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Flashcards in Fixed Assets Deck (62):

How are Research and Development costs recorded? Def? Pg. 9-1

They are expensed in the period incurred and are not capitalized

Looking for a new product / new process; "you dont know if the product will work"; development or improvement of a process


Which expenditures are included in the cost of a building? Pg. 8-1

All expenditures to get the building into working condition are ready for use; ie) any type of construction is a building cost and should be depreciated


Which expenditures are included in the cost of land? Pg. 8-1

All expenditures to get the land ready for its intended use:

Title & County Fees

Clearing of Land - Dirt work etc.

Demolition and removal of old buildings (minus any scrap or salvage)

Note: capitalized land costs are not depreciated


In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.

The new asset is recorded at the book value of the asset given up.

The only gain that can be recognized is any boot (cash) received.


In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange.

The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.


How is donated property recorded by the donee?

Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose

Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value


How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.


How is double-declining balance (DDB) depreciation calculated?

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.


How is Sum of Year's Digits (SYD) depreciation calculated?

(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense

For example the depreciation factor for the third year of a 10-year asset would be:

: 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5%

Remaining useful life : 8 SYD : 55


How is straight line depreciation calculated?

(Cost - Salvage Value) / Useful life : depreciation expense


When is an asset considered to be impaired? How is impairment loss calculated? Pg. 8-12

What is carrying value also known as?

Step 1
When the un-discounted future cash flows are less than the carrying value of the asset.

Step 2
Carrying Value (net of depreciation) - Fair Value : Impairment Loss

Note: impaired assets that recover their value can't be written back up once written down

*Book value; used to WRITE DOWN ASSET


How are legal fees to defend a patent amortized?

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent's economic life.

If unsuccessful they are expensed immediately.


What are the two steps for testing goodwill impairment?

What is significant of gains and losses?

Compare the CV to the FV. If FV is greater than CV no impairment exists you're done

If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.

Losses are recognized, but gain are not


How are costs for developing software recorded? Pg. 9-6

1) Expenses prior to technological feasibility are expensed as R&D; remember to look at how many months!!!

2) After technological feasibility but prior to production costs are capitalized; pick the highest % to amortize; either expected total sales of software or straight line; one year will be used for expense (R&D)

3) Expenses incurred during production are charged to inventory.

Expenses incurred training on internal use software are expensed.


What expenditures are included in the cost of equipment?

All expenditures to get the asset into working condition and ready for use:

Purchase price + liabilities assumed
Legal fees
Construction loan interest

Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.


When do you use the Relative Fair Value Method? Pg. 8-1

For lump sum purchases (when you acquire land and building for a lump sum)

*To allocate cost of building and land because you can only depreciate building


Benefits of capitalizing asset VS expensing asset

Capitalzing an asset is a benefit for book because income would be higher; this would result in the books looking better for investors since income is higher and earnings per share would be higher

Expensing an asset is a benefit for tax because it reduces income; this would result in paying less tax


Cost incurred AFTER acquisition: When would you capitalize it instead of expensing it Pg. 8-5

Cost incurred AFTER acquisition: When would you expense it instead of capitalizing it Pg. 8-5

Journal Entries for Bigger, Better, and Longer

If it makes the asset bigger (additions, new capacity, new functions), better (improving efficiency), or longer (extension of an asset's useful life

If there is repairs and maintenence

Bigger and Better
Asset: debit
Cash: credit

Longer (extension of asset's useful life)
Accumulated Depreciation: debit
Cash: credit


Straight-line method of depreciation equation Pg. 8-6 & Pg. 8-8

*What does this form of depreciation assume?

(Cost - Salvage Value) / Useful life = Depreciation Expense

*It assumes that the benefit of the asset is the same every year (building)


Accerlerated Methods: What does it assume? Pg. 8-6 & Pg. 8-8
a) Sum of the years digits
b) Double Declining Balance
c) Units of production: Activity Method
d) Depletion Pg. 8-11

Used when an asset gives greater benefits in earlier years than in later years (cars, equipment => runs better and get obsolete); Better for matching, minimize obsolence, and even out expenses
a) (Cost - Salvage Value) x (#of years left in asset's life / sum of years in asset's life) => for denominator use
N(N+1) / 2
b) Cost {(1/# years) x 2} = > double straight line
reduce to salvage value (IGNORE SALVAGE VALUE) =>
Roger cake
c) (Cost - SV) x (hours this year / total estimated hours)
d) (Cost - SV) x (units extracted / total expected recoverable units) => "depreciation" of natural resources


What are terms that relate to capitalize or to expense? Pg. 8-35 TBS

Capitalize = Product Cost => get product ready for its intended use

Expense = Period Cost


What is salvage value?

