or ships

Question 3

What assets DO NOT qualify for interest capitalization?

Answer 3

• inventories routinely produced in large quantities on a repetitive basis
• assets in use, or ready for their intended use in earning activities
• assets not being used in earning activities, that are not undergoing activities necessary to ready them for use

Question 4

Does the declining balance depreciation method recognize salvage value in depreciation calculation?

Answer 4

No, but the asset is not depreciated beyond the salvage value

Question 5

What is the formula for double declining balance depreciation method?

Answer 5

Asset cost / estimated life = straight line rate x 2 = double declining rate (depreciation expense year 1)
asset cost - depreciation expense year 1 = end of year carrying amount
year 1 end of year carrying amount x double declining rate = depreciation expense year 2

and so on

Question 6

What is the formula for sum of the years’ digits depreciation method?

Answer 6

asset cost x remaining years in useful life / sum of all years in useful life = periodic expense

Ex - a 5 year estimated life 1+2+3+4+5 =15

year 1 = asset cost x 5/15 = depreciation expense
year 2 = asset cost x 4/15 = depreciation expense

Question 7

What is the formula for units of production depreciation method?

Answer 7

asset cost x units produced in the year / total units the asset is expected to produce = depreciation expense

Question 8

What is the formula for the composite/group depreciation method?

Answer 8

Group assets are individually calculated at straight line depreciation = total cost - salvage value / estimated useful life

Total amount of annual straight line depreciation for the group assets / total cost of the group assets = average composite rate

Question 9

The composite method of depreciation applies to?

Answer 9

Groups of dissimilar assets with varying useful lives

Question 10

The group method of depreciation applies to?

Answer 10

similar assets

Question 11

If a company purchases real property and the city assesses taxes for sidewalks, how should the company treat the accrued taxes for this local improvement?

Answer 11

The company should add the accrued taxes to the property’s adjusted basis. Taxes assessed for local benefit that increase the value of real property are not deductible as tax expense.