PP&E: Cost Basis Flashcards
What is historical cost?
the basis for valuation of purchased fixed assets; it is measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use
How are donated fixed assets recorded?
they are recorded at FMV along with incidental costs incurred; they result in the recognition of a gain on the income statement
How is the cost of land calculated?
when land has been purchased for the purpose of constructing a building, all costs incurred up to excavation for the new building are considered land costs; the following are included:
purchase price, brokers’ commissions, title and recording fees, legal fees, draining of swamps, clearing of brush and trees, site development (ex. grading of mountain tops to make a “pad”), existing obligations assumed by the buyer (including mortgages and back taxes), costs of razing/tearing down an old building (demolition), less proceeds from sale of existing buildings, standing timber, etc.
How are the cost of land improvements calculated?
land improvements are depreciable and include the following:
fences, water/sewer systems, sidewalks, paving, landscaping, lighting
interest costs during the construction period should be added to the cost of land improvements based on the weighted average of accumulated expenditures
How is the cost of the plant calculated?
cost of plant or buildings includes the following:
purchase price, all repair charged neglected by the previous owner (“deferred maintenance”), alterations and improvements, architect’s fees, and possible addition of construction-period interest
for a “basket purchase” of land and building, you need to allocate the purchase price based on the ratio of appraised values and individual items
How is the cost of equipment calculated?
cost includes all expenditures related directly to the acquisition or construction of the equipment and includes the following:
invoice price, less cash discounts and other discounts (if any), add freight-in (and insurance while in transit and while in construction), add installation charges (including testing and preparation for use), add sales and federal excise taxes, possible addition of construction period interest
Capitalize vs Expense
proper accounting is determined based on the purpose of the expenditure
additions increase the quantity of fixed assets and are capitalized
improvements/betterments improve the quality of fixed assets and are capitalized to the fixed asset account; in a replacement, a new, similar asset is substituted for the old asset. If the carrying value of the old asset is known, remove it and recognize any gain/loss; capitalize the cost of the improvement/replacement to the asset account. If the carrying value of the old asset is unknown, and the asset’s life is extended, debit accumulated depreciation for the cost of the improvement/replacement; the usefulness of the asset is increased, capitalize the cost of the improvement/replacement to the asset account
ordinary repairs should be expensed as repair and maintenance; extraordinary repairs should be capitalized; treat the repair as an addition, improvement, or replacement, as appropriate
Fixed assets constructed by a company
when a fixed asset is constructed by a company, the cost of the fixed asset includes: DM and DL, repairs and maintenance expenses that add value to the fixed asset, overhead (including direct items of overhead [any “idle plant capacity” expense), construction period expense
construction period interest should be capitalized based on weighted average of accumulated expenditures as part of the cost of producing fixed assets
For the CPA exam, it is important to remember two rules concerning capitalized interest
rule 1: only capitalize interest on money actually spent, not on the total amount borrowed
rule 2: the amount of capitalized interest is the lower of: actual interest cost incurred or computed capitalized interest (avoidable interest)
Capitalization of interest period and when to disclose on the financial statements
capitalization of interest period begins when 3 conditions are met: expenditures for the asset have been made, activities that are necessary to get the asset ready for its intended use are in progress, and interest cost is being incurred
this continues as long as the 3 conditions are present; it stops during intentional delays in construction, but it continues during ordinary construction delays; it ends when the asset is (or independent parts of the asset are) substantially complete and ready for the intended use (regardless of whether it is actually used)
disclosure in financial statements for total interest cost incurred during the period and capitalized interest cost for the period, if any
