Property, Plant, & Equipment Flashcards
What expenditures are included in the cost of equipment?
All expenditures to get the asset into ‘working condition’ and ready for use:
Purchase price + liabilities assumed Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest
Alterations to existing facilities or additional equipment that extend the life or increase the efficiency of these assets are capitalized.
How are Research and Development costs recorded?
They are expensed in the period incurred and are not capitalized.
Which expenditures are included in the cost of a building?
All expenditures to get the building into ‘working condition’ are ready for use
Which expenditures are included in the cost of land?
All expenditures to get the land ready for its intended use:
Title & County Fees
Clearing of Land - Dirt work, etc.
Demolition and removal of old buildings (minus any scrap or salvage)
Note: capitalized land costs are not depreciated
In an exchange of non-monetary assets, how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?
If the cash flows from the assets exchanged are not significantly different, no gain or loss is recognized on a non-monetary exchange, as it lacks commercial substance.
The new asset is recorded at the book value of the asset given up.
The only gain that can be recognized is any boot (cash) received.
In an exchange of non-monetary assets, what gain is recognized if resulting cash flows are significantly different?
If resulting cash flows are significantly different, then the transaction has commercial substance and a gain/loss is recorded on the exchange.
The new asset is recorded at the FAIR VALUE of the assets given up, unless the asset acquired has a fair value that is easier to determine.
How is donated property recorded by the donee?
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
Exam Tip - Think of a charity holding a “fair” and then donating the property which is then recorded at “fair value”
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
When is an asset considered to be impaired? How is impairment loss calculated?
When the undiscounted future cash flows (NOT fair value) are less than the carrying value of the asset.
Carrying Value - Fair Value = Impairment Loss
Note: impaired assets that recover their value can’t be written back up once written down
How are legal fees to defend a patent amortized?
If the patent is SUCCESSFULLY defended, the legal fees are amortized over the patent’s economic life.
If unsuccessful, they are expensed immediately.
What are the two steps for testing goodwill impairment?
Compare the CV to the FV. If FV is greater than CV, no impairment exists, you’re done.
If impairment appears to exist, the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.
How are costs for developing software recorded?
Expenses prior to technological feasibility are expensed as R&D.
After technological feasibility, but prior to production, costs are capitalized.
Expenses incurred during production are charged to inventory.
Expenses incurred training on internal use software are expensed.
What is the acquisition cost for assets purchased on a deferred payment plan?
Cash equivalent price
If unavailable, use imputed interest rate to record asset at PV of future payments
What is the acquisition cost for assets purchased by the issuance of securities?
FV of asset or FV of securities issued, whichever is more clearly determinable
What is the acquisition cost for assets in a group purchase?
Lump sum should be allocated according to each asset’s FV
What is the general boundary between nonmonetary and monetary transactions?
If cash received is at least 25% of the FV in the exchange, then it is a monetary transaction
What are nonreciprocal transfers?
Transfers of assets or services in one direction
Examples:
- enterprise to owners
- enterprise to another entity in enterprise
- entity’s reacquisition of outstanding stock
How should nonmonetary assets from nonreciprocal transfers be recorded?
Recorded at FV
Credit to APIC – Donated Services for gifts from governments
Credit to Revenue for gifts from others
Where does ordinary accounting guidance for nonmonetary transactions NOT apply?
Exchange of a business for a business
Transfer of nonmonetary assets between companies under common control (e.g. parent and subsidiary)
Stock issued or received in stock dividends or stock splits
Transfers of assets to an entity for an ownership interest
Pooling assets to find or produce oil or gas
Transfers of financial assets
Involuntary conversions, such as destruction or theft
When should nonmonetary exchanges be based on recorded amounts rather than fair value?
- If FV of neither asset exchanged can be reasonably determined
- If it is an exchange of something the company ordinarily sells for an asset to be sold in the same line of business
- If the transaction lacks commercial substance
How does asset impairment affect transactions with no commercial substance?
Normally assets received are recorded at CV of assets given up
If one asset is impaired, then the company giving that asset should recognize the impairment (as a loss), and record the asset received at the impaired value
For nonmonetary exchanges with boot, how do you calculate the portion of BV sold for the company receiving the boot?
If boot is received, the received asset might be recorded at a lower carrying value than otherwise
(BV of old asset) x [boot / (boot + BV of new asset)] = portion of consideration sold
How are gain and loss determined for nonmonetary exchanges with boot?
Giver of boot does not recognize either
For recipient of boot, if cash received > portion of asset sold, then gain. Otherwise, loss.
If the recipient of boot in a nonmonetary exchange has a gain, how is the transaction recorded?
BV of old asset - portion of BV sold = recorded amount for new asset
Debit: new asset
Debit: Cash
Credit: old asset
Credit: Gain
If the recipient of boot in a nonmonetary exchange has a loss, how is the transaction recorded?
