F-4 DEPRECIABLE ASSETS & DEPRECIATION

Question 1

Q: Give examples of costs to be capitalized as land.

FAR 4-30

Answer 1

• Acquisition price
• Closing costs, such a as real estate broker commissions, legal fees, escrow fees, title guarantee insurance
• Any mortgages, liens, or encumbrances on the land which the buyer assumes
• Preparation costs, such as surveying costs, leveling costs, tree removal
• Cost of razing an existing building, in getting land into condition for intended use
• Improvements with indefinite life
• Less: Proceeds from sale of assets on land

Note : Excavating costs for a building and cost of improvements with a definite life are not included in land.

Question 2

Q: How is investment property defined and reported under IFRS?

Far 4-31

Answer 2

_ IFRS._

Investment Property – Land and/or buildings held to earn rental income or for capital appreciation is reported using one of two models:

Cost model
Carrying Value = Historical cost – Accumulated Depreciation.

Fair Value Model
Reported at fair value and not depreciated. Gains and losses from fair value adjustments are reported on the income statement.

Question 3

DEPRECIABLE ASSETS AND DEPRECIATION

Q: State two rules concerning capitalizing interest.

FAR 4-32

Answer 3

• Only capitalize interest on money actually spent, not on amount borrowed.
• The amount of capitalized interest is the lower of:

o Actual interest cost incurred, or

o Computed capitalized interest (avoidable interest).

Question 4

Q: For capitalizing interest, when does the capitalization period begin?

FAR 4-33

Answer 4

Begins when three conditions are met:

1. Expenditures for the asset have been made.
2. Activities that are necessary to get the asset ready for its intended use are in progress.
3. Interest cost is being incurred.

Ends when the asset is substantially complete and ready for its intended use.

Question 5

Q: Name the most common depreciation methods.

Give the basic formula for calculating each method.

FAR 4-34

Answer 5

Straight-line
(Cost – Salvage) / useful life

Sum-of-the Years’ Digits
Sum of years = n(n+1)/2
(Cost – Salvage) x (Years remaining) / (Sum of years)

Double Declining Balance
2 x Straight-line rate x net book value of asset *

* No deduction for salvage to determine the depreciable based.

*Depreciate down to salvage value.

Units of Production
(Cost – Salvage) / estimated hours x Actual hours for period.

Question 6

DEPRECIATION: IFRS vs. U.S. GAAP

Q: Explain the different approaches to depreciation under IFRS and U.S. GAAP.

FAR 4-35

Answer 6

• Under IFRS, the depreciation method used should match the expected pattern of fixed asset consumption. (Not required under U.S. GAAP.)
• Under IFRS, component depreciation is required. (Not required under U.S. GAAP.)

Question 7

Q: State the rules for computing depletion on natural resources.

Hint: Remember it is REAL property.

FAR 4-36

Answer 7

• Residual value (substract)
• Extraordinary/development cost
• Anticipated restoration cost
• Land purchase price

_Step 1: _
“Cost of land” + “Extraction development costs” + “Anticipated restoration costs” – “Residual value” divided by “Estimated recoverable units”

Step 1 simplify:

*(Cost of Land +E +A - R)/ Estimated Recoverable units.

Step 2:

Multiplied (step 1 results) by “Units extracted”

= Equals “Depletion”