Fixed Assets Flashcards
How are Research and Development costs recorded?
They are expensed in the period incurred and are not capitalized.
Equipment purchased for current & future periods should have the depreciation for the current period captured as R&D Expense.
DM & DL for prototypes are expensed and not capitalized.
Which expenditures are included in the cost of a building?
All expenditures to get the building into working condition are ready for use
Which expenditures are included in the cost of land?
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
How is donated property recorded by the donee?
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
How are legal fees to defend a patent amortized?
If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent’s economic life.
If unsuccessful they are expensed immediately.
Generally, what costs are capitalized for tangible property?
All costs necessary to get the asset to the work site and to prepare it for use
What is capitalized for a self-constructed fixed asset?
Direct materials, direct labor, variable overhead, and fixed overhead
How are assets received through donation valued?
At fair value unless fair value cannot be determined, then book value
What is required to capitalize interest costs?
A period of time for the asset to be prepared to be used.
Interest is only accrued until the asset is placed in use.
Why is it very important to capitalize costs associated with land?
Because land nor the costs associated with land are depreciated
What two values are typically given for interest and which one should be taken?
Average and Actual.
The lower of the two should be taken due to the Conservatism Principle.
Remember to only consider the interest accumulated on the expended portion of the loan. Interest on the un-expended portion of the loan must not be capitalized.
How do you calculate Average Interest?
(Beginning Year Cost + Ending Year Cost)/2 = Weighted Average Accumulated Expenditures
Weighted Avg Accum Exp/Rate = Average Interest
What are the three exception criteria for non-monetary asset exchange?
- Fair value of asset received and asset given up are both unknown
- The exchange transaction is done to facilitate sales
- The transaction lacks commercial substance because:
a. Cash flows do NOT change in their risk, timing and amount
b. Do not include tax effects when considering the cash flows
If the non-monetary exchange does not meet any of the exception criteria, what happens?
- Use the Fair Value Method
- Calculate the realized gain/loss:
FV of assets Given up vs CV of Assets given up
(if you do knot know the FV of assets given up, then use the FV of the assets received) - Recognize realized loss because of conservatism
Recognize realized gain because the exception criteria are not met
4. Asset Rec'd (FV) DR
Loss (Calculated) DR
Accum Dep DR
Asset Given (HC) CR
Gain (Calc) CR
If the non-monetary exchange meets exception criteria (1), what happens?
- Use the CV Method
- Do not calculate realized gain/loss
- No gain or loss is recognized as everything is done at CV
- Asset Rec’d (PLUG) DR
Accum Dep DR
Asset Given (HC) CR
If the non-monetary exchange meets exception (2) or (3), and no boot is paid/received?
- Calculate the realized Gain/Loss
FV of Assets Given Up vs CV of Assets Given Up
(If you do not know the FV of the assets given up, use the FV of the assets rec’d) - Recognize the realized Loss
Do not recognize realized gain - Asset Rec’d (Plug) DR
Loss (Calc) DR
Accum Dep DR
Asset Given (HC) CR
If the non-monetary exchange meets exception (2) or (3), and Boot is Paid?
- Calculate the realized Gain/Loss
FV of Assets Given Up vs CV of Assets Given Up
(If you do not know the FV of assets given up, use FV of assets rec’d) - Recognize realized loss
Do not recognize realized gain
3. Asset Rec'd (Plug) DR
Loss (Calc) DR
Accum Dep DR
Asset Given (HC) CR
Cash CR
If the non-monetary exchange meets exception (2) or (3), and Boot is received?
- Calculate the realized gain/loss
FV of Assets Given up vs CV of Assets Given Up
(If you do not know the FV of assets given u, use the FV of the assets received) - Recognize realized loss
Recognize some realized gain pro-rata =
Realized Gain x (FV of Boot/FV of Boot + Asset Rec’d)
3. Cash DR
Asset Rec'd (Plug) DR
Loss (Calc) DR
Accum Dep DR
Asset Given (HC) CR
Gain (Calc) CR
When does a non-monetary exchange become a monetary exchange?
When the Boot is 25% or more of the FV of the exchange
For a non-monetary exchange, if exception (3) is met, what happens to the non-recognized gain?
It is recognized though lower depreciation expense over the life of the Asset Rec’d because the un-recognized gain offsets the Asset Value of the Asset Rec’d
What are the three types of Capital Expenditures?
- Addition
- Betterment
- Major Repairs
Of the Capital Expenditures, Addition is?
An addition to a capitalized asset
Asset DR
Cash CR
Of the Capital Expenditures, Betterment is?
- Something that makes a capitalized asset more productive, more efficient but does not extend the useful life of the asset
Asset DR
Cash CR
Of the Capital Expenditures, Major Repairs is?
Something that extends the life of a capitalized asset
Accum Dep DR
Cash CR
How is the double declining balance method figured?
1/Life x 2 = DDB% (Double Declining Balance)
DDB% * (HC-AD) = Depr for that year
*NOTE: Do not take into account Salvage Value when calculating this
Can the Decling Balance Method be another factor other than 2?
Yes
How is the Sum of the Years Digit (SYD) Method figured?
