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Flashcards in Ch 10 Deck (73):

Property, plant and equipment AKA Plant Assets
AKA Fixed Assets

building structures (offices, factories, warehouses),
Equipment (machinery, furniture, tools)


How relevant is Fair value to property, plant and equipment?

Not very

Consistent with going concern assumption that it's held
For use of business not for sale like inventory


3 major characteristics with property, plant and equipment?

1 acquired for use in operations, not for resale

2 Longterm in nature and usually depreciated

3 they possess physical substance


Historical cost

Measures cash price of obtaining the asset and
Bringing to location + condition necessary for use


Under IFRS, historical cost for property, plant and equipment is the...

Benchmark (preferred) treatment

However companies may revalue these assets regularly


2 reasons subsequent to acquisition, why companies should not write up property, plant, equipment to reflect fair value when it's above cost?

1 historical cost is most reliable (includes actual transactions)

2 companies should not anticipate gains and losses
But should recognize them when asset is sold


Removal of old buildings, clearing, grading and filling is a...why?

Land cost

because activity is necessary to condition land for
intended purpose


Special assessments for local improvements 4 examples?

Pavements, street lights, sewers, drainage systems


4 examples of improvements with limited lives?

Driveways, walks, fences, parking lots


If land is held for speculation it should be classified as?
If a real estate concern holds land for resale it should be classified as?

An investment



Self constructed asset accounting problems?

When company makes its own equipment it's hard
To allocate indirect costs

There's no purchase or contract price


2 ways a company can handle indirect costs when they make their own equipment?

1 assign no fixed overhead to cost of constructed asset

2 assign full portion of all overhead to construction process


Assigning no fixed overhead to cost of constructed asset assumes?

Company will have same overhead costs regardless

Company assigns variable overhead costs that would
Increase due to the construction


Full costing approach, definition? Belief?

Assign portion of all overhead to construction process
Of self made asset

Belief that all costs should attach to all products
And assets manufactured


Companies should assign to a self constructed asset a...

Pro rata portion of fixed overhead to determine its cost


3 suggested approaches to account for interest incurred in financing construction of property, plant and equipment?

1 capitalize no interest charges during construction

2 charge construction with all costs of funds employed,
Whether identifiable or not

3 capitalize only actual interest cost incurred during


Interest costs Approach: Capitalize no interest charges during construction

Interest is considered a cost of financing and not
A cost of construction


Interest costs Approach: charge construction with all costs of funds employed whether identifiable or not

Cost of construction should include cost of financing
Whether by cash, debt or stock


Interest cost approach: capitalize only actual interest costs incurred during construction

Capitalizes interest costs incurred through debt financing

GAAP Aproach


3 items considered in capitalizing interest approach?

1 qualifying assets
2 capitalization period
3 amount of capitalize


The objective of capitalizing interest is to obtain a...

Measure of acquisition cost that reflects company's total
Investment in the asset

and charge that cost to future periods Benefited


2 general kinds of Qualifying assets for interest cost capitalization? Give examples

1) Assets under construction for company's use (buildings,
Plants, large machinery)

2) assets intended for sale or lease that are constructed
(ships, real estate developments)


2 types of assets that do not qualify for interest capitalization? Examples

1 assets in use or ready for intended use

2 assets that company does not use in its earning activities
And not undergoing activities intended to get ready for use

Ex land remaining undeveloped,
assets not used from excess capacity
Need for repair


Capitalization period

Period of time during which company must capitalize

Ends when asset is substantially complete and ready
For intended use


3 conditions of capitalization period?

1 expenditures for assets have been made

2 activities necessary to get asset ready for intended use
Are in progress

3 interest cost is being incurred


IFRS changes made for capitalizing interest as part of IASB's convergence project?

IFRS now requires companies to capitalize borrowing costs
Related to qualifying assets


Avoidable interest

Amount of interest cost during period company Could theoretically avoid if it hadn't made expenditures For asset


Determining the potential amount of interest under
The avoidable interest concept: equation

Potential amount of interest =
Interest rate(s) X (weighted-average accumulated expenditures)


For portion of weighted avg. accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of assets use the...

Interest rate incurred on specific borrowings


For the portion of weighted avg. accumulated expenditures that is greater than any debt incurred specifically to finance construction use...

Weighted avg. of interest rates incurred on all outstanding
Debt during period


2 special issues related to interest capitalization?

1 expenditures for land

2 interest revenue


If a company purchases land as a site for a structure (such as a plant site) interest costs capitalized during the period of construction are...

Part of the cost of the plant, not the land


Purchase of land for speculation, how are interest costs treated?

Should not capitalize interest costs in purchasing
Land held for speculation because asset ready for intended use


IFRS requires interest revenue earned on specific borrowings should...

