Chapter 10- Acquisition and Disposition Of Property, Plant, and Equipment

Question 1

How do you find weighted-average accumulated expenditures?

Answer 1

Expenditures X Capitalization Period

Question 2

What 3 items to consider when capitalizing actual cost incurred during construction?

Answer 2

1. Qualify assets
2. Capitalization Period
3. Amount to Capitalize

Question 3

How to calculate avoidable interest?

Answer 3

Interest rate(s) X Weighted-Average accumulated Expenditures

Question 4

What interest rate do you use if weighted-average accumulated expenditures is less than or equal to any amounts borrowed specifically to finance construction of assets??

Answer 4

Use the interest rate incurred on the specific borrowings

Question 5

What interest rate do you use if weighted-average accumulated expenditures is greater than any debt incurred specifically to finance construction of the assets??

Answer 5

Use a weighted average of interest rates incurred on all other outstanding debt during the period

Question 6

How do you find weighted-average interest rate?

Answer 6

Total Interest / Total Principal

Question 7

What two issues related to interest capitalization merit special attention?

Answer 7

1. Expenditures for land

2. Interest Revenue

Question 8

How should companies record property, plant, and equipment?

Answer 8

At the fair value of what they give up or at the fair value of the asset received, whichever is more clearly evident

Question 9

To properly reflect cost, companies…

Answer 9

Account for assets purchased on long-term credit contracts at the present value of the consideration exchanged between the contracting parties at the date of the transaction

Question 10

What does the company use the cash exchange price of the asset acquired (if determinable)

Answer 10

As the basis for recording the asset and measuring the interest element

Question 11

How do you find the present value of notes payable?

Answer 11

1. Subtract discount from note
2. Take the difference and multiply it by market rate
3. Record product as a debit under interest expense and credit it as discount on notes payable
4. Use effective interest approach to get second year of interest

Question 12

What is the effective interest approach?

Answer 12

(Note payable - Discount on Note payable) X Market rate

Question 13

How to calculate loss or gain?

Answer 13

Fair value- Book value

Question 14

To capitalize cost one of the following three conditions must be present( Name them)

Answer 14

1. Useful life must be increased
2. Quantity of units produced must be increased
3. Quality of units produced must be enhanced