- Take the sum of the years of the useful life and add them together
EX: An asset with 5 years of useful life would be 5+4+3+2+1 = 15
2. Year 1 - Take 5/15 x (HC - SV)
Year 2 - Take 4/15 x (HC - SV)
Year 3 - Take 3/15 x (HC - SV)
Year 2 - Take 2/15 x (HC - SV)
Year 1 - Take 1/15 x (HC - SV)
What capital expenditures are treated like revenue expenditures?
Ones that are immaterial
EX: Less than $50
Must depreciation be allocated in a systematic & rational manner?
Yes
When are the accelerated methods of depreciation acceptable?
- Increased productivity when the asset is new
- Increasing maintenance charges with age
- Risk of obsolescence
How is Physical Use Depreciation calculated?
Depreciation base is usually based on machine hours or output
(Current Activity/Output/Total Expected Activity/Output) x Depreciation Base
How is composite or group depreciation calculated?
It averages the service life of a number of property units and depreciates the group as if they were a single unit
Sum of Annual SL Depreciation of the individual assets/Total Asset Cost
EX: UPS depreciating a fleet of delivery trucks
Homogeneous or Group means?
Similar
Heterogeneous or Composite means?
Dissimilar
How is a Disposal recorded for a Group/Composite depreciated asset?
HC = 5
Cash Rec’d = 3
Cash 3
A/D 2
Asset 5
The Gain/Loss is recorded in the A/D account
What are the three Methods of Fractional Year Depreciation?
- A Whole year’s Depr in the year of acquisition and none in the year of disposal
- One-half year’s depreciation in the year of acquisition and year of disposal
- Depreciation to nearest whole month in both year of acquisition & year of disposal
*NOTE: Exam will usually specify which method
Where & How is disposal recorded for a normal asset?
- Income from Continuing Operations
Cash DR
A/D DR
Loss DR
Old Asset (HC) CR
Gain CR
Would an asset bought with the intention of holding for sale be depreciated?
No
Can losses on fixed assets held for sale be recovered?
Yes, but only to the amount of the original carrying value
How are Impairment Losses recorded?
Impairment Loss DR
Accumulated Depr CR
When determining Fair Value, do you use In-Use or In-Exchange?
Whichever is higher
When do you assume SL method?
When no method is given in the question
What factors may indicate impairment?
- Decline in demand/ability to keep up with technology/competition
- Decline in Fair Value or change in the way the asset is used
- Current or projected net operating loss or negative cash flows
- Unfavorable changes in the regulatory, legal or business environment
What is the Held for Use Test for Impairment for Tangible Assets?
If the Carrying Value > Nondiscounted future cash flows?
How is a Held for Use asset measured for an Impairment loss?
Carrying Value vs Fair Value
Loss goes into Operating Expenses for SEC Registerants
Loss goes into Other Expenses/Losses for Private companies
Can Asset be written-up at a later date if Impairment no longer applies?
No - unless it is a held for sale fixed asset
Is there an Impairment Test for Held for Sale assets?
No
How is the Impairment Loss measured on a Held for Sale asset?
Carrying Value vs NRV (Fair Value - Selling Costs)
Loss goes into Discontinued Items for material discontinued items
Loss goes into I for immaterial items
What is the Impairment Test for Intangible Assets (Excluding Goodwill) with a Finite Life?
If Carrying Value > Nondiscounted future Cash Flows
What is the Measurement for Impairment Loss for Intangibles (excluding Goodwill) with a Finite Life?
Carrying Value vs Fair Value
Loss goes into D for material items
Loss goes into I for all others
*NOTE: Cannot write up again
What is the Impairment Test for Intangible Assets (Excluding Goodwill) with a infinite Life?
Carrying Value vs Fair Value
What is the Measurement for Impairment Loss for Intangibles (excluding Goodwill) with a Infinite Life?
Carrying Value vs Fair Value
Loss goes into D for material items
Loss goes into I for all others
Don’t AMORTIZE as no amortization was done to begin with
Cannot write up again
Is Goodwill amortized or can GW be written up?
No
What is Goodwill as it is recognized in the accounting records?
The excess of the acquisition cost of what you bought over the fair market value of the net identifiable assets
How is the Test for Impairment for Goodwill calculated?
Step 1 - If CV of Reporting Unit with GW > ZERO and CV of RU > FV of RU
Then GW may be imparied - got to 2
Step 2 - If CV of GW alone > Implied FV of GW alone, then GW is impaired
Measure the Impairment Loss as the difference between CV of GW alone and Implied FV of GW alone
How is Implied FV of Goodwill calculated?
FV of entire unit - FV of all items except GW
Non Research & Development Terms
Commercial, Seasonal, & Routine
Does US GAAP have biological assets?
No
How does IFRS require depreciation to be calculated for PPE if the parts have separate useful lifes?
Each separate part much be depreciated
How is Goodwill Qualitatively measured?
If it is more likely than not (>50%) that the FV is less than it’s Carrying Value
How are start-up (including organization) costs recorded?
As period costs
How is Net Realizable Value (NRV) calculated?
