PPE

Question 1

Lump Sum Acquisitions - PPE

Answer 1

• Lump sum cost should be allocated to the individual assets based on the best indicator of relative fair values
  
  • Appraised value - use this amount for the percentage, but do not use this amount to record the assets
  • Use the total cost paid for the lump sum purchase of the assets and apply the appraised value percentages to this amount

Question 2

Involuntary Conversions

Answer 2

• Gain or less is recognized based on the carrying value of asset - insurance or other proceeds
  
  • Costs that you have paid for the asset for removal/clean up etc can be added to the book value
  • Repairs cannot be added to the book value, they need to be expensed and not capitalized
    Condemned - only those costs that are directly associate with the condemned amount can be added to the book value - such as appraisal fee or property and closing attorney fee associated with condemnation

Question 3

Post-Acquisition Expenditures:

Answer 3

• Ordinary repairs and maintenance -
  ○ charge to expense in period incurred
  
  • Restore asset to pre-damage condition (Repair for flood, fire, etc)
    ○ Charge portion not reimbursable from insurance to loss account in period which event occurred
  • Enhance service potential of asset by increasing efficiency or capability (additions, improvements, etc)
    ○ Capitalize by debiting the asset account
    ○ Carrying amount of assets or parts replaced should be removed from accounts and G/L recognized
  • Increase service potential of asset by increasing its useful life -
    ○ Capitalize by debiting the accumulated depreciation account
    § Normally the accumulated depreciation account is a credit balance
    ○ Remove carrying amount of any assets replaced and recognize a gain or loss
  • If expenditure benefits more than one period it should be capitalized

Question 4

Composite Method

Answer 4

• Group of dissimilar assets, but will apply the depreciation method as an overall group
  
  • When one asset is retired and cash has been received, the net carrying amount of all the asset accounts will be decreased by the cash proceeds exactly
    See accumulated depreciation for further details

Question 5

Accumulated Depreciation

Answer 5

• Assumed to be equal to the difference between cash received and cost
  
  • When asset cost and accumulated depreciation are both removed, the carrying amount of the asset is decreased by cash proceeds exactly
  • Increase in accumulated depreciation expense should be the depreciation expense for a certain year
  • Maximum amount of accumulated depreciation is cost - salvage value
  • Depreciable assets cannot be depreciated past the point of cost - accumulated depreciation = salvage value

Question 6

IFRS -

Answer 6

• Capitalized costs for PPE include freight costs along with costs to bring it to its location for use and make it ready for use
  
  • Interest, however, Is not included in the capitalized cost for PPE - as this is a finance cost and financing costs are expensed under IFRS
  • IFRS requires component depreciation to be applied, each separable part of an asset has its own depreciation rates
    Recognition - under IFRS you can choose to recognize PPE at cost or at Revaluation model. Will apply entire method to PPE

Question 7

Revaluation Model

Answer 7

• Fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses
  ○ When carrying value of assets differs materially from fair value of the assets, a revaluation must occur
  § Any increase being included in asset revaluation surplus, an equity account like OCI
  § Any decrease being accounted for as another loss included in income from operations
  § Any increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss
  EX: prior loss of 10k, then an increase of 15k - the 10k will be included in loss in net income, and the 5k will go to a gain in OCI

Question 8

Donated Assets

Answer 8

• Nonreciprocal transfer - recorded at fair value at the time of the transfer
  
  • Contingency - additional paid in capital until the contingency is fulfilled

Question 9

Capitalization vs Expense:

Answer 9

• Capitalized -
  ○ leasehold improvements, equipment, and furniture can only be capitalized as assets
  
  • Expensed -
    ○ All other items - lab expenses, General and Admin, Research and Development etc
    Once an asset is complete and ready for use or sale, any interest incurred after that is an interest expense and not capitalized

Question 10

Impairment Loss

Answer 10

• GAAP
  ○ Does not allow the restoration of an impairment loss
  ○ The reduced carrying amount of the asset is just treated as the new cost
  
  • IFRS
    ○ Does allow for the restoration of impaired assets
    ○ Full impairment loss can be recognized in the subsequent period
    Depreciable Base

Question 11

Depreciable Base

Answer 11

• Purchase price - salvage value
  
  • Even if ownership is transferred in a sale at a different cost than the original purchase price, still use the original purchase price as the depreciable base

Question 12

Building Held For Sale:

Answer 12

• Will no longer be depreciated
  Will never be valued at historical cost because a building that is held for sale is carried at no more than original cost - accumulated depreciation

Question 13

Capitalization of Interest

Answer 13

• Determined by applying the appropriate capitalization rate to the average amount of accumulated expenditures during the period
  
  • Interest cost is required to be capitalized equal to the less of a) avoidable interest (based on weighted average amount of accumulated expenditures) or b) actual interest cost incurred
  • Capitalization period begins when the following three conditions have been met:
    ○ Expenditures for the asset have been made
    ○ Activities that are necessary to get the asset ready for its intended use are in progress
    ○ Interest cost is being incurred
    Capitalization period ends when the qualifying asset is substantially complete and ready for its intended use