F3-M4-PP&E: Cost Basis

Question 1

Give some examples of capitalizable costs for:

• Acquisition of equipment
• Acquisition of building

Answer 1

Acquistion of Equipment:
Purchase price, freight-in, installation, testing, taxes, less any cash discounts allowed*

Acquisition of Building:
Purchase price, deferred maintenance, alterations, improvements, architect’s fees*

*If equipment or building is constructed by company, capitalized cost could include construction period interest.

Question 2

Describe the proper accounting for ordinary versus extraordinary repairs

Answer 2

Ordinary repairs are expensed as repair and maintenance. They do not increase the life or utility of the asset.

Extraordinary repairs either increase the life or utility of the asset. If the extraordinary repair increases the life of the asset, it is recorded by reducing accumulated depreciation. If the extraordinary repair increases the utility of the asset, it is capitalized to the fixed asset account.

Question 3

Give example of costs to be capitalized as land.

Answer 3

1. Acquisition price
2. Closing costs, such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance
3. Any mortgages, liens, or encumbrances on the land which the buyer assumes
4. Preparation costs, such as surveying costs, leveling costs, tree removal
5. Cost of razing an existing building, in getting land into condition for intended use
6. 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 4

State two rules concerning capitalizing interest

Answer 4

1. Only capitalize interest on money actually spent, not on amount borrowed.
2. The amount of capitalized interest is the lower of:
   a. Actual interest cost incurred; or
   b. Computed capitalized interest (avoidable interest)

Question 5

For capitalizing interest, when does the capitalization period begin?

Answer 5

It 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 6

How is fixed-asset carrying value computed under US GAAP

Answer 6

Carrying value = Historical cost - Accumulated depreciation - impairment