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FAR > Section 8 - Property, Plant & Equipment > Flashcards

Section 8 - Property, Plant & Equipment Flashcards

1
Q

What are characteristics of “fixed assets” aka PPE?

A
  • fixed assets acquired for use in operations and not for resale
  • long term in nature and subject to depreciation
  • tangible and physical substance
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2
Q

What are included in “fixed assets” aka PPE?

A
  • Land (property)
  • Buildings (plant)
  • Equipment

**accumulated depreciation is a “contra-asset” account on the B/S related to PPE

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3
Q

What are acquisition costs included with equipment to get it into “working condition” and ready for use that should be capitalized?

A
  • PURCHASE PRICE + liabilities assumes
  • shipping/transportation (freight in)
  • legal fees
  • insurance (title)
  • installation
  • taxes (sales, delinquent)
  • testing/test runs
  • construction loan interest
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4
Q

What are the costs included with land?

A
  • purchase price (include existing building that is to be demolished)
  • title and county fees
  • surveying
  • clearing, grading, and landscaping
  • costs of razing or demolishing an old building
  • proceeds from any sale of any scrap (old bricks) are subtracted from the land cost

***Capitalized land costs are NOT depreciated

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5
Q

What are Asset Retirement Obligations (ARO) recognized at?

A

Fair value of liability

OR

PRESENT VALUE of estimated future restoration costs using credit adjusted risk-free rate

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6
Q

What is ARO - estimated restoration costs classified as?

A

Long-term liabilities

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7
Q

What type of interest can be capitalized?

A

Construction loans for company’s own use (build by self or outside) on money actually spent and not the entire borrowed amount

**do not capitalized interest if costs are incurred after completion of construction

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8
Q

What is the amount of capitalized interest the lower of?

A

1) actual interest cost incurred

OR

2) computed capitalized interest (avoidable interest)

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9
Q

What are the three types of cost you can capitalized with the asset after you have acquired it?

A

If cost makes asset..

BIGGER - additions, new capacity, new functions (new hospital wing)

BETTER - improving efficiency (betterment/improvement), such as a rearrangement or improving a concrete floor

LONGER - extension of an asset’s useful life

JE for BIGGER and BETTER
Asset XXX
Cash XXX

JE for LONGER
Accumulated depreciation XXX
Cash XXX

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10
Q

What concept does the depreciation method address?

A

Matching concept

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11
Q

What are the four depreciation methods?

A

1) straight-line method (S/L)
2) sum of the years digits (SYD)
3) double declining balance
4) units of production (UOP) Activity Method

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12
Q

How do you calculate depreciation using the straight-line method?

A

(Cost - salvage value) / useful life = depreciation expense

JE
depreciation expense (I/S)
   accumulated depreciation (B/S contra account)
  • used when assets give equal benefits to the company throughout their useful lives
  • depreciation expense is the SAME each year
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13
Q

How do you calculate Sum of the Years Digits (SYD)?

A

(Cost - salvage value) * # of years left in asset’s life/ sum of years in asset’s life = depreciation expense

Sum of years in asset’s life formula = N(N+1)/2

N is estimated useful life

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14
Q

How do you calculate double declining balance (DDB)?

A

Year 1
Cost* (1/ # of years) * 2.0 = year 1 depreciation expense

Year 2
(cost - year 1 depreciation expense) * (%) = year 2 depreciation expense

  • IGNORE salvage value
  • depreciation expense should not be reduced below salvage value
  • switch from DDB to SL method in the last year
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15
Q

How do you calculate Units of Production (UOP) Activity Method?

A

(Cost - Salvage Value) * (hours this year/total estimated hours) = depreciation expense

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16
Q

What are the benefits of the accelerated methods (DDB and SYD)?

A
  • better MATCHING since assets is more productive in earlier years
  • minimize loss due to OBSOLESCENCE
  • helps to even out expenses. repairs and maintenance lower in earlier years, taking out depreciation early on helps keep total expenses more constant over time
17
Q

What is partial year depreciation?

A

When an asset is placed in service during the year, the depreciation expense is taken only for the portion of the year that the asset was used.

18
Q

How do you calculate depletion in natural resources property?

A

(depletion base/total volume at beginning of year)*units extracted = depletion

19
Q

How do you determine impairment loss on assets held for use?

A

1) expected future net cash flows

20
Q

How to determine “fair value” for exchanges with commercial substance (nonmonetary exchanges - asset for asset)?

A
  • recognize ALL gains and losses
  • record new asset at FMV. determine by first step below. then move on to step 2 if step 1 info not available
    1) FMV given up + cash paid (-cash received)
    2) FMV of asset received
    3) BV given up + cash paid (-cash received)

-Cash flow is DIFFERENT aka has commercial substance

IFRS characterize as “DISSIMILAR”

21
Q

How to determine “fair value” for exchanges LACKING commercial substance (nonmonetary exchanges - asset for asset)?

A
  • recognize all losses
  • defer all gains unless boot (cash) is RECEIVED
  • record at lower of:
    1) FMV given up + cash paid (-cash received)
    2) FMV of asset received
    3) BV given up + cash paid (-cash received)

-lacking substance also means “cash flow NOT significantly different”

IFRS characterize as “SIMILAR”

22
Q

What is PPE valuation under IFRS?

A

Use one of two options

1) Cost Model
Asset carried at Cost less Accumulated Depreciation and Impairment Loss

2) Revaluation Model

23
Q

What is the Revaluation Model under IFRS?

A
  • Asset is adjusted to FV less accumulated depreciation
  • increases in value prior to any decreases from adjustment are reported in current period as OCI
  • decreases in value first offset cumulative amounts of increase in OCI with excess reported in income
  • asset must be able to be reliably measured
  • must be applied to whole class of assets, not just one asset
  • no guidance on how often assets should be revalued under IFRS
24
Q

How are impairment loss recognized under IFRS?

A

Cost Method - loss is recognized immediately in profit or loss

Revaluation Method - loss is a revaluation decrease

25
Q

How are Investment Property recorded and valued under IFRS?

A
  • Property held for capital appreciation or to earn rentals (does not include property used in the course of business)
  • initially recorded at cost
  • revalued using
    • Fair Value Model
    • Cost Model
  • Fair Value Model
    • property revalued to Fair Value
    • Profit or loss recorded in current period of I/S
      • Investment profit/loss = I/S
      • PPE profit/loss = OCI
  • Cost Model
    • carried at (cost - accumulated depreciation)
    • fair value must be disclosed in notes of f/s

FAR (31 decks)

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