FAR-F3-M4&M5 - Cost Basis and Depreciation and Disposal Flashcards
Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should be valued at PRESENT VALUE of all future payments, computed using the market rate of interest. Should we use the present value of an ordinary annuity factor or the present value of $1 factor?
We use the present value of an ordinary annuity factor to calculate the present value of assets purchased. The same approach for whenever assets are sold for a non-interest bearing note as a payment received and fixed payments are received thereafter. In both cases, we need to use the present value of an ordinary annuity factor for the same interest rate and the same amount of years as the problem indicates.
Can interest be capitalized for land?
Interest should only be capitalized in connection with a DISCRETE MANUFACTURING ACTIVITY. Otherwise interest incurred to acquire land should be expensed when incurred.
How should land and buildings that are purchased together be accounted for?
If land and building are purchased “in a basket”, then allocate the purchase price based on the ratio of appraised value of the individual properties.
What kind of expenditures can be capitalized as equipment?
Costs include all expenditures related directly to the acquisition or construction of the equipment. Costs include all costs necessary to get the asset to its proper place, at the intended time and in condition for its intended use.
How are additions, improvements and repairs to fixed assets accounted for?
Additions are capitalized to the fixed asset account. Improvements are likewise capitalized to the fixed asset account. Repairs are capitalized to the fixed asset account if they increase the asset’s life or they increase the usefulness of the asset. If carrying value of the old asset is not known and the asset’s life is extended, then
Dr. Accumulated depreciation and Cr. Cash/AP for the cost of the repair.
When and how are interest costs capitalized?
Interest can only be capitalized when it is directly associated with a DISCRETE MANUFACTURING ACTIVITY. Construction period interest should be capitalized based on the weighted average of accumulated expenditures as part of the cost of producing fixed assets. And the interest rate to apply to the weighted average accumulated expenditures is the interest rate paid on borrowings specifically for asset construction FIRST. If the weighted average accumulated expenditures exceed the amount borrowed, then apply the interest rate for other borrowings to the excess amount. This calculated amount is considered avoidable interest. Compare the avoidable interest amount with the actual interest incurred and the lower of the 2 is considered your capitalized interest.
How do you test for impairment of PPE?
UNDISCOUNTED future net cash flows
LESS net carrying value
EQUALS negative amount, then Impairment has occurred.
Fair Value or PV of future net cash flows
LESS Carrying value
EQUALS impairment loss.
In other words, if the sum of the undiscounted future cash flows is LESS than the carrying amount, an impairment loss needs to be recognized. And the impairment loss is calculated as the amount by which the carrying amount exceeds the fair value of the asset or the DISCOUNTED cash flows.
If a fixed asset that previously impaired, experiences an increase in their NRV (fair value less costs to sell) that exceeds their current carrying value, can the carrying value of the fixed be increased?
Yes, a gain can be recorded but only to the extent of losses previously recorded on write downs. This is allowed ONLY for fixed assets HELD FOR SALE. It does not apply to assets held for use.
How is straight line depreciation calculated?
Straight line depreciation = (Cost - salvage value) / years of useful life
How is double declining deprecation calculated?
Double declining deprecation = 2 (1/N) * (Cost - accumulated depreciation), where N = the number of years of useful life.
How is the sum of the years digits depreciation calculated?
Sum of the years depreciation = (cost - salvage value) * (remaining life of assets / sum of the years)
What is composite depreciation and how is it calculated?
Composite depreciation is the process of averaging the economic lives of a number of property units and depreciating the entire class of assets over a single life. The formula is
total estimated cost - total salvage value = total depreciable cost.
Total annual depreciation = sum of individual annual depreciation.
Total depreciable cost / total annual depreciation = composite life. See FAR F3-M5-MCQ-05117
What is depletion and how is it calculated?
Natural resources are not depreciated. They are depleted. The formula for depletion:
total depletion = unit depletion rate * (# of units sold)
Unit depletion rate = depletion base / estimated # of units that can be extracted
Depletion base = cost to purchase property * development costs to prepare the land for extraction + any estimated restoration costs - residual value of land after resources are extracted
Are exploration costs for natural resources capitalized?
Exploration costs are only capitalized for successful expeditions. If not successful, then the exploration costs are expensed.
Is land and land improvements capitalized depreciated?
Land is the only asset that is not depreciated. Land improvements have a finite life so they are depreciable