Property, Plant & Equipment Flashcards
What costs might be included in the Acquisition Cost of a fixed asset?
Purchase price, Legal fees, Delinquent taxes, Title insurance, Transportation (Freight in), Installation, Test runs, Sales taxes
At what value are fixed assets initially recorded?
At the amount paid for the asset plus all the other costs that are necessary to get the asset ready for its intended use.
Do we depreciate land?
No
Do we depreciate building?
Yes
Which expenditures are included in the cost of land?
All expenditures to get the land ready for its intended use such as:
a) Purchase price (incl. any existing building to be demolished)
b) Title and County Fees
c) Surveying
d) Clearing, grading, and/or landscaping of land
d) Razing and demolishing cost of old buildings (minus any proceeds from scrap or salvage)
**Note: capitalized land costs are not depreciated
Which expenditures are included in the cost of buildings?
All expenditures to get the building ready for its intended use such as:
a) Purchase price of the building
b) Renovation and preparation costs to the building
c) Cost of permits
d) Any taxes assumed by the purchaser
e) Insurance paid during the construction of the building
f) Materials, labor, and overhead of construction
**Note: Avoidable interest, such as from construction loans, is also included
Is a building that we plan on destroying included in the cost of the building?
NO! It is included in the cost of land.
If Land and Building are purchased as a lump sum, how is an appropriate purchase price allocated to each asset category? Describe it.
The Relative Fair Value method is used, which consists of taking an estimate, such as a property tax appraisal, to determine the appropriate percentage of the purchase price to allocate between the land and building values.
How are asset retirement obligations (AROs), such as estimated restoration costs initially treated?
As long-term liabilities based upon a net present value calculation that applies an appropriate discount rate and number of years away from the restoration to the estimated eventual restoration completion costs.
What happens to asset retirement obligations at the end of each year they are not due?
Accretion expense is recognized based upon the annual increase in the present value of the ARO liability (annual discount rate x initial present value determination is a great approximation)
How is donated property recorded by the donee?
Dr. Fair Value of property (asset)
Cr. Other operating revenue
**Additional acquisition costs or costs associated with getting the property into working condition for its designed purpose might also be incurred afterward and be added to the asset value.
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
What type of interest related to fixed assets can be capitalized?
Interest arising from constructing an asset for the company’s own use (this is the interest that could’ve been avoided had we not constructed the asset. **Interest on loans stemming from taking on an extraordinary special order (for something capital intensive such as a ship-building order) are also permitted.
What amount of interest related to fixed assets may be capitalized? (What is the formula?)
Weighted average of accumulated expenditures x interest rate = capitalized portion of interest. (ALSO, interest on other debt that could’ve been avoided had we been able to pay it instead of the capitalizable interest)
Regarding the capitalization of interest, what does “Weighted Average of Accumulated Expenditures” mean?
On average, the quantity you spent throughout the interest period (year). Usually 50% is the effective weighted average “weighting”
How are repairs and routine maintenance expenditures treated?
Expensed as incurred, as they do not improve the asset; only restore it to its normal operating condition
How are expenditures that make an asset “bigger” or “better” treated? (i.e., additions, or efficiency improvement costs)
They are all capitalized.
How are expenditures that extend (“lengthen”) an asset’s useful life treated?
Reduce the accumulated depreciation associated with the asset (an indirect form of capitalization)
How are identifiable refurbishments treated?
Account for as if the old part was sold at a LOSS and replaced with a new part
How are non-identifiable refurbishments treated?
Either capitalize them for those that make it “bigger or better”, or reduce the accumulated depreciation associated with those assets whose useful lives have been extended/”lengthened”.
What is the definition of depreciation?
The systematic and rational allocation of the costs of an asset over its expected useful life.
What is accumulated depreciation?
A valuation account, sometimes referred to as a contra-asset account, which serves to decrease the carrying value of fixed assets over its useful life. Netting the purchase price of the asset against its associated accumulated depreciation balance yields the asset’s “book value”.
What is depreciable amount (depreciable base)?
The depreciable amount or depreciable base is the amount to be depreciated over the useful life of the asset. It is equal to the capitalized amount (this is the cost of the asset) minus the salvage value of the asset.
What is estimated salvage value?
The estimated salvage value is the value we expect the asset to have at the end of its useful life. The book value of the asset may not be depreciated below the salvage value. Some companies have an accounting policy that the salvage value is always equal to $0. (The estimated salvage value may also be called residual value. )
What is estimated useful life?
The estimated useful life is how long we expect the asset to be useful and it is the period of time over which we will recognize depreciation expense. At the end of its useful life the asset should have a book value equal to the expected salvage value. (The estimated useful life may also be called service life. )
How is straight line depreciation calculated?
(Cost - SALVAGE VALUE) ÷ Useful life. Straight-line depreciation (STL) is the simplest method and results in an equal allocation of depreciation expense to each income statement period; thus, assuming an equal utilization of the asset in each I/S period.
How is double declining balance depreciation calculated?
IGNORE SALVAGE VALUE. In double declining balance (DDB) method we use a rate that is double the percentage that would be recognized under the straight-line method (2 x 1 ÷ Useful life) ; thus, it is calculated as: Double declining rate x book value of the asset at the beginning of the year. The ensuing new book value of the asset is used for the following year’s calculation.
