Property Plant & Equipment - ASC 360

Question 1

What is property plant and equipment

Answer 1

tangible assets acquired for long-term use in the normal course of business. They are not for resale and generally are subject depreciation.

Question 2

What are acquisition cost that are capitalized?

Answer 2

• purchase price
• legal fee’s
• delinquent taxes
• title insurance
• Freight In (transportation cost)
• Installation
• Test runs
• sales taxes

Question 3

What cost are included in the “land” cost?

Answer 3

• purchasing price (including demolition of old building)
• surveying
• clearing, grading, and landscaping
• cost of razing (same a demolition)
• proceeds from the sale of any scrap (ex. old bricks) are subtracted from the land cost

Question 4

What is the relative fair value method

Answer 4

example land and building are purchased as a lump sum price.
-the lump sum cost must be allocated between the property and plant by the appropriate % based on the value of each divided by the total amount of the two assets. that % for each is multiplied by the cost (lump sum paid)

Question 5

According to ASC 410 how should ARO (asset retirement obligations) be recorded?

Answer 5

estimated restoration cost that are expected to be paid at the end of the period of usage should be recorded as a liability at fair market value which is the amount the obligation could be settled today.

Debit-Acrrection expense
ARO-Liability

Question 6

What disclosures are required for ARO (asset retirement obligations)

Answer 6

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

Question 7

what is the journal entry for receiving a donated item

Answer 7

Debit -Asset (for ex. land)

Credit-“other income” (contribution revenue)

Question 8

when do you capitalize interest on construction loans?

Answer 8

• if constructed for the company’s own use
• capitalized on a weighted average accumulated expenditures X interest rate = capitalized portion of interest
• its only the interest that could have been avoided if the building had not been built

Journal Entry is:
Debit-Building WIP
Debit-Interest Expense
Credit-Cash

Question 9

What is the accounting treatment once the construction is completed for what was once in work in process?

Answer 9

-the entire W-I-P is transferred to building and the interest expense cost are depreciated over its useful life of the building.

Question 10

If an asset has been improved to make it bigger better or longer how is it treated accounting wise?

Answer 10

those cost are capitalized
- Bigger (additions, new capacity, new functions); Better (betterment or improvement)
** Journal Entry**
Debit Asset
Credit Cash
-Longer (extends the useful life of the asset
**Journal Entry**
Debit-Accumulated Depreciation
Credit-Cash

Question 11

What is the journal entry for refurbishment?

Answer 11

Identifiable:
Debit-Accumulated Depreciation
Debit-Loss
Credit - Asset

not Identifiable (similar to a betterment)

Debit-Asset
Credit-Cash

not identifiable (similar to an extension)
Debit-accumulated depreciation
credit-cash

Question 12

Straight-line method

Answer 12

used when assets given an equal benefit through-out their useful lives.

(cost-salvage value)/useful life = depreciation expense each year

Journal entry is:
debit - depreciation expense
credit-accumulated depreciation

**has a straight line on a graph because it is depreciated in equal amounts

Question 13

when are accelerated methods of depreciation methods used?

Answer 13

when a asset gives greater benefits in earlier years than in later years

Question 14

sum of the years digit (SYD)

Answer 14

numerator = # of years left in the assets useful life
denominator=sum of the years in the assets useful life
formula for the denominator
N(N+1)/2

complete formula
(cost-salvage value)X(# of yrs left in asset useful life divided by the sum of the years in asset's life = depreciation expense.

has a straight slope that starts off high and slants downward

Question 15

what is the double declining balance?

Answer 15

a depreciation rate that is twice the straight-line rate applied against the book value of the asset. THIS METHOD DOES NOT SUBTRACT THE SALVAGE VALUE
formula
year 1 = cost X 2 divided by the estimated useful life = depreciation expense for yr 1
year 2 = (cost - yr 1) X 2 divided by the estimated useful life = depreciation expense for yr 2.

this process is repeated until salvage value is reached. you cannot depreciate below salvage value.

has a bell shaped slope on a graph

Question 16

What is the unit of production activity method?

Answer 16

a variable charge approach or physical usage depreciation
cost-salvage value X (hours this year divided by total estimated hours) = depreciation expense
** has a slow declining slop on graph scale**

Question 17

What are the benefits of using an accelerated method?

Answer 17

• better matching
• minimize obsolescence since the asset was depreciated more quickly, the carrying value is lower therefore the loss is smaller.
• helps to even out expenses - since repairs and maintenance in the earlier years is lower, if we take more depreciation earlier on, the total expenses would be more constant over time.

Question 18

what is a “group” of assets?

Answer 18

a collection of assets that are similar in nature (homogeneous)

Question 19

what is a “composite” of assets

Answer 19

refers to a collection of assets that are dissimilar in nature, fairly “heterogeneous” and have different lives

Question 20

what is the appraisal or inventory method of depreciation?

