Property, Plant and Equipment

Question 1

What 4 things can be included in the cost of land?

Answer 1

1. purchase price
2. costs incidental to acquisition, such as legal fees, commissions and title insurance
3. costs of preparing the land for use, such as costs of surveying, grading, filling, draining and clearing
4. any land improvement costs that have an indefinite service life

Question 2

How should the cost of tearing down an existing building be accounted for?

Answer 2

as part of the cost of preparing the land for use

Question 3

How should the cost of excavating for a building’s foundation be accounted for?

Answer 3

as part of the cost of the new building

Question 4

How are cash discounts handled when purchasing a plant asset?

Answer 4

net of any cash discount allowed. If payment is not made within the discount period, the discount not taken should be treated as a financing expense

Question 5

List the 3 views regarding the amount of fixed overhead that should be allocated to a plant asset being constructed?

Answer 5

1. allocate no fixed overhead (has little merit)
2. allocate only the incremental fixed overhead (represents the relevant cost to be capitalized
3. allocate a portion of all fixed overhead (emphasizes the production effort rather than the items produced)

Question 6

When assets are acquired in a single transaction (lump-sum acquisitions) for a lump sum, how should the cost be allocated?

Answer 6

cost should be allocated to the individual assets based on the best indicator of the relative FV.

Question 7

How should plant and equipment acquired by issuing equity securities be recorded?

Answer 7

at the FV of the securities issued or the FV of the assets received, whichever is more clearly evident. Par of stated value of stock issued should not be used

Question 8

In the absence of exchange transactions to indicate FV of stock issued or an asset received, the asset acquired should be recorded base on the best measurement of cost available. What is this cost?

Answer 8

independent appraised values

Question 9

Plant assets donated to an enterprise with “no strings attached” are recorded using what cost? i.e. it is a nonreciprocal transfer

Answer 9

FV at the time of the donation.

Question 10

Plant assets donated to an enterprise with “strings attached” are recorded using what cost? i.e. it is a reciprocal transfer

Answer 10

The transaction must be closely examined. The asset may represent a contingent asset, which normally would not be reflected in the accounts until the conditions have been met. If clear title has been transferred with an agreement to fulfill certain conditions in the future, careful assessment must be made of whether the enterprise has a loss contingency that should be disclosed or possible even recorded

Question 11

What are 3 conditions that must be met in order for interest to be capitalized?

Answer 11

1. assets that are constructed or otherwise produced for an enterprise’s own use (including assets constructed or produced for the enterprise by others for which deposits or progress payments have been made
2. assets intended for sale or lease that are constructed or other produced as discrete projects (ex. ships or RE developments)
3. investments (equity, loans, and advances) accounted for by the equity method while the investee has activities in progress necessary to commence its planned principal operations provided that the investee’s activities include the use of the funds to acquire qualifying assets for its own operations

Question 12

List 7 interest cost that should not be specifically capitalized?

Answer 12

1. assets in use or ready for their intended use in the earning activities of the entity
2. assets that are not being used in the earning activities of the entity and that are not undergoing the activities necessary to get them ready for use
3. assets that are not included in the consolidated BS of the parent entity and consolidated subsidiaries
4. investments accounted for the equity method after the planned principal operations o the investee begin
5. investments in regulated investees that are capitalizing both the cost of the debt and equity capital
6. assets acquired with gifts and grants that are restricted by the donor or grantor to acquisition of those assets to the extent that funds are available from such gifts and grants.
7. inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis

Question 13

In general, the capitalization rate is calculated how?

Answer 13

using a weighted average of the rate applicable to borrowings (debt) outstanding during the accounting period for which the capitalizable interest is being calculated, Note: new borrowing with a qualifying asset may use the rate on that borrowing

Question 14

The capitalization period (for interest) normally begins when what 3 conditions are present?

Answer 14

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

Question 15

How is interest expense disclosed in FS?

Answer 15

If no interest cost is capitalized, the total interest incurred and charged to interest expense during the period should be disclosed. When some interest cost is capitalized, disclosures should be made of the total interest cost incurred, the amount of capitalized, and the amount charged to expense

Question 16

Define depreciation

Answer 16

the process of allocating the cost of plant and equipment to the accounting periods in which the benefits (bundles of services) are received. It is a process of cost allocation, not of valuation

Question 17

When is a depreciation method deemed to be acceptable?

Answer 17

when it results in a systematic and rational allocation of the cost of an asset over the asset’s useful life

Question 18

What 4 items need to be determined before depreciation can be calculated?

Answer 18

1. cost
2. estimated useful life
3. estimated residual (salvage) value
4. depreciation method

Question 19

Estimation of the useful life should take into consideration the various factors that limit the service life of an asset. What are the 2 categories limiting factors?

