ACCT 312 Ch. 9

Question 1

Property, Plant, and Equipment

Answer 1

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)

Question 2

Historical cost

Answer 2

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

Question 3

Why use historical cost?

Answer 3

• Historical cost is reliable
• Companies should not anticipate G/L but only recognize them when asset is sold

Question 4

What does cost of land include?

Answer 4

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

Question 5

Land Improvements

Answer 5

Improvements to land with LIMITED lives. Will be depreciated.
- Ex. Private driveways, walks, fences, and parking lots

Question 6

Where is land acquired and held for speculation classified on the balance sheet?

Answer 6

investment

Question 7

Where is land held by a real estate concern for resale classified on the BS?

Answer 7

Inventory

Question 8

Cost of Equipment

Answer 8

Includes all expenditures in acquiring equipment
- purchase price + sales tax
- freight/shipping charges
- insurance during transit PAID BY THE PURCHASER
- assembling/installing/testing equipment

Question 9

Not included in Cost of Equipment?

Answer 9

Recurring costs related to equipment?
- Ex. Vehicle licenses, accident insurance on company trucks and cars

Question 10

Where do most construction costs go?

Answer 10

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

Question 11

Interest Capitalization

Answer 11

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

Question 12

Three items to consider capitalize interest

Answer 12

• Qualifying assets
• Capitalization period
• Amounts to capitalize

Question 13

What assets qualify for interest capitalization?

Answer 13

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

Question 14

Interest revenue

Answer 14

you should NOT subtract interest revenue against interest cost when calculating interest capitalized

Question 15

Asset Retirement Obligation

Answer 15

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

Question 16

Examples of things that need ARO

Answer 16

Nuclear facilities, Oil/gas stations, mining closures, landfills

Question 17

When calculating weighted-average interset rate

Answer 17

Do not include the specific contstruction loan. Use the other debt loans to calculate this

Question 18

How to get actual interest

Answer 18

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)

Question 19

Valutation of PPE

Answer 19

Companies should record PPE at its FAIR VALUE at the point of sale.

Question 20

What is the formula to calculate present value in lump-sum problems?

Answer 20

PV = FV / (1+r)^n

Question 21

What is the formula to calculate present value in multiple equal payments problems?

Answer 21

PV = { [1-(1/(1+r)^n)]/r } x one of the equal payments

Question 22

What do you do in an exchange of nonmonetary assets if it has commercial subtance?

Answer 22

Reord the asset at the fair value
- Recognize gain/loss immediately

Question 23

How do you know if an exchange has commercial substance?

Answer 23

If the two parties’ economic positions change

Question 24

What do you do if exchange of nonmonetary assets results in a loss (commercial or not)

Answer 24

Recognize the loss immediately in both scenarios

Question 25

How is the total gain or loss on a transaction calculated

Answer 25

Difference between fair value of the asset and book value of the asset

Question 26

If a gain is computed on a nonmonetary asset what do you do?

Answer 26

• if it has commercial substance, recognize entire gain
• lacks commercial substance,
  1.) and no cash is involved, no gain recognized
  2.) and some cash is given, no gain recognized
  3.) and some cash received, portion of gain is recognized through formula

Question 27

If cash is received in a transaction for a nonmonetary asset…

Answer 27

You recognize a portion of the gain using this formula
- (cash received / cash received + FV of other assets received) x Total gain

Question 29

Events that might lead to impairment

Answer 29

• Significant decrease in fair value of an asset
• Change in manner in which asset is used
• legal factors changing
• Accumulation of costs in excess of original amount
• Forecast of losses with an asset

Question 30

Difference between depreciation and impairment?

Answer 30

Depreciation is planned and gradual, while impairment is sudden and unplanned

Question 31

Recoverability test

Answer 31

Comparing estimated future cash flows to the book value of the asset.
- If future cash flows are EQUAL OR GREATER than book value, then no adjustment is needed
- If future cash flows is LESS THAN book value, the asset is impaired

Question 32

Recoverability test

Answer 32

Comparing estimated future cash flows to the book value of the asset.
- If future cash flows are EQUAL OR GREATER than book value, then no adjustment is needed
- If future cash flows is LESS THAN book value, the asset is impaired

Question 33

DDB (Double Declining Balance) Formula

Answer 33

(Cost - Acc. depr @ start of year) x 2/EUL

Question 34

When is restoration of impairment loss permitted?

Answer 34

When the asset that was impaired held for disposal

Question 35

Impairments chart

Answer 35

Check image

Question 36

When is depreciation on new cost basis used for impairment?

Answer 36

When the asset is held for use (not held for disposal)

Question 37

Assets acquired in a lump sum purchase should be recorded at:

Answer 37

relative fair market values

Question 38

In an exchange that lacks commercial substance in which a gain exists, and cash is received, the asset received is recorded at the:

Answer 38

fair value of the asset received less the deferred portion of the gain

Question 39

What is the credit entry when making a loss on impairment

Answer 39

Accumulated Depreciation-(equipment)