Fixed Assets Flashcards

1
Q

How are Research and Development costs recorded?

A

They are expensed in the period incurred and are not capitalized.

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2
Q

Which expenditures are included in the cost of a building?

A

All expenditures to get the building into working condition are ready for use

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3
Q

Which expenditures are included in the cost of land?

A

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

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4
Q

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?

A

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.

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5
Q

In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

A

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.

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6
Q

How is donated property recorded by the donee?

A

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

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7
Q

How is donation of property recorded by the donor?

A

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

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8
Q

How is double-declining balance (DDB) depreciation calculated?

A

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.

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9
Q

How is Sum of Year’s Digits (SYD) depreciation calculated?

A

(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

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10
Q

How is straight line depreciation calculated?

A

(Cost - Salvage Value) / Useful life : depreciation expense

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11
Q

When is an asset considered to be impaired? How is impairment loss calculated?

A

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

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12
Q

How are legal fees to defend a patent amortized?

A

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent’s economic life.

If unsuccessful they are expensed immediately.

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13
Q

What are the two steps for testing goodwill impairment?

A

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.

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14
Q

How are costs for developing software recorded?

A

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.

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15
Q

What expenditures are included in the cost of equipment?

A

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.

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16
Q

Accounting for additions to PPE

A

extensions, enlargements, expansions

DEBIT: ASEET ACCOUNT

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17
Q

Repairs and maintenance - ORDINARY

A

to maintain normal operating condition
do not add materially to use value
do not extend useful life

EXPENSE

18
Q

Repairs and maintenance-MAJOR

A

not recurring large expenditures

  1. increase quality or output - DEBIT: ASSET
  2. extend useful life - DEBIT: ACCUM DEPN
19
Q

Replacement of major component - BV of old component known

A

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

20
Q

Replacement of major component - BV of old component NOT known

A

Increases the use value - DEBIT ASSET

Extends useful life - DEBIT ACCUM DEPN

21
Q

Reinstallations/rearrangements

A

Material cost and greater efficiency - DEBIT ASSET

No measurable future benefit - EXPENSE

22
Q

Physical usage depreciation method

A

Annual depreciation =

current activity/output
___________________ x depreciation base
otal output (net of SV)

23
Q

GRAPH

A

SL - straight
DDB - curve
SYD - slant

24
Q

Inventory depreciation method

A

based on appraisal values of beginning and ending inventories

beginning inventory
= cost of new acquisitions
– ending inventory
= depreciation expense for the month/year

25
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.
26
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
27
Impairment journal entry
Impairment loss | Accumulated depreciation
28
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
29
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
30
READ FIXED ASSETS - IFRS WILEY (XEROX FILE)
READ
31
Impairment loss of long lived assets still used in current operations - computation
Carrying value minus FV NOT NRV !!!
32
Impairment loss of long lived assets to be sold/disposed of - computation
Carrying value minus NRV
33
When should long lived assets tested for recoverability
When events or changes in circumstances indicate that its carrying amount may not be recoverable.
34
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
35
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
36
Depreciation for PPE used in research and development
If the asset can be used after the research, charge depreciation expense to R&D.
37
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
38
ORGANIZATION COSTS | Improvements to leased offices prior to occupancy
is not organization costs | it is an amortizable asset
39
Composite life computation
cost-SV /total depreciation amortization (SL)
40
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