PP&E

Question 1

When do you capitalize PP&E improvements

Answer 1

Capitalize improvements that increase the carrying value of the equipment.

Example: new car engine

Do not capitalize regular maintenance

Question 2

How would you record replacing a piece of machinery that increases the useful life without replacing the carrying value

Answer 2

Debit Accumulated Deprecation
Credit Cash

Question 3

How do you calculate impairment loss

Answer 3

Step 1: Check if BV > undiscounted cash flows
Step 2: Impairment loss = BV - undiscounted cash flows

Question 4

What costs are included in depletion base

Answer 4

Purchase costs
+ Development costs
+ PV of anticipated restorations costs
- Residual value of land after extraction

Question 5

What is the depletion method

Answer 5

Pro-rating the depletion base based on total expected recoverable units and units extracted

Question 6

When do you capitalize interest costs for equipment

Answer 6

Constructed for use by outside contract
Constructed for sale as discrete project

Question 7

How do you capitalize interest costs

Answer 7

Lower of:
1. Weighted average accumulated expenditure * interest rate
2. Actual interest cost incurred (old borrowings + new borrowings)

Question 8

How are exchanges with commercial substance treated

Answer 8

A nonmonetary exchange has commercial substance if the entity’s future cash flows are expected to change significantly as a result of the exchange.

The acquisition is recorded at the fair value of the asset surrendered. If the FV of the asset given up is not known, use the FV of the asset received.

For asset received at 55k for an asset given up at 50k
The Journal Entry is:

Dr. Machinery $50,000
Cr. Land $20,000
Cr. Gain $30,000