Chapter 9 - Capital Assets Flashcards
What are the 3 Valuation methods (Initial and subsequent measurement)?
For capital assets, the choice of valuation method is made at the start, so it applies to both initial and subsequent measurement
- Cost model - Use price paid and depreciate that
- Revaluation model - Optional for PPE and intangible assets with an active market
- FV Model - Required for biological assets except bearer plants, choice for investment property
How does the cost model work?
Initial and subsequent measurement:
- Cost less accumulated depreciation
How does the revaluation model work?
- Asset acquired and recorded at cost
- Record depreciation expense until next valuation (could be yearly, every 2 years, etc)
- Revalue asset (is tricky to know whether the gain/loss goes to OCI or PnL)
Objective: Put losses on PnL and put gains in OCI
Four possibilities to know:
a) Upward valuation while a past downward revaluation has occured:
- Recognize increase in PnL up to the amount of any previous downward revaluations
- Recognize the excess increase to OCI
b) upward revaluation while no past downward revaluation has occured:
- Record increase to OCI
c) Downward revaluation while a past upward revaluation has occured:
- Recognize decrease in OCI up to the value of any past upwards revaluations
- Recognize excess decrease in PnL
d) Downward revaluation while no previous upward revaluation has occured:
- Recognize decrease to PnL
How to account for basket purchases?
Prorate the cost for each item based on their FVs
Example: If a computer, hard drive, and flashlight were bought for $300 but the computer has a FV of $110, the hard drive has a FV of $95 and the flashlight has a FV of $110
Sum of FVs = 110 + 110 + 95 = 315
Cost of computer = (110 / 315) * 300 = 104.76
How does the FV model work
Initial recognition:
- At cost (same as at FV becuase company is paying a FV price)
Subsequent measurement:
- At FV with gains/loss to PnL
How are spare parts recorded?
If they meet the definition of property, plant, and equipment:
- Classify as PPE but the useful life would be hard to determine for depreciation
If don’t meet the definition of property, plant, and equipment:
- Classify as inventory
Definition of property, plant, and equipment:
- Expected to be used for more than one period and held for use in the production or supply of goods/services or for rental to others
What is the definition of property, plant, and equipment
Definition of property, plant, and equipment:
- Expected to be used for more than one period and held for use in the production or supply of goods/services or for rental to others
How do you measure Subsequent costs for PPE (Betterment vs expense)
Maintenance or ordinary repairs:
- Expense
- Can never be a provision
Additions (major part or betterment):
- Capitalize costs
- Any remaining book value of the part being replaced is a loss on the PnL
How to account for Environmental or safety costs (hint: involuntary and voluntary)
- Involuntary costs MUST be capitalized
- Voluntary costs are capitalized only if future benefit exists
How are DM, DL, and MOH treated when building a self-constructed asset?
- They are capitalized to the asset if directly attributable
- If not directly attributable, expense costs
The asset account has a fair market value cap
How are incidental revenues and expenses from self-constructed assets treated? (Parking Lot Revenue)
- Any profits or losses from incidental operations need to be a SEPARATE element in earnings
When to recognize site restoration or decommissioning costs?
When a contractual or constructive obligation exists
ASPE: Constructive obligations do not exist
How to INITIALLY recognize site restoration or decommissioning costs
- Measure the liability at PV
- Credit a liability and capitalize it to the related asset account (debit asset)
How to SUBSEQUENTLY measure site restoration or decommissioning obligations?
Each period:
1. Depreciate the capitalized portion to income on same basis as the asset
2. Interest expense is recorded while increasing the liability account
- The asset account does not get written up by interest expense
What is commercial substance in context of non-monetary asset exchanges?
Commercial substance exists if there is a significant change in company’s cash flows (value) after the exchange
How to record capital assets acquired in an exchange with and without commercial substance?
