Property, Plant, and Equipment (PP&E)

Question 1

what costs are included in acquisition costs?

Answer 1

All costs that prepare the asset for its intended use.
Examples:
- purchase price
- legal fees
- delinquent taxes
- title insurance
- transportation (freight in)
- installation
- test runs
- sales taxes

Question 2

What various costs are included in the cost of land, even if you later put a building on that land

Answer 2

• purchase price (including any building to be demolished)
• surveying
• clearing, grading and landscaping
• costs of razing or demolishing old building
• proceeds from the sale of any scrap on the land (or from bldg)

Question 3

if 2 assets are purchased together with unknown individual costs, how is the relative fair value method used

Answer 3

determine the current fair value for each asset, then determine it’s percentage of the total current fair value. Multiply each percent by the original cost to get the relative cost based on the fair market value.

Question 4

what is an Asset Retirement Obligation (ARO)

Answer 4

ASC 420
estimated restoration costs that are expected to be paid at the end of the period of usage, which should be recorded as a liability at fair market value of what the obligation will be settled today. If this can’t be determined, estimates are made based on the PV of the estimated future restoration costs.

Examples include oil derricks in the ocean that need to be removed, strip mines where the land needs to be graded and grass planted.

Question 5

what disclosures are required for Asset Retirement Obligations (ARO)

Answer 5

• Description of the obligation and related asset
• description of how fair value was determined
• the funding policy
• A reconciliation of the beginning and ending carrying value

Question 6

If a company has a building built, what interest expense can be capitalized?

Answer 6

ASC 835

Interest expense that could have been avoided if they had NOT built the building

Question 7

can interest for inventory related items be capitalized?

Answer 7

no it must be expensed. (not that IFRS allows capitalized interest for inventory only if the period of time to prepare the inventory for sale is very long)

Question 8

how much can a company capitalize in interest when it builds a building? (formula used)

Answer 8

weighted average accumulated expenditures * rate, but never more than the total interest amount

Question 9

which types of costs incurred AFTER acquisition of an asset are capitalized and which are expensed

Answer 9

capitalized when the cost makes the asset BIGGER, BETTER or LONGER. Expensed when it is repairs or maintenance cost

Question 10

what account is debited for capitalized post-acquisition asset costs for each case: bigger, better, longer

Answer 10

bigger = asset
better = asset
longer = accumulated depreciation

Question 11

what are the x methods of depreciation

Answer 11

straight line
sum of years digits
double declining balance
units of production (activity)

Question 12

formula for sum of years digits to get denominator

Answer 12

N*(N+1) / 2

Question 13

under which depreciation method is salvage value ignored until towards the end

Answer 13

double declining balance

Question 14

what are some benefits of an accelerated depreciation method? (aside from tax)

Answer 14

• better matching since asset is more productive in earlier years
• minimize loss due to obsolescence since more is depreciated early
• helps to even out expenses since repairs and maintenance are less in the beginning

Question 15

what is depletion

Answer 15

similar to depreciation but for natural resources like petroleum, minerals and timber

Question 16

are changes in depreciation estimates treated retroactively or currently and prospectively

Answer 16

currently and prospectively

Question 17

what is an impairment

Answer 17

when the carrying amount of an asset falls and it it determined that it can not be recovered. At this point a write off is needed

Question 18

examples of impairments

Answer 18

• a significant decrease in the market value of an asset
• a significant change in the extent or manner in which an asset is used
• a significant adverse change in legal factors or in the business climate that affects the value of the asset
• an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset
• a projection or forecast that demonstrates continuing losses associated with an asset

Question 19

what are the 2 categories of assets that are treated differently for impairment

Answer 19

assets held for use,

assets held for sale

Question 20

what is the process of determining an impairment loss on assets held for use

Answer 20

1. review events or changes in circumstances for possible impairment
2. If the review indicates impairment, apply the recoverability test. If the sum of the expected future net cash flows is less than the carrying amount, an impairment loss has occurred
3. The impairment loss is the amount by which the carrying amount of the asset is greater than the fair value

Question 21

can impairment losses be recovered?

Answer 21

not under US GAAP. Under IFRS, recovery is allowed

Question 22

at what value are assets held for sale carried at

Answer 22

lower of cost or NRV similar to inventory.

Question 23

should assets held for sale be depreciated?

