F3 - M4 - PP&E

Question 1

Fixed assets are measured at historical cost, what is included in valuing an asset on the books?

Answer 1

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

Question 2

When a fixed asset is donated to you, what is the journal entry and how is it valued?

Answer 2

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

Question 3

Land that is purchased for the purpose of building construction includes what in its valuation?

Answer 3

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.

Question 4

Are are land improvements depreciable assets?

Answer 4

Yes, and they include Fences, water systems, sidewalks, paving, landscaping, lighting.

Question 5

What do the cost of the buildings include?

Answer 5

Purchase price

Deferred maintaince (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)

Question 6

What happens when you purchase land with a building on it?

Answer 6

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.

Question 7

What is included in the acquisition or construction of equipment?

Answer 7

The invoice price minus any discounts if any

Add freight in (and insurance while in transit and while in construction)

Installation charges

Add sales and federal excise taxes

Question 8

What are additions, improvements, replacement? Are these capitalized? (AIR)

Answer 8

Additions - This increases the quantity of the fixed asset.

Improvements - This increases the quality or improves the fixed assets.

Replacement - When you substitute of a new asset for an old one.

All are capitalized.

Question 9

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.

Answer 9

You want to debit the new asset at cost, and credit cash or however you paid.

Debit a loss for the new asset and credit the net book value (cost - depr).

Question 10

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?

Answer 10

If you do not know the assets old value, debit accumulated depreciation for the cost of the improvement/replacement and credit cash.

Question 11

What are costs that will be capitalized in the construction of fixed assets?

Answer 11

Direct materials, direct labor, repairs and maintenance that is extraordinary, overhead, construction period interest (during the construction of the fixed asset).

Question 12

The excpetion, should construction period interest be capitalized during the construction of the fixed asset?

Answer 12

Yes

Question 13

How do you compute the capitalized costs?

Answer 13

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 interest you already paid, not accrued.

The amount of capitalized interest is the lower of:

interest cost inccured or computed capitalized interest

Question 14

What are the three conditions that need to be met in order for you to start capitalizing interest?

Answer 14

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, archtiect

Activites such as filing permits or things to get the asset ready have started

Interest is being incurred

Question 15

What is the difference between an ordinary delay and an intentional delay?

Answer 15

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.

Question 16

If you are leasing a building, and you purchase leasehold improvements on that lease, is this expensed or capitalized?

Answer 16

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.

Question 17

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?

Answer 17

Yes

Question 18

What is the component method when it comes to accounting for buildings that are damaged?

Answer 18

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.

Question 19

What do I need to focus on before the test?

Answer 19

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.