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FAR > Fixed Assets > Flashcards

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 - Surveying

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 at fair 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

Straight Line x 2:

YR 1: Cost x ( (1 / Useful Life) x 2)
YR 2: (Cost - Dep Exp) x ((1/Useful LIfe) x 2)

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.

The economic life is a max of 20 years, but use shorter

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13
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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14
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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15
Q

If land and building are acquired for a lump sum, how do you allocate the cost?

A

Use the relative fair value to allocate costs

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16
Q

Asset Retirement Obligations

A

Estimated costs when retiring an asset (such as restoration) expected to be paid at end of the period of usage - recorded as a liability at fair market value (unless not determinable then PV of expected future costs)

Liability is considered long term, amortized using effective interest method

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17
Q

When can you capitalize interest costs on construction?

A
  • constructed for company’s own use

- assets manufactured for resale resulting from a special order (long period of time)

18
Q

When can you NOT capitalize interest costs on construction?

A
  • costs incurred after completion of construction

- Inventory manufactured in the ordinary course of business

19
Q

What amount is to be capitalized on interest of construction?

A

Weighted Average accumulated expenditures x interest rate = capitalized portion of interest

Never exceed actual interest cost

20
Q

Repair and Maintenance expense

A

Costs incurred to keep or restore an asset to its normal operating condition.

Expensed as incurred

21
Q

Capitalized Costs After Acquisition: What are the 3 characteristics of these costs in order to be capitalized instead of expensed?

A

Make the Asset:

  1. BIGGER - additions, new capacity, new functions
  2. BETTER- Improve efficiency or improve functioning
  3. LONGER - Extend the asset’s useful life (reduce the accumulated depreciation in this case - debit A/D, credit cash)
22
Q

Refurbishment

A

Replace part of an asset

1) Identifiable:   Account for it as if sold the old part and are replace it with the new part
A/D   XX
Loss  XX
        Asset XX
Asset XX
        Cash XX

2) Not Identifiable:

A) Enhance the Asset
Asset XX
Cash XX

B) Increase the asset useful life
A/D XX
Cash XX

23
Q

How is units of production depreciation calculated?

A

(Cost - SV) x Hrs this year / Total Est hours

24
Q

Benefits of accelerated depreciation methods

A
  • Better matching since asset is more productive in earlier years
  • Minimize loss due to obsolescence since asset was depreciated earlier
  • Helps even out expenses : Since R&M in earlier years is lower, and more later, expenses will even out
25
Q

How do you calculate the composite method of depreciation?

A

Year 1: Calculate each individual annual depreciation (Cost / Useful Life)
Year 2: Total Composite Cost / Total Composite Annual Depreciation (that was calculated in YR1) = Est. Life to calculate the remaining depreciation of the composite

26
Q

Depletion

A
  • Depreciation of natural resources often called “wasting assets”
  • Depletion base is the total cost of the property providing natural resources (exploring, drilling, excavating)
  • Depletion base is usually allocated by the ratio of extracted units over the total expected recoverable units

(Units Extracted / Total Expected Recoverable Units)
x (Cost - SV)

Allocate between COGS and Inventory

27
Q

Changes in Salvage Value, Useful Life, or Depreciation Rates are considered changes in what? How are these accounted for?

A

Change in Estimate

Treated currently and prospectively

28
Q

Impairments of Long-Lived Assets Held for Use - when does an impairment take place?

How are these long-lived assets measured?

A

Occurs when the CV is not recoverable & a W/O is needed

  • significant decrease in the mkt value
  • significant change in extent/manner asset is used
  • significant adverse legal factors / business climate
  • accumulation of costs significantly > original amount
  • projection/forecast of continuing losses

Measured at the LOWER OF its carrying amount or fair value less cost to sell.

29
Q

Journal Entry to record an impairment loss for assets held for use:

A 
Impairment Loss (I/S) XX
       Accum. Deprec.      XX
30
Q

When does an exchange have commercial substance?

A

Whenever the risk, timing, and/or amount of cash flow are affected by the exchange

Since most exchanges result in some change in future cash flows, most have substance

31
Q

Exchanges with Commercial Substance - how transaction is accounted for:

A
  • Recognize ALL gains and losses
  • Record new asset at : (start at 1 unless unknown)
    1. FMV given up + cash paid (- cash recv’d)
    2. FMV of asset recv’d
    3. BV of asset given up + cash paid (-cash recv’d)
32
Q

Exchanges Lacking Commercial Substance - how transaction is accounted for:

A
  • Recognize all losses
  • Defer all gains, unless BOOT is Recv’d
  • Record lower of:
    1) FMV given up + cash paid (- recv’d)
    2) FMV of asset recv’d
    3) BV given up + cash paid (-recv’d)
33
Q

Non-monetary exchanges that lacks commercial substance, when can you record a gain?

A

Only when BOOT is received (reason is b/c this results in a small amount of commercial substance)

Recognize the gains only up the amount of cash recv’d

When boot is more than 25% of total consideration - considered commercial substance and all gain is recognized.

34
Q

What is a copyright, a copyright’s period and copyright’s useful life is:

A

Copyright is protection of artisitic works, including books and software.

Copyright’s period is creator’s life plus 70 years

Amortize over its’ useful life

35
Q

What is a trademark, a trademark’s useful life, and how often can a tradmark be renewed?

A

Exclusive use of an identifying name for a product.
External acquisition costs are amortized over their useful life.
Indefinite number of renewals for periods of 10 years each.

36
Q

Intangible assets with definite lives vs. indefinite lives:

A

Definite Lives: Amortized over their estimated useful life. The amount to amortized is the cost-residual value
Test annually for impairment

Indefinite Lives: Not Amortized, but tested annually for impairment

37
Q

Deficits accumulated during the development stage should be recorded where?

A

Recorded as part of stockholders’ equity

38
Q

Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?

A

Capitalized and depreciated over its estimated useful life

39
Q

What changes in circumstances or events may warrant for an assessment of impairment?

A
  1. A significant decrease in the market value of the asset
  2. A significant adverse change in the business climate 3. An accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset
40
Q

Criteria of determining when long-lived assets are considered “held for sale” and how to account for this change in classification

A

Long-Lived Asset considered Held for Sale if:

a) asset is available for prompt sale as is
b) asset sale is probable (usually 12 mo)

To account for this - the asset is reclassifed as a current asset and is measured at the lower of its BV or FV - Cost to sell

Depreciation Discontinues at the time or reclassification

FAR (20 decks)

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