Unit 8 - PPE

Question 1

Leasehold improvements

Answer 1

General improvements to leased property should be capitalized as leasehold improvements and amortized in accordance with the straight-line method over the shorter of their expected useful life or the lease term.

However if:

A - the useful life of the asset extends beyond the lease term and renewal of the lease is reasonably certain, the amortization period may include all or part of the renewal period.

B - f renewal is uncertain, the useful life is the remaining term, and the salvage value is the amount, if any, to be paid by the lessor to the lessee at the expiration of the lease.

Question 2

Internally Constructed Assets (Capitalization of interest)
An asset qualifies for capitalization of interest if:

Answer 2

(1) relevant expenditures have been made,
(2) activities necessary to prepare the asset for its intended use are in progress, and
(3) interest is being incurred. The capitalized amount is determined by applying an interest rate to the average qualifying expenditures accumulated during the period.

These expenditures in any given period include those incurred in that period plus those incurred in the construction of the asset in all previous periods.

Example:
Thus, the total interest cost capitalized in Year 4 equals the interest rate on the specific new borrowing times the average accumulated expenditures for the asset in Year 3 and Year 4.

Question 3

Depreciation Methods

Non-accelerated methods

Answer 3

Straight line: (cost - salvage value) / number of years

Service hours method: (cost - salvage / total service hours) x hours used

Units of output: (cost - salvage/total units) x units produced