PP&E: Cost Basis (F3:M4)

Question 1

what is historical cost?

Answer 1

price of obtaining the asset and bringing it to the location and condition necessary for its intended use

Question 2

what are land costs?

Answer 2

all costs incurred up to excavation for a new building (digging a hole for the foundation)

Question 3

list some land improvements. Are they depreciable?

Answer 3

fences
water systems
sidewalks
paving
lighting
*interest costs during construction period based on weighted average of accumulated expenditures

YES!

Question 4

what are the two key rules to remember concerning capitalized interest?

Answer 4

only capitalize interest on money actually spent

the amount of capitalized interest is the lower of:

1. actual interest cost incurred
2. computed capitalized interest (avoidable interest)

Question 5

capitalization of interest period begins when what three conditions are present?

Answer 5

1. expenditures for the asset have been made
2. activities that are necessary to get asset ready for its intended use are in progress
3. interest cost is being incurred

• stops during intentional delays in construction
• ends when asset is substantially complete

Question 6

when does the construction period begin?

Answer 6

at point the decision is made to build on land

Question 7

whenever assets are purchased requiring fixed payments extending beyond one year, how should the assets be valued?

Answer 7

at the PV of all future payments

Question 8

steps for determining the amount of interest that can be capitalized

Answer 8

1. calculate weighted average accumulated expenditures (expenditure amount x portion of year outstanding)
2. appropriate interest rate x weighed average accumulated expenditures
3. compare capitalized interest to the actual interest
   * amount of interest capitalized cannot be greater than actual interest