No reduction in BV for new asset
Debit: new asset
Debit: Cash
Debit: Loss
Credit: old asset
If a nonmonetary exchange has boot, how should the payer of the boot record it?
Record asset received at amount of boot + consideration for new asset
No gain recognized
What assets qualify for interest capitalization?
Assets constructed for repetitive self-use
Assets acquired for self-use through arrangements with progress payments
Assets constructed as discrete projects for sale (e.g. ships, real estate)
What assets do not qualify for interest capitalization?
Routinely manufactured inventory
Assets in use or ready for use
Assets not in use and not being prepared for use
How much interest cost is to be capitalized?
The cost incurred during the acquisition period that could have been avoided if expenditures had not been made
The “principal” towards which the interest rate is applied is the AVERAGE ACCUMULATED EXPENDITURES for the period of acquisition
-example: if $500,000 is spent during the period, then the average is $500,000 / 2 = $250,000
How does interest earned (not incurred) affect the amount of interest capitalized in an asset?
No effect – earned interest does not offset incurred interest
How do you calculate the interest to be capitalized?
If (average accumulated expenditures) < (amount borrowed in loan for construction), then apply the rate of the loan to the entire AAE
If not, then apply that rate to the portion of AAE equal to the amount borrowed
-for the remainder of the AAE, apply the weighted avg. rate for the other liabilities held by the company
How does capitalized interest affect interest expense?
Since capitalized interest is absorbed into the cost of the asset, interest expense is reduced by that same amount
How are repairs on fixed assets reported?
Ordinary repairs = expensed
Extraordinary repairs = capitalized
How is double-declining balance (DDB) depreciation calculated?
(2 / useful life) x (cost)
Ignore salvage value, except as a lower bound for the asset’s book value.
How is fixed-percentage-of-declining-balance depreciation calculated?
Same as the double-declining balance method, but uses a different number instead of 2 (e.g. 1.25 or 1.75)
How is straight-line depreciation calculated?
(cost - salvage value) / useful life = depreciation expense
How is sum-of-the-years’-digits (SYD) depreciation calculated?
(cost - salvage value) x (useful life / SYD) = depreciation expense
For example, the depreciation factor for the third year of a 10-year asset would be:
= 8 / (10+9+8+7+6+5+4+3+2+1) = 8/55 = 14.5%
What is a shortcut to calculate SYD?
SYD = n(n+1)/2
How is group depreciation recorded?
For homogeneous assets with similar service lives, one depreciation rate applied to whole group
If assets are retired…
- Credit asset for cost
- Debit acc. depr. for same amount less proceeds received
No gains or losses recorded
How is composite depreciation recorded?
For each asset (or class), use the SL method and record the following:
Cost - Salvage Value = Depreciable Base / Useful Life = Depreciation Expense
Composite Depreciation Charge = the sum of depreciation expenses
(CDC) / (sum of costs) = Composite Depreciation Rate
(sum of depreciable bases) / (CDC) = Composite Life
Same rules for asset retirement as group depreciation
What are variable charge methods for depreciation?
Depreciation Expense = (cost - salvage value) / (total expected output/usage) x (current output/usage)
Might be recorded with units of output, service hours, etc.
What are different ways to record depreciation on assets that are acquired or disposed in the middle of a year?
- full depreciation in year of acquisition, none in year of disposal
- half and half
- proportional based on number of months
How is depletion expense recorded?
Depletable base = total cost of natural resource, including exploring, drilling, etc. less salvage value
Divide depletable base by estimated # of units available to get rate
Depletion expense = (rate) x (units extracted)
How is an involuntary conversion recorded?
Gain or loss should be recognized for difference between amount received from insurer and carrying value of asset(s)
Gain or loss is affected by removal and cleanup costs, but not by reinvestment of insurance proceeds in new asset
If a company uses composite depreciation on a group of assets and retires one, how is the net carrying amount affected?
Decreased by cash received for retired asset
Cash is for salvage value, so it is essentially a realization of the salvage-value asset into cash – hence you reduce the net carrying amount by that much
What is the general principle concerning capitalization for asset modifications?
If the modification benefits future periods, then capitalize it
For nonmonetary exchanges with boot, if there is a gain, does the recipient of the boot always reduce the value of the acquired asset?
No – if the exchange is one where the FV of the acquired asset should be recorded, then the total consideration is the FV of that asset + the boot
What are the scenarios when a recipient of boot reduces the value of the acquired asset?
When any of the three criteria for using BV are true:
(1) FV can’t be determined
(2) exchange is of ordinarily-traded assets for other ordinarily-traded assets
(3) no commercial substance
Extra card to inform you to modify your original cards about boot, so that they are consistent with the previous two cards specifying when a portion of BV should be sold
-Also look up info on boot to make sure you’re not wrong, because the Bisk book really sucks it up on this one
You = awesome
