Property, Plant and Equipment

Question 1

What are the requirements for an asset to be included in plant assets?

Answer 1

1. Be currently used in operations;
2. Have a useful life extending more than one year beyond the balance sheet date; and
3. Have physical substance. Intangible assets are different from plant assets in that they have no physical substance.

Question 2

There are 4 categories for plant assets. what are they?

Answer 2

Plant and Equipment
Land Improvements
Land
Natural Resources

Question 3

What items are included in plant and equipment?

Answer 3

This category of fixed assets is composed of buildings, machinery, and equipment. These assets have a finite useful life and can also be referred to as depreciable assets

Question 4

What items are included in land improvements?

Answer 4

This asset differs from land in that it has a finite useful life and is depreciated. Examples of land improvements include parking lots, fencing, external lighting, and some landscaping.

Question 5

What items are included in land?

Answer 5

This category includes the site of a manufacturing facility, the site of administrative offices, and the site of any storage warehouses. Any plot of land in which a company has constructed facilities specifically related to primary business operations is included in this category.

It is the only asset in the plant asset category that is not depreciated or amortized

Question 6

What items are included in natural resources?

Answer 6

Include such items as a gravel pit, a coal mine, a tract of timber land, and an oil well. This category of assets will produce income until all the natural resources are extracted and sold. These assets are frequently referred to as depletable assets.

Question 7

When are costs capitalized to plant assets?

Answer 7

If the estimated time of benefit is related to the current and future accounting periods, the expenditure is capitalized.

If the estimated time of benefit is related to the current accounting period only, the expenditure is recorded as an expense

If the expenditure is immaterial, the company will account for the expenditure in the most expedient way possible

Question 8

What is included in the cost of a plant asset?

Answer 8

The acquisition cost of property, plant, and equipment includes two components, the cash equivalent price or negotiated acquisition cost and the so-called get ready costs.
The get ready costs include all costs incurred to get the asset on the company’s premises and ready for use.

Question 9

How do you determine the gain in an exchange where money is present?

Answer 9

Boot Received / (Boot received + FMV of assets received ) * Total Gain = gain recognized

Question 10

How do you value plant assets?

Answer 10

In general, plant assets should be valued at the market value of consideration given in exchange, or at the market value (cash equivalent price) of the asset acquired, whichever is more readily determinable and reliable.

Cash Purchase - cash equivalent price
Credit Purchase - PV of future cash payments
Issuance of Securities - FMV of security or FMV of asset aquired
Donated Assets - FMV
Group Purchase = Allocate to individual assets

Question 11

How to you value self constructed assets?

Answer 11

It includes 4 components:
Labor – The direct labor charges related to the construction of the asset will be capitalized
Material – The direct materials related to the construction of the asset will be capitalized.
Overhead – The overhead charges related to the construction of the asset will be capitalized.
Interest Cost Incurred During the Construction Period –Capitalization of interest is allowed only when assets are constructed.

If the total cost of construction exceeds market value, a loss is recognized for the difference and the asset is recorded at market value.

Question 12

Why is interest during construction capitalized?

Answer 12

The justification for interest capitalization is that had the construction not taken place, the funds used in construction could have been used to reduce interest bearing debt. This avoidable interest is the amount of interest that would have been avoided had the construction not taken place. In a sense, the construction then caused that amount of interest, which therefore should be included in the cost of the asset constructed.

Question 13

Is interest capitalized on construction of inventory items?

Answer 13

Interest is not capitalized on the construction or manufacture of inventory items, even if the inventory requires significant time for completion

Question 14

What is required for interest to be capitalized?

Answer 14

Qualifying expenditures have been made
Activities that are necessary to get the asset ready for its intended use are in progress
Interest cost is being incurred

Question 15

What steps are taken to compute capitalized interest?

Answer 15

The two steps are: (1) compute average accumulated expenditures, and (2) apply the appropriate interest rate(s).

AAE = average cash (or other qualifying expenditures) investment in the project during the period. This is the amount of debt that could have been retired during the period.

This is the amount of interest to be capitalized, subject to the limitation that capitalized interest cannot exceed actual interest cost for the period.

