Fixed Assets Flashcards
Amount of interest to be capitalized
The lesser of the actual interest or the Average interest
Avg interest: Avg. accumulated expenditures during construction x Interest rate x Construction period
Avg accum exp during construction = exp at the beginning + expenses at the end of year/2
Nonmonetary Transactions- Criteria
Nonmonetary transaction must meet one of the 3 following criteria:
- FMVs of asset received and asset given up are both unknown; OR
- The exchange transaction is done to facilitate sales; OR
- The transaction lacks commercial substance:
a) Cash flows do NOT change in their risk, timing, and amount; AND
b) Do not include tax effects when considering the cash flows.
Nonmonetary Transactions - Boot received, realized gain pro-rata (calculation)
When boot is received for a nonmonetary exchange you may recognize some of the realized gain pro-rata:
Realized gain x (FMV of Boot/FMV of Boot +FMV of asset Rec’d)
Exception- if boot is 25% or more of the FMV of the exchange recognize the entire gain.
Purchase of groups of fixed assets (Basket Purchase)
Cost should be allocated based on relative value:
Cost of all assets acq x Market value of Asset A/ Market value of all assets acquired
Capital Expenditures
are not normal, recurring expenses; they benefit the operatons of more than one period. (increase the CV of the asset)
Betterment - makes asset more efficient, productive, does not increase the life of the asset. JE: Dr. Asset Cr. Cash.
Major Repairs- does increase the life of the asset. JE: Dr. Accum Dep. Cr. Cash
Both cases the CV of the asset is increased.
Revenue expenditures
normal recurring expenditures. Some capital expenses can be expensed as revenue exp. when immaterial.
“repairs and maintenance” acocunt would get rolled into “selling expense” if it was repairs and maintenance on a selling show room..etc.
Straight line method
Historical cost - Salvage value / Useful life in years
Declining balace method
1/life in years to convert to a %
Historical cost - Accum depn. x declining balance %
Double declining balance
1/life in years to convert to a % x 2
Historical cost - Accum depn. x declining balance %
Sum-of-the-years-digit (SYD)
n(n+1)/2 n= useful life in years this will give you a denominator Ex. Useful life 5, calculated denominator 15 Year 1: 5/15 x HC - SV Year 2: 4/15 x HC - SV Year 3: 3/15 x HC - SV...
Accelerated Depreciation
Justified by: (more depreciation at the beginning less towards the end)
- Increased productivity when asset is new (better matching, more conservative)
- Increasing maintenance charges with age
- Risk of obsolescence
SL Method in Units of Activity, production or output
Historical cost - Salvage Value/ Useful life in activity = Depreciation expense per unit.
Composite (group) depreciation
Group: assets are similar - homogenous
Composite: assets are dissimilar - heterogeneous
No gains or losses are recognized on disposal of assets (only if the whole group or composite was disposed)
JE: Dr. Cash
Dr. Accum Dep (plug)
Cr. Asset (HC)
The net carrying amount of composite/group assets would decrease by the cash received on disposal of asset.
=Sum of annual SL depreciation of individual assets/Total asset cost
Entry to record disposal of an asset
Dr. Cash
Dr. Accum Depn
Dr. Loss (plug figure to make it balance)
Cr. Old asset (HC)
Cr. gain (plug figure to make it balance)
depending on gain or loss on disposal of asset plug the figure in to balance the JE.
Circumstances that may indicate that an impairment has occured - Tangible and Intangible assets (except Goodwill)
- Decline in demand, inability to keep up with technology/competition
- Net operating loss
- Decline in FMV
- Negative cash flow
- Change in regulatory or legal environment
Test for impairment (tangible and intangible assets excluding goodwill)
Carrying Value vs. Non discounted Future Cash flows.
CV > Non discounted future CFs this item is impaired - measure the impairment loss
Measure the impairment loss (tangible assets held for use and intangible assets finite and indefinite life)
Carrying value vs. FMV
Intangible assets - indefinite life
Asset for which useful life is unknow, do not amortize. Test for impairment: CV vs. FMV Measure the impaierment loss CV vs. FMV
Patents - amortization
Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent’s remaining economic life (shorter of the legal or useful life.)
R&D expenses (internal or external) are always expensed, never capitalized.
Circumstances that may indicate that an impairment has occured - Goodwill impairment
- Decline in demand, inability to keep up with technology/competition
- Net operating loss
- Decline in FMV
- Negative cash flow
- Change in regulatory or legal environment
Research and Development
R&D Expenses: New knowledge New technology Reformation/ reformulating a process/modification Prototype Model Application of research findings
Never R&D:
Commercial production or activity
Seasonal
routine
Development Stage Enterprise
devots substantially all of its efforts to establish a new business, planned principle ops have not started or they have started but there was been no significant revenue.
B/S should show cumulative losses since inception under SHE
I/S, Statement of CF current period and cumulative amounts since inception
Development stage enterprise must be identified on FS
Leasehold improvements
properly capitalized and amortized over the remaining life of the lease, or the useful life of the improvements, whichever is shorter.
Cost principle
requires that assets be recorded at historical cost.
