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.