8. Property, Plant, and Equipment Flashcards
If an entity puts a $10,000 down payment on a piece of equipment and then makes $5,000 monthly payments on the equipment over 24 months, should it record the equipment’s original carrying value as $10,000 + (24 x $5,000) = $130,000?
No. It should record the equipment at its equivalent cash price–i.e. the amount it would pay if it paid the full price in cash on the date of purchase. Say the equivalent cash price is $110,000. The $20,000 difference represents the 24 monthly payments discounted to the date of purchase. The entity should debit expense for $20,000 and debit fixed assets for $110,000. The entity should credit cash for $10,000 (the down payment) and credit notes payable for $120,000 (the total monthly payments).
How do you calculate annual depletion expense and annual depletion per ton?
- Calculate total depletion base: total cost to acquire and prepare asset + any restoration cost - expected sales value
- Multiply total depletion base (in dollars) by ratio of the year’s extraction (in tons) to total estimated extraction (in tons). The result is annual depletion expense.
- To get depletion per ton, divide the annual depletion expense by tons extracted in the year
How do you calculate annual depreciation expense using the units of production method?
- Calculate total depreciable base: cost to acquire and prepare asset - salvage value
- Multiply total depreciable base (in dollars) by ratio of the year’s units produced to total estimated units to be produced. The result is annual depreciation expense.
When is an asset retirement obligation expensed?
It is amortized over the useful life of the asset.
How do you test whether an asset has been impaired?
- Determine the lowest level of identifiable cash flows associated with the asset.
- Perform a recoverability test: compare the expected future net undiscounted cash flows from the asset with the asset’s current carrying amount. If the latter exceeds the former, the asset is impaired.
- Determine the impairment amount by comparing the carrying amount to fair value, which is either the market value or present value (i.e. discounted future net cash flows) of the asset. Impairment is the amount by which carrying value exceeds fair value.
How does component depreciation under IFRS work?
Each significant component of an asset must be depreciated separately over its individual useful life. Significance is determined by judgment–e.g., any component equal to or greater than 10% of the asset’s total cost. Useful lives may vary. E.g., a truck may have an overall useful life of 20 years, but the engine may have a useful life of 10 years before it must be replaced.
When a fixed asset’s carrying value exceeds its fair value, has the asset become impaired?
Yes. The definition of impairment is when an asset’s carrying value exceeds its fair value.
What’s the maximum amount of interest related to an asset that may be capitalized as part of the asset annually under US GAAP?
The amount is based on the weighted average cumulative expenditures on the asset for the year. Calculate the weighted average by adding all the expenditures on the asset (such as a building) during the year and then dividing by the number of expenditures. Then multiply the product by the interest rate on the loan used to finance the asset. The result is the amount of interest you can capitalize. Any excess interest is expensed.
If the weighted average cumulative expenditures is greater than the amount borrowed to directly finance the asset, you can capitalize all of the interest on the loan that directly financed the asset. The amount of weighted average cumulative expenditure in excess of the amount borrowed to directly finance the loan can be multiplied by the interest rate on indirect debt that could have been avoided had the asset not been purchased.
How do you calculate depreciation expense under the double-declining balance method?
Ignoring any salvage value, apply double the straight-line depreciation rate to the asset’s carrying value.
For example, if an asset with a carrying value of $100,000 is being depreciated over five years, apply a rate of 2/5 (double the SL rate of 1/5) to the carrying value for a depreciation expense of $40,000. The following year, apply 2/5 to (100,000-400,000 = ) 600,000 for a depreciation expense of $240,000
How do you calculate depreciation expense under the sum of the years’ digits method?
In a non-monetary exchange lacking commercial substance, what book value should a company record for the asset it receives in the exchange?
The company should record the lower of three values:
- the fair value of the asset given up (plus or minus cash paid or received)
- the fair value of the asset received
- the book value of the asset given up (plus or minus cash paid or received)
Is gain ever recognized from a non-monetary exchange lacking commercial substance?
Gain is recognized in a NME lacking commercial substance when boot is received. Note that only the recipient of the boot recognizes the gain. Note that only part of the gain is recognized–i.e., the proportionate share of boot received to total consideration received.
Example: Company A exchanges a machine with FV of $105,000 for a machine with FV of $91,000 plus $14,000 in cash. The machine given up cost $75,000, so gain is $105,000 - $75,000 = $30,000. The $14,000 boot represents 13.33% of the total consideration ($14,000/$105,000 = 0.1333). Therefore, Company A recognizes 13.33% of the gain, i.e. 0.1333 x $30,000 = $4,000.
In a non-monetary exchange lacking commercial substance, how are gains and losses handled when no boot is exchanged?
Recognize all losses.
Defer all gains until the newly received assets are sold.
