Ch 10

Question 0

How relevant is Fair value to property, plant and equipment?

Answer 0

Not very

Consistent with going concern assumption that it’s held
For use of business not for sale like inventory

Question 1

Property, plant and equipment AKA Plant Assets

AKA Fixed Assets

Answer 1

Land,
building structures (offices, factories, warehouses),
Equipment (machinery, furniture, tools)

Question 2

3 major characteristics with property, plant and equipment?

Answer 2

1 acquired for use in operations, not for resale

2 Longterm in nature and usually depreciated

3 they possess physical substance

Question 3

Historical cost

Answer 3

Measures cash price of obtaining the asset and

Bringing to location + condition necessary for use

Question 4

Under IFRS, historical cost for property, plant and equipment is the…

Answer 4

Benchmark (preferred) treatment

However companies may revalue these assets regularly

Question 5

2 reasons subsequent to acquisition, why companies should not write up property, plant, equipment to reflect fair value when it’s above cost?

Answer 5

1 historical cost is most reliable (includes actual transactions)

2 companies should not anticipate gains and losses
But should recognize them when asset is sold

Question 6

Removal of old buildings, clearing, grading and filling is a…why?

Answer 6

Land cost

because activity is necessary to condition land for
intended purpose

Question 7

Special assessments for local improvements 4 examples?

Answer 7

Pavements, street lights, sewers, drainage systems

Question 8

4 examples of improvements with limited lives?

Answer 8

Driveways, walks, fences, parking lots

Question 9

If land is held for speculation it should be classified as?

If a real estate concern holds land for resale it should be classified as?

Answer 9

An investment

Inventory

Question 10

Self constructed asset accounting problems?

Answer 10

When company makes its own equipment it’s hard
To allocate indirect costs

There’s no purchase or contract price

Question 11

2 ways a company can handle indirect costs when they make their own equipment?

Answer 11

1 assign no fixed overhead to cost of constructed asset

2 assign full portion of all overhead to construction process

Question 12

Assigning no fixed overhead to cost of constructed asset assumes?

Answer 12

Company will have same overhead costs regardless

Company assigns variable overhead costs that would
Increase due to the construction

Question 13

Full costing approach, definition? Belief?

Answer 13

Assign portion of all overhead to construction process
Of self made asset

Belief that all costs should attach to all products
And assets manufactured

Question 14

Companies should assign to a self constructed asset a…

Answer 14

Pro rata portion of fixed overhead to determine its cost

Question 15

3 suggested approaches to account for interest incurred in financing construction of property, plant and equipment?

Answer 15

1 capitalize no interest charges during construction

2 charge construction with all costs of funds employed,
Whether identifiable or not

3 capitalize only actual interest cost incurred during
construction

Question 16

Interest costs Approach: Capitalize no interest charges during construction

Answer 16

Interest is considered a cost of financing and not

A cost of construction

Question 17

Interest costs Approach: charge construction with all costs of funds employed whether identifiable or not

Answer 17

Cost of construction should include cost of financing

Whether by cash, debt or stock

Question 18

Interest cost approach: capitalize only actual interest costs incurred during construction

Answer 18

Capitalizes interest costs incurred through debt financing

GAAP Aproach

Question 19

3 items considered in capitalizing interest approach?

Answer 19

1 qualifying assets
2 capitalization period
3 amount of capitalize

Question 20

The objective of capitalizing interest is to obtain a…

Answer 20

Measure of acquisition cost that reflects company’s total
Investment in the asset

and charge that cost to future periods Benefited

Question 21

2 general kinds of Qualifying assets for interest cost capitalization? Give examples

Answer 21

1) Assets under construction for company’s use (buildings,
Plants, large machinery)

2) assets intended for sale or lease that are constructed
(ships, real estate developments)

Question 22

2 types of assets that do not qualify for interest capitalization? Examples

Answer 22

1 assets in use or ready for intended use

2 assets that company does not use in its earning activities
And not undergoing activities intended to get ready for use

Ex land remaining undeveloped,
assets not used from excess capacity
Need for repair

Question 23

Capitalization period

Answer 23

Period of time during which company must capitalize
Interest

Ends when asset is substantially complete and ready
For intended use

Question 24

3 conditions of capitalization period?

