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FAR - CPA > FAR CPA Lessons 89-103 > Flashcards

FAR CPA Lessons 89-103 Flashcards

1
Q

What are the requirements to be included in plant assets?

A
  1. Be currently used in operations;
  2. Have a useful life extending more than one year beyond the balance sheet date; and
  3. Have physical substance. Intangible assets are different from plant assets in that they have no physical substance.
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2
Q

What are plant equipment assets?

A

buildings, machinery, and equipment. These assets have a finite useful life and can also be referred to as depreciable assets.

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3
Q

What are land improvement assets?

A

it has a finite useful life and is depreciated.

parking lots, fencing, external lighting, and some landscaping.

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4
Q

What are land assets?

A

the site of a manufacturing facility, the site of administrative offices, and the site of any storage warehouses. Any plot of land in which a company has constructed facilities specifically related to primary business operations is included

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5
Q

What are natural resources assets?

A

This category of assets will produce income until all the natural resources are extracted and sold. These assets are frequently referred to as depletable assets

gravel pit, a coal mine, a tract of timber land, and an oil well

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6
Q

What costs are capitalized upon acquisition of plant assets?

A

the cash equivalent price or negotiated acquisition cost and all costs incurred to get the asset on the company’s premises and ready for use

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7
Q

What costs are capitalized during the life of plant assets?

A

The expense must be material in amount and the estimated to be capitalized and then depreciated, an expenditure must make the asset “bigger, better, or last longer.”

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8
Q

What amount does the cost principle require that assets be recorded at?

A

Historical Cost - All costs incident to the acquisition of the asset

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9
Q

What are the four components included in determining what costs to capitalize for a self-construction asset?

A
  1. Labor
  2. Material
  3. Overhead
  4. Interest cost incurred during the construction project
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10
Q

What are the two approached for capitalizing overhead charges in construction?

A
  1. Incremental overhead approach

2. Pro rata overhead allocation approach

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11
Q

What is the incremental overhead approach?

A

capitalize only the incremental overhead. For example, if a company typically has $5,000,000 of overhead, but during the period of construction, overhead increased to $5,500,000, the incremental overhead related to the project is $500,000.

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12
Q

What is the pro rata overhead allocation approach?

A

capitalize the overhead on a pro rata basis. For example, if the project represents 15% of the total direct labor hours for the period, 15% of the total overhead will be allocated to the project.

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13
Q

When is capitalized interest allowed?

A

when a company constructs a fixed asset interest can be capitalized only during the construction

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14
Q

Why is interest allowed to be capitalized during construction?

A

The justification for interest capitalization is that had the construction not taken place, the funds used in construction could have been used to reduce interest-bearing debt. - This exemplifies the matching principle because the interest expense to deferred until it can be matched against revenues when the asset is creating revenue

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15
Q

What are the three conditions required to be met to

A
  1. Qualifying expenditures have been made. Cash payment, transfers of assets or interest-bearing debt
  2. Activities that are necessary to get the asset ready for its intended use are in progress.
  3. Interest cost is being incurred.
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16
Q

What are the two steps involved in computing capitalized interest?

A
  1. Compute average accumulated expenditures

2. Apply the appropriate interest rates

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17
Q

What is avoidable interest?

A

The interest on debt that could have been retired had the construction not taken place

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18
Q

How do you computer Average Accumulated Expenditures (AAE)?

A

Average cash (Or other qualifying expenditures) investment in the project during the period

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19
Q

What are the two ways of computing total interest to be capitalized?

A
  1. Weighted Average Method

2. Specific Method

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20
Q

What is the weighted average method?

A

Capitalizes interest using the weighted average rate on all interest bearing debt

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21
Q

What is the specific method?

A

Capitalizes interest on specific construction loans first. Then, if needed, capitalizes interest on all other debt based on the average interest rate for that debt.

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22
Q

When AAE < total interest-bearing debt

A

Reported interest expense for the period is the difference between total interest cost and the amount of interest capitalized. In this case, because AAE is less than total debt, not all debt could have been avoided.

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23
Q

When AAE > total interest-bearing debt

A

All interest cost is capitalized and there is no reported interest expense for the period. In this case, all debt could have been avoided had construction activities not taken place.

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24
Q

When can you capitalize a post-acquisition cost?

A

If the expenditure makes the asset:

  1. More productive (provides more benefit)
  2. Has a longer life
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25
Q

When can you capitalize additions (extension or enlargement) of an asset?

A

If an integral part of the larger asset, depreciate the addition over the shorter of its useful life or the remaining useful life of the larger asset.

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26
Q

What is a revenue expenditure?

A

normal, recurring expenditures such as normal repairs and maintenance.

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27
Q

Define Betterment

A

(improvement) is the replacement of a major part or component of an existing asset with a significantly better or improved part or component.

28
Q

What are the two justifications for depreciation?

