Chapter 9 Flashcards
What are the requirements for PP&E
- used in operation and not for resale
- long term in nature and usually depreciated
- possess physical substance
What does historical cost consist of
1.) The acquisition price plus sales tax
2.) Cost incurred bringing the asset to its location, such as freight/shipping costs
3.) Cost to get asset ready for its intended use
Why is historical cost used for PPE cost
- It is reliable
- companies should not anticipate gains/losses until asset is sold
What do companies consider to capitalize interest
1.) Qualifying assets
2.) Capitalization Period
3.) Amount to capitalize
What is capitalized interest
Interest on the construction loan to make asset possible
When does Interest Capitalization period begin
1.) When expenditures for the asset have be made
2.) Readying the asset is in progess
3.) Interest costs are being incurred
When does the interest capitalization period end
When you asset is ready for it’s intended use
What is book value/carrying value
Cost - Accumulated Depreciation
What is avoidable interest
The interest you capitalize
What is WAAE
Weighted Average Accumulated Expenditures
How do you calculate WAAE
Expenditure amount X the captialization period
Ex if it started in july you would take expenditure multiplied by 6/12
How do you calculate the avoidable interest
1.) Take WAAE less than/equal to the specific loan and multiple it by the rate
2.) Amount that is greater than specific loan is multiplited by average general loan rate
How do you calculate General loan rate
Take amount of loan X months to find weighted principal and then you multiply by the rate
To find interest rate you take total interest divided by total weighted principal
If a company purchases land as a site for a structure how does it affect interest cost capitalized
You would add in the land to the plant when calculating interest
When a asset exchange has commercial substance how should a company report it
Recognize any gains or losses immediately
What does it mean if a transaction has commercial substance
The future cash flows change as a result of the transaction
The two parties economic position changes!!
What amount of percentage does cash have to be for the entire gain to be recognized even if it lacks commercial substance
25%
How do you figure out Fair Value of asset you are receiving if it is not given in the problem
What you owe the company + FV of machine your giving up
How do you calculate the loss/gain of the transaction
Fair value of used machine - the book value of the used machine
What do you do when the exchange lacks commercial substance but there is cash received
you record losses/partial gain
How do you calc the gain that is recorded
(Cash or Boot /(Cash +Fair Value)) X Gain
What do you record when a transaction lacks commercial substance and not cash is received
only record losses
How do you record the gain deffered
Instead of writing it as a gain you just remove the amount of the gain from the Fair value of asset you are receiving
What are the three conditions in order to capitalize a cost incurred
1.) Useful life must be increased
2.) Quantity of units produced must be increased
3.) Quality of units produced must be improved
What are the 4 major types of expenditures
1.) Additions
2.) Improvements or replacements
3.) Rearrangements and Reinstallation
4.) Repairs
What is typically included in land costs
1.) Acquisition
2.) Closing Costs
3.) cost incurred getting land ready (grading, filling clearing)
4.) assumptions of any liens, mortgages
- Salvage is reduced
What is typically included in cost of equipment
-Acquisition
-Sales tax
-Insurance during transit paid by purchaser
-Assembling, installing and testing equipment
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