FAR - Financial Statement Acct - Property, Plant, Equipment Flashcards
Plant/Fixed assets
Property, Plant, Equipment
PPE Main issues
1) used in operations
2) useful life > 1 year
3) physical substance
*if held for investment -> excluded -> not productive asset
assets used to produce revenues and depreciated
1) What costs to capitalize?
2) How to allocate that cost?
3) How to measure impaired value?
4) Determine value in nonmonetary exchange transaction?
5) Determine asset retirement obligation
Categories of Plant Assets
Plant/Equip: buildings, machinery, equip - finite useful life, depreciable assets
Land: any plot of land related to primary business operations, only asset that isn’t depreciated
Land improvements: parking lot, fencing, external lighting, and landscaping. Finite useful life/depreciated.
Natural Resources: gravel pit, coal mine, tract of timber land, oil well. Produce income until resources are extracted/sold, known as depletable assets.
required footnote disclosure on property, plant, and equipment?
Treatment for a an old company building for sale..
useful life, depreciation methods, and the accumulated depreciation of plant asset.
- reclassified as an asset held for sale
- current asset
- no longer depreciated
- reported @ NRV
Capitalized Costs - 2 components
Capitalization definition
Expense definition in respect to capitalization
1) cash/negotiation price
2) get ready costs - costs incurred to get asset ready for intended use and location
EX: sales tax, cost to setup/test equip, title fees, attorney
fees, construction costs, demolition costs, additions, improvements, replacement, rearrangements,
expense is capitalized in an asset account if est. time of benefit is related to current/future acct periods
est. time of benefit is in the current period only OR expenditure is immaterial -> recorded as expense/period cost
EX: training, repair, maintenance, annual property tax, interest on purchase
components of capitalized costs of self-constructed assets.
considerations that must be given when electing to expense or capitalize an item.
limitation of recorded value of self-constructed assets
general rule for capitalizing expenditures?
Labor, material, overhead, interest cost
estimated time benefit and materiality
Market value at completion
Capitalize all expenditures necessary to bring the plant asset to its intended condition and location.
true/false
required to pay unpaid property taxes that were accrued on the land. These taxes should be expensed on purchase.
Reduce capitalization expenditure from any proceeds received
Other capitalized costs objective
False - unpaid taxes = material
True
1) extend useful life
2) increase productivity/efficiency
Valuation of plant asset
cash purchase
deferred payment plan (credit purchase)
1) @ mkt value of consideration given in exchange
OR
2) @ mkt value (cash equivalent price) of asset acquired
cash equiv price paid for asset
deferred payment plan = PV of future cash payment using market rate of interest
DR. Asset
Cr. Cash
Cr. Payable
issuance of securities
Donated Assets
group purchase
FMV of security OR FMV of asset acquired, whichever is clearly determinable
asset given, no compensation rec’d, non-reciprocal transfer, contribution expense = FMV of asset donated, remove BV of asset donated, recognize gain/loss in difference between BV/FMV of asset donated, if FMV not determinable, use BV
group of fixed assets acquired in single transaction, total negotiated price allocated to individual assets acquired, allocation is based on respective FMMVs of individual assets acquired
self constructed assets - 4 components
1) labor
2) DM
3) OH
4) interest cost incurred during construction period
1) labor, 2) material, 3) OH, 4) interest cost incurred during construction
construction related direct labor charges
construction related direct materials
a) incremental OH - capitalize only incremental OH, increase over total OH amount
b) pro rata OH allocation - capitalize OH on a pro rata basis, percentage used
capitalize interest only when assets are constructed, interest on debt incurred to purchase cannot be capitalized
Limitation on recorded value
if total cost of construction exceeds MKT value, loss is recognized for difference, asset is recorded at MKT value
self constructed asset cannot be recorded in excess of MKT value at time of completion, forwards losses
true
true/false
The cost of a self-constructed asset generally will equal its fair value.
false
qualifying assets
interest capitalization formula
avoidable interest
conditions for capitalized interest
assets for enterprise’s own use, sale, or lease (discrete projects). significant time period, discrete projects, NOT inventory and NOT routinely produced
average accumulated expenditures X interest rate
interest would have been avoided if construction didn’t take place
1) qualifying expenditures made
2) construction activities proceeding
3) interest cost incurred
When are unpaid construction input costs included in Average Accumulated Expenditures (AAE)?
interest rates should be used to determine capitalized interest?
not until cash is paid
1) weighted average method on all interest bearing debt
2) specific method - construction loans first, then other debt
how much is capitalized interest incurred?
