Acc 318 Chapter 10 Fall 2006

Front 1

Fixed Assets

Back 1

Property, Plant & Equipment. They include land building structures, and equipment.

Front 2

The major characteristics of property plant & equipment

Back 2

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.

Front 3

historical cost

Back 3

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.

Front 4

Costs incurred after the assets acquisition

Back 4

such as additions, improvements, or replacements. Costs are only added to assets costs only if they provide future service potential otherwise they are expensed.

Front 5

Land Costs

Back 5

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.

Front 6

Land purchased for the construction of a new building

Back 6

all costs incurred up to the excavation for the new builing are considered land costs

Front 7

reductions in the price of land

Back 7

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

Front 8

Special Assessments for local improvements

Back 8

pavements, street lights, sewers, landscaping, and drainage systems are usually charged to the land account. They are relatively permanent in nature

Front 9

Land improvements

Back 9

Improvements with limited lives ex.private driveways, walks , fences, and parking lots they can be depreciated over their useful lives

Front 10

Land as an investment

Back 10

Land for which its use is speculative

Front 11

Cost of Buildings

Back 11

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.

Front 12

Equipment

Back 12

delivery equipment, office equipment, machinery, furniture and fixtures, furnishings, factory equipment, and similar fixed assets.

Front 13

Cost of Equipment

Back 13

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.

Front 14

self constructed assets

Back 14

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.

Front 15

2 methods of assigning indirect costs to self constructed assets

Back 15

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)

Front 16

Interest costs during construction

Back 16

3 approaches suggested to account for interest incurred in financing, the construction or acquisition of property,plant & equipment

Front 17

Capitilize no interest charges during construction

Back 17

interest is considered a cost of financing and not a cost of construction.

Front 18

Charge construction with all costs of funds employed, whether identifiable or not

Back 18

interest whether actual or imputed, is a cost of building, just as labor, materials, and overhead are costs.

Front 19

capitilize only the actual interest costs incurred during construction

Back 19

relies on the historical cost concept that only actual transactions are recorded. Approach recommended by GAAP

Front 20

why capitilize interest costs?

Back 20

during construction the asset is not generating revenues. Once revenues can be earned interest should be reported as an expense and matched to revenues

Front 21

3 factors of interest capitalization

Back 21

1. qualifying assets 2. capitalization period 3. amount to capitilize

Front 22

qualifying asset

Back 22

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)

Front 23

Capitalization Period

Back 23

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.

Front 24

The amount of interest to capitalize

Back 24

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.

Front 25

avoidable interest

Back 25

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.

Front 26

Weighted average accumulated expenditures

Back 26

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.

Front 27

interest rates to be applied to weighted average accumulated expenditures

Back 27

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.

Front 28

actual interest

Back 28

take the debt and times it by the interest rates, sum it.

Front 29

Expenditures for Land

Back 29

when land is purchased with the intent of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.

Front 30

Interest revenue and interest capitalization

Back 30

Companies frequently borrow money and invest the excess funds. Revenue from the excess invested may not be used to offset interest expense.

Front 31

valuing assets

Back 31

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.

Front 32

cash discounts and asset valuation

Back 32

If the discount is taken it should be considered a reduction in the purchase price of the asset.

Front 33

Deferred Payment Contracts

Back 33

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.

Front 34

Lump sum purchases (group of plant assets purchased at a lump-sum price)

Back 34

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.

Front 35

Issuance of Stock

Back 35

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.

Front 36

accounting for the exchange of nonmonetary assets

Back 36

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.

Front 37

economic substance

Back 37

an exchange has economic substance if the future cash flows change as a result of the transaction

Front 38

exchange has economic substance

Back 38

recognize gains and losses immediately

Front 39

exchange lacks economic substance-no cash received

Back 39

defer gains; recognize losses immediately

Front 40

exchange lacks economic substance-cash received

Back 40

recognize partial gain; recognize losses immediately

Front 41

why are losses recognized immediately whether the exchange has economic substance or lacks economic substance

Back 41

assets should not be valued at more than their cash equivalentprice. If the loss is deferred than assets are overstated

Front 42

step 1 in recognizing gains and losses on exchanges of nonmonetary assets

Back 42

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.

Front 43

step 2 in recognizing gains and losses on exchanges of nonmonetary assets

Back 43

If a loss is computed in step 1, always recognize the entire loss.

Front 44

step 3 in recognizing gains and losses on exchanges of nonmonetary assets

Back 44

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.

Front 45

costs incurred to achieve greater future benefits should be ?

Back 45

capitilized

Front 46

expenditures that simply maintain a given level of services should be ?

Back 46

expensed

Front 47

To capitalize costs, one of three conditions must be present:

Back 47

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.

Front 48

Major Types of Expenditures

Back 48

1.Additions
2. Improvements and Replacements
3. Rearrangement and Reinstallation
4. Repairs

Front 49

Additions (capital expenditure or revenue expenditure)?

Back 49

any addition to plant assets is capitilized because a new asset has been created.

Front 50

Improvements (also called betterments) and replacements(capital expenditure or revenue expenditure)?

Back 50

improvements-substitution of an better asset
replacement-substitution of a similar asset
If it increase the future service potential yes capitilize the expenditure.

Front 51

3 methods to capitalize improvements and replacements

Back 51

1. substitution approach
2. capitilize the new cost
3. Charge to accumulated depreciation

Front 52

Substitution approach to capitalize improvements and replacements

Back 52

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

Front 53

Capitilizing the new cost of the improvement or replacement

Back 53

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
component.

Front 54

Accumulated Depreciation Approach to capitalize improvements and replacements

Back 54

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.

Front 55

rearrangement and reinstallation (capital expenditure or revenue expenditure)

Back 55

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.

Front 56

ordinary repairs

Back 56

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.

Front 57

examples of ordinary repairs

Back 57

Examples of ordinary repairs include:
roof and/or flashing repairs
window repairs and glass replacement
tuck pointing
painting
masonry repairs
floor repairs

Front 58

major repairs

Back 58

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.

Front 59

Repairs

Back 59

Ordinary repairs should be expensed in the period incurred. Major
repairs should be treated as an addition, improvement, or replacement.

Front 60

Dispositions of Plant Assets.

Back 60

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
recognized.

Front 61

involuntary conversion

Back 61

(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

Front 62

Miscellaneous disposal problems

Back 62

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