Estimated resale value of an asset at the end of its useful life


How to determine if there is an IMPAIRMENT LOSS for Held for USE? Pg. 8-12
2 Steps

Journal Entry as a result?

*What is something that you cannot do?

1) If carrying value > the expected future net cash flows (recoverability test) => proceed to step 2
2) Find the difference between the Carrying Value and the Fair Value

Loss on Impairment (I/S): debit
Accumulated Depreciation: credit

*You may not recover the impairment for assets Held for Use; also cannot be written up or down


How to determine if there is an IMPAIRMENT LOSS for Held for SALE? Pg. 8-13

*Journal Entry as a result?

*What is significant about this term?

Check if CV > NRV then write down to NRV; if CV is less than NRV leave at CV

*Loss: debit
Other asset: debit (NRV)
Accumulated Depreciation: debit
Equipment: credit

*Restoration are allowed for impairment loss held for sale (can be written up or down), but not for held for use

*NOT to be depreciated


What is a Nonmonetary Exchange? Pg. 8-16
*How is it reported as?
a) Exchanges WITH commercial substance; how do you determine the amount of the new asset?
b) Exchanges LACKING commercial substance; how do you determine the amount of the new asset?

*If boot received is greater than or equal to 25% total consideration received?

*What values do you utilized?
a) New asset
b) Old asset

*What if there is an appraised value?

Trade an asset for an asset
*By its fair value
a) Like you sold your asset and bought a new one; therefore you recognize ALL GAINS AND LOSSES
1) FMW give up + cash paid - cash received (1st choice)
2) FMV of asset received (2nd choice)
3) BV given up + cash paid - cash received (3rd choice)
b) Dealing with a competitor or someone that you usually would not deal with; recognize all LOSSES; defer all gains unless BOOT is RECEIVED (cash received)
Pick lower of:
1) FMW give up + cash paid - cash received
2) FMV of asset received
3) BV given up + cash paid - cash received

*All gain is recognized

*a) New asset: FMV
b) Old asset: BV

*Just find the difference between appraised value and cost to find the gain / loss


When can interest be capitalized? Pg. 8-3

Interest from the money used to build the asset that is constructed for the company's own use


What is an intangible? Pg. 9-1

What are its characteristics? (3)

Lacks physical substance

a) Includes goodwill
b) Internal or External
c) Identifiable or unidentifiable


After Acquisition for Intangibles: Intangible #13

a) Finite useful life intangibles VS b) Indefinite useful life intangibles Pg. 9-2; Intangiblel #13
*How do you amortize?
*How do you test for impairment?

a) Subject to amortization; tests annually for impairment (same approach used in fixed assets held for use)

b) NOT subject to amortization; test at least annually for impairment


What is goodwill? Pg. 9-3

*How is it created?

*How do you test for impairment?

It is an unidentifiable intangible; equals purchase price - FMV (refer to equity method); it is also tested annually for IMPAIRMENT

*It is created through the purchase of a business

*Its a different approached compared to fixed assets and intangibles
1) Compare CV/BV with FV; exists if CV>FV
2) FV net asset > FV reporting unit


Computer Software: How to allocate the costs? Pg. 9-5
a) Costs prior to technological feasibility (working model)
b) Cost incurred after technological feasibility (working model) but before production
c) Cost incurred after production

a) Research and development EXPENSE because you don't know if its going to work, therefore you SHOULD NOT capitalize it; remember to look at how many months!!!
b) They are considered software costs and are amortized by LARGER of straight-line, or ratio to revenue/total revenue; the amortized part will be expensed
c) These are considered PRODUCTION COSTS, which will be part of inventory


What do you include in the costs for goodwill (intagibles)?

What dont you include?

Only compare with what you paid VS what is it worth

The cost of creating, maintaining, and storing are expensed as incurred, and not added to goodwill


How do you amortized computer software developed to sell, lease, or market as a product? Pg. 9-5

What is net capitalized cost?

Amortized over LARGER of straight-line or ratio of revenues/total revenues

Cost net of amortization


Name and define 3 types of intangibles Pg. 9-1

*Finite Useful life intangible
*Indefinite Useful life intangible

1) Knowledge: Research and development what will result in a new product or process
2) Legal Right and Identifiable intangibles: includes patents, copyrights, trademmarks, franchises, leasehold improvements and licenses
*Finite: subject to amortization (ie straight-line); also test assets annually for impairment
*Indefinite: not subject to amortization, but rather tested annually for impairment
3) Goodwill: compare the amount paid for and what its worth; instead of amortization, goodwill is tested for impairment each year


When should revenue of a franchise agreement should be recognized? Pg. 9-8 Intangible #19

What happens when the franchisor has NOT substantially performed all material services and conditions?