To find AAE - 2 methods
amount capitalized is lesser of actual interest paid on note OR avoidable interest
1) weighted average of ALL expenditures
2) simple average, equal payments made all year, average of beginning/ending balance
true/false
Average accumulated expenditures is a measure of the amount of debt that could have been retired had construction activities not taken place during the period
when interest is capitalized, future depreciation expense increases
Capitalized interest is limited to actual interest cost incurred.
interest capitalized increases assets/income
amount capitalized cannot exceed total interest incurred
true
true
true
true - reverse interest expense -> higher net income
AAE > interest bearing debt
AAE
all interest costs will be capitalized/no interest expense
interest expense based on difference between interest capitalized and interest costs
true/false
capitalized interest limited to actual interest incurred bc you cannot capitalize more interest than paid for
actual interest = ceiling for amount of interest to be capitalized
true
true
total interest/total principal = percentage
actual interest + percentage ^ (AAE - construction related loan) = interest capitalized
Interest is capitalized only up to AAE
total interest/total principal = percentage
percentage X AAE = interest capitalized
true = specific method
true
true = average method
interest capitalized in one period becomes part of AAE next period –> compounding
interest may be capitalized on a quarterly/annual basis
unpaid construction costs are not included in AAE until paid in cash
true
true
true - debt can be considered avoidable (wages, accts, utilities)
land developed for sale, is interest capitalized to land?
land held for speculation, is interest capitalized to land?
If the proceeds from a specific construction loan are not fully used for financing construction until well into the construction phase, how is the interest handled?
yes
no, b/c land is in intended use/no construction
interest revenue is reported separately with no effect on interest capitalized. If funds are externally restricted, offset exists bc funds are restricted to use in construction
amount of interest capitalized/expensed must be disclosed in period capitalized and interest paid for must be disclosed in statement of cash flows in statement/disclosure
recorded cost of asset is increased by amount capitalized
after asset placed in service, interest is no longer capitalized, depreciation begins
interest capitalization is not limited to specific construction loan debt
true
true
true
If Average Accumulated Expenditures (AAE) > total interest-bearing debt, why is there no interest expense?
Where should the amount of interest paid be disclosed?
All debt could have been avoided if construction had not taken place.
In the statement of cash flows, as either part of the statement, as a supplemental schedule or in a footnote.
When interest rates have been increasing and the firm has debt from earlier years, the specific method of capitalizing interest results in a higher amount of interest to be capitalized compared with the weighted average method.
Capitalized interest is limited to interest on construction loan debt.
true
false - limited to actual interest
When would you increase the asset’s account basis by the post-acquisition cost?
accounting approaches for post-acquisition expenditures.
What is the useful life for depreciating an addition?
general rule on when to capitalize post-acquisition expenditures?
When productivity has been enhanced
1) substitution
2) increase larger asset by post-acquisition cost (productivity)
3) debit accumulated depreciation (increase life)
If integral part of old asset, over shorter of addition’s or old asset’s useful life. If not, over addition’s useful life.
asset becomes more productive or if it extends the asset’s life.
When an entity suffers a casualty loss to an asset, the accounting loss is recorded at the net carrying value of the damaged asset, if known. In this case, the cost and related accumulated depreciation are identifiable. The entity should therefore recognize a loss in the current period equal to the carrying amount of the damaged portion of the building. The refurbishing of the building, which is an economic event separate from the fire damage, should be treated similarly to the purchase of other assets or betterments. The cost of refurbishing the building should therefore be capitalized and depreciated over the shorter of the refurbishment’s useful life or the useful life of the building.
true
book value
depreciable cost
depreciation
depreciation justifications
original cost - accumulated depreciation
original cost - salvage value
systematic/rational allocation of capitalized plant asset cost over time periods (matching principle)
1) assets wear out over time
2) assets become obsolete
3 kinds of noncurrent assets
4 depreciation factors
1) plant assets - depreciated
2) natural resources depleted
3) intangible assets - amortized
1) capitalized cost
2) estimated useful life
3) estimated salvage value
4) depreciation method chosen
Straight Line Depreciation - same benefits per year
Service hours - same benefits per hour
Units of output - same benefit per unit
Depreciable Cost / Useful Life
( Depreciable Cost / Useful Life in Hours ) X hours for year
(Depreciable Cost / Useful Life in units ) X units of output for year
Depreciation is included in overhead and allocated to production based on machine hours or direct labor for what type of asset?
minimum book value
after all depreciation has been recorded using either method, the net asset will be recorded at salvage value, and accumulated depreciation will equal the original cost minus salvage value.
both group and composite depreciation utilize the straight-line depreciation method
Manufacturing assets.
salvage value is never depreciated, BV always includes salvage value, an asset cannot be depreciated such that BV is less than salvage value
true
true
if useful life and salvage value changes, old factors will not be removed and accumulated depreciation will exist dependent on them, important when converting
depreciation method is used for group/composite assets?