Offset interest costs capitalized


Should companies offset interest revenue against interest cost when determining amount of interest to capitalize as part of construction cost of assets?

Companies should not net or offset interest revenue
Against interest cost


Valuation: companies should record property, plant and equipment at...

The fair value of what they give up
Or at fair value of asset received


Companies account for assets purchased on long term credit contracts at...

Present value of consideration exchanged btw
contracting parties at date of transaction


How does the company use the cash exchange price of the asset acquired?

Cash exchange price used as,
basis for recording asset and measuring interest element


When a company purchases a group of plant assets at a single lump sum price, how does the company valuate the transaction?

Company allocates total cost among various assets on
Basis of their relative fair values


When a company acquires property by issuing securities, such as common stock, what is a fair indication of cost of the property? What is not a good indication?

Market price of stock issued is fair indication of
cost of property acquired (at current cash equivalent price)

Par or stated value of stock fails to properly measure
Property cost


How do companies account for no monetary assets?

On basis of fair value for assets given up or assets received

Companies should recognize gains and losses immediately


An exchange has commercial substance if?

Future cash flows change and economic position as
result of transaction


How is an exchange of nonmonetary assets accounted for when it lacks commercial substance?

Defer gains, recognize losses immediately


Exchange has commercial substance

Recognize gains and losses immediately


Exchange lacks commercial substance, cash received?

Recognize partial gain; recognize losses immediately


Formula for gain recognition, some cash received?

Recognized gain =
Total gain X
(Cash received (boot)
/cash received (boot) + fair value other assets Received)



Donations or gifts


Non reciprocal transfers, examples?

Transfer of assets in one direction

Ex. Cash, land, securities, buildings, use of facilities


How are no reciprocal transfers accounted for?

Fair value of asset to establish value on books


FASB's position on recognizing received no reciprocal transfers?

Recognize as revenues in period received


Unconditional, contribution expense

Depends only on passage of time or demand by recipient on performance

Company should record contribution expense (donation
expense) immediately


Conditional contribution expense

Company recognizes expense in period benefited
By contribution


Prudent cost concept

If company ignorantly paid too much for asset
It's theoretically preferable to charge a loss immediately


Costs incurred to achieve greater future benefits should be...

Whereas expenditures that simply maintain a given level of service should be...




3 conditions required to capitalize costs?

1 useful life of asset must be increased

2 quantity of units produced from asset must be increased

3 quality of units produced must be enhanced


4 Major types of expenditures?

1 additions
2 improvements and replacements
3 rearrangement and reinstallation
4 repairs


Expenditure: additions, define? How should they be accounted for and why?

Increase or extension of existing assets

Companies capitalize any addition to plant assets
Because new asset is created


Expenditure: improvements and replacements

Substitution of an improved asset for an existing one


Expenditure: rearrangement and reinstallation

Movement if assets from one location to another

Benefits future periods



Expenditures that maintain assets in condition for operations


What is the difference btw an improvement and a replacement?

Substitution of a better asset for the one currently used

Replacement = substitution of similar asset


Accounting for improvements and replacements 3 ways?

1 use substitution approach
2 capitalize new cost
3 charge to accumulated depreciation


Improvements and replacements: substitution approach, requirement? Define?

Correct if carrying amount of old asset is available

Remove the cost of old asset to replace with new asset


Improvements and replacements: capitalize new cost

Capitalizes improvements
And keeps,carrying amount of old asset on books


Improvements and replacements: charge to accumulated depreciation, define? How is it debited in the journal?

When company does not improve quantity or quality
Of asset itself but extends its useful life

Company debits expenditure to Accumulated Depreciation


How are repairs accounted for?

Charges ordinary repairs to expense account in
period incurred on basis that it's primary period benefited


Major repair, such as an overhaul. How should it be accounted for?

Cost should be handled as an addition, improvement or replacement


Improvements and replacements: carrying value known how is it accounted for?

Remove cost of and accumulated depreciation on old asset
Recognizing gain or loss

Capitalize cost of improvement or replacement


Improvements and replacements: carrying value unknown 2 conditions?

1 assets useful life is extended, debit acc. Depr.
For cost of improvement/replacement

2 if quantity or quality of asset's useful life is increased
Capitalize cost of improvement/replacement to asset acct.


Rearrangement and reinstallation: if original installation cost is known?

Account for cost of rearrangement/reinstallation as
replacement (carrying amount known)


Rearrangement and reinstallation: if original installation cost is unknown and rearrangement/reinstallation cost is material in amount and future benefits?

Capitalize as asset


Rearrangement and reinstallation: if original installation cost is unknown and rearrangement/reinstallation cost is immaterial or future benefit is questionable?

Expense cost when incurred


Involuntary conversion, define, examples?

Asset's service terminated involuntarily

Ex. Fire, flood, theft, condemnation