Chapter 9 - Capital Assets

Question 1

What are the 3 Valuation methods (Initial and subsequent measurement)?

Answer 1

For capital assets, the choice of valuation method is made at the start, so it applies to both initial and subsequent measurement

1. Cost model - Use price paid and depreciate that
2. Revaluation model - Optional for PPE and intangible assets with an active market
3. FV Model - Required for biological assets except bearer plants, choice for investment property

Question 2

How does the cost model work?

Answer 2

Initial and subsequent measurement:
- Cost less accumulated depreciation

Question 3

How does the revaluation model work?

Answer 3

1. Asset acquired and recorded at cost
2. Record depreciation expense until next valuation (could be yearly, every 2 years, etc)
3. 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

Question 4

How to account for basket purchases?

Answer 4

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

Question 4

How does the FV model work

Answer 4

Initial recognition:
- At cost (same as at FV becuase company is paying a FV price)

Subsequent measurement:
- At FV with gains/loss to PnL

Question 4

How are spare parts recorded?

Answer 4

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

Question 5

What is the definition of property, plant, and equipment

Answer 5

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

Question 6

How do you measure Subsequent costs for PPE (Betterment vs expense)

Answer 6

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

Question 7

How to account for Environmental or safety costs (hint: involuntary and voluntary)

Answer 7

• Involuntary costs MUST be capitalized
• Voluntary costs are capitalized only if future benefit exists

Question 8

How are DM, DL, and MOH treated when building a self-constructed asset?

Answer 8

• They are capitalized to the asset if directly attributable
• If not directly attributable, expense costs

The asset account has a fair market value cap

Question 9

How are incidental revenues and expenses from self-constructed assets treated? (Parking Lot Revenue)

Answer 9

• Any profits or losses from incidental operations need to be a SEPARATE element in earnings

Question 10

When to recognize site restoration or decommissioning costs?

Answer 10

When a contractual or constructive obligation exists

ASPE: Constructive obligations do not exist

Question 11

How to INITIALLY recognize site restoration or decommissioning costs

Answer 11

1. Measure the liability at PV
2. Credit a liability and capitalize it to the related asset account (debit asset)

Question 12

How to SUBSEQUENTLY measure site restoration or decommissioning obligations?

Answer 12

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

Question 13

What is commercial substance in context of non-monetary asset exchanges?

Answer 13

Commercial substance exists if there is a significant change in company’s cash flows (value) after the exchange

Question 14

How to record capital assets acquired in an exchange with and without commercial substance?

Answer 14

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

Question 15

WEIRD ONE:
How do you record exchange of capital assets with shares?

Answer 15

• Record at the FV of assets received
• If info not available, use FV of shares

Question 16

WEIRD ONE:
How do you record receiving a donation of capital assets?

Answer 16

• Must debit FV asset and CR contributed surplus

DR FV Asset
CR Contributed Surplus

Question 17

What are the different types of government assistances in accounting? (Hint: It is categorized into 3)

Answer 17

1. Government assistance related to PPE
2. Government grant unrelated to PPE
3. Forgivable Loan

Question 18

How do you record government assistance related to PPE? (Hint: There are 2 ways)

Answer 18

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**

Question 19

How do you record government grants NOT RELATED to PPE? (Hint: There are 2 ways)

Answer 19

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

Question 20

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

Answer 20

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

Question 21

How to record investment property both initially and subsequently?

Answer 21

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

Question 22

Criteria for intangible assets?

Answer 22

To record an intangible asset:
1. Must be separately identifiable from the business

2. Must meet asset criteria

Question 23

How to measure intangibles both initially and subsequently? (Hint: Which measurement models can be used?)

Answer 23

Can use either
1) Cost Model
2) Revaluation model

Question 24

Research vs Development - When can they be capitalized?

Answer 24

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