A
  1. Assets wear out over time

2. Assets become obsolete

29
Q

Define Book value

A

Original cost less accumulated depreciation to date

30
Q

Define Depreciable Cost

A

Total depreciation to be recognized over the life of the asset. This amount equals original cost less salvage value.

31
Q

Define Minimum Book Value

A

Salvage value. In no case is salvage value depreciated.

32
Q

What are the three kinds of noncurrent assets subject to depreciation?

A
  1. Plant Assets (depreciated)
  2. Natural assets (depleted)
  3. Intangible assets (amortized)
33
Q

What are the four factors used in determining the amount of depreciation recognized?

A
  1. Capitalized Costs
  2. Estimated useful life
  3. Estimated Salvage value
  4. Depreciation method chosen
34
Q

How do you calculated straight line depreciation?

A

(Cost − Salvage Value) / Useful Life = Annual Depreciation

Example: Land

35
Q

How do you calculated service hour depreciation method?

A

Depreciation Rate = (Cost − Salvage Value) / (Useful Life in Service Hours)

Depreciation for the year is calculated by multiplying the service hours by the depreciation rate

Example: Delivery Vehicle

36
Q

How do you calculated units of output depreciation method?

A

Depreciation Rate = (Cost − Salvage Value) / (Useful Life in Units of Production)

Depreciation for the year is calculated by multiplying the Units of Production by the depreciation rate

Example: Oil drilling equipment

37
Q

How do you calculate the sum-of-the-years’ digits depreciation?

A

SYD =(N(N+1))/2 = 1 + 2 + … + N
(N= Useful Life in years)
SYD is the denominator of the fraction used each year to compute depreciation. The numerator is the number of years remaining at the beginning of the year.

Year 1 Depreciation: (N/SYD)(Cost − Salvage Value)
Year 2 Depreciation: ((N-1)/SYD)(Cost − Salvage Value))

38
Q

How do you calculate the double declining method of depreciation?

A

= (Cost - Accumulated depreciation)*(2/N)
N = Useful life in years

-Salvage value is not deducted in the calculation, however you cannot depreciate past the salvage value. In the year you would go below switch to straight line deprecation

39
Q

How do you calculate partial or fraction year depreciation

A 
Using the chosen method multiply the whole years worth of depreciation by the number of month in the calendar year. Example:
Purchased on 7/1/2019
Year 1 is 7/1/2019-6/30/2020
Year 1 = Y1D(6/12)
Year 2 = Y1D(6/12)+Y2D(6/12)
40
Q

How do you calculate depreciation using the Inventory appraisal method?

A

At the end of each year, the assets are appraised and recorded at market value. The appraisal is for the entire group, which saves accounting costs. The decline in market value from the previous year is depreciation expense for the year.

41
Q

How do you calculate depreciation using the group/composite method?

A

This system applies the straight-line method to groups of assets rather than to assets individually.

The composite depreciation rate = (Annual group SL depreciation) / (Total original cost of group)

42
Q

What costs can be capitalized for a natural resource?

A

Acquisition costs
Exploration costs
Development costs

43
Q

What is included in acquisition costs for natural resources?

A

The amount paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources.

44
Q

What is included in Exploration costs for natural resources?

A

The amount paid to drill or excavate or any other costs of searching for natural resources.

45
Q

What is included in Development costs for natural resources?

A

The amount paid after the resource has been discovered but before production begins.

46
Q

What are the Methods of Accounting for Exploration Costs?

A
  • Successful-efforts method - Costs are only capitalized is related to a successful exploration
  • Full-costing method - All costs of exploration are capitalized
47
Q

What are Extraction Costs?

A

Depreciation on removable assets, wages, and material costs pertaining to the extraction effort; these costs are debited to the inventory of resource, not to the natural resources account.

48
Q

What are Production Costs?

A

Additional processing costs after extraction; this cost also is debited to the inventory of resource, not to the natural resources account.

49
Q

What are the three categories that assets subject to impairments fall into?

A
  1. Assets in use
  2. Assets held for disposal (sale)
  3. Assets to be disposed of other than by sale (by spin-off to shareholders, by exchange for other assets, or by abandonment)
50
Q

Conditions that indicate and impairment test needs to be run

A
  1. Significant decrease in the fair value of the asset
  2. Significant change in the way asset is used or physical change in asset
  3. An unfavorable change in laws, regulations, or the business climate that would adversely affect the use of the asset
  4. Significantly higher than expected costs involved with the construction or acquisition of an asset
  5. There have been or projected to be negative operating or cash flow (losses) from the asset.
  6. The entity decides to sell the asset before the end of its expected life.
51
Q

How do you calculate the impairment loss for a “in use” asset?

A

Impairment Loss = Carrying value - Fair Value

- Depreciate new basis
- No reversal of loss
52
Q

How do you calculate the impairment loss for a “For sale” asset?

A

Impairment Loss = Carrying value - Fair Value less cost to sell

- No Depreciation
- Reversal of loss permitted
53
Q

What is the impairment test to determine if a loss should be recognized?

