Final Flashcards
What types of land improvements are not included in cost?
Improvements with limited lives, such as private driveways, walk, fences, and parking lots
How are land improvements with limited lives recorded?
As Land Improvements and they are depreciated
When is land classified as an investment
When it is acquired and held for speculation
How does GAAP require companies to account for interest incurred in financing construction
Capitalize actual costs incurred during construction
When does the capitalization period begin?
When expenditures for the asset have already been made, activities for readying the asset are in progress, or interest costs are being incurred
When does the interest capitalization period end?
When the asset is substantially complete and ready for use
What is the amount of interest capitalized?
the lesser of actual interest costs or avoidable interest (normally it will be avoidable)
What is avoidable interest?
The amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset
How should companies record PP&E?
At the fair value of what they give up or at the fair value of the asset received; whichever is more clearly evident
Why do companies give cash discounts?
To encourage prompt payment
What are deferred payment contracts?
Assets purchased on long-term credit contracts at the present value of the consideration exchanged
How do you account for lump-sum purchases?
allocate the total cost among the various assets on the basis of their relative fair market values
Why is issuance of stock important in PP&E Valuation?
the market price of the stock issued is a fair indication of the cost of the property acquired
How do you account for the exchange of nonmonetary assets
on the basis of fair value of the asset given up or fair value of the asset received; whichever is clearly more evident
When should a company immediately recognize gains or losses on exchanges?
When the transaction has commercial substance
When does an exchange have commercial substance?
if the future cash flows change as a result of the transaction; if the two parties’ economic positions change
When do companies recognize a loss in an exchange?
Immediately, whether the exchange has commercial substance or not
Why do companies immediately recognize a loss during an exchange
companies hsould not value assets at more than their cash equivalent price; if the loss were deferred assets would be overstated
When do companies recognize a gain in an exchange if there is commercial substance?
Companies usually record the cost at fair value of the asset given up and therefore they are immediately recognizing the gain
When do companies recognize a gain in an exchange if there is not commercial substance and no cash was received?
The gain is deferred and you reduce the basis of the asset received
When do companies recognize a gain if there is not commercial substance but cash was received?
The portion of the gain a company recognizes is the ratio of monetary assets to the total consideration received
When should costs subsequent to acquisition be expensed?
when they are expenditures that simply maintain a given level of services
When should costs subsequent to acquisition be capitalized
if they are costs incurred to achieve greater future benefits
One of what three conditions must be present in order to capitalize costs subsequent to acquisition
- useful life must be increased
- quantity of units produced must be increased
- quality of units produced must be enhanced
When a company retires or disposes of PP&E how what depreciation must be recognized?
Depreciation must be taken up to the date of disposition
What is an involuntary conversion?
When an asset’s service is terminated through something like fire, flood, theft, or condemnation
How are involuntary conversions accounted for?
Like any other gains or losses; the amount between the amount recovered and the asset’s book value is the gain or loss
What is depreciation?
the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset
What is the declining balance method?
it utilizes a depreciation rate that is some multiple of the straigh-line method
What is an important fact to keep in mind when using the declining balance method?
Do not deduct the salvage value when computing the depreciation base
How do you do the straight line method of depreciation?
Cost less salvage / estimated service life = depreciation charge
How do you do the activity method of depreciation?
(Cost less salvage * activity)/ total estimated activity = depreciation charge
How do you use sum-of-the-years’-digits
each fraction uses the sum of the years as a denominator. the numerator is the number of years of estimated life remaining as of the beginning of the year
How are revision of depreciation rates accounted for?
They are accounted for in the current period and prospective periods, do not change previously reported results
When is there an impairment?
When the carrying amount of an asset is not recoverable
When does an asset fail the recoverability test for impairment
if the sum of the expected future net cash flows from the long-lived asset is less than the carrying amount of the asset
What is the amount of an impairment?
the amount by which the carrying amount of the asset exceeds the fair value of the asset
For impairment, what is the fair value use in the calculation
the market value of the present value of expected future net cash flows
Can impairment loss be restored?
No, the reduced carrying amount becomes the new cost basis. there is no change in this except for depreciation or amortization in future periods or for additional impairments
