PP&E

Question 1

Non monetary exchange Q:
A exchanged a track with a carrying amount of $12k and FV of 20K for a track and $4k cash in a trans that lacked commercial substance. The FV of track received was $16k.
At what amount should A record the truck received in exchange?

Answer 1

When the trans lacks commercial substance, it is generally recorded at book value. Since cash received 4K and new track worth $16k, it indicates the cash is 20% of the total.

DR: New $9,600
DR: Cash $4,000
CR: Old $12,000
CR: Gain $1,600 ($8000 x 20%)

Question 2

Nonmonetary exchange with commercial substance - how to record it?

Answer 2

Priority 1 => 3
1. FMV given up + cash paid (or - cash received)
2. FMV of asset received
3. BV given up + cash paid (or - cash received)
Recognize all gain/loss

Question 3

Nonmonetary exchange lacking commercial substance - how to record it?

Answer 3

Record lower cost of following three:
1. FMV given up + cash paid (or - cash received)
2. FMV of asset received
3. BV given up + cash paid (or - cash received)
LCM - recognize all losses and defer all gains unless boot is received

Question 4

Assume commercial substance on all exam questions involving nonmonetary exchanges unless xxx?

Answer 4

1. the FV of assets received/relinquished cannot be determined within a reasonable unit
2. the exchange is made purely to facilitate the sale of the product to a party that is not a party of the exchange (usually competitor or vendor)
3. the exchange lacks commercial substance

Question 5

Lacks commercial substance - BOOT received - how to record?
FMV received $8000
Cash received $2000
BV given up $6000

Answer 5

FMV received $8000 + cash received $2000 = total consideration $10,000
Cash received / total consideration = $2000/$10000 = 20%
Total consideration $10k - BV given up $6k = realized gain $4k
Realized gain $4k * 20% = $800

JE: 
DR: New $4800
DR: Cash $2000
 CR: Old $6000
 CR: Gain $800

Question 6

Lacks commercial substance - BOOT received - when the boot received is more than or equal to 25% of the total consideration received (including the boot)

Answer 6

The transaction is viewed as a monetary exchange and all of the gain is recognized.

Question 7

IFRS - what are the methods to record PP&E?

Answer 7

1. Cost model (CM) - the asset is depreciated to its residual value
2. Revaluation Model (RM) - it is only used when the FV is readily determinable

Question 8

IFRS - Reevaluation model (RM) - how to record to where?

Answer 8

Asset is periodically adjusted fair value; write up or down.
Write up: OCI - it’s not in DENT - it’s in DENT”R”
Write down: OCI - if the value goes down below the original - it is reported in Income => then, it goes back to income if the value goes up until the amount loss in I/S is covered.

Question 9

IFRS - impairment process - how to recognize and to record?

Answer 9

carrying value > net recoverable amount = impairment loss
Recoverable amount - how much you are gonna generate through use or disposal.
With CM - profit or loss
With RM - revaluation decrease

Question 10

IFRS - impairment process - when should you test it? When an asset is revalued, what are the procedures for the class?

Answer 10

When there is an indication that the item is impaired.
Some items are required to test once a year -
Indefinite useful lives, intangibles not ready to be use.
Also, when an asset is revalued, the entire class of PPE to which the asset belongs must be revalued.

Question 11

IFRS - Investment property

Answer 11

In GAAP, there is no category for this, but IFRS has a new category as investment property.
Either record it as fair value model (write up/down as the value goes up/down, no depreciation is recorded) or cost model (depreciation / impairment)

Question 12

IFRS - Biological assers

Answer 12

Living things - plants, animal - distinguished from agricultural products
Fair value less cost to harvest = net realizable value
Gain/loss - I/S
When the FV cannot be measured, it is measured at cost less accum. deprec. and accum. impairment losses.

Question 13

IFRS - Borrowing costs

Answer 13

GAAP - expense it

IFRS - You can capitalize borrowing cost as part of the cost of that asset.

Question 14

What is the three-step process of determining an impairment loss?

Answer 14

1. Review events or changes in circumstances for possible impairment, if none are identified, no further testing is required.
2. If the review indicates impairment, apply recoverability test (The expected future net cash flow < carrying amount => impairment has occurred)
3. Impairment loss amount = carrying amount - fair value

Question 15

Impairment loss example - Carrying value $600, expected future net cash flow $580, market value $525

Answer 15

Recoverability test - carrying value is more than expected future net cash flow => impairment has occurred
Loss = carrying value $600 - market value $525 = $75
JE:
DR: Loss on impairment (I/S) $75
CR: Accum. deprec. $75

Question 16

Capitalization of interest - when do you capitalize? when not to capitalize? and amount to be capitalized?

Answer 16

1. Capitalize interest cost if asset is: 1) constructed for company’s own use (built by self or outsider), 2) assets manufactured for resale resulting from a special order (ships)
2. DO NOT capitalize interest if: 1) costs are incurred after completion of construction, 2) inventory manufactured in the ordinary course of business
3. Amount to be capitalized is: 1) weighted average accumulated expenditures x interest rate = capitalized portion of interest, 2) interest on other debt that could have been avoided by repaying of debt, 3) never exceed actual interest rate