Acct 351 Chapter 10

Question 1

Additions

Answer 1

Increases or extensions of existing assets

Question 2

asset retirement costs

Answer 2

These are costs recognized at the same time as the liability associated with the retirement of an asset is recognized

Question 3

avoidable borrowing costs

Answer 3

When an entity borrows funds to finance a specific qualifying asset, the avoidable costs are the actual borrowing costs that would not have been incurred if the expenditures for the qualifying asset had not been made

Question 4

biological assets

Answer 4

Any living asset, such as livestock or trees

Question 5

boot

Answer 5

The payment or receipt of a significant amount of cash or other monetary asset when assets are exchanged or traded in

Question 6

Borrowing costs

Answer 6

Interest and other costs that an entity incurs in connection with the borrowing of funds

Question 7

capital approach

Answer 7

A method for accounting for contributions of assets where the increase in assets is treated as contributed (donated) capital (a Contributed Surplus account) rather than as earned revenue

Question 8

capital expenditure

Answer 8

An expenditure that increases an asset’s useful life, increases the quantity of units produced from the asset, or enhances the quality of units produced

Question 9

capitalization period

Answer 9

Is the time period during interest may be capitalized. It begins when three conditions are present: (1) expenditures for the asset have been made; (2) activities that are necessary to get the asset ready for its intended use are in progress, and (3) interest cost is being incurred

Question 10

capitalization rate

Answer 10

A weighted-average borrowing rate on general borrowings, used to determine avoidable borrowing costs on non-asset-specific debt

Question 11

capitalized

Answer 11

Recorded in asset accounts and then depreciated, as is appropriate for expenditures for items with useful lives greater than one year.

Question 12

commercial substance

Answer 12

A quality of transactions that create a significant change in a company’s expected future cash flows and therefore its value

Question 13

cost

Answer 13

The cost of an item of property, plant, and equipment includes all expenditures needed to acquire the asset and bring it to its location and ready it for use

Question 14

cost model (CM)

Answer 14

A model that measures property, plant, and equipment assets after acquisition at their cost less accumulated depreciation and any accumulated impairment losses

Question 15

cost reduction method

Answer 15

Method whereby the asset cost and future amortization is reduced by the amount of government assistance received

Question 16

deferral method

Answer 16

Recording the amount of government assistance received as a deferred credit, amortizing it to revenue over the life of the related assets

Question 17

depletion base

Answer 17

This is made up of capitalized costs of acquisition, exploration, development and restoration

Question 18

fair value

Answer 18

An estimate of the price an enterprise would have received if it had sold the asset or would have paid, if it had been relieved of the liability, on the measurement date in an arm’s length exchange motivated by normal business considerations

Question 19

fair value model (FVM)

Answer 19

A method of accounting for investment property, under which it is recognized on the statement of financial position after acquisition at its fair value

Question 20

fixed assets

Answer 20

Tangible capital assets that are acquired for use in operations and not for resale, are long-term in nature, and are usually subject to amortization and possess physical substance

Question 21

income approach

Answer 21

A method to account for contributions of assets that requires the amount received to be deferred and recognized over the period that the related assets are employed

Question 22

inspections

Answer 22

An organized formal evaluation of property, plant, and equipment

Question 23

Investment property

Answer 23

Property held to generate rentals and/or appreciate in value rather than to sell in the ordinary course of business or to use in production, administration, or in supplying goods and services

Question 24

leasehold improvements

Answer 24

Improvements made to the leased property by the lessee

Question 25

lump-sum price

Answer 25

When several assets are purchased together for a single price

Question 26

major overhauls

Answer 26

Substantial repairs or replacements of equipment, or renovations to property

Question 27

Mineral resource properties

Answer 27

Capitalized costs that are associated with the acquired rights, and the exploration, evaluation, and development of these minerals

Question 28

Mineral resources

Answer 28

Sometimes called wasting assets, generally refer to minerals and oil and gas resources that do not regenerate

Question 29

Monetary assets

Answer 29

Money or claims to future cash flows that are fixed in amounts and timing by contract or other arrangement

Question 30

Non-monetary assets

Answer 30

Items whose price in terms of the monetary unit may change over time.

Question 31

non-reciprocal transfers

Answer 31

Transfers of assets in one direction only such as donations, gifts or government grants

Question 32

Ordinary repairs

Answer 32

Expenditures made to maintain plant assets in operating condition, which are charged to an expense account in the period in which they are incurred

Question 33

plant assets

Answer 33

Tangible capital assets that are acquired for use in operations and not for resale, are long-term in nature, and are usually subject to amortization and possess physical substance

Question 34

Property, plant, and equipment

Answer 34

Properties of a durable nature used in regular business operations to generate income. (Synonym: capital assets

Question 35

Qualifying assets

Answer 35

When an entity borrows funds to finance a specific qualifying asset, the avoidable costs are the actual borrowing costs that would not have been incurred if the expenditures for the qualifying asset had not been made

Question 36

Rearrangement and reinstallation costs

Answer 36

Expenditures intended to benefit future periods and to facilitate future production by the movement of assets from one location to another

Question 37

Replacements

Answer 37

The substitution of a similar asset

Question 38

revaluation model (RM)

Answer 38

A model for accounting for a long-lived asset that carries the asset at its fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses

Question 39

revenue expenditure

Answer 39

An expense where the benefit is in the period in which the expense occurred

Question 40

self-constructed assets

Answer 40

Where a company builds an asset and assigns all relevant costs to be capitalized

Question 41

tangible capital assets

Answer 41

Assets that are acquired for use in operations and not for resale, are long-term in nature, and are usually subject to amortization and possess physical substance

