FAR M4 - PP&E Cost Basis

Question 1

PP&E

Answer 1

• Fixed assets
• not for resale
• physical substance, long term and subject to depreciation

Question 2

PP&E Presentation

Answer 2

The following must be shown separately on the BS or footnotes at original cost:

• Land - no depreciation
• Buildings (plant)
• Equipment

Cost - A/D = NBV

-A/D contra asset (credit balance). May be combined for two or more asset categories.

Question 3

Historical Cost

Answer 3

• cash or cash equivalent price to obtain the asset and bring it to the ovation and condition necessary for use

Question 4

Donated Asset

Answer 4

• Recorded at fair market value along with incidental costs incurred.
• Donated fixed asset result in the recognition of a gain on the IS

Fixed Asset DB
Gain on non-reciprocal transfer CR

Question 5

Valuation Under IFRS

Answer 5

• cost (just like GAAP) or revaluation (IFRS only)

Cost = historical cost - A/D - impairement

Revaluation = FV @ revalue date - subsequent A/D - subsequent impairment

Question 6

Revaluation (IFRS only)

Answer 6

Class of fixed assets is revalued to FV and then reported at FV less subsequent A/D and impairment. Revaluations must be done frequently to ensure the carrying amount does not differe materially from FV at the end of the period.
- Must be applied to all items in class of fixed assets and not to individual assets. Classes include land, building, machinery, furniture and fixtures, office equipment, etc.

Question 7

Revaluation Losses

Answer 7

Initial revaluation losses (FV < carrying value before revaluation) are reported on the IS, unless the revaluation loss reverses a previously recognized revaluation gain. In t this situation it is recognized under other comprehensive income and reduces the revaluation surplus in accumulated OCI (off IS).

Question 8

Revaluation Gains

Answer 8

Initial revaluation gain are reported under OCI, unless the revaluation gain reverses a previously recognized revaluation loss. In which case, it is reported on the IS to the extent that it reverses the previously recongized revaluation loss.

Question 9

Impairement

Answer 9

• Revalued asset becomes impaired

- recorde by first reducing any revaluation surplus to zero with further impairement losses reported on the IS.

Question 10

Land

Answer 10

• No depreciation
• Includes all costs incurred up to EXCAVATION for the new building are land costs i.e. purchase price, broker’s commission, title & recording fees, legal fees, draining of swamps, clearing of bursh and trees, filling in/leveling, existing obligations of the buyer (taxes, mortgage), demolition of building.
• Less proceeds from sale of existing buildings, timber, etc.

Question 11

Land Improvements

Answer 11

• Items that can be depreicated

- i.e. fences, water systems, landscaping, sidewalks, paving, lighting

Question 12

Plant

Answer 12

Cost of plant or bldgs (cost of excavation (digging foundation) forward:

• Purchase price
• All repair charges neglected by previous owners (deferred maintenance)
• Alterations/improvements
• Architect fees
• Possible addition of construction period interest

Question 13

Summary of land vs. building cost

Answer 13

Land Cost - filling a hole or leveling

Bldg Cost - digging a hole for the foundation

Question 14

Land & Bldg Purchase Allocation

Answer 14

Allocated purchase price based on the ratio of appraised values of individual items.

Question 15

Cost of Equipment

Answer 15

Costs include:

• Invoice price less any discounts
• Freight in
• Installation
• Sales and Federal Taxes

Question 16

Capitalize vs. Expense

Answer 16

• Capitalize ADDITIONS, IMPROVEMENTS(betterments), REPLACEMENTS, EXTRAORDINARY REPAIRS
• If the carrying value of the old asset is KNOWN, remove it and recognize any gain or loss. Capitalize the cost of the new asset
• If the carrying value of the old asset is UNKNOWN, and the assets life is extended, debit A/R for the cost of the improvement/replacement. Decreases A/D and increased NBV.
• Ordinary repairs are expensed

Question 17

General Rules for Capitalization vs. Expense

Answer 17

Additions - capitalize
Improvement/Replacement 
  - Increase life - reduce A/D
  - Increase usefulness - capitalize
Ordinary Repair - expense
Extraordinary Repair 
  - Increase life - reduce A/D
  - Increase usefulness - capitalize

Question 18

Fixed Asset Constructed

Answer 18

Capital costs:

• Direct materials and labor
• Repairs & maintenance that add value to fixed asset
• Overhead
• Construction loan interest

Question 19

Capitalization of Interest Costs

Answer 19

• Not based on the amount borrowed. It is based on amount borrowed and USED. Capitalized based on the weighted average of the accumulated expenditures as part of the cost of producing fixed costs, such as:
• Bldgs, machinery, land improvements, constructed or produced for others or to be used internally
• Fixed assets intended for sale or lease, such as real estate projects
• Land improvements. If a structure is placed on the land, charge the interest cost to the structure, not the land

Question 20

Computing Capitalized Interest

Answer 20

• Calculated as the interest rate x the average amount of accumulated expenditures for the qualifying asset during the period (avoidable interest)
• Construction loan interest rate
• If general debt is used, use the weighted average of the general loan rate
• The amount capitalized should not exceed the actual interest costs
• Do not reduce the capitalizable interest

Question 21

Interest Capitalization Rules

Answer 21

1. Only capitalize the interest on money actually spent, not amount borrowed
2. The amount of capitalized interest is the lower of:
   
   • actual interest incurred or
   • computed capitalized interest (avoidable interest)

Question 22

Capitalization Interest Period

Answer 22

1. Expenditures have been made
2. Activities are in process (permits filed)
3. Interest is being incurred
   * All activities have to be within the period during “construction, not before or after
   * * Continues as long as the three conditions are present
   * **Stop during intentional delays, but continues during ordinary construction delays (inspection, strike)
   * ***Ends when substantially complete

Question 23

Capitalized Interest Disclosures

Answer 23

1. Interest incurred during the period “100”
2. Capitalized interest cost for the period, if any “75”
   “25” as part of interest on the IS
   *Shows proportion of interest expense vs. capitalized on FS