Financial Statement Accounts 2 Flashcards
Valuation of plant assets on books:
- Cash purchase price
- Credit purchase=PV of future cash payments using market rate of interest
- Issuance of securities=FV of security OR asset, whichever more readily available
- Donated assets=FV with gain recorded
County assessment for sewer lines would be a cost of what?
Land
The asset has a service life of 10 years, estimated residual value of $10,000, and will be depreciated under the double declining balance method. At completion, the asset was worth $105,000 at fair value. What amount of depreciation will be recognized on the asset in total over its service life?
$95,000
The sum of the four listed costs is $120,000, which exceeds fair value of $105,000. Therefore, the asset is capitalized at $105,000, the lesser of the two amounts. Subtracting the $10,000 residual value yields $95,000 depreciable cost.
Immediately after a note payable was signed, its present value was $30,000. This note and $20,000 cash were used to acquire a used plant asset at the beginning of the current year. The interest rate implied in the note is 6%. Total interest payments due on the note over its term amount to $4,000. The term exceeds one year. No payments on the note are due during the current year. What amount of interest expense is recognized for the first year (current year) on this note, and what amount is capitalized to the plant asset account?
The interest expense recognized for the first year is .06($30,000) = $1,800. Although no interest is paid, interest is accrued, increasing the carrying value of the note. The asset is capitalized at $50,000, the sum of cash down payment and present value of the note. The interest over the note term is not capitalized because it does not assist in the process of placing the asset into its intended condition and location.
Plant assets are occasionally acquired by means other than by paying cash. Choose the correct statement about such acquisitions.
If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account.
The more objective or readily determinable value is used for recording the building. If the number of shares is significant in relation to the total shares outstanding, the stock price will be affected by the increase in the shares outstanding resulting from the purchase. The more objective value is the appraised value of the building.
Interest capitalization increases:
Plant assets and income (if all interest first recorded as interest expense, capitalizing it decreases expenses)
DR: Plant Asset under construction
CR: Interest expense
Capitalizes interest
Capitalization of interest exemplifies:
Matching principle since benefit of constructed asset will be over its useful life so expenses not recognized until asset can provide revenues.
3 criteria for interest to be capitalized:
- Qualifying expenditures made
- Construction is in progress
- Interest costs are being incurred, limited to actual interest incurred during period of construction
When does interest capitalization conclude?
Capitalization concludes when asset is substantially completed and ready for intended use.
Specific method vs. weighted average
(1) average accumulated expenditures exceed total interest bearing debt (principal) and
(2) the interest rates on all interest bearing debt instruments are the same.
Which situation yields the same results for the two approaches?
BOTH
When average accumulated expenditures exceeds interest bearing debt, all interest for the period is capitalized because all debt could have been avoided if the construction had not taken place. Also, if the interest rates on all debt are the same, then the two approaches yield the same results.
Debt is frequently incurred when plant assets are acquired. For example, debt may be incurred on the purchase of plant assets. Debt may also be incurred during the construction of plant assets. How is the interest in these two cases treated for financial reporting?
Debt for purchase- EXPENSE
Debt during construction-capitalize
Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny’s carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should the land and building be reported on Papa’s consolidated statements prepared immediately after the transaction?
Land- 60K
Building-50K
Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be “eliminated” so that the consolidated statements would show land at $60,000 and buildings at $50,000.
During Year 1, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete.
How much of the interest incurred should be reported as interest expense in the Year 1 Income Statement?
Machine for own use- interest after completion
Asset held for sale- all interest incurred
Interest is capitalized on the construction of assets for sale only if the assets are large, individual, discrete projects, such as ships or real estate developments. The equipment constructed for sale does not appear to be a discrete item in that sense and, thus, none of the interest is capitalized. It is all expensed.
Interest costs, when material, can be capitalized for the following:
- Assets constructed for firm’s own use
2. Assets intended for lease or sale produced as discrete projects (ships, land being developed)
A firm is constructing a warehouse for its own use and purchased the land for the site immediately before beginning construction. Interest is capitalized on which of the following:
Warehouse- YES
Land- NO
Interest only capitalized for land if land being developed for sale. Cost of land included in AAE but interest is capitalized to the warehouse, not land.
Average accumulated expenditures for year five on a construction project amounted to $70,000. The total cash invested in the project by the end of year five, was $160,000. During year six, the firm spent another $240,000 (total) on the project, uniformly throughout the year. Compute average accumulated expenditures for year six.
