Property, Plant and Equipment

Question 1

How do land improvements differ from land?

Answer 1

This asset differs from land in that it has a finite useful life and is depreciated.

Question 2

List the requirements for inclusion in plant assets.

Answer 2

• Currently used in operations;
• Have a useful life extending beyond one year;
• Have physical substance.

Question 3

List some examples of natural resources.

Answer 3

Items such as gravel pits, coal mines, tracts of timber land, and oil wells.

Question 4

List the components of capitalized costs of self-constructed assets.

Answer 4

• Labor
• Material
• Overhead
• Interest Cost

Question 5

What is the general rule for capitalizing expenditures?

Answer 5

Capitalize all expenditures necessary to bring the plant asset to its intended condition and location.

Question 6

List the general rules on costs to capitalize.

Answer 6

• Cash equivalent price

- Get ready costs

Question 7

List the considerations that must be given when electing to expense or capitalize an item.

Answer 7

• Estimated time benefit

- Materiality

Question 8

List the limitation of recorded value of self-constructed assets.

Answer 8

Market value at completion.

Question 9

Define “get ready costs.”

Answer 9

All costs incurred to get the asset on the company’s premises and ready for use.

Question 10

How is the cash equivalent price in the issuance of securities determined?

Answer 10

In fair value of asset acquired or of securities issued, whichever can be most clearly determined.

Question 11

How are donated items recorded?

Answer 11

Recorded at fair market value.

Question 12

How is the price for group purchases recorded?

Answer 12

Total price is allocated to individual assets.

Question 13

Define “cash equivalent price.”

Answer 13

The amount of cash paid for the asset on acquisition date.

Question 14

What are the two allowed methods to compute total interest to be capitalized?

Answer 14

Weighted Average Method and Specific Method.

Question 15

When are unpaid construction input costs included in Average Accumulated Expenditures (AAE)?

Answer 15

Not until cash is paid.

Question 16

Define “avoidable interest.”

Answer 16

The amount of interest that would have been avoided had the construction not taken place.

Question 17

Define “qualifying assets” for interest capitalization.

Answer 17

Assets constructed for an enterprise’s own use or assets intended for sale or lease that are constructed as discrete projects.

Question 18

List the conditions that must exist to capitalize interest.

Answer 18

• Qualifying expenditures have been made
• Construction is proceeding
• Interest cost is being incurred.

Question 19

What interest rates should be used to determine capitalized interest?

Answer 19

Average interest rate during period or specific interest rate applicable to construction debt.

Question 20

List the interest capitalization formula.

Answer 20

Interest Rate X Average Accumulated Expenditures

Question 21

List the two-step process involved in computing capitalized interest.

Answer 21

(1) Compute average accumulated expenditures

2) Apply the appropriate interest rate(s

Question 22

If Average Accumulated Expenditures > total interest-bearing debt, what is interest expense for the period?

Answer 22

The difference between total interest cost and the amount of interest capitalized.

Question 23

If Average Accumulated Expenditures > total interest-bearing debt, why is there no interest expense?

Answer 23

All debt could have been avoided if construction had not taken place.

Question 24

What is not included in Average Accumulated Expenditures until paid in cash?

Answer 24

Any unpaid construction input costs.

Question 25

If the proceeds from a specific construction loan are not fully used for financing construction until well into the construction phase, how is the interest handled?

Answer 25

The interest revenue is reported separately with no effect on interest capitalized.

Question 26

Where should the amount of interest paid be disclosed?

Answer 26

In the statement of cash flows, as either a part of the statement, as a supplemental schedule, or in a footnote.

Question 27

If Average Accumulated Expenditures > total interest bearing debt, what is interest expense for the period?

Answer 27

All interest is capitalized and there is no reported interest expense for the period.

Question 28

When would you increase the assets’ account basis by the post-acquisition cost?

Answer 28

When the productivity of the asset is enhanced rather than the useful life extended.

Question 29

List the accounting approaches for post-acquisition expenditures.

Answer 29

• Substitution
• Increase larger asset account by post-acquisition cost
• Debit accumulated depreciation

Question 30

What is the useful like for depreciating an addition?

Answer 30

If integral part of old asset, over shorter of addition’s or old asset’s useful life. If not, over addition’s useful life.

Question 31

What is the general rule on when to capitalize post-acquisition expenditures?

Answer 31

If the asset becomes more productive or if it extends the assets life.

Question 32

What type of allocation is depreciation considered?

Answer 32

Systematic and rational allocation of capitalized asset cost to time periods.

Question 33

Define “book value.”

Answer 33

Original cost less accumulated depreciation to date.

Question 34

How do we calculate the annual straight-line depreciation amount of an asset?

Answer 34

(Cost - Salvage Value) / Useful Life

Question 35

List the non-accelerated methods of depreciation.

Answer 35

(1) Straight-line Method
(2) Service Hours Method
(3) Units of Output Method

Question 36

How do we calculate depreciation based on service hours?

Answer 36

• Depreciation rate x service hours used

- Depreciation rate = (cost - salvage value) / estimated hours

Question 37

Depreciation is included in overhead and allocated to production based on machine hours or direct labor for what type of asset?

Answer 37

Manufacturing assets.

Question 38

When is the inventory method of depreciation used?

Answer 38

When the inventory items are smaller homogeneous groups of assets and individual records for the assets are not maintained.

Question 39

How do we calculate the rate used in double declining balance?

Answer 39

Twice the straight-line rate.

Question 40

What depreciation method does not use salvage value?

Answer 40

Double declining balance.

Question 41

What depreciation method us used for group/composite assets?

Answer 41

Straight-line method to groups rather than individual assets.

Question 42

List the type of costs capitalized for natural resources.

Answer 42

• Acquisition
• Exploration
• Development

Question 43

List the methods of accounting for exploration costs.

Answer 43

• Successful efforts

- Full costing

Question 44

What costs are included in the full costing method for exploration costs?

Answer 44

All costs of exploring for the resource are capitalized to the natural resources account.

Question 45

What costs are included in the successful efforts method for exploration costs?

Answer 45

Only the cost of successful exploration efforts are capitalized to the natural resources account.

Question 46

List the depletion rate formula.

Answer 46

(Natural Resources account balance - residual value) / (Total estimated units)

Question 47

What is the classification of natural resources on the balance sheet?

Answer 47

Non-current asset.

Question 48

Define “depletion.”

Answer 48

Refers to the allocation of the cost of the natural resource to inventory.

Question 49

Under IFRS, what two methods can be used to adjust accumulated depreciation?

Answer 49

The proportional and reset methods.

Question 50

Under IFRS, how is interest during construction accounted for?

Answer 50

Expensed or capitalized.

Question 51

How frequently do companies have to review depreciation policies under IFRS?

Answer 51

They have to be reviewed annually.

Question 52

What happens during the reset method?

Answer 52

Accumulated depreciation is reset to zero by closing it to the building account and then the building is adjusted for the revaluation.

Question 53

Under IFRS, is revaluation of PP&E allowed?

Answer 53

Yes, revaluation is allowed.

Question 54

Where is revaluation surplus reported under IFRS until the PP&E is sold?

Answer 54

It is reported in Equity.