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62 Cards in this Set

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Fixed Assets
Property, Plant & Equipment. They include land building structures, and equipment.
The major characteristics of property plant & equipment
1. They are acquired for use in operations and not for resale. 2. They are long tern in nature and usually subject to depreciation. 3. They posess physical substance.
historical cost
measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition neccessary for its intended use.
Costs incurred after the assets acquisition
such as additions, improvements, or replacements. Costs are only added to assets costs only if they provide future service potential otherwise they are expensed.
Land Costs
1)Purchase Price 2)closing costs & Legal fees 3)costs incurred in getting the land in condition for its intended use (grading filling, draining, etc) 4)assumptions of any liens, mortgages, or any encumbrances on the property (taxes, etc) 5)any additional land improvements that have an indefinite life.
Land purchased for the construction of a new building
all costs incurred up to the excavation for the new builing are considered land costs
reductions in the price of land
any proceeds obtained in the process of getting a land ready for its intended use. ex. salvage receipts on demolition of old building or sale of cleared timber
Special Assessments for local improvements
pavements, street lights, sewers, landscaping, and drainage systems are usually charged to the land account. They are relatively permanent in nature
Land improvements
Improvements with limited lives ex.private driveways, walks , fences, and parking lots they can be depreciated over their useful lives
Land as an investment
Land for which its use is speculative
Cost of Buildings
should include all expenditures related directly to their acquisition or construction. 1)materials, labor, & overhead costs incurred during construction 2)professional fees and building permits.
delivery equipment, office equipment, machinery, furniture and fixtures, furnishings, factory equipment, and similar fixed assets.
Cost of Equipment
purchase price, freight & handling charges incurred, insurance on equipment while in transit, cost of specail foundations if required, assembling & installation costs, and costs of trial runs. all expenditures in acquiring and getting ready for use.
self constructed assets
Such assets may cause valuation problems
because of the assignment of overhead. The options are to assign a
portion of all overhead, allocate on a basis of lost production, or assign no
fixed overhead. The first option is preferred.
2 methods of assigning indirect costs to self constructed assets
1)assign no fixed overhead costs-only variable costs that increase due to construction of asset 2)assign a portion of all overhead to the construction (full costing method)
Interest costs during construction
3 approaches suggested to account for interest incurred in financing, the construction or acquisition of property,plant & equipment
Capitilize no interest charges during construction
interest is considered a cost of financing and not a cost of construction.
Charge construction with all costs of funds employed, whether identifiable or not
interest whether actual or imputed, is a cost of building, just as labor, materials, and overhead are costs.
capitilize only the actual interest costs incurred during construction
relies on the historical cost concept that only actual transactions are recorded. Approach recommended by GAAP
why capitilize interest costs?
during construction the asset is not generating revenues. Once revenues can be earned interest should be reported as an expense and matched to revenues
3 factors of interest capitalization
1. qualifying assets 2. capitalization period 3. amount to capitilize
qualifying asset
to qualify for interest capitalization assets must require a period of time to get them ready for their intended use. 2 types;a)assets under construction for an enterprises own use b)assets intended for sale or lease that are constructed or otherwise produced (ships)
Capitalization Period
is the period of time during which interest must be capitalized. 3 conditions; a)expenditures for the asset have been made b) activities that are neccessary to get the asset ready for its intended use are in progress C) interest cost is being incurred. interest capitalization continues only if these 3 conditions are present.
The amount of interest to capitalize
You capitalize the lesser of the avoidable interest and the actual interest expense (not cash paid). If the actual is greater, the excess is interest expense in the current period. Once the construction job is finished, all interest is expensed, even that on specific construction debt.
avoidable interest
is the amount of interest that could have been avoided if expenditures for the asset had not been made. Determined by multiplying the interest rates by the weighted average accumulated expenditures for qualifying assets.
Weighted average accumulated expenditures
The accumulated expenditures is called the weighted average accumulated expenditures (WAAE). It is computed by multiplying each construction expenditure by the fraction of the year it is outstanding; the earlier in the year that the expenditure is made, the greater the fraction. The book rounds off to the nearest month.
interest rates to be applied to weighted average accumulated expenditures
1.First use the rate on specific construction debt, if there is any. If the construction debt amount is greater than the expenditures calculated in 1, use only this rate. Just multiply this rate times the WAAE.
2.If the WAAE exceed the construction debt amount (or if there is no construction debt), calculate the weighted average interest rate on all other (non-specific construction) debt. Then multiply this rate by the excess (of the WAAE over the construction debt).
Add the result from 2A with the result from 2B. The sum is called the avoidable interest.
actual interest
take the debt and times it by the interest rates, sum it.
Expenditures for Land
when land is purchased with the intent of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.
Interest revenue and interest capitalization
Companies frequently borrow money and invest the excess funds. Revenue from the excess invested may not be used to offset interest expense.
valuing assets
an asset should be recorded at the fair market value of what is given up or at the fair value of the asset received, whichever is more clearly evident.
cash discounts and asset valuation
If the discount is taken it should be considered a reduction in the purchase price of the asset.
Deferred Payment Contracts
to properly reflect cost, assets purchased on long term credit contracts should be accounted for at the present value. when no interest rate is stated or the rate in unreasonable the rate must be imputed.