A
  • If book value (BV) > RC, then the asset is impaired because book value will not be recovered
  • If BV ≤ RC, then the asset is not impaired and no impairment loss is recognized
Book Value (BV)
Recoverable Cost (RC)
54
Q

What are the six criteria that must be met for determining when an asset is considered held for sale?

A
  1. Management commits to a plan to sell the asset or group of assets.
  2. The asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for such sales. This criterion does not preclude a firm from using the asset while it is held for sale nor does it require a binding agreement for future sale.
  3. An active program to locate a buyer has been initiated.
  4. The sale is expected to take place within one year. In limited cases, the one-year rule is waived for circumstances beyond the firm’s control (e.g., due to a new regulation or law, environmental remediation, or deteriorating market).
  5. The asset is being actively marketed for sale at a price that is reasonable in relation to its current value.
  6. Sale of the asset must be probable.
55
Q

What is the recoverable amount of an impaired asset under IFRS?

A

The recoverable amount is the higher of:

  1. The asset’s fair value less cost of disposal (the price that one would receive to sell an asset in an orderly transaction with a market participant); or
  2. The asset’s value in use (which represents the entity-specific pretax cash flows discounted to present value).
56
Q

What are the major differences between GAAP and IFRS for impairment losses?

A
  • Under IFRS impairment testing is a one step process while under GAAP it is a two step process
  • Under IFRS the recoverable amount is the higher of fair value less cost to sell or value in use while for GAAP it is FV
  • Under IFRS discounting is required to determine if an impairment exists and under GAAP it is not used
  • Under IFRS an impairment loss can be reversed but under GAAP it cannot.
57
Q

What are the significant differences in the accounting for PPE under IFRS than according to U.S. GAAP

A
  • Under IFRS the useful life and depreciation method is review annually - under GAAP only when events or circumstances change
  • Under IFRS Component depreciation required in some cases - GAAP not required
  • Under IFRS PPE can be revalued to FV and under GAAP it cannot
  • Under IFRS interest earned on construction funds can offset the interest cost and under GAAP it cannot
58
Q

What is an example of component depreciation?

A

a building can be broken down into components: roofing, electrical system, plumbing system, structural, etc. Component depreciation is based on the premise that each component of the asset has its own useful life and fair value.

59
Q

What is the proportional method?

A

accumulated depreciation is restated proportionately so the asset’s carrying value after revaluation equals the revalued amount.

60
Q

What is the reset method?

A

accumulated depreciation is “reset“ to zero by closing it to the building account, and then the building is adjusted for the revaluation.

61
Q

Define a nonmonetary asset

A

Such an asset does not have a fixed nominal or stated value, as is the case with cash, accounts receivable, and other monetary assets.

62
Q

Define commercial substance

A

the cash flows of the firm are not expected to change significantly as a result of the exchange, which means:

- The cash flows from the acquired asset will not be significantly different from those of the asset exchanged in terms of amount, timing, or risk; or
- The use value of the acquired asset is not significantly different from that of the asset exchanged, in relation to the fair value of the assets exchanged.
63
Q

What are the three exceptions when fair value plus gains or losses does not have to b used when exchanging nonmonetary assets?

A

Book value is used the below circumstances and no gain or loss is recognized.

  1. The fair value of neither asset can be determined.
  2. The exchange is made solely to facilitate sales to customers (e.g., inventory is exchanged for other inventory in the same line of business to enable one of the firms to make a sale to an outside party).
  3. The exchange lacks commercial substance
64
Q

List two characteristics that indicate an exchange has commercial substance

A
  1. The amount of cash paid or received on exchange is significant in relation to the fair value of the assets exchanged;
  2. The functions of the assets exchanged are different. For example, exchanging land for equipment would imply at the very least a different timing and duration of cash flows.
65
Q

For nonmonetary exchanges, the configuration of cash flows includes

A

For purposes of nonmonetary exchanges, the configuration of cash flows includes

66
Q

When can a gain or less be recognized if an exchange of nonmonetary assets lacks commercial substance?

A
  1. When a loss is evident, it is recognized in full and the acquired asset is recorded at market value
  2. When a gain is evident and cash is received, the gain is recognized in proportion of the amount of cash received and the acquired asset is recognized at market value less the portion of the gain unrecognized
    If the proportion represented by cash is 25% or more, then the entire gain is recognized,
67
Q

Identify the major differences in the accounting for nonmonetary exchanges under IFRS versus U.S. GAAP.

A
  • Under IFRS, advertising revenue is determined by reference to a nonbarter transaction. U.S. GAAP permits measurement of the revenue by using the fair value of the advertising services given or received.
  • Under IFRS an asset transferred to the entity by the government are recognized as a government grant. Under GAAP it is not specifically addressed.
  • IFRS does not specifically address the accounting when an asset or other resource is donated. U.S. GAAP requires that the fair value of the donated asset or service be recognized as an expense and a gain (or loss) is recognized on the revaluation of the donated item.

FAR - CPA (15 decks)

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