Fixed Assets Flashcards
How are Research and Development costs recorded?
They are expensed in the period incurred and are not capitalized.
Which expenditures are included in the cost of a building?
All expenditures to get the building into working condition are ready for use
Which expenditures are included in the cost of land?
All expenditures to get the land ready for its intended use:
Title & County Fees
Clearing of Land - Dirt work etc.
Demolition and removal of old buildings (minus any scrap or salvage)
Note: capitalized land costs are not depreciated
In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?
If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.
The new asset is recorded at the book value of the asset given up.
The only gain that can be recognized is any boot (cash) received.
In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?
If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange.
The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.
How is donated property recorded by the donee?
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
How is double-declining balance (DDB) depreciation calculated?
1 / (Useful Life x 2 x Book Value)
Ignore salvage value.
How is Sum of Year’s Digits (SYD) depreciation calculated?
(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense
For example the depreciation factor for the third year of a 10-year asset would be:
: 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5%
Remaining useful life : 8 SYD : 55
How is straight line depreciation calculated?
(Cost - Salvage Value) / Useful life : depreciation expense
When is an asset considered to be impaired? How is impairment loss calculated?
When the un-discounted future cash flows are less than the carrying value of the asset.
Carrying Value - Fair Value : Impairment Loss
Note: impaired assets that recover their value can’t be written back up once written down
How are legal fees to defend a patent amortized?
If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent’s economic life.
If unsuccessful they are expensed immediately.
What are the two steps for testing goodwill impairment?
Compare the CV to the FV. If FV is greater than CV no impairment exists you’re done.
If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.
How are costs for developing software recorded?
Expenses prior to technological feasibility are expensed as R&D.
After technological feasibility but prior to production costs are capitalized.
Expenses incurred during production are charged to inventory.
Expenses incurred training on internal use software are expensed.
What expenditures are included in the cost of equipment?
All expenditures to get the asset into working condition and ready for use:
Purchase price + liabilities assumed Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest
Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.
Accounting for additions to PPE
extensions, enlargements, expansions
DEBIT: ASEET ACCOUNT
Repairs and maintenance - ORDINARY
to maintain normal operating condition
do not add materially to use value
do not extend useful life
EXPENSE
Repairs and maintenance-MAJOR
not recurring large expenditures
- increase quality or output - DEBIT: ASSET
- extend useful life - DEBIT: ACCUM DEPN
Replacement of major component - BV of old component known
If BV of old component is known,
record the disposal first and recognize gain or loss on old asset
for the new component - DEBIT: ASSET
Replacement of major component - BV of old component NOT known
Increases the use value - DEBIT ASSET
Extends useful life - DEBIT ACCUM DEPN
Reinstallations/rearrangements
Material cost and greater efficiency - DEBIT ASSET
No measurable future benefit - EXPENSE
Physical usage depreciation method
Annual depreciation =
current activity/output
___________________ x depreciation base
otal output (net of SV)
GRAPH
SL - straight
DDB - curve
SYD - slant
Inventory depreciation method
based on appraisal values of beginning and ending inventories
beginning inventory
= cost of new acquisitions
– ending inventory
= depreciation expense for the month/year
Composite method
use straight line
group - similar assets
composite - dissimilar assets
use average service life of a group
Compute straight line depreciation for each asset type
Total all gross base, depreciation base (net of SV),
annual SL depreciation
COMPOSITE RATE =total depn. per asset type
——————————————–
total GROSS asset cost
Composite life =depreciation base / sum of SL
depreciation
NOTE: depreciation is recorded until the BV of the composite group is reduced to SV. Close respective asset type salvage value when retired.
NO GAINS AND LOSSES ON DISPOSAL !!!!!
Cash
Accumulated depreciation
Asset
Total group asset carrying value is reduced by the amount of cash received from the disposal.
Assets to be disposed of
Record at NRV (FV-selling cost)
Impairment can be recovered only up to carrying amount prior to impairment
Loss on planned disposition
Asset to be disposed of
Accumulated Depn
Asset
Impairment test
= if carrying value is less than the sum
of FUTURE UNDISCOUNTED cash
flows
Impairment loss = CV - NRV
Impairment journal entry
Impairment loss
Accumulated depreciation
Depletion of natural resources
Important (came out in the exam)
Depletion base = total cost - exploring, drilling,
excavating and other preparatory costs
= units extracted / total expected recoverable
units
X depletion base
Revision of depletion rate
like change in estimate
Unit rate computation
due to uncertainties in the recovery of natural resources
COMPUTATION OF UNIT DEPLETION RATE FOR THE YEAR
original cost xx
additional cost incurred xx
total costs xx
residual value xx
depletion taken PY’s xx (xx)
__________
Carrying value xx
Divide by:
units extracted current year
+ units recoverable at YEnd xx
____________
= UNIT DEPLETION RATE XX
READ FIXED ASSETS - IFRS WILEY (XEROX FILE)
READ
Impairment loss of long lived assets still used in current operations - computation
Carrying value minus FV
NOT NRV !!!
Impairment loss of long lived assets to be sold/disposed of - computation
Carrying value minus NRV
When should long lived assets tested for recoverability
When events or changes in circumstances indicate that its carrying amount may not be recoverable.
Under the DDB method of depreciation, although salvage value is not required in the computation, the accumulated depreciation will never be equal to the original cost at the end of the useful life. True or false?
True
Involuntary Conversion - computation of gain/loss
Do not adjust asset to FV
Update depreciation and compute carrying value up to the date of conversion
Gain or loss is CV - proceeds from insurance
Depreciation for PPE used in research and development
If the asset can be used after the research, charge depreciation expense to R&D.
R & D list to be expensed
Be careful of expenses that are not R&D but still need to be expensed using other Expense account titles
laboratory research for new knowledge
formulation and design of product alternatives
testing, modification of products or processes
preproduction prototypes and models
tools, dies for new technology
pilot plants not capable of commercial production
engineering activity until product is ready for manufacture
ORGANIZATION COSTS
Improvements to leased offices prior to occupancy
is not organization costs
it is an amortizable asset
Composite life computation
cost-SV /total depreciation amortization (SL)
Sale of asset in a group depreciation method and composite method
composite - not the same items
group - the same items
Cash
Accum Depn - PLUG
Asset - book value
APPLIES TO BOTH METHODS
