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FAR 4 > Fixed Assets > Flashcards

Fixed Assets Flashcards

1
Q

Characteristics of fixed assets

A
  1. Acquired for use in operations and not for resale
  2. LT in nature and subject to depreciation
  3. Possess physical substance
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2
Q

Classification of fixed asset

A
  1. Land
  2. Buildings
  3. Equipment (machinery, tools, furniture and fixtures)
  4. Accumulated depreciation account
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3
Q

What is the basis for valuation of purchased fixed assets under US GAAP?

A

Historical cost (purchase price)

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4
Q

Historical cost

A

Cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use

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5
Q

What is the basis for valuation of donated fixed assets under US GAAP?

A

Fair market value along with incidental costs incurred

Results in recognition of gain in IS

Dr. Fixed asset
Cr. Gain on nonreciprocal transfer

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6
Q

How are fixed assets valued under IFRS?

A

Initially recognized at the cost to acquire the asset

Then, can be valued using the cost model or the revaluation model

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7
Q

Cost model

A

Fixed assets are reported at historical cost adjusted for D/D and impairment

Cost model carrying value = Historical cost - A/D - Impairment

Same as US GAAP

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8
Q

Revaluation model

A

A class of fixed assets is revalued to FV and then reported at FV less subsequent A/D and impairment

Revaluation model CV = FV at revaluation date - Subsequent A/D - Subsequent impairment

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9
Q

How frequent should revaluations of fixed assets be?

A

Frequent enough to ensure that the CV does not differ materially from FV at the end of the reporting period

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10
Q

Can revaluation be applied to individual fixed assets?

A

No, revaluation must be applied to all items in a class of fixed assets

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11
Q

What must be disclosed when fixed assets are reported at FV?

A

The historical cost equivalent (cost - a/d - impairment)

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12
Q

Revaluation losses

A

Fir value < carrying value before revaluation

Reported on IS unless it reverses previously recognized revaluation gain (then would be recognized in OCI)

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13
Q

Revaluation gains

A

Fair value > carrying value before revaluation

Reported in OCI and accumulated in equity as revaluation surplus, unless reverses previously recognized revaluation loss (then reported on IS to extent of loss)

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14
Q

Impairment of revalued fixed asset

A

Recorded by first reducing any revaluation surplus to zero with further impairment losses reported on IS

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15
Q

Equipment

A

Office equipment, machinery, furniture, fixtures, and factory equipment

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16
Q

What is included in the cost of equipment?

A

All expenditures related directly to their acquisition or construction

  1. Invoice price
  2. Less cash discounts/other discounts
  3. Add freight-inn (and insurance while in transit and in construction)
  4. Add installation charges (including testing/preparation for use, cost to rearrange)
  5. Add sales and federal excise taxes
    6 Possible addition of construction period interest
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17
Q

How are additions to equipment accounted for?

A

Capitalize

Dr. Assets
Cr. Cash/accounts payable

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18
Q

How are improvements and replacements accounted for?

A

Capitalize

CV of old asset known: remove it and recognize any gain/loss; capitalize cost of improvement/replacement to asset account

CV of old unknown and:

  1. Asset’s life is extended – Dr. A/D (increases NBV) for cost of improvement/replacement
  2. Usefulness (utility) of asset is increased – capitalize cost of improvement replacement
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19
Q

How are repairs for equipment accounted for?

A

Ordinary: expensed as repair and maintenance

Extraordinary: capitalized (treat as addition, improvement, replacement)

20
Q

What is included in cost of land?

A

All costs incurred up to excavation (digging) for the new building

  1. Purchase price
  2. Brokers’ commissions
  3. Title and recording fees
  4. Legal fees
  5. Draining of swamps
  6. Clearing of brush/trees
  7. Site development
  8. Existing obligations assumed by buyer
  9. Costs of razing an old building
  10. Less: Proceeds from sale of existing building, timber, etc.
21
Q

What is considered to be a land improvement?