Fair Value (Selling Price) - Selling Costs
What costs are capitalized for Software Developed for Sale or Lease?
All costs after Tech Feasability but before Market Feasability & General Release
What costs are capitalized for Software Developed for Internal Use?
Costs during the Development State which occurs:
- After completion is probably
- After Management Commits Funds
How is a Development Staged Enterprise defined?
- Principle operations have not commenced
2. Principal operations have commenced but there has been no significant revenue
How should a Development Stage Enterprise do reporting?
Balance Sheet - Show cumulative losses since inception under SHE
Income & Cash Flow Statment - Should include both period and cumulative amounts since inception
FS must be identified as Development Stage Enterprise
The first fiscal year after the developmental stage, a disclosure is required stating that the pror period was a developmental stage
IFRS Depreciation Methods?
- Straight Line
- Declining Balance
- Units of Production/Activity
Two models for valuing PPE & Intangible Assets under IFRS?
- Cost Model
- Revaluation Model
NOTE: Investment Property can be valued using Cost or Fair Value models
How is value under the Cost Model calculated under IFRS?
Cost - AD - Accum Impairment = Carrying Value
How is value under the Revaluation Model calculated under IFRS?
Fair Value @ Revaluation Date - AD after Revaluation - Accum Impairment after Revaluation = Carrying Value
Revaluation JE
Asset or AD DR
Revalution Surplus CR
Where is Revlaution Surplus located under IFRS?
Other Comprehensive Income
Where is Gain/Loss on Disposal and the Revaluation Surplus closed to under IFRS?
Gain/Loss on Disposal -> Profit
Revaluation Surplus -> RE
Is there a rule regarding the frequency or date of Revaluation under IFRS?
No
What does Class of Assets have to do with valuation Model under IFRS?
Different valuation models can be used for different classes of assets, but not different assets within the same class
IFRS examples of Identifieable Intangible Assets
Patents Copyrights Brand names Customer Lists Trade Names Computer Software Formulae Licenses Franchises
IFRS examples of Unidentifiable Intangible Assets
Goodwill
Under IFRS, how are Intangible items recorded?
- If Acquired & Identifiable = Cost
- If Acquired in a business combination & Identifiable, then FV separate from GW
- If Acquired in a business combination & Unidentifiable, then Plug GW
- If internally developed & Identifiable, then cost of development (not R&D)
Under IFRS, how is Intangible Asset carrying value calculated under the Cost Model?
- Finite: Cost - Accum Amort - Accum Impairment = CV
Indefinite: Cost - Accum Impairment = CV
*Indefinite life must be tested annually for impairment at reporting date
Under IFRS, how is Intangible Asset value calculated under the Revaluation Model?
FINITE: FV from active market @ Revaluation Date - Accum Amort after Revaluation - Accum Impairment after Revaluation = CV
INDEFINITE: FV from active market @ Revaluation Date - Accum Impairment after Revaluation = CV
What is IFRS Investment Property?
- Property held to earn rentals
2. Property held to earn capital appreciation
What cannot be done with IFRS Investment Property?
Cannot be used in production, supply, administrative, or ordinary sales
IFRS Investment Property is recorded how?
At cost
How is IFRS Investment Property value calculated under the Cost Model?
Cost - AD - Accum Impairment = CV
*Must disclose FV
How is IFRS Investment Property value calculated under the Fair Value Model?
Cost Model or FV Model
Fair Value = Carrying Value
*No Depreciation is recorded
*Gains/Losses in changing FV are recorded in Profit/Loss
If cash is received on the disposal of an asset, what amount is the asset account reduced by?
The amount of cash received minus any gains
Under IFRS, how may development costs be capitalized?
Under restrictive conditions - must meet six criteria
Under IFRS, recoverable amount is defined as?
The greater of net selling price or value in use
If Land & Building are purchased together, the value of each must be based on what?
Relative Market Value
EX: Use of property valuation percentage x price paid
Capital Leases must be recorded how?
Present Value of the lease payment.
However, the leased assets cannot be recorded at an amount greater than the FMV
The Leased payment should be discounted at the lessor of the Lessee’s incremental borrowing rate or the Lessor’s Implicit rate (if known by the Lessee)
Which depreciation method is computed the same as depletion?
Productive-Output Method
Future Cash Flows from an Asset when determining Impairment include?
Future Incoming Cash Flows
Future Outgoing Cash Flows
Future Incoming Cash Flows expected from sale of Asset
Start up costs include?
- Onetime activities related to opening a facility
- Introducing a new product/service
- Conducting business in a new territory
Are patents amortized over legal or useful life?
Legal or useful life - whichever is shorter.
How are leasehold improvements capitalized?
Over the course of the Lease Life or Useful life - whichever is shorter.
If a note payable is incurred while acquiring a capitalized asset, what cost is capitalized?
The present value of the note payable plus any down payments.
The test for recoverability of operational assets under ASC 360 uses:
Undiscounted cash flows less related outflows
The test for recoverability of operational assets under ASC 360 uses:
Undiscounted cash flows less related outflows
Can Goodwill be increased above it’s carrying value?
No
