Ch. 10 Flashcards
Cash discounts for prompt payment, how should the discount be taken?
Company should consider the discount as a reduction in the purchase price of the asset
When no interest rate is stated or if the specified rate is unreasonable
Company imputes an appropriate interest rate
When imputing an interest rate, companies consider what factors?
Brows credit rating, the amount and maturity date of the note, and prevailing interest rate
Cash exchange price of the asset acquired is used for
The basis for recording the asset and measuring the interest element
In lump sum purchases the total cost is allocated
Among the various assets on the basis of their relative fair values
No monetary assets
Is accounted on the basis of fair value of asset given up or the fair value of the asset received whichever is clearly more evident
Companies should recognize what immediately?
Gains and losses on exchange
Rationale for immediate recognition is that more transactions have
Commercial substance and gains and losses should be recognized
An exchange has commercial substance if
Future cash flows change as a result of that transaction
Two parties economic position change
For the exchange of similar assets can the economic position of company change,?
Yes
It is possible to exchange similar assets but not have a significant difference in cash flows. So if the company is in the same positions before the exag version the company recognizes?
Loss but generally defers a gain
If company receives no cash in exchange it defers
Gain
If company receives cash in such exchange it recognizes
Part of gain immediately
When the company exchanges non monetary assets and a loss results the companies recognize the loss immediately because
Companies should not value assets at more than their cash equivalent price
Should companies recognize a loss whether it has commercial substance or not?
Yes
Cost of non monetary asset acquired in exchange for another non monetary asset at the fair value of he asset given up and immediately recognizes a gain
,
When should the fair value of the asset received be used?
Only when it is clearly more evident the fair value of asset given up
Contribution is some type of asset such as cash securities land building BUT IT COULD ALSO BE
Forgiveness of debt
Accounting for contributions should be recognized as
Contributions received as revenues in the period received
Some companies promise to give pledge some type of asset in the future
If the promise is UNCONDITIONAL
UNCONDITIONAL : depends only on the passage of time or on de and by the recipient for performance, the company should report contribution expense and related payable immediately
CONDITIONAL : company recognizes the expense in the period benefited by the contribution generally when it transfers the asset
Prudent cost
This concept states that if for some reason accompany ignorantly paid too much for an asset originally it is theoretically preferable to charge a loss immediately
Costs incurred to achieve greater future benefits should be
Capitalized
Whereas expenditures that simply maintain a given level of services should be
Expensed
In Oder to capitalize cost , one of the three conditions must be present
- The useful life of asset must be increased
- Quantity of units produced from asset must be increased
- Quality of the units produced must be enhanced
Four major expenditures
Additions - increase or extension of existing assets
Improvements and replacements - substitution of an improved asset for an existing one
Rearrangement and reinstallation - movements of assets from one location to another
Repairs- expenditures that maintain assets in condition for operation
By definition companies do what to any addition to plant assets because a new asset is created
Capitalize
The problem additions have is h
Accounting for any changes related to the existing structure as a result of the addition.
Companies substitute one asset for another through
Improvements and replacements
Improvement
Is the substitution of a better asset for the one currently used
Replacement
Is the substitution of a similar asset
If the expenditure increase the future service potential of the asset a company can capitalize it using three ways
- Substitution approach
- Capitalize the new cost
- Charge to accumulated depreciation
Substitution approach is correct if what is available
Carrying amount of old asset
Capitalize new cost
Capitalizes improvement and keeps the carrying amount of old asset on the books
Charge to accumulated depreciation
If company does not improve quantity or quality of the asset itself but instead extends its useful life the company debits expenditure to accumulated depreciation
Rearrangement and reinstallation costs
If material : capitalize new costs as an asset to be amortized over future periods expected to benefit
If immaterial: cannot be separated from other operating expenses or if their future benefit is questionable, company should immediately expense
Ordinary repAIRS
Maintain assets in operating condition
Ordinary repairs are charged to
Expense account in the period incurred on the basis that it is the primary period benefited
If a major report occurs server all periods will benefit
True
For repairs , a company should handle costs as an
Addition improvement or replacement
Generally the book value of asset does not equal the disposed value of asset
True
Reasons: depreciation is an estimate of cost allocation and not a Process of valuation
Gain or loss is a correction of
Net income
Involuntary conversion
Such as fire flood theft or condemnation
If company scraps or abandons an asset without
Any cash recovery it recognize a loss to the asset book. Value
If scrap exists the gain or loss that occurs is between
Assets scrap value and its book value
If an asset can still be used even though it is fully depreciated
It may be kept on the books at historical cost less depreciation
