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Flashcards in Fixed Assets Deck (36):

Amount of interest to be capitalized

The lesser of the actual interest or the Average interest
Avg interest: Avg. accumulated expenditures during construction x Interest rate x Construction period

Avg accum exp during construction = exp at the beginning + expenses at the end of year/2


Nonmonetary Transactions- Criteria

Nonmonetary transaction must meet one of the 3 following criteria:
1. FMVs of asset received and asset given up are both unknown; OR
2. The exchange transaction is done to facilitate sales; OR
3. The transaction lacks commercial substance:
a) Cash flows do NOT change in their risk, timing, and amount; AND
b) Do not include tax effects when considering the cash flows.


Nonmonetary Transactions - Boot received, realized gain pro-rata (calculation)

When boot is received for a nonmonetary exchange you may recognize some of the realized gain pro-rata:
Realized gain x (FMV of Boot/FMV of Boot +FMV of asset Rec'd)

Exception- if boot is 25% or more of the FMV of the exchange recognize the entire gain.


Purchase of groups of fixed assets (Basket Purchase)

Cost should be allocated based on relative value:

Cost of all assets acq x Market value of Asset A/ Market value of all assets acquired


Capital Expenditures

are not normal, recurring expenses; they benefit the operatons of more than one period. (increase the CV of the asset)
Betterment - makes asset more efficient, productive, does not increase the life of the asset. JE: Dr. Asset Cr. Cash.
Major Repairs- does increase the life of the asset. JE: Dr. Accum Dep. Cr. Cash
Both cases the CV of the asset is increased.


Revenue expenditures

normal recurring expenditures. Some capital expenses can be expensed as revenue exp. when immaterial.
"repairs and maintenance" acocunt would get rolled into "selling expense" if it was repairs and maintenance on a selling show room..etc.


Straight line method

Historical cost - Salvage value / Useful life in years


Declining balace method

1/life in years to convert to a %
Historical cost - Accum depn. x declining balance %


Double declining balance

1/life in years to convert to a % x 2
Historical cost - Accum depn. x declining balance %


Sum-of-the-years-digit (SYD)

n(n+1)/2 n= useful life in years
this will give you a denominator
Ex. Useful life 5, calculated denominator 15
Year 1: 5/15 x HC - SV
Year 2: 4/15 x HC - SV
Year 3: 3/15 x HC - SV...


Accelerated Depreciation

Justified by: (more depreciation at the beginning less towards the end)
1. Increased productivity when asset is new (better matching, more conservative)
2. Increasing maintenance charges with age
3. Risk of obsolescence


SL Method in Units of Activity, production or output

Historical cost - Salvage Value/ Useful life in activity = Depreciation expense per unit.


Composite (group) depreciation

Group: assets are similar - homogenous
Composite: assets are dissimilar - heterogeneous
No gains or losses are recognized on disposal of assets (only if the whole group or composite was disposed)
JE: Dr. Cash
Dr. Accum Dep (plug)
Cr. Asset (HC)
The net carrying amount of composite/group assets would decrease by the cash received on disposal of asset.

=Sum of annual SL depreciation of individual assets/Total asset cost


Entry to record disposal of an asset

Dr. Cash
Dr. Accum Depn
Dr. Loss (plug figure to make it balance)
Cr. Old asset (HC)
Cr. gain (plug figure to make it balance)
depending on gain or loss on disposal of asset plug the figure in to balance the JE.


Circumstances that may indicate that an impairment has occured - Tangible and Intangible assets (except Goodwill)

- Decline in demand, inability to keep up with technology/competition
- Net operating loss
- Decline in FMV
- Negative cash flow
- Change in regulatory or legal environment


Test for impairment (tangible and intangible assets excluding goodwill)

Carrying Value vs. Non discounted Future Cash flows.

CV > Non discounted future CFs this item is impaired - measure the impairment loss


Measure the impairment loss (tangible assets held for use and intangible assets finite and indefinite life)

Carrying value vs. FMV


Intangible assets - indefinite life

Asset for which useful life is unknow, do not amortize.
Test for impairment:
CV vs. FMV
Measure the impaierment loss
CV vs. FMV


Patents - amortization

Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent's remaining economic life (shorter of the legal or useful life.)

R&D expenses (internal or external) are always expensed, never capitalized.


Circumstances that may indicate that an impairment has occured - Goodwill impairment

- Decline in demand, inability to keep up with technology/competition
- Net operating loss
- Decline in FMV
- Negative cash flow
- Change in regulatory or legal environment


Research and Development

R&D Expenses:
New knowledge
New technology
Reformation/ reformulating a process/modification
Application of research findings

Never R&D:
Commercial production or activity


Development Stage Enterprise

devots substantially all of its efforts to establish a new business, planned principle ops have not started or they have started but there was been no significant revenue.
B/S should show cumulative losses since inception under SHE
I/S, Statement of CF current period and cumulative amounts since inception
Development stage enterprise must be identified on FS


Leasehold improvements

properly capitalized and amortized over the remaining life of the lease, or the useful life of the improvements, whichever is shorter.


Cost principle

requires that assets be recorded at historical cost.


Demolition of building on land - Capitalization

Any proceeds from salvage of the old building that is demolished is netted against the cost, the net costs go to the land no the new building.


Costs of internally developed software

after the development stage may be capitalized and amortized over the asset’s economic life.


nonmonetary, nonreciprocal transfers (donations)

The gain or loss is calculated as the difference between the fair value of the nonmonetary asset transferred and its recorded amount at the date of donation. Gains or losses related to the nonreciprocal transfer of nonmonetary assets are recognized because they have been earned or incurred by the entity at the date of transfer.ASC Topic 958


Legal fees from a successful defense of a patent suit

may be capitalized in the patent account because such a suit establishes the legal rights of the holder. It is irrelevant how the patent was acquired as long as there is ownership. (internally or purchased)


ASC Topic 350 Goodwill testing periodically for impairment

At the operating segment level or one level below.
Also at the level of the reporting unit.
Good will is NEVER tested at the entity level.


Accounting for development costs - IFRS

Development costs may be capitalized as an intangible asset if it meets 6 criteria


Intangible assets with indefinite lives - IFRS

Must be tested annually at the annual reporting date.


Gains on involuntary conversions

If the total proceeds of the gain are re-invested in a similar item, the gain is not taxable (deduct from the books)
Otherwise, they are to be recognized in the financial statements in the year they occur.


Current portion of income tax

The current portion of income tax is calculated as taxable income multiplied by the current tax rate


Deferred income tax expense or benefit

The net change during the year in an enterprise’s deferred tax liabilities or assets.


Net operating loss carryforward

Amount of loss in prior year which may be carried forward to future years to offset the tax due in those years. The value of the carryforward is the net operating loss multiplied by the tax rate for the year in which the carryforward is expected to be realized.


Income tax expense must be reported in two components

The amount currently payable (current portion) and the tax effects of temporary differences (deferred portion). The amount currently payable, or current income tax expense, is computed by multiplying taxable income by the current enacted tax rate