CH 10 Flashcards
(37 cards)
What are major characteristics of property , plant , and equipment
a. Acquired for use in operations ( not resale)
b. They are long term and depreciate
c. Possess physical substance
What is valuation of property, plant, and equipment
a. Historical cost
What is valuation of land to acquire it to use?
a. Purch price
b. Closing costs
c. Costs incurred in getting the land in condition for useage
d. Assumption of any liens, mortgages, or encumbrances
e. Additional land improvements
If land is at resale, should company record it as inv?
a. Yes
Define Self construction asset
a. An asset that a company constructs on its own.
Define Overhead
a. Indirect costs of manufacturing creates special problems
i. E.g., power, heat, light, insurance, property taxes
How do company account for indirect cost in two ways
a. Assign no fixed overhead to the cost of the constructed asset
b. Assign a portion of all overhead to construction process
i. Also called Full costing approach
To assign and determine cost of an asset, how does a company determine its cost
a. Pro rata portion, fixed overhead
What are the three approaches of interest costs
a. Capitalize no interest charges during construction
b. Charge construction with all cost of fund employed whether identifiable or not
c. Capitalize only the actual interest cost incurred during construction
What is GAAP rules on capitalizing on actual interest
a. Historical cost of acquiring an asset includes all cost ( including interest) incurred to bring the asset to the condition and location necessary for its intended use
b. An asset SHOULD NOT generate revenues
c. ONLY deter interest costs, it should be recorded as interest exp when asset is ready to use to generate revenue
What are GAAP 3 proposals to match interest cost
a. Qualifying assets ( be ready in a period of time)
b. Capitalization period
c. Amount to capitalize
What are two not qualified as asset capitalization
a. Asset are ready for intended use
b. Assets that a company does not use in its earnings activities that are in development for use
Define Capitalization period
a. The period of time during which a company must capitalize interest
What are three conditions to qualify as Capitalization period
a. Expenditures for the asset have been made
b. Activities that are necessary to get the asset ready for its intended use are in progress
c. Interest cost is being incurred
What is Amount to Capitalize means?
a. The amount of interest to capitalize is limited to the lower of actual interest cost incurred during the period or avoided interest
Define Avoidable interest
a. The amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset
How does a company apply the avoidable interest concept
a. Weighted-average accumulated expenditures
Define Weighted-average accumulated expenditures
a. Company weights the construction expenditures by the amount of time
What are two principles of interest rates
a. Use the interest rate incurred on the specific borrowings if weighted average accumulated expenditures is less than debt incurred
b. Use a weighted average of interest rates incurred on all outstanding debt during the period if weighted average accumulated expenditures is greater than debt
What are two special issues relate to interest capitalization
a. Expenditures for land
b. Interest revenue
What is expenditures for land
Interest cost capitalized during the period of construction are part of the cost of the plant ( expect for land).
What is interest revenue
a. Companies should not net or offset interest revenue against interest cost
What are the accounting problems for property, plant, and equipment
a. Cash discounts
b. Deferred payment contracts
c. Lump sum purchases
d. Issuance of stock
e. Exchanges of nonmonetary assets
Define lump sum purchases
a. A special problem of valuing fixed assets arises when a company purchases a group of plant assets