Average accumulated expenditures is the amount of debt for the annual period that could have been avoided. In this case, the firm has $160,000 already invested in the project at the beginning of year six. That amount represents $160,000 in debt, that could have been avoided for year six if the firm had not been involved in the construction project. The expenditures during year six were incurred evenly. Average accumulated expenditures therefore = $160,000(12/12) + $240,000/2 = $280,000. Also, [$160,000 + ($160,000 + $240,000)]/2 = $280,000.
Post-acquisition cost can be capitalized when:
- Asset is more productive (greater utility)
2. Asset has longer useful life
A building suffered uninsured water and related damage. The damaged portion of the building was refurbished with upgraded materials. The cost and related accumulated depreciation of the damaged portion are identifiable.
To account for these events, the owner should:
Capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building.
Zahn Corp.’s comprehensive Balance Sheet at December 31, 20X5 and 20X4 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 20X5.
Depreciation charged to operations in 20X5 was:
The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts.
Thus, the $10,000 amount is a decrease in accumulated depreciation.
What factor must be present to use the units of production (activity) method of depreciation?
Total units to be produced can be estimated.
On January 1, 20X5, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon expects to use these cabinets for five years.
Brecon’s 20X5 multi-step Income Statement should include:
One-fifth of the cabinet costs in selling, general, and administrative expenses.
The cabinets are not involved in the manufacturing of the goods. Rather, they are used to help sell the merchandise.
Thus, the depreciation is not included in cost of goods sold; rather, it is included in selling, general, and administrative expenses.
In which of the following situations is the units of production method of depreciation most appropriate?
An asset’s service potential declines with use.
This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset.
A fixed asset with a five-year estimated useful life and no residual value is sold at the end of the second year of its useful life.
How would using the sum-of-the-years’-digits method of depreciation, instead of the double declining balance method of depreciation, affect a gain or loss on the sale of the fixed asset?
Decrease gain, increase loss
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.
Choose the best association of terms in the natural resources accounting area with the conceptual framework.
Successful efforts method-definition of asset.
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.
During January 20X5, before the 20X4 financial statements were issued, Pine received insurance proceeds of $500,000. On what amount should Pine base the determination of its loss on involuntary conversion?
The sum of the carrying value ($520,000) and removal/cleanup cost ($10,000) is the amount to compare to the insurance proceeds when computing the loss. The fire caused the latter costs to be incurred; therefore, the cleanup costs should be included in the loss.
What amount should Rudd report as gain (loss) on disposal of the van in its 20X4 income statement?
The gain of $300 is the difference between the insurance proceeds and the sum of the carrying value of the van plus the cost of the new engine. The repair cost is expensed. It does not increase the value of the van. $300 = $3,500 − $2,500 − $700.
Which of the following conditions must exist in order for an impairment loss to be recognized?
The carrying amount of the long-lived asset is not recoverable.
A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. Under IFRS what amount of impairment loss should be reported?
$15,000
This response is the difference between carrying value and recoverable amount. According to IFRS the recoverable amount is the greater of fair value less cost to sell ($105,000) or value in use ($100,000). Value in use is the discounted cash flows.
Under IFRS the test for asset impairment is to compare the carrying value of the asset to its recoverable amount. Which of the following is the recoverable amount according to IFRS?
The greater of fair value less cost to sell or value in use is the recoverable amount according to IFRS.
Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company’s manufacturing operations would be capitalized?
Insurance on machine while in transit.
Testing and preparation of machine for use.
Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin.
The proceeds from the sale of the building should be:
Deducted from the cost of the land.
Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?
When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued.
When remeasurement to fair value is used, it must be applied to the entire class or components of PPE.
A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In year 1, the company acquired the land for $100,000. At the end of year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the year 2 change in fair value?
By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.
Under IFRS an increase in an assets fair value above original cost are recorded in a revaluation surplus account and any decreases in an assets fair value below the original cost are recorded as losses to the income statement
Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets?
A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price.
The amount recorded for the asset acquired is its fair value, or the fair value of the asset transferred plus or minus cash paid or received, whichever is more reliably determinable. By using the lower fair value of the asset transferred to measure the value of the asset acquired, the asset acquired will not be overstated above its fair value.
Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?
Gains and losses from nonmonetary exchanges that have commercial substance are recognized immediately.
The exchange was made to facilitate sales to their respective customers.
What amount of gain (loss) should Beam record related to the inventory exchange?
Under GAAP, exchanges of inventory made to facilitate sales are an exception to fair value measurement. Therefore, no gain or loss is recognized
In a barter transaction where advertising services provided are exchanged for advertising services received, under which of the following situations can the advertising provider recognize revenue for the services performed? Assume the accounting is under IFRS guidelines.
When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty
The fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty (SIC Interpretation 31, para 5)
