Chapter 10 Flashcards
Characteristics of PPE
Physical
Long-term
Used in operations
Categories of PPE
Building
Land
Equipment
Cost of Land
- Purchase Price
- Closing costs (title, attorney fees, recording fees)
- Cost of grading, filling, draining and clearing
- Liens, Mortgages, encumbrances
- Indefinite life land improvements
Definite life improvements (land)
private driveways, fences, etc
Cost of Building
Materials, labor and overhead
Professional fees and permits
Cost of Equipment
Purchase price Freight and handling Insurance in transit Special foundation costs Assembling and installation costs Costs of conducting trial runs
Why do we capitalize interest?
GAAP requires- in accordance with historical cost
How do we capitalize interest?
Determine qualifying assets, capitalization period and amount to be capitalized
When do we begin the capitalization period
Expenditures have been made
Activities for readying the asset are in progress
interest costs are being incurred
When do we end the capitalization period
When the asset is substantially complete and ready for use
What assets can we capitalize?
Assets under construction for company’s use
Assets intended for sale or lease that are constructed or produced as discrete projects.
Avoidable interest
the amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset
Steps to calculate capitalization of interest
- Determine which assets qualify
- Determine the capitalization period
- Compute weighted average accumulated expenditures
- Compute the actual interest rate and the avoidable interest rate
- Journal entries
Costs to be capitalized after acquisition
Useful life must be increased
Quantity of units must be increased
Quality of units must be enhanced
Capitalized vs Expensed PPE
Capitalized PPE must achieve future benefits
Expensed PPE maintains a given level