Answer 19

1. physical factors such as normal deterioration and wear and tear from usage
2. functional factors such as obsolescence and inadequacy

Question 20

Is salvage value a factor in the double-declining balance method of depreciation?

Answer 20

no except that the asset cannot be depreciated below the salvage value

Question 21

What 4 disclosures related to fixed assets and depreciation should be made in the FS or in the footnotes?

Answer 21

1. depreciation expense for the year
2. balances of major classes or depreciable assets, by nature or function, at the BS date
3. accumulated depreciation, either by major classes of depreciable assets or in total at the BS date
4. a general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets

Question 22

What are the 6 different depreciation methods?

Answer 22

1. straight-line
2. fixed percentage of declining balance
3. double declining
4. sum of the years’ digits
5. units of production
6. group or composite

Question 23

According to IAS 16, the cost of an item or property, plant and equipment comprises of what 3 things?

Answer 23

1. purchase price, including import duties and non-refundable purchase taxes, after deduction trade discounts and rebate
2. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
3. the initial estimated cost of dismantling and removing the item and restoring the site on which it is located, the obligation for which the entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for the purposes other than to produce inventories during that period

Question 24

How does IAS measure an asset after initial recognition?

Answer 24

it shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment

Question 25

What is the revaluation method under IAS?

Answer 25

After recognition as an asset, an item of PPE whose FV can be measured reliably shall be carried at the revalued amount, being its FV at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations may be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using FV at the end of the reporting period.

Question 26

How do increases in an asset’s carrying amount recognized according to IAS?

Answer 26

as in increase in other comprehensive income and accumulated in equity under the heading or revaluation surplus. However, the increase shall be recognized in P&L to the extent that it reverses a revaluation decrease of the same asset previously recognized in P&L

Question 27

How do decreases in an asset’s carrying amount recognized according to IAS?

Answer 27

it shall be recognized in P&L. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset

Question 28

What is an asset retirement obligation?

Answer 28

It refers to an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant

Question 29

What is an asset retirement cost?

Answer 29

It refers to the amount capitalized that increases the carrying amount of the long-lived asset when a liability for an asset retirement obligation is recognized.

Question 30

What is an asset retirement?

Answer 30

It is defined as the other-than-temporary removal of a long-lived asset from service. It includes the sale, abandonment, recycling, of disposal in some other manner, but does not encompass the temporary idling of a ling-lived asset.

Question 31

When should an entity recognize a retirement obligation?

Answer 31

It should recognize the fair value of an asset retirement obligation in the period in which it is incurred if a reasonable estimate of FV can be made. Otherwise, the liability should be recognized in the first period in which a reasonable estimate of FV can be made.

Question 32

What 3 criteria must be met for an asset retirement obligation to be reasonably estimable?

Answer 32

1. it is evident that the FV of the obligation is embodied in the acquisition price of the asset
2. an active market exists for the transfer of the obligation
3. sufficient information exists to apply an expected present value technique

Question 33

FASB specifies that an entity has sufficient information to apply an expected value technique if either of 2 conditions exist. What are they?

Answer 33

1. the settlement date and method of settlement of the obligation have been specified by others
2. the information is available to reasonable estimate a) the settlement dated or the range of potential dates, b) the method of settlement or potential methods of settlement and c) the probabilities associated with the potential settlement dates and potential methods of settlement

Question 34

Should an entity depreciation or amortize the asset retirement costs?

Answer 34

amortize using a systematic and rational method over its useful life

Question 35

After the initial measurement, an entity should recognize period-to-period changes in the liability for an asset retirement obligation from what 2 things?

Answer 35

1. the passage of time

2. revisions to either the timing or the amount of the original estimate of undiscounted cash flows

Question 36

How should an entity measure changes in the asset retirement obligation due to the passage of time?

Answer 36

by applying the interest method based on an interest rate equal to the credit-adjusted, risk-free rate that existed when the liability was initially measured. That amount should be recognized as accretion expense (interest cost) on the income statement

Question 37

What happens to an asset retirement obligation upon settlement?

Answer 37

an entity recognizes a gain or loss for the difference between the settlement amount and the carrying amount of the asset retirement obligation at the date of settlement

Question 38

What 3 disclosures must be made about an entity’s asset retirement obligations?

Answer 38

1. a general description of the asset retirement obligation and the associated long-lived assets
2. the FV of assets that are legally restricted for purposes of settling asset retirement obligations
3. a reconciliation of the beginning and ending aggregate carrying amount of asset retirement obligations showing separately the changes attributable to liabilities incurred in the current period, liabilities settled in the current period, accretion expense, and revisions in estimated cash flows, whenever there is a significant change in one or more of those four components during the reporting period.

Question 39

Under IFRS, the recognition criteria for an asset retirement obligation are more stringent than under GAAP. the obligation is not recognized until what happens?

Answer 39

There is a present legal obligation and the FV of the obligation can be reasonably estimated