Answer 20

an estimate is made at the end of the year of the value of the assets, and sufficient depreciation expense is recorded to reduce the carrying value to the amount. it is usually only used when the loss in value is directly related to the productivity such a property being rented to others.

Question 21

what is the depletion formula of depreciation?

Answer 21

depletion base divided by the total volume @ the beginning of the year X units extracted.

Question 22

what is the full cost approach for exploration cost (for assets that can be depleted i.e. coal mining or extracting oil)

Answer 22

all exploration cost are capitalized and become part of the cost of depleted resources that are found.

Question 23

what is the successful efforts approach for exploration cost (for assets that can be depleted i.e. coal mining or extracting oil)

Answer 23

exploration cost are attributed separately to each property and only those that yield an extractable resource are capitalized. cost that are attributable to unsuccessful efforts are expensed.

Question 24

What are examples of impairments

Answer 24

• significant decrease in market value of an asset
• significant change in asset’s physical condition or the extent or manner in which it is used
• significant adverse change in legal factors or in the business climate that affects the value of the asset
• accumulation of cost significantly in excess of the amount originally expected to acquire or construct the asset
• projection or forecast that demonstrates continuing losses associated with an asset
• an expectation that is more likely than not that the asset will be disposed of before the end of its expected useful life.

Question 25

how is the impairment loss calculated?

Answer 25

carrying amount is greater than the fair value.

the test is by evaluating the carrying amount against the “expected future net cash flows”. if the carrying value is greater then the asset is impaired. The amount is based on the difference between the carrying value and the fair market value is what is actually booked.

Question 26

what disclosure are required for impaired assets

Answer 26

• description of impaired assets and circumstances which led to the impairment
• amount of impairment and manner in which fair value was determined
• caption in income statement in which impairment loss is aggregated if it is not presented separately.

**on the income statement it is reported in “non operating section” in income from continuing operation.

journal entry is:
Debit- impairment loss
Credit-accumulated depreciation

Question 27

Exchanges w/commercial substance

Answer 27

• recognize all gains (if boot is received to the extent of the % of cash received in the total transaction, not all the cash received is considered the can only a % of it) and losses
• recognize all gains and losses
• record new asset at FMV if #1 known; If #1 not known then # 2 etc
• ** (1) FMV given up + cash paid (-cash received
• • (2) FMV of asset received
• • (3) Book Value (BV) given up + cash paid (-cash received)

Question 28

when does an nonmentary exchange NOT have commercial substance?

Answer 28

When the following apply:

• the FV of the assets received/relinquished cannot be determined w/in a reasonable limit.
• 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 w/a competitor or vendor merely to facilitate future sales to unrelated customers
• the exchange lacks commercial substance and the question will state the cash flows are expected to be substantially unchanged as a result of the exchange

-the asset acquired will be recognized at the sales price less any monetary consideration rec’d or plus any monetary consideration given.

Note: in all 3 exceptions the carryover basis (book value or carrying amount adjusted for cash paid or received as part of the transaction) is used to measure the transaction instead of the fair value.

Question 29

How can fixed assets be accounted for under ifrs?

Answer 29

• cost model
• or when the FV is readily determinable the revaluation model is which the asset is reported at revalued amnt (FV) less depreciation & impairments since the most recent revaluation.

Question 30

how are fixed assets accounted for under the cost model under IFRS?

Answer 30

use component depreciation, depreciating each significant part separately.

Question 31

How are biological assets accounted for under IFRS?

Answer 31

-recognized at FV less disposal costs @ harvest (net realizable value) unless the FV cannot be reliably measured (cost model applied) w/gains and losses recognized in income.

Question 32

Can previously recognized impairment losses for fixed asset be reversed under IFRS?

Answer 32

yes up to the previous recognized losses.

Question 33

how is depreciation treated under IFRS?

Answer 33

depreciation factors such as salvage value, useful life, & method are required to be reevaluated each period.

Question 34

how are nonmonetary exchanges treated under IFRS?

Answer 34

• exchanges are characterized as similar/dissimilar assets
• exchanges that are dissimilar are accounted for the same way as exchanges w/commercial substance both gains & losses are recognized
• in all exchanges of similar assets, losses are recognized and gains are not.

Question 35

non monetary exchanges are accounted for how

Answer 35

• as if it were two different events
  1. as a sale of the asset relinquished
  2. as a purchase of the asset received

as a result a gain or loss is recognized on the asset relinquished in the difference of the fair value and the book value of the asset relinquished. if the fair value of the asset rec’d is not know then the FV of the asset relinquished is used.

If the fair value is not known for neither then the BV will have to be used for both the asset rec’d and given up and no gain or loss w/be recognized.