When is the inventory method of depreciation used?
depreciation method does not use salvage value?
calculate the rate used in double declining balance?
true
Straight-line method to groups rather than individual assets. (saves money/time, no gain/loss, no A/D)
inventory items are smaller homogeneous groups of assets and records are not maintained. (APPRAISAL)
DDB
1) Straight-line rate (number of years divided into 1) i.e., if 5 years 1/5 = 20%.
2) Twice the straight-line rate 20% x 2 = 40%.
The declining balance methods depreciate assets to zero because they do not subtract salvage value when computing depreciation.
The declining balance methods do not subtract salvage value when computing depreciation.
DDB method multiplies the beginning book value for a period by (2/useful life) in computing depreciation for the period.
One of the advantages of the composite method of depreciation is that accumulated depreciation records are not maintained on an individual asset basis.
in SYD, add numbers up in numerator = full years of depreciation over SYD
Convert DDB percentage into number and put over useful life of asset to find the depreciation rate
false
true
true
true
true
true
the higher the depreciation expense, the higher the deduction!
The asset has a larger book value under SYD after two years. For a given amount of proceeds on disposal, the larger book value under SYD causes any gain on disposal to be smaller than under DDB, and any loss greater than under DDB. In other words, the gain decreases and the loss increases, relative to DDB.
The DDB method’s rate is always twice the straight-line rate, or 2/useful life. The method does not subtract salvage value when computing depreciation, but it also does not reduce book value below salvage value. The depreciation in any year is the rate times the beginning net book value of the asset.
Salvage value is the portion of the asset’s cost not subject to depreciation. Total depreciation, under any method, is limited to depreciable cost (cost less salvage value). The declining balance methods do not subtract salvage when computing depreciation. Care must be taken to avoid depreciating an asset beyond salvage value.
In year 4, Turtle switches to the straight-line method. The book value ($50,000 − $32,000 = $18,000) would be depreciated over the remaining three years (five years less two gone by). Therefore, year 4 depreciation is $6,000 ($18,000 × 1/3) and 12/31/Y4 accumulated depreciation is $38,000 ($32,000 + $6,000).
true
true
true
true
true (DDB convert to S/L)
Composite/group assets - additions increase the total original cost, asset disposals (cash received) reduce the total original cost
Straight-line depreciation would result in the highest carrying value.
true
true
3 types of natural resource costs
successful efforts accounting method for natural resources? - best reflects the asset account
full costing method for natural resources?
natural resources?
Depletion formula
Depletion
1) acquisition: acquire to explore natural resources
2) exploration: drill/excavate/other costs
3) development: after resource has been discovered, but before production
costs capitalized are from successful exploration costs AND acquisition/development costs
all costs for exploring the natural resource are capitalized
noncurrent asset, (timber/oil/minerals), extracting costs not included
[(costs - residual/salvage value)/total estimated units) X (total units removed)]
allocation of the cost of the natural resource to inventory.
true/false
depletion base represents the same concept as depreciable cost for a depreciable plant asset
Depletion is the cost of the natural resources account allocated to the resources removed in the period
successful efforts method results in a lower depletion rate compared to the full costing method
Depletion is recorded as an expense as soon as the resource is recovered
The depletion rate is the sum of the cost incurred to acquire the mineral rights, find the minerals, and develop the site less the salvage value, all divided by the estimated number of units of resource expected to be removed from the site.
Depletion for a period is the cost of the deposit allocated to the inventory removed for the period.
The successful efforts method capitalizes only the cost of exploration efforts that locate the resource. As such, only those efforts that yield a probable future benefit are capitalized. This is a direct application of the asset definition, which requires that an asset have a probable future benefit.
true
true
true
false - capitalize costs to inventory
T
T - extraction costs are NOT depleted, but capitalized to inventory
T
(IFRS) how is interest during construction accounted for?
How frequently do companies have to review depreciation policies under International Financial Reporting Standards (IFRS)?
