CH 10 Flashcards
What are major characteristics of property , plant , and equipment
a. Acquired for use in operations ( not resale)
b. They are long term and depreciate
c. Possess physical substance
What is valuation of property, plant, and equipment
a. Historical cost
What is valuation of land to acquire it to use?
a. Purch price
b. Closing costs
c. Costs incurred in getting the land in condition for useage
d. Assumption of any liens, mortgages, or encumbrances
e. Additional land improvements
If land is at resale, should company record it as inv?
a. Yes
Define Self construction asset
a. An asset that a company constructs on its own.
Define Overhead
a. Indirect costs of manufacturing creates special problems
i. E.g., power, heat, light, insurance, property taxes
How do company account for indirect cost in two ways
a. Assign no fixed overhead to the cost of the constructed asset
b. Assign a portion of all overhead to construction process
i. Also called Full costing approach
To assign and determine cost of an asset, how does a company determine its cost
a. Pro rata portion, fixed overhead
What are the three approaches of interest costs
a. Capitalize no interest charges during construction
b. Charge construction with all cost of fund employed whether identifiable or not
c. Capitalize only the actual interest cost incurred during construction
What is GAAP rules on capitalizing on actual interest
a. Historical cost of acquiring an asset includes all cost ( including interest) incurred to bring the asset to the condition and location necessary for its intended use
b. An asset SHOULD NOT generate revenues
c. ONLY deter interest costs, it should be recorded as interest exp when asset is ready to use to generate revenue
What are GAAP 3 proposals to match interest cost
a. Qualifying assets ( be ready in a period of time)
b. Capitalization period
c. Amount to capitalize
What are two not qualified as asset capitalization
a. Asset are ready for intended use
b. Assets that a company does not use in its earnings activities that are in development for use
Define Capitalization period
a. The period of time during which a company must capitalize interest
What are three conditions to qualify as Capitalization period
a. Expenditures for the asset have been made
b. Activities that are necessary to get the asset ready for its intended use are in progress
c. Interest cost is being incurred
What is Amount to Capitalize means?
a. The amount of interest to capitalize is limited to the lower of actual interest cost incurred during the period or avoided interest
Define Avoidable interest
a. The amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset
How does a company apply the avoidable interest concept
a. Weighted-average accumulated expenditures
Define Weighted-average accumulated expenditures
a. Company weights the construction expenditures by the amount of time
What are two principles of interest rates
a. Use the interest rate incurred on the specific borrowings if weighted average accumulated expenditures is less than debt incurred
b. Use a weighted average of interest rates incurred on all outstanding debt during the period if weighted average accumulated expenditures is greater than debt
What are two special issues relate to interest capitalization
a. Expenditures for land
b. Interest revenue
What is expenditures for land
Interest cost capitalized during the period of construction are part of the cost of the plant ( expect for land).
What is interest revenue
a. Companies should not net or offset interest revenue against interest cost
What are the accounting problems for property, plant, and equipment
a. Cash discounts
b. Deferred payment contracts
c. Lump sum purchases
d. Issuance of stock
e. Exchanges of nonmonetary assets
Define lump sum purchases
a. A special problem of valuing fixed assets arises when a company purchases a group of plant assets
Define Issuance of stock
a. The market price of the stock issued is a fair indication of the cost of the property acquired
b. Stock is a good measure of the current cash equivalent price
When does a company exchange of nonmonetary assets
a. From the basis of the fair value of the asset given up or the fair value of the asset received whichever is clearly more evident
b. Companies should recognize immediately any gains or losses on the exchange
What is commercial substance
a. Future cash flows change as a result of the transaction if two parties’ economic parties change
From commercial substance, when exchanges items that are different in value, is there a imminent gain?
a. No, only imminent loss
If losses were deferred, assets would be overstated
a. Yes
When accepting donations, valuation of the asset should be zero?
a. Yes
Define Prudent cost
a. A company ignorantly paid too much for an asset originally, it is theoretically preferable to change a loss immediately
Is this a true statement: cost incurred to achieve greater future benefits should be capitalized, whereas expenditures that simply maintain a given level of service should be expensed
a. Yes
What are three rules to capitalize on costs?
a. The useful life of the asset must be increased
b. The quantity of units produced from the asset must be increased
c. The quality of the units produced must be enhanced
IS capital expenditure and revenue expenditure an expense
a. Yes
What are three rules of capitalizing on improvements and replacements
a. Use carrying amount of the old asset or replaced at the new cost
b. Capitalize the new cost
c. Charge to accumulated depreciation
Should gains and loss be included in an income statement
a. Yes
Define involuntary conversation
a. Asset’s service that is terminated