Question 16

What are the two methods that can be used to determine interest capitalization?

Answer 16

Weighted Average and Specific Method

Question 17

How do you calculate interest with the weighted average method?

Answer 17

Capitalizes interest using the weighted average rate on all interest bearing debt.

Question 18

How do you calculate interest with the specific method?

Answer 18

Capitalizes the interest on specific construction loans first. Then, if needed, capitalize interest on all other debt based on the average interest rate for that debt

Question 19

When is interest capitalized for land?

Answer 19

A. For land used as a building site, the cost of the land is included in AAE for the building, and interest is capitalized to the building; (The land is not being constructed.)
B. For land developed for sale, interest is capitalized to the land;
C. For land held for speculation, no interest is capitalized because the land is in its condition of intended use, and there is no asset under construction.

Question 20

How do you capitalize interest for partial year computations?

Answer 20

Interest rate – adjust the interest rate for the fraction of the year the debt is outstanding
Expenditures – weight by the percent of the period invested in the project. An expenditure occurring at the beginning of the second month of a quarter receives a weight of 2/3.

Question 21

When is a post-acquistion cost of an asset capitalized?

Answer 21

if, as a result of the expenditure, the asset is:

1. More productive (provides more benefits); or
2. Has a longer useful life.

Otherwise it is expensed

Question 22

Are asset repairs capitalized?

Answer 22

Repairs keep the asset in an ordinarily efficient operating condition. Repairs do not typically extend the life of the asset or increase its value. Repairs are typically expensed in the period incurred.

Question 23

How do you treat a capitalized addition to an asset?

Answer 23

If an integral part of the larger asset, depreciate the addition over the shorter of its useful life or the remaining useful life of the larger asset.
If not, depreciate the addition over its useful life.

Question 24

How do you treat a capitalized modification to an asset?

Answer 24

1. Substitution: remove the accumulated depreciation and original cost of the old component, recognize the loss, and capitalize the post-acquisition expenditure to the larger asset. This alternative is available only if the accounting system maintained records of the old component cost and accumulated depreciation.
2. Increase the larger asset account by the post-acquisition cost. This approach is used when the productivity rather than the useful life of the larger asset is enhanced, and when the accounting system does not maintain records of the old component cost and accumulated depreciation.
3. Debit accumulated depreciation. This approach is used when the expenditure increases the useful life of the larger asset. The debit to accumulated depreciation turns back the clock on the life of the larger asset. This approach is suited especially to extraordinary repairs.

For each of these three approaches, the post-acquisition cost is depreciated over the shorter of its useful life or remaining useful life of the larger asset

Question 25

What is depreciation?

Answer 25

is a systematic and rational allocation of capitalized plant asset cost to time periods.

Question 26

Why do we depreciate?

Answer 26

Assets wear out over time;

Assets become obsolete.

Question 27

Define Book Value

Answer 27

Original cost less accumulated depreciation to date.

Question 28

Define Depreciable Cost

Answer 28

Total depreciation to be recognized over the life of the asset. This amount equals original cost less salvage value.

Question 29

Define Minimum Book Value

Answer 29

Salvage value

Question 30

What is the equation for the straight line depreciation method?

Answer 30

Cost - Salvage Value / Useful Life

Annual depreciation is the same each year.

Question 31

What is the equation for the service hours depreciation method?

Answer 31

The life of the asset is defined in terms of service hours, and the depreciation rate per service hour is calculated by using the formula shown below. The number of total service hours the asset will provide must be estimated and used as the denominator.
Depreciation rate = (Cost-Salvage Value) / (Useful Life in Service Hours)
Depreciation for any given year is calculated by multiplying the service hours for the year by this constant depreciation rate per service hour

Question 32

What is the equation for the units of output depreciation method?

Answer 32

The life of the asset is defined in terms of units of output, and the depreciation rate per unit of output is calculated using the formula shown below. The number of total units the asset will produce must be estimated and used as the denominator.
Depreciation rate = (Cost - Salvage Value) / (Useful Life in Units of Production)
Depreciation for any given year is calculated by multiplying the units of output for the year by this constant depreciation rate per unit of output.

