Fixed Assets

Question 1

Fixed Assets

The accounting for nonmonetary exchanges should be based on?

Answer 1

In general, the accounting for nonmonetary exchanges should be based on fair value, which is the same basis as that used in monetary transactions. The asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident.

The difference between this fair value and the book value of the asset surrendered should be recognized as a gain or loss at the time of the exchange.

Question 2

Fixed Assets

Describe Sum of the Years Digits (SYD)

Answer 2

Sum-of-the-years’-digits is an accelerated depreciation method that applies a fraction, which decreases each period, to the acquisition cost (less residual value). It is based on the assumption that the productivity or revenue-generating power of the asset is relatively greater during the earlier years of its life or that maintenance expenses tend to increase during the later years. It produces results similar to double-declining balance.

Fraction computation:
•Numerator: years’ digit in reverse order: 4, 3, 2, 1,
•Denominator: sum of the years’ digits: 1 + 2 + 3 + 4 = 10, or
•n[(n+1) ÷ 2], where n = life in years [4 (5) ÷ 2] = 10.

Fractions for each successive year:
•Year 1: 4/10
•Year 2: 3/10
•Year 3: 2/10
•Year 4: 1/10

The computation is SYD depreciation = Fraction × (Cost - Residual value).

Question 3

Fixed Assets

What are the three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:

Answer 3

1. Fair value is not determinable.
2. Exchange transaction is to facilitate sales for customers.
3. Exchange transaction lacks commercial substance.

Question 4

Fixed Assets
True or False

In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity’s future cash flows.

Answer 4

True

In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity’s future cash flows.

Question 5

Fixed Assets
What are the two criteria that is used to determine that the entity’s future cash flows are expected to change significantly in a nonmonetary Fixed Asset transaction ?

Answer 5

FASB ASC 845-10-30-4 specifies that the entity’s future cash flows are expected to change significantly if either of the following criteria is met:

1. The configuration (risk, timing and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred.
2. The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged.

Question 6

Fixed Assets

True or False

The amount of interest cost which should be capitalized during building construction is the lower of avoidable interest or actual interest.

Answer 6

True

The amount of interest cost which should be capitalized during building construction is the lower of avoidable interest or actual interest.

Question 7

Fixed Assets

What is the formula to calculate gain when the assets exchanged DO NOT have commercial substance.

Answer 7

Total Gain = Fair value Assets received - Book value of assets given up

Gain recognized = (Boot received) / (Boot received + FMV of assets received)) x Total Gain

Question 8

Fixed Assets

When is a long lived asset considered impaired?

Answer 8

A long lived asset is considered impaired if the future cash flows (UNDISCOUNTED) expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset

Question 9

Fixed Assets

If an asset is deemed impaired, what action needs to be taken?

Answer 9

The assets carrying value is reduced to fair value and a loss on impairment is recognized for the difference.

Question 10

Fixed Assets

Under IFRS, what valuation methods are used for intangible assets?

Answer 10

The cost model or the revaluation model.

Question 11

Fixed Assets

Under IFRS, any changes when using the revaluation method should be recorded where in the financial statements?

Answer 11

Retained earnings

Question 12

Fixed Assets

True or False

Under IFRS, when an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued

Answer 12

True

Under IFRS, when an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued.

Question 13

Fixed Assets

Under IFRS, intangible assets with indefinite lives must be tested for impairment when?

Answer 13

Annually at the annual reporting date.

Question 14

Fixed Assets

True or False

When software costs are capitalized, yearly amortization of these costs is based on the greater of the ratio of current sales to expected total sales or the straight-line method over the useful life of the asset (four years).

Answer 14

True

When software costs are capitalized, yearly amortization of these costs is based on the GREATER of the RATIO OF CURRENT SALES TO EXPECTED TOTAL SALES or the STRAIGHT LINE method over the useful life of the asset .

Question 15

Fixed Assets

Provide an example of the two step process in calculating the impairment of goodwill.

Answer 15

Impairment of goodwill is a two-step process:

Step 1, Compare:

(a) year-end fair value of reporting unit $400,000
(b) carrying amount, INCLUDING goodwill $470,000
If (b) exceeds (a), go to step 2.

If (a) exceeds (b), no impairment.

Step 2, Compare:

(a) implied fair value of reporting
unit goodwill ($400,000 - $330,000) $ 70,000
(b) carrying amount of goodwill $100,000
Since (b) exceeds (a) by $30,000, an impairment loss of $30,000 is recognized.

If (a) exceeds (b), no impairment.

Note: The impairment loss cannot exceed the recorded goodwill.

Question 16

Fixed Assets

For interest in construction financing, how should the amounts be treated after completion of construction?

Answer 16

Expense

The capitalization period shall end when the asset is substantially complete and ready for its intended use.

Question 17

Fixed Assets

How is the gain or loss on the settlement of the ARO (Asset Retirement Obligation) liability measured?

Answer 17

The gain or loss on the settlement of the ARO liability is the difference between the :

Expected cash flow adjusted for inflation and market risk and the actual settlement cost.

Question 18

Fixed Assets

True or False

For the DDB method, Salvage value is not used in the depreciation formula, but the plant asset cannot be depreciated below its salvage value.

Answer 18

True
For the DDB method, Salvage value is not used in the depreciation formula, but the plant asset cannot be depreciated below its salvage value.

Question 19

Fixed Assets

True or False

the accounting for nonmonetary exchanges should be based on fair value, which is the same basis as that used in monetary transactions. The asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. The difference between this fair value and the book value of the asset surrendered should be recognized as a gain or loss at the time of the exchange.

Answer 19

True

the accounting for nonmonetary exchanges should be based on fair value, which is the same basis as that used in monetary transactions. The asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. THE DIFFERENCE BETWEEN THIS FAIR VALUE AND THE BOOK VALUE OF THE ASSET SURRENDERED SHOULD BE RECOGNIZED AS A GAIN OR LOSS AT THE TIME OF THE EXCHANGE.