Answer 23

no because depreciation expense will not match with income and the asset cost will be recovered with the sale

Question 24

can an asset held for sale be written up

Answer 24

yes. because they are continually revalued at lower of cost or NRV, the asset CAN BE WRITTEN UP or down as long as the write-up is never greater than the carrying amount of the asset before the impairment

Question 25

what account is hit on involuntary conversions (eminent domain, destruction, etc)

Answer 25

Involuntary conversion gain/loss

Question 26

what is a nonmonetary exchange

Answer 26

when dissimilar assets are exchanged for each other, with or without cash “boot”

Question 27

what are the 2 types of monetary exchanges

Answer 27

1. exchanges with commercial substance

2. exchanges that lack commercial substance

Question 28

define commercial substance with regard to monetary exchanges

Answer 28

ASC 845
an exchange has commercial substance whenever the risk, timing, and/or amount of cash flows (these 3 elements together are called the configuration) are affected by the exchange. Nearly all exchanges result in some change in future cash flows

Question 29

3 exceptions to the norm where nonmonetary exchanges lack commercial substance

Answer 29

1. The fiar value of the assets received/relinquished cannot be determined within a reasonable limit
2. The exchange is made purely to facilitate the sale of the product to a party that is not a party of the exchange (usually such exchanges take place with a competitor or vendor merely to facilitate future sales to unrelated customers)
3. The exchange lacks commercial substance. The question will state that the cash flows are expected to be substantially unchanged as a result of the exchange

Question 30

are nonmonetary exchanges with commercial substance recognized at fair value or book value

Answer 30

fair value unless it cannot be determined, then use book value

Question 31

what are the 3 methods of valuing nonmonetary exchanges

Answer 31

1. FMV given up + cash paid - cash received
2. FMV of asset received
3. Book Value (BV) given up + cash paid - cash received

Question 32

at what value are nonmonetary exchanges WITHOUT commercial substance valued at

Answer 32

lower of:

1. FMV given up + cash paid - cash received
2. FMV of asset received
3. Book Value (BV) given up + cash paid - cash received

Question 33

at what point are gains/losses taken for nonmonetary exchanges with commercial substance

Answer 33

both gains and losses are taken immediately

Question 34

at what point are gains/losses taken for nonmonetary exchanges WITHOUT commercial substance

Answer 34

losses are taken immediately

gains are not taken at time of exchange since it is not complete (will be resold)

Question 35

for nonmonetary exchanges WITHOUT commercial substance and WITH boot (

Answer 35

recognize gain up to the portion of the proceeds that are cash

Question 36

for nonmonetary exchanges WITHOUT commercial substance and WITH boot (>= 25%), how much gain can be recognized

Answer 36

all gain is recognized

Question 37

IFRS - what area of accounting has some of the most significant differences between US GAAP and IFRS

Answer 37

Fixed assets (PP&E)

Question 38

IFRS - what are the 2 models used for subsequent measurement of PP&E

Answer 38

cost model (CM)
revaluation model (RM)

Question 39

IFRS - can different valuations models (CM or RM) be used for individual assets, classes of assets or both

Answer 39

different classes of assets can use different valuation models, but not individual assets

Question 40

IFRS - what is the equation for valuing fixed assets at the cost model (CM)

Answer 40

cost - accumulated depreciation - any accumulated impairment loss

Question 41

IFRS - what is the equation for valuing fixed assets at the revaluation model (RM)

Answer 41

fair value - accumulated depreciation - any accumulated impairment loss

Question 42

IFRS - what account do PP&E revaluations above original cost go to, and what financial statements do they show up on

Answer 42

Revaluation Surplus account

Balance Sheet under OCI

Question 43

IFRS - what is the definition of Investment Property

Answer 43

property held to earn rentals, for capital appreciation, or both. It may not be used in the production or supply of goods or services or for admin purposes. Property under construction that will be future investment property does not qualify as investment property

Question 44

IFRS - what valuation model(s) can be used for investment property

Answer 44

cost model (CM)
revaluation model (RM)

Question 45

IFRS - what is differernt about using the revaluation model (RM) for investment property vs for fixed assets (PP&E)

Answer 45

investment property gains and losses go directly to the income statement, not to OCI

Question 46

IFRS - can previously recognized impairments ever be reversed?

Answer 46

under IFRS, yes, but not under GAAP

Question 47

IFRS - what are biological assets and what are they valued at on the statement of financial position (BS)

Answer 47

biological assets are animals, plants, etc. They must be disclosed separately on the statement of financial position (BS). Valuation is at the FMV - selling costs aka Net Realizable Value (NRV)

Question 48

IFRS - when can borrowing costs (interest) be capitalized?

Answer 48

IFRS requires certain borrowing costs to be capitalized if they are related to acquisition, construction, or production of a qualifying asset. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use, including: inventory, PP&E, intangible assets, or investment property.
Borrowing costs that do not meet the rules for capitalization are expensed in the current period.
Under US GAAP, interest is generally expensed in the period incurred

Question 49

IFRS - what must be done for a fixed asset that has individual component that have different useful lives?

Answer 49

Each major component must be depreciated separately under it’s individual useful lives

Question 50

An impairment loss on equipment held for use should be reported on the income statement under which section

Answer 50

ASC 360

income from continuing operations before income taxes