Question 33

What is the justification for using an accelerated depreciation method?

Answer 33

The theoretical justification for using an accelerated method is related to the matching principle. It is assumed the asset will be more productive in the earlier years.

Another justification is obsolescence. Assets subject to obsolescence (high-tech equipment for example) will provide most of their benefits early in their life.

Question 34

What is the equation for the sum of the years digits depreciation?

Answer 34

a. First, the sum of the years’ digits must be calculated by using the formula shown below.
N = useful life in years.
SYD =(N(N+1))/2 = 1 + 2 + … + N
SYD is the denominator of the fraction used each year to compute depreciation. The numerator is the number of years remaining at the beginning of the year.
Year 1 Depreciation: (N/SYD)(Cost - Salvage Value)
Year 2 Depreciation: ((N-1)/SYD)(Cost - Salvage Value))
Year N Depreciation: (1/(SYD))(Cost - Salvage Value))

Question 35

What is the equation for the double declining balance depreciation?

Answer 35

Depreciation in year 1 = Cost(2/N)
Depreciation in year 2 = (Cost - depreciation in year 1)(2/N)
This method differs from those discussed previously in three ways:
Salvage value is not used in the computation of depreciation
Annual depreciation is based on the beginning book value of the asset.
Each year, accumulated depreciation must be checked to ensure that book value does not fall below salvage value.

Question 36

What method is used when it is impractival to depreciate an asset on the individual basis?

Answer 36

Appraisal methods - Inventory or Group

Question 37

What is the inventory appraisal method?

Answer 37

This method is applied to groups of smaller homogenous assets. At the end of each year, the assets are appraised and recorded at market value. The appraisal is for the entire group which saves accounting costs

Question 38

What is the group or composite appraisal method?

Answer 38

This system applies the straight-line method to groups of assets rather than to assets individually. Accumulated depreciation records are not maintained by asset; rather, only a control account is used to accumulate depreciation. Gains and losses are not recorded. The entry to dispose of an asset plugs the accumulated depreciation account

The composite depreciation rate = (annual group SL depreciation) / (total original cost of group

Question 39

What is a natural resource?

Answer 39

A noncurrent asset that contains the cost of acquiring, exploring, and developing a natural resource deposit (e.g., timber, oil and minerals). It does not include the cost of extracting the resource.

Question 40

Define Acquistion Costs

Answer 40

The amount paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources.

Question 41

Define Exploration costs

Answer 41

The amount paid to drill or excavate or any other costs of searching for natural resources.

Question 42

Define Development Costs

Answer 42

The amount paid after the resource has been discovered but before production begins.

Question 43

What are the 2 methods to account for natural resource exploration costs?

Answer 43

Successful method and full cost

Question 44

What is the successful efforts method for exploration costs?

Answer 44

Only the cost of successful exploration efforts is capitalized to the natural resources account; unsuccessful efforts are expensed.

Question 45

What is the full costing method for exploration costs?

Answer 45

All costs of exploring for the resource are capitalized to the natural resources account. (The total amount capitalized cannot exceed the expected value of resources to be removed.)

Question 46

What is depletion?

Answer 46

After all costs are capitalized to the natural resources account, the resource begins to be removed and depletion is recorded. Depletion is the term used to refer to the allocation of the cost of the natural resource to inventory. Depletion is taken on the natural resource asset (sum of the three costs above less the residual value).

Depletion for a period = (depletion rate) x (number of units removed in period)
Depletion rate = (Natural resources account balance - residual value) / (total estimated units)

Question 47

What is an extraction cost?

Answer 47

Depreciation on removable assets, wages, and material costs pertaining to the extraction effort - these costs are debited to the inventory of resource, not to the natural resources account.

Question 48

What is a production cost (natural resource)

Answer 48

Additional processing costs after extraction - this cost also is debited to the inventory of resource, not to the natural resources account.

Question 49

Can PPE ever be revalued?

Answer 49

under IFRS, it can be revalued to fair value. Under Gaap it is not permitted.

Question 50

Can interest earned on construction funds be offset against interest costs?

Answer 50

Under IFRS, they can be offset. Under GAAP they are not allowed to be offset.