With commercial substance:
- Use FV of asset given up as book value of the asset acquired
- If FV of asset received is more reliable, use that
Example: If exchanging a crane with a FV of 47K for a truck with no clear FV and no cash is received. The book value of the crane is 30K. A 17K gain will need to be recognized and the journal entries will be as follows:
DR Truck 47,000
CR Crane 30,000
CR Gain. 17,000
Without commercial substance:
- Use Book value of asset given up
Example: If Regina exchanges a crane with a book value of 30K for a new crane with a FV of 33K.
DR New crane 30K
CR Old crane. 30K
If there is a cash payment, it decreases the carrying value of the asset received because you are also receiving cash as part of the assets received in the exchange.
So if with the no commercial substance example it changed to this:
Regina exchanges a crane with a book value of 30K for a new crane with a FV of 33K. Regina also receives 12K cash in the exchange
DR New Crane 18K
DR Cash. 12K
CR Old Crane. 30K
WEIRD ONE:
How do you record exchange of capital assets with shares?
- Record at the FV of assets received
- If info not available, use FV of shares
WEIRD ONE:
How do you record receiving a donation of capital assets?
- Must debit FV asset and CR contributed surplus
DR FV Asset
CR Contributed Surplus
What are the different types of government assistances in accounting? (Hint: It is categorized into 3)
- Government assistance related to PPE
- Government grant unrelated to PPE
- Forgivable Loan
How do you record government assistance related to PPE? (Hint: There are 2 ways)
Option 1: Deduct from related asset account with amortization on that net amount
Option 2: Record a separate “deferred liability” and amortize to income over the same period as the related asset
Example: Government gave a grant of $1M to help construction building costing $5M. Estimated useful life of the building is 20 yrs.
Option1: Deduct from related asset :
Initial:
DR Cash 1M
CR Building. 1M
Subsequent:
DR Depr Exp. 200K
CR Accum Depr. 200K
Option 2 - Deferred Liability:
DR Cash. 1M
CR Liability. 1M
DR Liability. 50K
CR Depr Exp. 50K
*Would also depreciate the building as normal**
How do you record government grants NOT RELATED to PPE? (Hint: There are 2 ways)
Option 1: Deduct from associated costs
Option 2: Put it as other income
Example: Government gave a grant of $1M to help subsidize research costs for this year
Option 1- Deduct from related expense:
DR Cash. 1M
CR Research exp. 1M
Option 2 - Other Income:
DR Cash. 1M
CR Other Income. 1M
How to record a forgivable loan? Both at inception and subsequently ; and for when the loan criteria is expected to be satisfied and when it is uncertain
If loan criteria is likely to be met, treat it as a government grant would and either
1) Record as other Income
2) Deduct from related expense
If loan criteria is uncertain to be met:
- Record a forgivable loan liability at inception
Subsequently, if loan criteria IS being complied with:
- Amortize the loan to income on a straight-line basis of the loan duration terms
DR Forgivable Loan
CR Other Income
Subsequently, if loan criteria IS breached:
- It has to be paid back to the government
DR Forgivable Loan
CR Cash
How to record investment property both initially and subsequently?
Initially:
At the price paid because it is assumed to be at FV
Subsequently:
- Can use either the cost model or the FV model
1) Cost model - Depreciate initial cost as normally
2) FV Model :
- Gain or loss recognized in net income
- No depreciation
- No impairment testing
Criteria for intangible assets?
To record an intangible asset:
1. Must be separately identifiable from the business
- Must meet asset criteria
How to measure intangibles both initially and subsequently? (Hint: Which measurement models can be used?)
Can use either
1) Cost Model
2) Revaluation model
Research vs Development - When can they be capitalized?
Research expenses - Always expensed
Development costs could be capitalized if they meet the TRIFUM criteria:
T - Technically Feasible
R - resources to complete are held
I - Intent to complete
F - Future Economic Benefit
U - Use or sell is the expected outcome
M - Measurable costs needed to complete