Question 42

unit of measure issue

Answer 42

The components by which assets are measured and recorded, and the issue in determining which components to recognize

Question 43

weighted-average accumulated expenditures

Answer 43

A calculation of construction expenses that are weighted by the amount of time that interest cost could be incurred on the expenditure

Question 44

Identify the characteristics of property, plant, and equipment assets, and explain the importance of these long-term assets to a business enterprise

Answer 44

Property, plant, and equipment assets are tangible assets held for use in the production of goods and services, for rental to others, or for administrative purposes, and have a useful life of more than one accounting period. This type of asset provides an entity with its operating capacity and infrastructure, but also adds to fixed costs. For this reason, it is important that a company invest enough in PP&E to meet its potential, but not so much that it has to bear the related costs of overcapacity

Question 45

Identify the costs to include in the measurement of property, plant, and equipment assets at acquisition

Answer 45

PP&E costs that provide probable future economic benefits to the entity and that can be measured reliably are recognized. Asset components should be recognized separately to the extent their costs are significant and/or the related assets have different useful lives or patterns of depreciation. Asset costs include all necessary costs directly attributed to acquiring the asset, bringing it to its location, and making it ready for use. These include direct material, direct labour, and variable overhead costs for self-constructed PP&E assets, borrowing costs for those taking substantial time to get ready for use, and dismantling and restoration costs required as a result of the asset’s acquisition. Once the asset is in place and ready for use, costs are no longer capitalized

Question 46

Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a non-monetary exchange, or a contributed asset

Answer 46

Cost means the asset’s cash equivalent cost. When payment is deferred beyond normal credit terms, the excess paid over cash cost is interest. When a number of assets are acquired in a basket purchase, the cost is allocated based on the relative fair value of each. When PP&E assets are acquired and paid for by issuing the entity’s shares, cost is usually determined as the fair value of the asset. When acquired in an exchange of assets, cost is the fair value of the assets given up, unless the fair value of the assets received can be more reliably measured. However, if the transaction lacks commercial substance or fair values cannot be reliably determined, the assets acquired are measured at the book value of the assets given up. This amount cannot exceed the fair value of the assets acquired. Assets contributed to a company are measured at fair value and credited to contributed surplus if donated by a shareholder. This is rare. If contributed by government, the contribution is accounted for under the income approach whereby the amount credited flows through the income statement, usually as the asset is used by the entity

Question 47

Identify the costs included in specific types of property, plant, and equipment

Answer 47

Land: Includes all expenditures made to acquire land and to make it ready for use. Land costs typically include the purchase price; closing costs, such as title to the land, legal fees, and registration fees; costs incurred to condition the land for its intended use, such as grading, filling, draining, and clearing; the assumption of any liens, mortgages, or encumbrances on the property; and any additional land improvements that have an indefinite life. Buildings, including investment property: Includes all expenditures related directly to their acquisition or construction. These costs include materials, labour, and direct overhead costs that are incurred during construction and professional fees and building permits. Equipment: Includes the purchase price, freight, and handling charges that are incurred; insurance on the equipment while it is in transit; the cost of special foundations if they are required; assembling and installation costs; and the costs incurred in calibrating the equipment so that it can be used as intended. Mineral resource properties: Four types of costs may be included in establishing the cost of mineral resource assets. These are (a) acquisition costs, (b) exploration and evaluation costs, (c) development costs, and (d) site restoration and asset retirement costs.

Question 48

Understand and apply the cost model

Answer 48

The cost model is appropriate for all classes of PP&E, including investment property. Under this model, the assets are carried at cost less accumulated depreciation and any accumulated impairment losses

Question 49

Understand and apply the revaluation model

Answer 49

The revaluation model may be applied to any class of PP&E except investment property, provided its fair value can be measured reliably. Under this model, the assets are carried at their fair value at the revaluation date less any subsequent accumulated depreciation and any subsequent accumulated impairment losses. While held, net increases in fair value are not reported in income, but are accumulated in a revaluation surplus account in equity. Net losses are reported in income once the revaluation surplus has been eliminated

Question 50

Understand and apply the fair value model

Answer 50

The fair value model can be applied only to investment property and the choice between cost and fair value must be made for all investment property reported. Under this model, all changes in fair value are recognized in net income. No depreciation is recognized

Question 51

Explain and apply the accounting treatment for costs incurred after acquisition

Answer 51

Day-to-day servicing, repair, and maintenance costs, and costs of rearrangement and relocation, are expensed as incurred. PP&E expenditures that provide future economic benefits and whose costs can be reliably measured are capitalized. The cost of additions, replacements, and major overhauls and inspections are capitalized and the carrying amount of the replaced asset or the previous overhaul or inspection is removed from the accounts

Question 52

Identify differences in accounting between private entity GAAP and IFRS, and what changes are expected in the near future

Answer 52

In general, the accounting for PP&E assets is very similar under both IFRS and private entity GAAP because the principles underlying both are very similar. However, under IFRS, practice remains closer to the principles identified. This is seen, for example, in accounting for components and major overhauls and inspections; incidental revenues and expenses before asset use; and borrowing costs. IFRS permits application of a revaluation model and a fair value model, neither of which is acceptable under private entity GAAP. The IASB is researching activities related to the extractive industry with the objective of developing accounting standards to cover the exploration for, and the development and extraction of, minerals and oil and gas resources and assets. In addition, a new standard on fair value measurement is expected to be finalized in 2010

Question 53

Calculate the amount of borrowing costs to capitalize for qualifying assets

Answer 53

The avoidable borrowing costs related to the financing of eligible expenditures on qualifying assets are capitalized to the extent they are less than the total borrowing costs incurred in the period