Cpa Review- Far 4-3 (Fixed Assets)

Front 1

Fixed Assets- Characteristics

Back 1

1. Acquired for use in operations and not for resale.
2. They possess physical substance.

Hint 1

3. Long term in nature and subject to depreciation.

Front 2

Classification of Fixed Assets

Back 2

-Following must be shown separately on the B/S (or footnotes) at original (historical) cost.
1. Land (property)
2. Buildings (plant)

Hint 2

3. Equipment (show specific categories separately if significant)
4. Accumulated Depreciation (contra-asset): maybe combined for two or more categories
5. Fixed Assets are Nonmonetary: isn't fixed in dollars and instead the value fluctuates with changes in the price value

Front 3

Valuation of Fixed Assets- GAAP

Back 3

1. Historical Cost: basis for valuation of purchased fixe assets. Measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.

Hint 3

2. Donated Fixed Assets: recorded at fair market value along with incidental costs incurred. Result in the recognition of a gain on the I/S.
DR. Fixed asset (FMV)
CR. Gain on nonreciprocal transfer (U or I)

Front 4

Valuation of Fixed Assets- IFRS

Back 4

-Initially recognized at the cost to acquire the asset. Then can be valued under the cost or revaluation model.
1. Cost Model: Carrying value = Historical cost - Accumulated depreciation - Impairment

Hint 4

2. Revaluation Model: a class of fixed assets is revalued to FV and then reported at FV less subsequent depreciation and impairment. Revaluations must be made frequently enough to ensure that carrying amount does not differ significantly from FV at the end of the reporting period (if it does further revaluation required). When reported at FV, the historical cost equivalent must be disclosed.

Front 5

Revaluation Losses, Gains, & Impairment

Back 5

1. Revaluation Losses: (FV < Carrying value before revaluation) are reported on the I/S unless it reverses a previously recognized revalution gain (recognized in OCI and reduces the revalution surplus in accumulated OCI).

Hint 5

2. Revaluation Gains: (FV > Carrying value) reported in OCI unless it reverses a previously recognized revaluation surplus (reported on the I/S to the extent they reverse the loss).
3. Impairment: if revalued fixed assets subsequently become impaired, the impairment is recorded by reducing any revaluation surplus to 0 with further impairment losses reported on the I/S.

Front 6

Cost of Equipment

Back 6

-Office equipment, machinery, furniture, fixtures, and factory equipment.
-Include expenditures related directly to their acquisition or construction*

Hint 6

*Invoice price (less cash discounts if any), add freight-in (and insurance while in transit and in construction), add installation charges (including testing and preparation for use), add sales and federal excise taxes, possible addition of construction period interest.

Front 7

Equipment- Capitalize vs. Expense

Back 7

1. Additions: increase the quantity of fixed assets- capitalize.
3. Repairs: (1) if ordinary- expense, (2) if extraordinary- capitalize and treat as an addition, improvement, or replacement as appropriate.
3. Improvements: improve the quality of fixed assets and are capitalized to the fixed asset account.

Hint 7

4. Replacements: new similar asset is substituted for the old asset.
-If carrying value is known, remove it and recognize any gain or loss. Capitalize the cost of the improvement/replacement to the asset account.
-If carrying value is unknown and: (1) Asset's life is extended- DR. A/D for the cost of the improvement/replacement and CR. Cash or A/P, (2) Usefulness of the asset is increased- capitalize the cost of the improvement/replacement to the asset account.

Front 8

Cost of Land

Back 8

-When land has been purchased for the purpose of constructing a new building, all costs up to excavation for the new building are considered land costs. All the following expenditures are included:

Hint 8

-(1) Purchase price, (2) Broker's commission, (3) Title and recording fees, (4) Legal fees, (5) Clearing of land, (6) Site development, (7) Existing obligations assumed by buyer, including mortgage and back taxes, (8) costs of razing (tearing down) an old building (demolition), (10) LESS: proceeds form sale of existing buildings, standing timber etc.

Front 9

Land Improvements and Interest Costs

Back 9

-Land improvements are depreciable such as, (1) Fences, (2) Water systems, (3) Sidewalks, (4) Paving, (5) Landscaping, (6) Lighting.

Hint 9

-Interest costs during construction period should be added to cost of land improvement based on weighted average of accumulated expenditures.

Front 10

Cost of Buildings

Back 10

-(Excavation forward) Include, (1) Purchase Price etc., (2) All repair charges neglected by previous owner (deferred maintenance), (3) Alterations and improvements, (4) Architect's fees, (5) Possible addition of construction period interest.

Hint 10

-When preparing the land for the construction of a building:
1. Land Cost- filling a hole or leveling
2. Building Cost- digging a hole for the foundation.

Front 11

Basket Purchase

Back 11

-(of Land & Building)
-Allocate the purchase price based on the ratio of appraised values of individual items.

Front 12

Investment Property (IFRS only)

Back 12

-Buildings held by an entity or by a lessee under a finance (capital) lease to earn rentals or for capital appreciation.
-Includes property under construction or development for future use as investment property.

