Property, Plant and Equipment Flashcards
How do land improvements differ from land?
This asset differs from land in that it has a finite useful life and is depreciated.
List the requirements for inclusion in plant assets.
- Currently used in operations;
- Have a useful life extending beyond one year;
- Have physical substance.
List some examples of natural resources.
Items such as gravel pits, coal mines, tracts of timber land, and oil wells.
List the components of capitalized costs of self-constructed assets.
- Labor
- Material
- Overhead
- Interest Cost
What is the general rule for capitalizing expenditures?
Capitalize all expenditures necessary to bring the plant asset to its intended condition and location.
List the general rules on costs to capitalize.
- Cash equivalent price
- Get ready costs
List the considerations that must be given when electing to expense or capitalize an item.
- Estimated time benefit
- Materiality
List the limitation of recorded value of self-constructed assets.
Market value at completion.
Define “get ready costs.”
All costs incurred to get the asset on the company’s premises and ready for use.
How is the cash equivalent price in the issuance of securities determined?
In fair value of asset acquired or of securities issued, whichever can be most clearly determined.
How are donated items recorded?
Recorded at fair market value.
How is the price for group purchases recorded?
Total price is allocated to individual assets.
Define “cash equivalent price.”
The amount of cash paid for the asset on acquisition date.
What are the two allowed methods to compute total interest to be capitalized?
Weighted Average Method and Specific Method.
When are unpaid construction input costs included in Average Accumulated Expenditures (AAE)?
Not until cash is paid.
Define “avoidable interest.”
The amount of interest that would have been avoided had the construction not taken place.
Define “qualifying assets” for interest capitalization.
Assets constructed for an enterprise’s own use or assets intended for sale or lease that are constructed as discrete projects.
List the conditions that must exist to capitalize interest.
- Qualifying expenditures have been made
- Construction is proceeding
- Interest cost is being incurred.
What interest rates should be used to determine capitalized interest?
Average interest rate during period or specific interest rate applicable to construction debt.
List the interest capitalization formula.
Interest Rate X Average Accumulated Expenditures
List the two-step process involved in computing capitalized interest.
(1) Compute average accumulated expenditures
2) Apply the appropriate interest rate(s
If Average Accumulated Expenditures > total interest-bearing debt, what is interest expense for the period?
The difference between total interest cost and the amount of interest capitalized.
If Average Accumulated Expenditures > total interest-bearing debt, why is there no interest expense?
All debt could have been avoided if construction had not taken place.
What is not included in Average Accumulated Expenditures until paid in cash?
Any unpaid construction input costs.
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?
The interest revenue is reported separately with no effect on interest capitalized.
Where should the amount of interest paid be disclosed?
In the statement of cash flows, as either a part of the statement, as a supplemental schedule, or in a footnote.
If Average Accumulated Expenditures > total interest bearing debt, what is interest expense for the period?
All interest is capitalized and there is no reported interest expense for the period.
When would you increase the assets’ account basis by the post-acquisition cost?
When the productivity of the asset is enhanced rather than the useful life extended.
List the accounting approaches for post-acquisition expenditures.
- Substitution
- Increase larger asset account by post-acquisition cost
- Debit accumulated depreciation
What is the useful like for depreciating an addition?
If integral part of old asset, over shorter of addition’s or old asset’s useful life. If not, over addition’s useful life.
What is the general rule on when to capitalize post-acquisition expenditures?
If the asset becomes more productive or if it extends the assets life.
What type of allocation is depreciation considered?
Systematic and rational allocation of capitalized asset cost to time periods.
Define “book value.”
Original cost less accumulated depreciation to date.
How do we calculate the annual straight-line depreciation amount of an asset?
(Cost - Salvage Value) / Useful Life
List the non-accelerated methods of depreciation.
(1) Straight-line Method
(2) Service Hours Method
(3) Units of Output Method
How do we calculate depreciation based on service hours?
- Depreciation rate x service hours used
- Depreciation rate = (cost - salvage value) / estimated hours
Depreciation is included in overhead and allocated to production based on machine hours or direct labor for what type of asset?
Manufacturing assets.
When is the inventory method of depreciation used?
When the inventory items are smaller homogeneous groups of assets and individual records for the assets are not maintained.
How do we calculate the rate used in double declining balance?
Twice the straight-line rate.
What depreciation method does not use salvage value?
Double declining balance.
What depreciation method us used for group/composite assets?
Straight-line method to groups rather than individual assets.
List the type of costs capitalized for natural resources.
- Acquisition
- Exploration
- Development
List the methods of accounting for exploration costs.
- Successful efforts
- Full costing
What costs are included in the full costing method for exploration costs?
All costs of exploring for the resource are capitalized to the natural resources account.
What costs are included in the successful efforts method for exploration costs?
Only the cost of successful exploration efforts are capitalized to the natural resources account.
List the depletion rate formula.
(Natural Resources account balance - residual value) / (Total estimated units)
What is the classification of natural resources on the balance sheet?
Non-current asset.
Define “depletion.”
Refers to the allocation of the cost of the natural resource to inventory.
Under IFRS, what two methods can be used to adjust accumulated depreciation?
The proportional and reset methods.
Under IFRS, how is interest during construction accounted for?
Expensed or capitalized.
How frequently do companies have to review depreciation policies under IFRS?
They have to be reviewed annually.
What happens during the reset method?
Accumulated depreciation is reset to zero by closing it to the building account and then the building is adjusted for the revaluation.
Under IFRS, is revaluation of PP&E allowed?
Yes, revaluation is allowed.
Where is revaluation surplus reported under IFRS until the PP&E is sold?
It is reported in Equity.
