Chapter 11 Flashcards
What is PPE and what are they used for?
Property, plant, equipment.
Assets used in the production of goods and services that firm sells in order to generate operation income and cash flow.
Tangible in nature.
Expected use is longer than one year or longer than one operation cycle, whichever is longer.
Used in the production and sale of other assets, for rental to others, or for administrative purposes.
What is Capitilization?
The process of recording an expenditure as an asset.
What is a capital expenditure?
A cost recorded by the company as an asset rather than an expense.
What is a capitalization policy for PPE?
Sets guidelines based on the type and/or magnitude of the cost of the asset required.
What is a non-monetary exchange?
When a company acquires an asset by exchanging antoher asset rather than paying with cash.
What is a basket purchase?
A firm acquires two or more fixed assets together for a single purchase price.
What are homogeneous assets?
They are the same.
A firm records the PPE at cost and includes it on the balance sheet, assigning equal amount to each homogeneous asset.
What are heterogeneous assets?
They are dissimilar from one another.
Relative fair value method allocates the total purchase cost to the individual assets acquired in a single transaction by assigning the total cost incurred based on the percentage that each assets fair value bears to the total fair value of all assets purchased.
What is a notes payable?
Formal credit arrangements between a creditor (lender) and a debtor (borrower) requiring the payment of a stated face amount on maturity date.
What is avoidable interest?
Interest the firm could have avoided if it had not borrowed funds to construct the plant asset.
Amount of interest capitalized is the lesser of actual interest incurred and avoidable interest.
What weighted-average expenditures?
The construction expenditures weighted by the portion of year that the expenditure is outstanding until the project is complete, or the end of the year if it is not complete.
What is the period of capitalization?
Firms capitalize interest from the time of initial expenditure to the time the asset is ready for its intended use.
If the constructed asset is complete, but idle, the firm must charge interest incurred after the completion of construction to expense.
What is the computation of capitalized interest?
Avoidable interest = the weighted average accumulated expenditures * appropriate interest rate.
The firm capitalizes the lesser of the actual interest or the avoidable interest.
What is full-cost accounting?
When the firm allocates the construction project a proportionate share of all indirect cost incurred by the company.
What is depreciation?
The systematic and rational allocation of the cost of a long-term plant asset to expense over the assets expected useful life.