Hint 12

-GAAP does not include a specific definition or set of accounting rules for investment property.
-Doesn't include owner-occupied property, or property held for sale in the ordinary course of business.

Front 13

Costs of Investment Property

Back 13

-Initial cost of investment property includes:
1. Purchase price

Hint 13

2. Expenses directly related to purchase, including legal services, professional fees, property transfer taxes, and other taxes.

Front 14

Capitalize vs. Expense- Investment Property

Back 14

Following costs are capitalized and added to the carrying value:
1. Costs incurred to to subsequently add to the property

Hint 14

2. Costs to replace part of the property
3. Costs to service the property
-Doesn't include the cost of day-to-day servicing, repairs, and maintenance costs, labor, or minor parts (expensed in period incurred).

Front 15

Investment Property Measurement Models

Back 15

1. Cost Model: reported on the B/S at historical cost less accumulated depreciation (if appropriate). When the cost model is used, FV of the investment property must be disclosed.
2. Fair Value Method: reported on the B/S at FV and isn't depreciated. Best evidence for FV is current prices in an active market for similar property in the same location and condition. FV reflects market conditions at the end of the accounting period.

Hint 15

-Once adopted, FV measurement must be applied consistently until the asset is disposed of or can no longer be classified as investment property b/c it's owner-occupied or will be developed for sale in the ordinary course of business.
-Gains and Losses: investment property should be revalued w/ regularity so that the carrying value doesn't differ materially from FV. A gain or loss arising from a change in the FV of the investment property is recognized in earnings in the period in which it arises.

Front 16

Fixed Assets Constructed by a Company

Back 16

Costs Include:
1. Direct Materials & Direct Labor
2. Repairs and maintenance expenses that add value to the fixed asset

Hint 16

3. Overhead, including direct items of overhead (any "idle plant capacity" expense) & include construction period interest.
4. Do not include profit

Front 17

Capitalization of Interest Costs

Back 17

-An exception b/c generally expensed as incurred (period cost)
-Should be capitalized (based on weighted average of accumulated expenditures) as part of the cost of producing fixed assets such as:
1. Fixed assets intended for sale/lease and constructed as discrete projects (real estate projects)

Hint 17

2. Buildings, machinery, or land improvements, constructed or produced for others or to be used internally
3. Land improvements (if structure is placed on the land, charge interest cost to the structure, not the land)

Front 18

Interest Cost

Back 18

-Based on interest obligations having:
1. Stated (explicit) interest rate, or if not stated, use:

Hint 18

-Imputed interest rate per ASC 835, Interest
-Imputed interest rate per ASC 840, Leases

Front 19

Do Not Capitalize Interest Cost

Back 19

1. On inventory routinely manufactured: however do capitalize interest on special order goods on hand for sale to customers.
2. On fixed assets held before or after construction period (during only)

Hint 19

3. During intentional delays in construction (ex: waiting for market to improve): however, do capitalize interest cost during ordinary delays in construction (ex: waiting for a permit, employee strike)

Front 20

Weighted Average Amount of Accumulated Expenditures

Back 20

-Capitalized interest costs for a particular period are determined by applying an interest rate to the average amount of

Hint 20

accumulated expenditures for the qualifying asset suring the period (known as the avoidable interest)
-Not calculated on the amount borrowed

Front 21

Interest Rate on Borrowings

Back 21

-The interest rate paid on borrowings (specifically for asset construction) during a particular period should be used to determine the amount of interest cost to be capitalized for the period.

Hint 21

-Where a qualifying asset is related to a specific new borrowing, the allocated interest cost is equal to the amount of interest incurred on the new borrowing (rate on construction loan)

Front 22

Interest Rate on Excess Expenditures

Back 22

-If the average accumulated expenditures outstanding exceed the amount of the related specific new borrowing, interest cost should be computed on the excess.

Hint 22

-The interest rate that should be used on the excess is the weighted average interest rate for other borrowings of the company.

Front 23

Not to Exceed Actual Interest Costs

Back 23

-Total capitalized interest costs for any particular period may not exceed the total interest costs actually incurred by an entity during that period.

Hint 23

-In consolidated F/S's, this limitation should be applied on a consolidated basis.

Front 24

Do Not Reduce Capitalized Interest

Back 24

-Do not reduce capitalizable interest by income received on the unexpended portion of the loan.
-Pass Key:

Hint 24

1. Rule 1: only capitalize interest on the money actually spent, not on the total amount borrowed.
2. The amount of capitalized interest is the lower of: (1) Actual interest cost incurred or, (2) Computed capitalized interest (avoidable interest)

Front 25

Capitalization of Interest Period

Back 25

-Begins when 3 conditions are present:
1. Expenditures for the asset have been made (building decision made)
2. Activities that are necessary to get the asset ready for its intended use are in progress (permits filed)
3. Interest cost is being incurred

Hint 25

-Continues as long as the 3 conditions are present
-Ends when the asset is (or independent parts of the asset are) substantially complete and ready for the intended use (regardless of whether it is actually used)

Front 26

Disclose in the F/S's

Back 26

1. Total interest cost incurred during the period

Hint 26

2. Capitalized interest cost for the period, if any