When the franchisor has SUBSTANTIALLY PERFORMED all material services and conditions, therefore you can include the whole amount of the agreement

You recognize ZERO revenue => only recognize at current


What is included in research and development expense?
Pg. 9-1

Equipment purchased for current research and development projects only => immediately expensed as R&D because of uncertainty

*Think what is considered research and what is considered development

*IMPORTANT: also include depreciation expense


What do you think of when an exchange "lacks commercial substance?" Pg. 8-17


No gain is recognized unless boot is RECEIVED!!!

You would then have to find the percentage of cash over consideration received and multiply by the deferred gain

*Not expected to significantly affect cash flows


What is another term for an asset being tested for recoverability?

Same thing as being tested for impairment


What is the signifcance of depreciation, and to what value will the fixed asset drop down to?

The fixed asset will drop down to its salvage value, except for double declining balance in which salvage value is ignored


For property, plant, and equipment what do you capitalize for interest? Pg. 8-3

The interest cost incurred furing the construction period; it is considered the avoidable interest which is construction for the company's own use


Why do you check for impairment? Pg. 8-12

When certain circumstances occur, you should check for impairment; ie) a significant decrease in the market value of an asset; a significant adverse change in legal factors


What is the depreciable base for a used item? The BV / CV of the item, or how much the company bought the item for? PPE #20

Use amount the company bought it for, but use salvage value of new owners


Would accuulated depreciation equal the original cost at the end of the asset's estimated life via straight line and double declining balance? PPE #22

What is the significance of depreciation and salvage value?


For straight line, sum of the years digits, and units of production you would depreciate until salvage value

For ddb salavage is ignored, but towards the end of its useful life, depreciation switches to straight line or sum of the years digits => THEN it is reduced to its salvage value


Impairments Pg. 8-12 PPE #29
a) Long-ived assets Held for Use
b) Held for Sale (to be disposed of)

a) CANNOT recover the impairment for assets
b) CAN be written up or down in future periods as long as the write-up is never greater than the carrying amount of the asset before the impairment


For PP&E (ACQUISITION COSTS), how do you determine the amount used to depreciate / capitalize the asset? Pg. 8-1

Add purchase price + costs to prepare for its INTENDED USE


Costs incurred AFTER acquistion Pg. 8-5 (expense or capitalize) for PP&E
a) Repairs and maintenance expense
b) If cost makes the asset BIGGER, BETTER, or LONGER

a) EXPENSE as incurred


Is the interest capitalized for construction of a company's own use limited in amount? PPE #1 & 44

Limited up to its weighted average amount


Difference between impairment of fixed assets VS IFRS? PPE #9

For IFRS: Original cost of equipment (net of tax) - expected net future cash inflows


What to remember for PP&E IFRS? Pg. 8-19 (2)

Describe the revaluation model

a) Cost model
b) Revaluation model: when you write up / down, and above cost goes to OCI [DENT-R]; when you write up / down, and below cost goest to I/S


What is the journal entry for impairment loss for...
a) PP&E
b) Intangibles

This is to write down the asset
a) Impairment loss: debit
Accumulated Depreciation: credit
b) Impairment loss: debit (I/S)
Goodwill: credit


For goodwill in the balance sheet, do you include money spent to maintain goodwill? Intangible #7



If an intangible has a indefinite life, do you amortize?

No, only amortize if have useful life / legal life


What do you have to test for annually with goodwill? Intangible #32

Check if it is impaired at EACH reporting unit; if CV > FV it is impaired


Regarding patent rights, litigation costs would be capitalized or expensed when patent right is successfully defended? Intangible #33

Capitalized if sucessfully defended; also includes amount spent to obtain patent license

Expensed if not successfull


Regarding patent rights, litigation costs would be capitalized or expensed when patent right is successfully defended? Intangible #33

Capitalized if sucessfully defended

Expensed if not successfull


Start- up costs will be capitalized or expensed? Intangible #36

It will be expensed


What should you think about when having a problem regarding franchise fees?

Revenue should be recognized when the franchisor has substantially performed all material services and conditions, and collectibility is reasonably assured => if this is not true the revenue is not recognized and cash received will be considered UNEARNED FRANCHISE fees


For research and development, when do you depreciate? Intangible #43

You depreciate any FUTURE research and development projects


When is goodwill disclosed in the balance sheet?

When it has been created through a purchase of a business


The legal cost of applying for a patent license should be capitalized or expensed? Intangibles #35

It should be capitalized


What is the relationship between depreciation and salvage value?

When you depreciate an asset, you would depreciate it all the way down to its salavage value; therefore accumulated depreciation will not equal the cost of the asset in the end


When do you consider intended use?

For inventory cost, and PP&E


Does maintenance of goodwill count in the calculation of goodwill? Intagibles #7

It does not count