Module 11: Fixed Assets

Question 1

Impairment Loss

Answer 1

An impairment loss is only recognized if the carrying amount of the asset is not recoverable. The carrying value is considered not recoverable if it exceeds the sum of the expected value of the undiscounted cash flows of the asset.

Question 2

Development cost can only be capitalized if they meet six (6) criteria

Answer 2

1) Technological feasibility of completing the asset for use or sale has been achieved;
2) the entity intends to complete and use or sell the asset;
3) the entity has the ability to use or sell the asset;
4) the entity understands how the asset will generate probable future economic benefits;
5) technical, financial, and other resources are available to complete development of the asset;
6) the entity has the ability to reliably measure the expenditures.

Question 3

Composite (group) depreciation

Answer 3

averages the service life of a number of property units and depreciates the group as if it were a single unit. The term “group” is used when assets are similar; “composite” when they are dissimilar. The depreciation rate is the following ratio:

Sum of annual SL depreciation of individual assets / Total asset cost (depreciation base)

Question 4

Development Stage Enterprises (ASC Topic 915)

Answer 4

ASC Topic 915 defines development stage enterprises as one devoting substantially all of its efforts to establishing a new business and (1) planned principal operations have not commenced, or (2) planned principal operations have commenced, but there has been no significant revenue.

Question 5

Capitalization of Interest

Answer 5

Only assets which require a period of time to be prepared for use qualify for interest capitalization. The amount of interest to be capitalized is the amount which could have been avoided if the project had not been undertaken. This amount includes amortization of any discount, premium, or issue cost; but it shall not exceed the actual interest incurred during the period. The amount of “avoidable” interest is computed as follows:

Average accumulated expenditures during construction x Interest Rate x Construction period

Question 6

Acquisition Cost

Answer 6

Fixed Assets & Tangible property

Question 7

Boot

Answer 7

money/ cash

Question 8

Capitalization Expenditures

Answer 8

Increase the carrying value of the asset . Are not normal, recurring expenses; they benefit the operations of more than one period. The cost of major rearrangements of assets to increase efficiency. Examples include, additions, replacements, betterments, and extraordinary repairs and maintenance.

Question 9

Commercial Substance

Answer 9

A transaction has commercial substance if the configuration of cash flows are significantly different as a result of the exchange. The configuration of cash flows includes the risk, timing, and the amount of future cash flows.

Question 10

Configuration of cash flows

Answer 10

…..

Question 11

Depreciation

Answer 11

Annual charge to income for asset use during the period. Since depreciation is a non cash expense it does not provide resources for the replacement of assets. It is simply a means of spreading asset cost to periods in which the assets produce revenue.

Question 12

Goodwill

Answer 12

….

Question 13

Goodwill Impairment

Answer 13

…..

Question 14

Impairment Loss

Answer 14

…..

Question 15

Intangible Asset Amortization

Answer 15

……

Question 16

Non-monetary Exchange

Answer 16

a reciprocal transfer wherein the transferor has no substantial continuing involvement in the asset, and the risks and rewards of ownership are transferred.

Question 17

Betterment

Answer 17

does not extend the useful life of the asset, however makes the asset more productive and more efficient. Increase the carrying value. JE: Dr. Asset; Cr. Cash

Question 18

Major Repair

Answer 18

Extends the useful life. Increase the carrying value. Also, makes the asset more productive and more efficient. JE = Dr. A/D and Cr. Cash

Question 19

Revenue Expenditure

Answer 19

Treated as repair and maintenance expense. Normal, recurring expenditures. Some expenditures that meet the test for capital expenditures are expenses because they are immaterial.

Question 20

Composite Depreciation

Answer 20

a weighted average of a group of assets - usually not similar

Question 21

Group Depreciation

Answer 21

Use when assets are similar

Question 22

Biological Assets (Agricultural Assets) - IFRS

Answer 22

Living animals or plants and must be disclosed as a separate item on the balance sheet. Biological assets are recognized when future economic benefits is probable, the entity controls the asset as a result of past events, and the cost or fair value can be measured reliably. Agricultural produce should be measured as fair value less costs to sell at harvest.

Question 23

Investment Property - IFRS

Answer 23

Property held to earn rents, to earn capital appreciation, or both.

Question 24

Transaction lacks commercial substance when….

Answer 24

a) Cash flows do NOT change in their risk, timing, and amount; AND
b) Do not include tax effects when considering the cash flows.

Question 25

Depletion charge per unit

Answer 25

Net Cost of resource (cost + restoration cost - salvage value)/ unit of resource