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26 Cards in this Set

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Fixed Assets- Characteristics
1. Acquired for use in operations and not for resale.
2. They possess physical substance.
3. Long term in nature and subject to depreciation.
Classification of Fixed Assets
-Following must be shown separately on the B/S (or footnotes) at original (historical) cost.
1. Land (property)
2. Buildings (plant)
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
Valuation of Fixed Assets- GAAP
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.
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)
Valuation of Fixed Assets- IFRS
-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
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.
Revaluation Losses, Gains, & Impairment
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).
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.
Cost of Equipment
-Office equipment, machinery, furniture, fixtures, and factory equipment.
-Include expenditures related directly to their acquisition or construction*
*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.
Equipment- Capitalize vs. Expense
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.
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.
Cost of Land
-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:
-(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.
Land Improvements and Interest Costs
-Land improvements are depreciable such as, (1) Fences, (2) Water systems, (3) Sidewalks, (4) Paving, (5) Landscaping, (6) Lighting.
-Interest costs during construction period should be added to cost of land improvement based on weighted average of accumulated expenditures.
Cost of Buildings
-(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.
-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.
Basket Purchase
-(of Land & Building)
-Allocate the purchase price based on the ratio of appraised values of individual items.
Investment Property (IFRS only)
-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.
-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.
Costs of Investment Property
-Initial cost of investment property includes:
1. Purchase price
2. Expenses directly related to purchase, including legal services, professional fees, property transfer taxes, and other taxes.
Capitalize vs. Expense- Investment Property
Following costs are capitalized and added to the carrying value:
1. Costs incurred to to subsequently add to the property
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).
Investment Property Measurement Models
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.
-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.
Fixed Assets Constructed by a Company
Costs Include:
1. Direct Materials & Direct Labor
2. Repairs and maintenance expenses that add value to the fixed asset
3. Overhead, including direct items of overhead (any "idle plant capacity" expense) & include construction period interest.
4. Do not include profit
Capitalization of Interest Costs
-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)
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)
Interest Cost
-Based on interest obligations having:
1. Stated (explicit) interest rate, or if not stated, use:
-Imputed interest rate per ASC 835, Interest
-Imputed interest rate per ASC 840, Leases
Do Not Capitalize Interest Cost
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)
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)
Weighted Average Amount of Accumulated Expenditures
-Capitalized interest costs for a particular period are determined by applying an interest rate to the average amount of
accumulated expenditures for the qualifying asset suring the period (known as the avoidable interest)
-Not calculated on the amount borrowed
Interest Rate on Borrowings
-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.
-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)
Interest Rate on Excess Expenditures
-If the average accumulated expenditures outstanding exceed the amount of the related specific new borrowing, interest cost should be computed on the excess.
-The interest rate that should be used on the excess is the weighted average interest rate for other borrowings of the company.
Not to Exceed Actual Interest Costs
-Total capitalized interest costs for any particular period may not exceed the total interest costs actually incurred by an entity during that period.
-In consolidated F/S's, this limitation should be applied on a consolidated basis.
Do Not Reduce Capitalized Interest
-Do not reduce capitalizable interest by income received on the unexpended portion of the loan.
-Pass Key:
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)
Capitalization of Interest Period
-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
-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)
Disclose in the F/S's
1. Total interest cost incurred during the period
2. Capitalized interest cost for the period, if any