Answer 24

1 expenditures for assets have been made 2 activities necessary to get asset ready for intended use Are in progress 3 interest cost is being incurred

Question 25

IFRS changes made for capitalizing interest as part of IASB's convergence project?

Answer 25

IFRS now requires companies to capitalize borrowing costs | Related to qualifying assets

Question 26

Avoidable interest

Answer 26

Amount of interest cost during period company Could theoretically avoid if it hadn't made expenditures For asset

Question 27

Determining the potential amount of interest under | The avoidable interest concept: equation

Answer 27

``` Potential amount of interest = Interest rate(s) X (weighted-average accumulated expenditures) ```

Question 28

For portion of weighted avg. accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of assets use the...

Answer 28

Interest rate incurred on specific borrowings

Question 29

For the portion of weighted avg. accumulated expenditures that is greater than any debt incurred specifically to finance construction use...

Answer 29

Weighted avg. of interest rates incurred on all outstanding | Debt during period

Question 30

2 special issues related to interest capitalization?

Answer 30

1 expenditures for land 2 interest revenue

Question 31

If a company purchases land as a site for a structure (such as a plant site) interest costs capitalized during the period of construction are...

Answer 31

Part of the cost of the plant, not the land

Question 32

Purchase of land for speculation, how are interest costs treated?

Answer 32

Should not capitalize interest costs in purchasing | Land held for speculation because asset ready for intended use

Question 33

IFRS requires interest revenue earned on specific borrowings should...

Answer 33

Offset interest costs capitalized

Question 34

Should companies offset interest revenue against interest cost when determining amount of interest to capitalize as part of construction cost of assets?

Answer 34

Companies should not net or offset interest revenue | Against interest cost

Question 35

Valuation: companies should record property, plant and equipment at...

Answer 35

The fair value of what they give up | Or at fair value of asset received

Question 36

Companies account for assets purchased on long term credit contracts at...

Answer 36

Present value of consideration exchanged btw | contracting parties at date of transaction

Question 37

How does the company use the cash exchange price of the asset acquired?

Answer 37

Cash exchange price used as, | basis for recording asset and measuring interest element

Question 38

When a company purchases a group of plant assets at a single lump sum price, how does the company valuate the transaction?

Answer 38

Company allocates total cost among various assets on | Basis of their relative fair values

Question 39

When a company acquires property by issuing securities, such as common stock, what is a fair indication of cost of the property? What is not a good indication?

Answer 39

Market price of stock issued is fair indication of cost of property acquired (at current cash equivalent price) Par or stated value of stock fails to properly measure Property cost

Question 40

How do companies account for no monetary assets?

Answer 40

On basis of fair value for assets given up or assets received Companies should recognize gains and losses immediately

Question 41

An exchange has commercial substance if?

Answer 41

Future cash flows change and economic position as | result of transaction

Question 42

How is an exchange of nonmonetary assets accounted for when it lacks commercial substance?

Answer 42

Defer gains, recognize losses immediately

Question 43

Exchange has commercial substance

Answer 43

Recognize gains and losses immediately

Question 44

Exchange lacks commercial substance, cash received?

Answer 44

Recognize partial gain; recognize losses immediately

Question 45

Formula for gain recognition, some cash received?

Answer 45

Recognized gain = Total gain X (Cash received (boot) /cash received (boot) + fair value other assets Received)

Question 46

Contributions

Answer 46

Donations or gifts

Question 47

Non reciprocal transfers, examples?

Answer 47

Transfer of assets in one direction Ex. Cash, land, securities, buildings, use of facilities

Question 48

How are no reciprocal transfers accounted for?

