Property, Plant, and Equipment: Mixed Topics Flashcards
GAAP and IFRS are what systems
mixed-attribute systems
record amounts at what they are worth today
fair value
- investments
3 things to determine PPE
- activity used in operations
- long term in nature (benefit > 1 year)
- tangible - physically touch it
5 accounts in PPE
- land
- land improvements
- equipment
- buildings
- construction in process
property currently in service as a building site
land
4 acquisition costs under land
- purchase price
- reasonable purchase fees (realtor commission, closing costs)
- work required to be able to build on the land (clearing, grading, filling, draining)
- removing structures if redeveloping
whats accounting treatment on land
do no depreciate
site enhancements that are not permanent (sidewalks, driveways, parking lots, landscaping)
land improvements
accounting treatment for land improvements
depreciate
what is the difference in land and land improvements? + why would improvements be depreciated but not land itself
land improvements require maintenance, subject to damage eventually be replaced
tangible property used in companys operations (drills, saws, machines, tools)
equipment
capitalize all reasonable acquisition costs under equipment such as
- purchase price (net of discounts)
- installation
- sales tax
- freight
accounting treatment for equipment
depreciate
permanent or temporary structures used in companys operations
- exclude the land
-capitalize all reasonable acquisition costs
buildings
accounting treatement for buildings
depreciate
- PPE assets (like building or equipment) being manufactured
construction in process
- capitalize all reasonable costs to build
(what you would have been billed by someone else if paying to have it manufactured)
construction in process
accounting treatment for construction in process
accumulate costs in construction in process
(transfer to building, equipment, etc. and then start depreciating)
several fixed assets are purchased for a lump sum
(purchasing land with a building on it)
lump sum (basket purchased)
2 lump sum methods
- proportional method
2.incremental method
acquire a new asset by giving up an old asset
nonmonetary asset exchange
4 steps to account for exchange
- record the new asset at fair value
- remove book value of asset given up
- record any cash received or paid
- plug entry to gain or loss
purpose fix the transaction other than tax avoidance
commercial substance
assume all transactions have _______ substance
commercial substance
compony constructs its own asset rather than purchase
(nike builds their own manufacturing center
self constructed asset & interest capitalization
2 primary accounting issues with self constructed assets and interest capitalization
- what to do with overhead
- what to do with interest incurring during construction
- incremental overhead approach
- full cost approach
which accounting issue with self constructed assets and interest capitalizationis this?
what to do with overhead
- asset includes all cost necessary to get asset ready for intended use
which accounting issue with self constructed assets and interest capitalization is this?
what to do with interest incurring during construction
3 steps when self constructed assets & interest capitalization
- determine accumulated depreciation
- calculate amount of interest to be capitalized
- make sure actual interest incurred > capitalized interest
capitalize interest based on what we actually spend on construction
which step is this a part of?
step 1: determine accumulated depreciation
- use interest rate on construction specific loan if available
- use average interest rate on “normal” debt if no specific construction loan
which step is this a part of?
step 2: calculate amount of interest to be capitalized
- GAAP allows you to use any systematic and rational approach to do this
- the objective is to allocate expense
depreciation
3 main methods of depreciation
- uniform
- accelerated
- output
- straight line
which method of depreciation is this?
unifrom
- sum of the years digits
- declining balance
which method of depreciation is this?
accelerated
- units of production
which method of depreciation is this?
output
Weve calculated the amount of depreciation what do we do with that amount
Dr. depreciation expense (-SE)
Cr. accumulated depreciation (-A)
How do we present PPE on the balance sheet with the effect of depreciation
Dr. land
Dr. equipment
Cr. accumulated depreciation
why do we credit accumulated depreciation, rather than equipment, each period
historical cost is preserved in the equipment account
net book value does not equal
fair value
________ is a systematic and rational method to assign costs, but it does not track the actual decline in value of the item
depreciation
3 steps to account for disposal of PPE
- update depreciation to time of disposal
- determine gain or loss
- remove asset and accumulated depreciation from books
switching from accelerated to non accelerated is
relatively common
switching from non accelerated to accelerated is
uncommon
2 steps to determine if you record an impairment
step 1: compare net cash inflows to book value/carrying value/net book value
- IF STEP 1 FAILED GO TO STEP 2
step 2: compare fair value to carrying value(net book value)
- IF NET BOOK VALUE IS < FAIR VALUE = RECORD AN IMPAIRMENT
what happens if the asset is no longer in use
- assess the asset for impairment
- transfer the asset to “other assets”
- discontinue depreciation
________ assets are unique in that they can be written up or down
held for sale assets
costs to keep assets in operating condition without prolonging the useful life
maintenance and ordinary repairs
accounting treatment for maintenance and ordinary repairs
expense
(oil changes, replacing small parts)
3 potential accounting treatments for improvements or replacements
- substitution
- capitalize the asset replacement
- reduction of accumulated depreciation
- remove the net book value of the old component
- add the cost of the new component
which potential accounting treament to improvements or replacements is this
treatment 1: substitution
2 steps to improvement treatment 1: substitution
step 1. remove the cost of the original component
step 2. capitalize the asset replacement
- use if old component is fully depreciated
which potential accounting treament to improvements or replacements is this
treatment 2: capitalization
- length of life of asset is extended but quality is not improved
which potential accounting treament to improvements or replacements is this
treatment 3: reduction of accumulated depreciation
2 treatments for rearrangements
treatment 1: capitalize and depreciate
treatment 2: expense
- if adds benefit to future periods
which potential accounting treament to rearrangements is this
treatement 1: capitalize and depreciate
- no clear benefit to the future
which potential accounting treament to rearrangements is this
treatment 2: expense
