FAR 8 - PP&E Flashcards
Cost of land includes?
+ Purchase Price
+ Surveying
+ Clearing, grading, & landscaping
+ Cost of razing/demolishing old building
- Proceeds from sale of scraps
= Cost of land
Asset Retirement Obligation (ARO)
Obligation to restore an asset to a specific condition prior to abandonment resulting in a liabilitiy recognized at its fair value when the obligation is incurred.
- Liability recorded at FMV
- If FMV not given, based on PV of expected future costs
- Liability increases each year based on discount rate
Accretion Expense
Increase in an obligation, such as an ARO, resulting from the passage of time, generally calculated using the effective interest method.
Journal Entry:
DR: Accreation Expense
CR: ARO Liability
When should interest costs be capitalized?
&
What is the amount to be capitalized?
- If asset is constructed for company’s own use
- Asset manufactured for resale resulting from a special order
Capitalized: Weighted avg accum expenditures x interest rate
What are the four Depreciation Methods
- Straight Line
- Double Declining
- Sum of the years Digits
- Units of Production
Straight Line Method
vs.
Double Declining
SL = (Cost - Salvage Value) / Useful Life
Double Declining = Twice the SL Rate
DD Year 2 Calculation = (Cost - Depr Exp) * SL%
NOTE: In DD, salvage value is ignored
Sum of the Years Digits (SYD)
+ (Cost - Salvage Value)
x ( # years left in asset’s life / sum of years in asset’s life)
= Depreciation Expense
SYD = N(N+1) / 2
Units of Production (UOP)
+ (Cost - Salvage Value)
x (hours this year / total estimated hours)
= Depreciation Expense
Note: “Cost - SV” & “Total Hrs” are constant values
Depletion
(Units Extracted/Total Expected Recoverable Units)
x (Cost - SV)
= Depletion
or
Yr: 1
(Cost - SV / Total Volume) x Units Extracted = Depletion
Yr: 2
(BV/CV Estimated Volume Left) x Units Extracted = Dep
Impairment of Long-lived Assets
HELD FOR USE
Two Step Process:
- CV > Expected Future Cash Flow (top see if impaired)
- CV > FMV (to calculate amount to write down)
DR: Impairment Loss
CR: Accumulated Depreciation
Impairment of Long-lived Assets
HELD FOR SALE
- Impaired if CV > NRV
- When assets are no longer being used for operations, asset is reclassified to Other Assets.
- When transferred, asset is valued at the LOWER OF its CV or NRV
- Asset is NOT Depreciated
- Asset can be written up or down; if writen up, its value can NOT be greater than the original Carrying amount.
Exchanges with Commercial Substance
(Unlike)
Recognize all Gains & Losses
Recognize new asset at FMV.
FMV will be any of the three:
1. FMV given up + cash paid (-cash recv)
2. FMV of asset received
3. BV given up + cash paid (-cash recv)
Exchanges Lacking Commercial Substance
- Record new asset at LOWER OF:
- FMV given up + cash paid (-cash recv)
- FMV of asset received
- BV given up + cash paid (-cash recv)
- Recognize all Losses
-
Defer all gains, unless BOOT is RECEIVED
- Gain to be calculated based on boot to total consideration received***
GAIN CALCULATION:
+ FMV Asset received
+ Cash/Boot Received
= Total Consideration Received***
- Book Value Given up
= Total Gain
x Boot Consideration (Cash Received/Total Condr Rer’d)
= Gain (to be recognized)
JOURNAL ENTRY:
DR: New Asset (PLUG)
DR: Cash (boot received)
CR: Old Asset (BV)
CR: Gain ( based on boot/total consideration)
NOTE: If boot received is 25% greater than or equal of the total consideration received, all of the gain is recognized.
Capitalized Interest Calculation
+ Annual Expenditure
x (Prorated over the year % = 1/# yrs)
= Avg Current Expenditure
+ Prior Year Spending
= Avg accumulated expend
x Interest Rate of Loan
= Capitalized Interest
Costs Incurred After Aquisition
(Capital Expenditure)
Bigger, Better, Longer
Bigger - DR: Asset, CR: Cash
Better - DR: Asset, CR: Cash
Longer : DR: Accum Depr, CR: Cash