(IFRS), what two methods can be used to adjust accumulated depreciation?
What happens during the reset method?
Where is revaluation surplus reported under International Financial Reporting Standards (IFRS) until the Property, Plant, and Equipment (PPE) is sold?
Expensed or capitalized OR interest earned on a construction loan is offset against construction costs
(GAAP is not allowed)
IFRS reviews annually
(GAAP, reviews when events change)
proportional and reset methods
Accumulated depreciation is reset to zero by closing it to the building account, and then the building is adjusted for the revaluation.
Reported under equity in B/S
(GAAP, revaluation isn’t permitted)
If plant and equipment are remeasured to fair value, accumulated depreciation must also be adjusted.
When the component parts of an asset have differing useful life, IFRS requires component depreciation.
Remeasurement of plant and equipment to fair value must be applied to the entire asset class or remeasurement is not permitted.
when revaluing assets to reliable FV figure, gain = revaluation surplus = equity account (OCI), losses = recognized.
true
true
(GAAP, component depreciation isn’t allowed)
true
true
under component depreciation (IFRS), each asset must correlate to its own useful life period.
IFRS allows the use of the cost model or the revaluation model for reporting plant, property, and equipment.
proportional method (adj. accum. Deprec.)
reset method (adj. accum. deprec)
revaluation surplus is depreciated over remaining life of asset and taken directly to R.E
true
true
restate AD proportionately so the asset’s carrying value after revaluation equals revalued amount
AD is reset to zero by closing it to the respective asset account, then the asset is adjusted for the revaluation
true
if asset doesn’t produce cash flow > BV?
3 impaired assets?
impairment indicators (5)
potential impaired asset
1) held in use
2) held for disposal (sale)
3) to be disposed other than sale
1) huge decrease in mkt value
2) change in asset/way used
3) legal factor/change in business climate
4) asset costs incurred greater than planned
5) CF losses from asset
Held for Use Impairment tests
How are assets grouped for impairment testing?
amount of impairment loss on assets held for disposal determined?
- Sum net future cash flows from asset (recoverable cost);
- If sum > book value, no impairment;
- If sum
items must be reported for impairment losses?
amount of impairment loss on asset in use determined?
When is a held for sale asset impaired?
held for use, An impaired asset is written down to FV. The loss equals: BV - FV.
(test for impairment uses BV and RC/CF, while the measurement of the loss uses BV and FV. )
asset held for use, amount reported is the lower of CV or FV under income from continuing operations, No reversal of the loss, and depreciate the new basis
Report the loss as part of ordinary income and disclose.
- asset impaired;
- events leading to impairment;
- amount of the impairment loss;
- method of determining FV & interest rate.
Difference between FMV and CV or BV
BV exceeds its fair value less cost to sell (NRV) at the end of the reporting period.
true
true
assets held for use, JE of the impairment loss
Asset for sale, impairment test
Asset for sale, No depreciation allowed and the reversal of the loss is permitted
Asset for sale criteria, all six conditions must be present, if all six are not met, classified as assets held for use
DR: Impairment Loss
CR: Accumulated Depreciation
Compare NRV (FV - cost to sell) to CV
if CV > NRV, loss
if CV
asset held for sale accounting treatment
After an asset held for disposal is written down due to an impairment loss, the new book value is fair value less cost to sell.
An asset in use is impaired and written down with a loss recognized. In subsequent periods fair value at the impairment date becomes the new cost for depreciation purposes.
Recovery of impairment losses is prohibited under U.S. GAAP.
1) written down to (FV - cost to sell) NRV
2) asset removed from plant asset
3) depreciation no longer taken
4) can be written up/down if held another period
5) write up cannot exceed initial impairment loss
true
true
true
How are assets grouped for impairment testing under International Financial Reporting Standards (IFRS)?
IFRS, how is the impairment loss presented if the asset is carried at fair value?
reversals of impairment allowed under (IFRS)?
value in use?
recoverable amount under IFRS?
“cash-generating unit”: smallest identifiable group off assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
impairment loss would be classified out of other comprehensive income and into earnings.
yes
PV of the future cash flows generated from the asset or CGU
higher of the fair value less the cost to sell or the assets value in use.
true/false
Under IFRS, impairment testing applies to assets carried at cost and at amortized cost.
IFRS the impairment loss can be recovered if the asset is held for use or disposal.
IFRS, Intangible assets with indefinite lives must be tested for impairment annually at the annual reporting date.
true
true
true
