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Flashcards in Chapter 10 Deck (17)
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1
Q

Characteristics of PPE

A

Physical
Long-term
Used in operations

2
Q

Categories of PPE

A

Building
Land
Equipment

3
Q

Cost of Land

A
  • Purchase Price
  • Closing costs (title, attorney fees, recording fees)
  • Cost of grading, filling, draining and clearing
  • Liens, Mortgages, encumbrances
  • Indefinite life land improvements
4
Q

Definite life improvements (land)

A

private driveways, fences, etc

5
Q

Cost of Building

A

Materials, labor and overhead

Professional fees and permits

6
Q

Cost of Equipment

A
Purchase price
Freight and handling
Insurance in transit
Special foundation costs
Assembling and installation costs
Costs of conducting trial runs
7
Q

Why do we capitalize interest?

A

GAAP requires- in accordance with historical cost

8
Q

How do we capitalize interest?

A

Determine qualifying assets, capitalization period and amount to be capitalized

9
Q

When do we begin the capitalization period

A

Expenditures have been made
Activities for readying the asset are in progress
interest costs are being incurred

10
Q

When do we end the capitalization period

A

When the asset is substantially complete and ready for use

11
Q

What assets can we capitalize?

A

Assets under construction for company’s use

Assets intended for sale or lease that are constructed or produced as discrete projects.

12
Q

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

13
Q

Steps to calculate capitalization of interest

A
  1. Determine which assets qualify
  2. Determine the capitalization period
  3. Compute weighted average accumulated expenditures
  4. Compute the actual interest rate and the avoidable interest rate
  5. Journal entries
14
Q

Costs to be capitalized after acquisition

A

Useful life must be increased
Quantity of units must be increased
Quality of units must be enhanced

15
Q

Capitalized vs Expensed PPE

A

Capitalized PPE must achieve future benefits

Expensed PPE maintains a given level

16
Q

Disposition of PPE

A

Can be sold, exchanged, involuntarily converted or abandoned

** Do not forget to catch up interest/depreciation

17
Q

Involuntary Conversion

A

Asset can be terminated involuntarily by fire, flood, theft, etc

*Difference between amount recovered are recorded as a gain or loss