Answer 48

Fair value of asset to establish value on books

Question 49

FASB's position on recognizing received no reciprocal transfers?

Answer 49

Recognize as revenues in period received

Question 50

Unconditional, contribution expense

Answer 50

Depends only on passage of time or demand by recipient on performance Company should record contribution expense (donation expense) immediately

Question 51

Conditional contribution expense

Answer 51

Company recognizes expense in period benefited | By contribution

Question 52

Prudent cost concept

Answer 52

If company ignorantly paid too much for asset | It's theoretically preferable to charge a loss immediately

Question 53

Costs incurred to achieve greater future benefits should be... Whereas expenditures that simply maintain a given level of service should be...

Answer 53

Capitalized Expensed

Question 54

3 conditions required to capitalize costs?

Answer 54

1 useful life of asset must be increased 2 quantity of units produced from asset must be increased 3 quality of units produced must be enhanced

Question 55

4 Major types of expenditures?

Answer 55

1 additions 2 improvements and replacements 3 rearrangement and reinstallation 4 repairs

Question 56

Expenditure: additions, define? How should they be accounted for and why?

Answer 56

Increase or extension of existing assets Companies capitalize any addition to plant assets Because new asset is created

Question 57

Expenditure: improvements and replacements

Answer 57

Substitution of an improved asset for an existing one

Question 58

Expenditure: rearrangement and reinstallation

Answer 58

Movement if assets from one location to another Benefits future periods

Question 59

Repairs

Answer 59

Expenditures that maintain assets in condition for operations

Question 60

What is the difference btw an improvement and a replacement?

Answer 60

Substitution of a better asset for the one currently used Replacement = substitution of similar asset

Question 61

Accounting for improvements and replacements 3 ways?

Answer 61

1 use substitution approach 2 capitalize new cost 3 charge to accumulated depreciation

Question 62

Improvements and replacements: substitution approach, requirement? Define?

Answer 62

Correct if carrying amount of old asset is available Remove the cost of old asset to replace with new asset

Question 63

Improvements and replacements: capitalize new cost

Answer 63

Capitalizes improvements | And keeps,carrying amount of old asset on books

Question 64

Improvements and replacements: charge to accumulated depreciation, define? How is it debited in the journal?

Answer 64

When company does not improve quantity or quality Of asset itself but extends its useful life Company debits expenditure to Accumulated Depreciation

Question 65

How are repairs accounted for?

Answer 65

Charges ordinary repairs to expense account in | period incurred on basis that it's primary period benefited

Question 66

Major repair, such as an overhaul. How should it be accounted for?

Answer 66

Cost should be handled as an addition, improvement or replacement

Question 67

Improvements and replacements: carrying value known how is it accounted for?

Answer 67

Remove cost of and accumulated depreciation on old asset Recognizing gain or loss Capitalize cost of improvement or replacement

Question 68

Improvements and replacements: carrying value unknown 2 conditions?

Answer 68

1 assets useful life is extended, debit acc. Depr. For cost of improvement/replacement 2 if quantity or quality of asset's useful life is increased Capitalize cost of improvement/replacement to asset acct.

Question 69

Rearrangement and reinstallation: if original installation cost is known?

Answer 69

Account for cost of rearrangement/reinstallation as | replacement (carrying amount known)

Question 70

Rearrangement and reinstallation: if original installation cost is unknown and rearrangement/reinstallation cost is material in amount and future benefits?

Answer 70

Capitalize as asset

Question 71

Rearrangement and reinstallation: if original installation cost is unknown and rearrangement/reinstallation cost is immaterial or future benefit is questionable?

Answer 71

Expense cost when incurred

Question 72

Involuntary conversion, define, examples?

Answer 72

Asset's service terminated involuntarily Ex. Fire, flood, theft, condemnation