A
  1. Fences
  2. Water systems
  3. Sidewalks
  4. Paving
  5. Landscaping
  6. Lighting

Depreciable

22
Q

How are interest costs during construction period for land accounted for?

A

Added to cost of land improvement based on weighted average of accumulated expenditures

23
Q

What is included in the cost of a building?

A

From excavation forward

  1. Purchase price, etc
  2. All repair charges neglected by previous owner (deferred maintenance)
  3. Alterations/improvements
  4. Architect’s fees
  5. Possible addition of construction period interest
24
Q

How is a basket purchase of land and building accounted for?

A

Purchase price is allocated based on the ratio of appraised values of individual items

25
Q

Investment property

IFRS only

A

Land or buildings held by an entity or by a lessee under a finance (capital) lease to earn rentals or for capital appreciation

Rental or to flip

26
Q

Are owner-occupied property, property held for sale in ordinary course of business, or property being constructed or developed included in investment property?

A

No, unless it is under construction/development for future use as investment property

27
Q

Cost of investment property

A

Initial cost = Purchase price + Expenses directly related to purchase, including legal services, professional fees, property transfer taxes, and other taxes

28
Q

What costs are capitalized and added to the carrying value of investment property?

A
  1. Costs incurred to subsequently add to the property
  2. Costs to replace part of the property
  3. Costs to service the property
29
Q

What are the investment property measurement models?

A
  1. Cost model

2. Fair value model

30
Q

Cost model for investment property

A

Reported on BS at historical cost less A/D

FV must be disclosed

31
Q

Fair value model

A

Reported on BS at FV and not depreciated

Need an active market

32
Q

How long must the fair value measurement be applied once adopted for investment property?

A

Consistently until the asset is disposed of or no longer classified as investment property

33
Q

Where are gains and losses from the fair value model for investment property measurement recorded?

A

Recognized in earnings in period in which it arises

34
Q

Costs included in fixed assets constructed by a company

A
  1. Direct materials and direct labor
  2. Repairs and maintenance expenses that add value to fixed asset
  3. Overhead, including direct items of overhead (construction period interest)
  4. Do not include profit
35
Q

How should interest be accounted for?

A

Expensed as incurred (period cost)

36
Q

How is construction period interest accounted for?

A

Capitalized based on weighted average of accumulated expenditures

37
Q

When do you not capitalize interest cost?

A
  1. On inventory routinely manufactured
  2. On fixed assets held before or after construction period
  3. During intentional delays in construction
38
Q

How can you compute capitalized cost?

A
  1. Weighted average amount of accumulated expenditures (avoidable interest)
  2. Interest rate on borrowings (rate on construction loan)
  3. Interest rate on excess expenditures (weighted average) – general debt
  4. Not to exceed actual interest costs (cap/ceiling)
  5. Do not reduce capitalizable interest
39
Q

Two rules concerning capitalized interest

A
  1. Only capitalize interest on money actually spent, not on the total amount borrowed
  2. The amount of capitalized interest is the lower of:
    - — Actual interest cost incurred, or
    - — Computed capitalized interest (avoidable interest)
40
Q

When does the capitalization of interest period begin?

A

When the following conditions are present:

  1. Expenditures for the asset have been made (building decision made)
  2. Activities that are necessary to get the asset ready for its intended use are in progress (permits filed)
  3. Interest cost is being incurred

Continues as the three conditions are present

41
Q

When does the capitalization of interest period end?

A

When the asset is substantially complete and ready for the intended use

42
Q

How are interest costs incurred during the construction period of machinery to be used by a firm as a fixed asset accounted for?

A

Capitalized as part of the historic cost of acquiring the fixed asset

43
Q

How should interest costs on fixed asset held for sale be accounted for?

A

Expenses in IS for period incurred

44
Q

How are leasehold improvements accounted for?

A

Capitalized and then amortized over the lesser of the life of the improvements or the remaining term of the lease

45
Q

In regards to land, what type of interest is capitalized?

A

Interest in connection with a “discrete manufacturing activity”

FAR 4 (5 decks)

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