PP&E Flashcards
What are the 3 conditions necessary to be able to capitalize interest incurred in the construction of qualifying assets?
- Expenditures have been made (Note that incurrence of short-term non-interest-bearing debt such as A/P does not qualify).
- Activities necessary to get asset ready for intended use are in progress.
- Interest cost is being incurred (Imputed interest is not capitalized)
The amount of interest capitalized is the lesser of
Actual interest incurred or Avoidable interest.
Capitalized interest is limited to ____
actual interest incurred.
What disclosures are required related to capitalized interest?
Amount of interest capitalized and expensed during the period. Note that the amount of interest paid for the period is to be disclosed as part of the SOCF (as part of the statement, supplemental schedule, or in a footnote).
What is depreciation and what’s its purpose?
Depreciation is the process of allocating the cost of PP&E over the periods they are used to produce revenues.
It’s a systematic and rational process of attempting to associate revenues with the use of an asset. Not a valuation process.
Why would it be appropriate to use accelerated depreciation methods?
Accelerated methods assume that some assets provide greater benefits in the early years of an asset’s life.
Accelerated depreciation methods are also appropriate when benefits derived from the asset are approximately equal over the asset’s life, but repair and maintenance costs increase significantly in later years.
What are the pros and cons of activity-based depreciation methods?
Activity-based depreciation methods provide a better matching of the asset’s cost to the use of that asset to help produce revenues. An asset’s productivity is more closely associated with the benefits provided by the asset than the mere passage of time.
However, activity-based methods are often infeasible or too costly to use.
What is the effect of straight-line depreciation on net income?
Straight-line depreciation produces a higher net income than accelerated methods in the early years of an asset’s life.
What are some differences between US GAAP and IFRS with respect to depreciation?
- Component depreciation.
IAS 16 requires that each component of an item of PPE must be depreciated separately if its cost is significant in relation to the total cost of the item. US GAAP allows component depreciation but not often used in practice. - Residual Value.
IFRS requires a review of residual values at least annually. - Revaluation.
IAS 16 allows a company to report PPE at net book value or at fair value (revaluation). US GAAP prohibits revaluation.
How are PP&E reported on the balance sheet?
Original cost less accumulated depreciation.
How is residual/salvage value treated when using the DDB Method?
DDB does not subtract the residual value in calculating the depreciable base. Instead, RV is only used as a limitation on total depreciation; hence, we can’t depreciate below the RV.
How is sum-of-the-years’-digits method calculated?
The SYD Method multiplies the depreciable base by a declining fraction.
Which depreciation method provides a higher/lower total depreciation over an asset’s life?
All methods provide the same total depreciation over an asset’s life.
What factor is needed to use the units-of-production method?
Total units to be produced can be estimated.
When is it appropriate to use the units-of-production method?
When an asset’s service potential declines with use.
A bookkeeper failed to record $40,000 of depreciation expense for the year. The error was detected in year 2. How much is year 2’s depreciation expense?
$40,000. Only one year of depreciation expense should be recognized.
The error in year 1 should be treated as a prior period adjustment in year 2 because it is a correction of an error. Accordingly, year 2’s beginning retained earnings should be adjusted, net of tax.
If estimated salvage value is improperly excluded from the depreciation computation (except for DDB), what is the effect on NI?
Depreciation expense is overstated (too high) so net income is understated.
What is the accounting treatment for restoration costs?
Restoration costs are capitalized and added to the depletion base. Note that natural resources are depleted, not depreciated.
An asset has an estimated residual value. Which depreciation method depreciates an asset to zero?
Depreciable assets should not be depreciated below salvage value under any depreciation method.