Lump sum purchases (group of plant assets purchased at a lump-sum price)
Total cost should be allocated on the basis of relative
market values. Insurance appraisals, property tax assessments, or
independent appraisals may be used as indicators of relative market values.
Issuance of Stock
Market value of stock issued is used as an indication of
the cost of the property acquired. If the stock’s market value is not
determinable, use the fair market value of the property acquired.
accounting for the exchange of nonmonetary assets
should be based on
the fair value of the asset given up or the fair value of the asset received, whichever
is clearly more evident.2 Thus, any gains or losses on the exchange should be recognized
immediately. The rationale for this approach is that most transactions have economic
substance and therefore should be recognized.
economic substance
an exchange has economic substance if the future cash flows change as a result of the transaction
exchange has economic substance
recognize gains and losses immediately
exchange lacks economic substance-no cash received
defer gains; recognize losses immediately
exchange lacks economic substance-cash received
recognize partial gain; recognize losses immediately
why are losses recognized immediately whether the exchange has economic substance or lacks economic substance
assets should not be valued at more than their cash equivalentprice. If the loss is deferred than assets are overstated
step 1 in recognizing gains and losses on exchanges of nonmonetary assets
Compute the total gain or loss on the transaction. This amount is equal to the difference between
the fair value of the asset given up and the book value of the asset given up.
step 2 in recognizing gains and losses on exchanges of nonmonetary assets
If a loss is computed in step 1, always recognize the entire loss.
step 3 in recognizing gains and losses on exchanges of nonmonetary assets
If a gain is computed in step 1,
(a) and the exchange has commercial substance, recognize the entire gain.
(b) and the exchange lacks commercial substance,
(1) and no cash is involved, no gain is recognized.
(2) and some cash is given, no gain is recognized.
(3) and some cash is received, the following portion of the gain is recognized:
[Cash received / (Cash received + Fair value of other assets received)] * Total Gain=portion of gain recognized

*If the amount of cash exchanged is 25% or more, recognize entire gain.
costs incurred to achieve greater future benefits should be ?
expenditures that simply maintain a given level of services should be ?
To capitalize costs, one of three conditions must be present:
1. Useful life of the asset must be increased.
2. Quantity of units produced from asset must be increased.
3. Quality of units produced must be enhanced.
Major Types of Expenditures
2. Improvements and Replacements
3. Rearrangement and Reinstallation
4. Repairs
Additions (capital expenditure or revenue expenditure)?
any addition to plant assets is capitilized because a new asset has been created.
Improvements (also called betterments) and replacements(capital expenditure or revenue expenditure)?
improvements-substitution of an better asset
replacement-substitution of a similar asset
If it increase the future service potential yes capitilize the expenditure.
3 methods to capitalize improvements and replacements
1. substitution approach
2. capitilize the new cost
3. Charge to accumulated depreciation
Substitution approach to capitalize improvements and replacements
The substitution approach applies if the book value of the old asset is available. Remove the cost of the old asset and replace it with the cost of the new asset
Capitilizing the new cost of the improvement or replacement
when a significant component of an asset wears out and replacing it increases
the asset’s useful life, then the replaced component is recorded as a separate asset and depreciated separately from the
asset it attaches to. The justification is the main asset probably has sufficient depreciation that includes the worn-out
Accumulated Depreciation Approach to capitalize improvements and replacements
When replacing a component of an asset, instead of using the Capitalization Approach and recording a new asset for
the component, the Accumulated Depreciation of the main asset can be debited. The rationale for debiting Accumulated
Depreciation is the new component erases some of the depreciation previously taken.
rearrangement and reinstallation (capital expenditure or revenue expenditure)
These are costs that will benefit future periods but do not represent additions, replacements or improvements. If the original installation cost can be estimated, along with the accumulated depreciation to-date, the cost may be handled as a replacementsubstitution method). Where the original cost is not known, the reinstallation or rearrangement cost should be capitalized.
ordinary repairs
Ordinary repairs are expenditures made to maintain plant assets in operating condition. Preventive maintenance, normal periodic repairs, replacement of parts, structural components, and other activities such as repainting, equipment adjustments, that are needed to maintain the asset so that it continues to provide normal services should not be capitalized but rather charged to an expense account. Ordinary repairs should be expensed.
examples of ordinary repairs
Examples of ordinary repairs include:
roof and/or flashing repairs
window repairs and glass replacement
tuck pointing
masonry repairs
floor repairs
major repairs
Major repairs are relatively large expenditures that benefit more than one operating cycle or periods. If a major repair, e.g., an overhaul, occurs that benefits several periods and/or extends the useful life of the asset, then the cost of the repair should be handled as an addition, improvement, or replacement, depending upon the type of repair made.
Ordinary repairs should be expensed in the period incurred. Major
repairs should be treated as an addition, improvement, or replacement.
Dispositions of Plant Assets.
Depreciation up to the date of disposition must be
recorded. The cost and accumulated depreciation of the asset must be removed
from the books, any cash received must be recorded, and a gain or loss is
involuntary conversion
(fire, theft, flood or condemned) Gains or losses are the same as in any other type of
disposition regardless of whether any resulting cash proceeds are going to be
reinvested in replacement assets. they are often reported in the extraordinary itemssection of the income statement
Miscellaneous disposal problems
If an asset is scrapped or abandoned w/o any cash recovery a loss should be recognized = to the assets BV. if scrap value existsthe gain or loss that occurs is equal to the assets scrap value and its book value