F3 - M4 - PP&E Flashcards
(21 cards)
Fixed assets are measured at historical cost, what is included in valuing an asset on the books?
The historical cost includes these three things:
Obtaining the asset
Transporting the asset to its intended location (freight in or shipping)
Getting the asset ready for its intended use
When a fixed asset is donated to you, what is the journal entry and how is it valued?
It is valued at the FMV, that is what the book value of the asset will be.
Debit: Asset at FMV
Credit: Gain, since no cash exchanged hands
Land that is purchased for the purpose of building construction includes what in its valuation?
When you purchase land for the purpose of building some construction, the land will be valued up until you excavate, which means dig holes in the land for purpose of building. These costs include
Purchase price
Brokers Commissions
Title, recording, legal fees
Draining swaps and clearing brush and trees
Site development (grading moutain tops, filling holes, and leveling.
Existing obigations assumed by the buyer, (mortages and back taxes)
Cost of removing an old building
Subtract: the proceeds from the sale of existing buildings and natural resources such as timber from the land.
Are are land improvements depreciable assets?
Yes, and they include Fences, water systems, sidewalks, paving, landscaping, lighting.
Interest costs during construction could be added to the land improvements.
What do the cost of the buildings include?
Purchase price
Deferred maintenance (repair charges neglected from the previous owner)
Alterations and improvements
Architect fees
Digging a hole for the foundation (building cost vs filling a hole or leveling it which would be land costs)
Construction period interest (potentially)
What happens when you purchase land with a building on it?
They will give you the appraisal for the land and the building, and you will allocate the land and the building based on the appraisal amount.
What is included in the acquisition or construction of equipment? What are some examples of equipment?
Office equipment, machinery, furniture, fixtures, and factory equipment.
The invoice price minus any discounts if any
Add freight in (and insurance while in transit and while in construction)
Installation charges (including testing and preparation for use)
Add sales and federal excise taxes
Possible addition of construction period interest
What are additions, improvements, replacement? Are these capitalized? (AIR)
Additions - This increases the quantity of the fixed asset.
Improvements - This increases the quality or improves the fixed assets. (Ex: Take an asphalt roof and replace with tile roof instead)
Replacement - When you substitute of a new asset for an old one. (This would be replacing an asphalt roof with another asphalt roof)
If it meets the AIR acronym, we capitalize it.
What is the process for replacing the old asset with a new asset? What is the entry for this? This is when you know the value of the old asset.
You want to debit the new asset at cost, and credit cash or however you paid. (Example below: Debit 15k and Credit 15k)
Debit a loss for the old asset and credit the net book value (cost - depr). (EX: Debit Loss for 6k and Credit NBV for 6K)
Cost of old asset = 10k
Accumulated depreciation = 4k
Net Book Value - 6k
Cost of new asset = 15k
What is the process for replacing the old asset with a new asset if the old asset value is unknown? What is the entry for this?
If you do not know the assets old value, debit accumulated depreciation for the cost of the improvement/replacement and credit cash.
So in the flashcard above’s example, you would debit and credit the 15k.
What are costs that will be capitalized in the construction of fixed assets?
Direct materials, direct labor, repairs and maintenance that is extraordinary (adds value, increases the life, quality, or usefulness), overhead, construction period interest (during the construction of the fixed asset).
The exception, should construction period interest be capitalized during the construction of the fixed asset?
Yes, you capitalize the interest during the construction of the fixed asset.
Normally you expense the interest when incurred, but this is the exception.
How do you compute the capitalized costs?
You need the weighted average method, which takes all the interest you paid in the year, and takes an average of them.
Important, this has to be money you actually spent, not total amount borrowed.
The maximum amount of capitalized interest is the lower of:
actual interest cost incurred or computed capitalized interest
So for example, let’s say that you have a project that will cost 1,000,000 and you borrow 500,000 from a bank for 11% and borrow the rest of the debt in other ways for a weighted average interest rate of 9%. What would be the capitalized interest rate on the project?
The two important things to note are that, you can only capitalize on expenditures for the project, and the cap on how much you can capitalize is the actual interest costs on all borrowings. So lets say you spent 600,000 in actual expenses in year 1, and actual interest borrowings were 150,000.
500,000 * .11 = 55,000
100,000 * .09 = 9,000
You would capitalize the 64,000 since it is less than the 150,000.
What are the three conditions that need to be met in order for you to start capitalizing interest?
This can only be capitalized during the construction period, and the three requirements have to be met.
Expenditures for the asset have been made - attorney, architect, etc. This shows that the start of the construction has been started.
Activities such as filing permits or things to get the asset ready have started.
Interest costs is being incurred, which means you are borrowing debt.
What is the difference between an ordinary delay and an intentional delay?
Ordinary delay - This is like waiting for inspection, and you can still capitalize the interest during this period.
Intentional dely - This is when you wait for the market to improve, so the capitalization of interest stops for this.
If you are leasing a building, and you purchase leasehold improvements on that lease, is this expensed or capitalized?
These would be capitalized, for as long as the lessee has the benefit. For example, if the lessee buys 15 year leasehold improvements, but the lease has a 20 year term, then we would depreciate over 15 years.
If the lessee buys 15 year leasehold improvements for a lease that expires in 10 years, then you depreciate over 10 years instead.
When assets are purchased requiring fixed payments extending beyond one year, should the assets be valued on the balance sheet at the present value of all future payments?
Yes
What is the component method when it comes to accounting for buildings that are damaged?
Let’s say for example, a building is damaged by a fire. If you know the carrying amount of the building that is damaged, and it is uninsured, then you can use the component method.
Basically you recognize a loss for the damaged portion of the building under the component method. If there was replacement and refurbishing to help create a new asset, then those costs must be capitalized.
What do I need to focus on before the test?
Make sure I have a good understanding of how to capitalize interest. Do the multiple choice on those, do a sim on it, and also maybe watch a video if still not making sense.
