Fixed Assets

Question 1

What determines if expenditures are expensed or capitalized for equipment?

Answer 1

Include all expenditures to get the asset into working condition and ready for use.

Question 2

What types of costs are capitalized for equipment?

Answer 2

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 efficiency of these assets are capitalized.

Question 3

How are R&D costs related to equipment treated?

Answer 3

They are expensed in the period incurred and NOT capitalized.

Question 4

How are expenditures related to buildings treated?

Answer 4

Includes all expenditures to get the asset into “working condition” and ready for use

Question 5

How are expenditures related to land treated?

Answer 5

Includes all expenditures to get the land ready for its intended use
○ Title & County Fees
○ Clearing of Land - Dirt Work, etc.
○ Demolition and Removal of Buildings (minus any scrap or salvage)

Question 6

What does it mean when a transaction lacks commercial substance?

Answer 6

Cash flows are not different; new asset value = book value of old asset.

Only gain recognized is any boot ( cash) received from the transaction.

Question 7

What does it mean when a transaction has commercial substance?

Answer 7

Cash flows are different; new asset value = fair value of old asset;

Question 8

When a transaction is an “arms length” deal, does it have or lack commercial substance.

Answer 8

It has commercial substance and it is valued at fair value.

Question 9

How is donated property recorded?

Answer 9

Donee- recorded at fair value plus costs associated with getting property into working condition
Donor- recorded at fair value of asset given up; gain/loss recorded.

Question 10

What is the formula for double-declining balance

Answer 10

= 1/useful life x 2 x book value

Question 11

Which type(s) of depreciation ignores salvage value?

Answer 11

Double Declining Balance

Question 12

When an asset that is being depreciated via DDB drops below straight line value, what happens?

Answer 12

You stop using DDB and switch to straight line to fully depreciate the asset

Question 13

What is the formula for sum of year’s digits?

Answer 13

= remaining useful life / (sum of year’s digits)

i.e. a 10 year useful life looks like this in year 3:
8 / (10+9+8+…2+1) = 8/55

Question 14

What is the formula for straight line depreciation?

Answer 14

= 1 / useful life

Question 15

When is an asset imparied?

Answer 15

When the undiscounted future cash flows < carrying value.

Question 16

How is impairment loss calculated?

Answer 16

Impairment loss = carrying value - fair value

Question 17

Can impaired assets recover their value after they have been written down? (GAAP)

Answer 17

No, once an item has been written down, it cannot be written back up.

Question 18

What costs are amortized related to patents?

Answer 18

Legal fees to successfully defend a patent are amortized over the patent’s economic life.

Question 19

What level is goodwill tested at?

Answer 19

Goodwill is tested at the Reporting Unit, but not at the entity level.

Question 20

How are software expenses treated before technological feasibility?

Answer 20

They are expensed as research and development

Question 21

How are software expenses treated after feasibility but prior to production?

Answer 21

They are capitalized

Question 22

How are software expenses treated that are incurred during production?

Answer 22

The expenses go to inventory.

Question 23

How are software expenses treated that are for training on internal use software?

Answer 23

They are expensed.