ACCT 312 Ch. 9 Flashcards
Property, Plant, and Equipment
Also called plant assets or fixed assets
- used in operations and not for resale
- Includes land, building structures (offices, factories, warehouses), and equipment (machinery, furniture, tools)
Historical cost
All costs that it took to aqcuire a product, ship a product, and get the product ready for its intended use
- Including: Acquisition price + sales tax + freight/shipping costs + Cost to install and/or test
Why use historical cost?
- Historical cost is reliable
- Companies should not anticipate G/L but only recognize them when asset is sold
What does cost of land include?
All expenditures to acquire land and ready it for use
- purchase price
- closing costs, title to the land, attorney’s fees, commissions to real estate agents
- costs of grading, filling, draining, and clearing
- assumption of mortgages/liens/encumbrances
- additional land improvements with INDEFINITE life
Land Improvements
Improvements to land with LIMITED lives. Will be depreciated.
- Ex. Private driveways, walks, fences, and parking lots
Where is land acquired and held for speculation classified on the balance sheet?
investment
Where is land held by a real estate concern for resale classified on the BS?
Inventory
Cost of Equipment
Includes all expenditures in acquiring equipment
- purchase price + sales tax
- freight/shipping charges
- insurance during transit PAID BY THE PURCHASER
- assembling/installing/testing equipment
Not included in Cost of Equipment?
Recurring costs related to equipment?
- Ex. Vehicle licenses, accident insurance on company trucks and cars
Where do most construction costs go?
To cost of buildings
- Niche. If it says they teaser down a building it will be for cost of land UNLESS it states that they are tearing that building down to build a new building, then it would go to cost of building
Interest Capitalization
The interest on a loan, that a company takes out to work on construction, is added to the total cost of the construction asset (usually a building).
- That amount of interest that they added to the cost of the asset from interest is the amount capitalized
- It is “capitalized because it is counted as a cost and not expensed on the income statement
Three items to consider capitalize interest
- Qualifying assets
- Capitalization period
- Amounts to capitalize
What assets qualify for interest capitalization?
Assets that are intended for use or sale that are constructed or produced. They must be undergoing activities to construct/produce these assets
- Buildings, machinery, plants
- Real estate, ships
Interest revenue
you should NOT subtract interest revenue against interest cost when calculating interest capitalized
Asset Retirement Obligation
The cost that it will take to restore a property back to sellable reason
- Add to building/property asset cost
- ARO is a liability
- Accretion expense is incurred over time with this
- Operating expense on the income statement
Examples of things that need ARO
Nuclear facilities, Oil/gas stations, mining closures, landfills
When calculating weighted-average interset rate
Do not include the specific contstruction loan. Use the other debt loans to calculate this
How to get actual interest
It is the total interest on all the notes that they give you
- Be mindful of the month that the note is issued (you may have to put it in the month multiplier thingy)
Valutation of PPE
Companies should record PPE at its FAIR VALUE at the point of sale.
What is the formula to calculate present value in lump-sum problems?
PV = FV / (1+r)^n
What is the formula to calculate present value in multiple equal payments problems?
PV = { [1-(1/(1+r)^n)]/r } x one of the equal payments
What do you do in an exchange of nonmonetary assets if it has commercial subtance?
Reord the asset at the fair value
- Recognize gain/loss immediately
How do you know if an exchange has commercial substance?
If the two parties’ economic positions change
What do you do if exchange of nonmonetary assets results in a loss (commercial or not)
Recognize the loss immediately in both scenarios
