Flashcards in PPE Deck (91):
What depreciation method is used for group/composite assets?
Straight-line method to groups rather than individual assets.
How do we calculate the rate used in double declining balance?
1) Straight-line rate (number of years divided into 1) i.e., if 5 years 1/5 = 20%. 2) Twice the straight-line rate 20% x 2 = 40%.
When is the inventory method of depreciation used?
When the inventory items are smaller homogeneous groups of assets and individual records for the assets are not maintained.
What depreciation method does not use salvage value?
Double declining balance.
List the considerations that must be given when electing to expense or capitalize an item.
Estimated time benefit; Materiality.
List the limitation of recorded value of self-constructed assets.
Market value at completion.
What is the general rule for capitalizing expenditures?
Capitalize all expenditures necessary to bring the plant asset to its intended condition and location.
List the components of capitalized costs of self-constructed assets.
Labor; Material; Overhead; Interest Cost.
Define "get ready costs".
All costs incurred to get the asset on the company's premises and ready for use.
List the general rules on costs to capitalize.
Cash equivalent price; Get ready costs.
What causes transfers between classifications for investments which do not give the investor significant influence?
Changes in investor intent or Changes in investor ability to hold-to-maturity.
How do we account for the transfer of an investment from held-for-trading to held-to-maturity or available-for-sale?
1. Credit Trading at recorded fair value; 2. Debit held-to-maturity or available-for-sale at current fair value; 3. Recognize unrealized holding gain/ loss in net income.
How do we account for the transfer of an investment from held-to-maturity to available-for-sale?
1. Credit held-to-maturity at unamortized cost; 2. Debit available-for-sale at fair value; 3. Unrealized (holding) gain or loss to Other Comprehensive Income.
How do we account for the transfer of an investment from available-for-sale to held-to-maturity?
1. Credit available-for-sale at recorded fair value; 2. Debit held-to-maturity at current fair value; 3. Unrealized holding gain/loss stays in Accumulate Other Comprehensive Income in Shareholders' Equity; 4. Unrealized holding gain/loss at date of transfer amortized over remaining life of debt.
What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the cost method?
Under normal circumstances, the carrying amount of the investment does not change under the cost method.
What major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?
The carrying amount of the investment would change when: 1. The subsidiary pays a liquidating dividend (i.e., dividend greater than earnings since the investment was made); 2. The investor buys additional shares of the subsidiary or sells some of the share it already owns.
How do we account for the transfer of an investment from held-to-maturity to held-for-trading?
1. Credit held-to-maturity at unamortized cost; 2. Debit available-for-sale at fair value; 3. Unrealized (holding) gain or loss to Other Comprehensive Income. 3. Recognize unrealized holding gain/ loss in net income.
Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to measure a debt investment at fair value that would otherwise be measured at amortized cost?
An investor can elect to measure a debt investment that would otherwise be measured at amortized cost at fair value when the use of fair value would eliminate or significantly reduce a measurement or recognition inconsistency that results from an accounting mismatch. An accounting mismatch occurs when assets or liabilities, or recognizing gains or losses on them, are measured on different bases.
Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to report gains or losses from changes in fair value of equity investments in other comprehensive income, rather than through profit and loss (net income)?
If the investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income, rather than through profit and loss (net income). The election must be made when the investment is first recognized and subsequently cannot be changed.
What conditions must be met under International Financial Reporting Standards (IFRS) No. 9 for an investment in debt to be classified as debt instruments measured at amortized cost?
Two conditions must be met: 1. Business model test - where the entity intends to hold the investment to collect the contractual cash flows, not to sell the instrument prior to its contractual maturity to realize changes in fair value; 2. Cash flow characteristic test - where the contractual terms of the investment give rise to cash flows on specific dates that are solely payments of principal and interest.
What are the categories of investments under International Financial Reporting Standards (IFRS) No. 9?
Under IFRS No. 9 two categories of investments (and other financial assets) include: 1. Debt investments measured at amortized cost; 2. All other investments, including debt instruments not at amortized cost and all equity investments.
Under IFRS, how is the impairment loss presented if the asset is carried at fair value?
Any impairment loss would be classified out of other comprehensive income and into earnings.
What is the value in use?
The present value of the future cash flows generated from the asset or cash generating unit.
How are assets grouped for impairment testing under International Financial Reporting Standards (IFRS)?
At the "cash generating unit" level.
What is a cash generating unit?
The smallest identifiable group off assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
What is the recoverable amount under IFRS?
The higher of the fair value less the cost to sell or the assets value in use.
Are reversals of impairment allowed under International Financial Reporting Standards (IFRS)?
Yes, they are allowed.
List the general test for impairment.
Book value > Recoverable Cost.
List the impairment tests for assets in use.
1. Sum net future cash flows from asset (recoverable cost); 2. If sum > book value, no impairment; 3. If sum
How is the amount of impairment loss on asset in use determined?
The amount by which the carrying value of the asset exceeds its market value.
When is a held for sale asset impaired?
Impaired when book value exceeds its fair value less cost to sell at the end of the reporting period.
How is the amount of impairment loss on assets held for disposal determined?
Fair value less cost to sell.
What items must be reported for impairment losses?
Report the loss as part of ordinary income and also disclose. 1. The asset impaired; 2. The events leading to impairment; 3. The amount of the impairment loss; 4. The method of determining fair value, including interest rate.
How are assets grouped for impairment testing?
Assets are grouped at the lowest possible organizational level where cash flows can be identified.
What interest rates should be used to determine capitalized interest?
Average interest rate during period or specific interest rate applicable to construction debt.
List the interest capitalization formula.
Interest Rate x Average Accumulated Expenditures.
What are the two allowed methods to compute total interest to be capitalized?
Weighted Average method and Specific method.
Define "qualifying assets" for interest capitalization.
Assets constructed for an enterprise's own use or assets intended for sale or lease that are constructed as discrete projects.
When are unpaid construction input costs included in Average Accumulated Expenditures (AAE)?
Not until cash is paid.
List the two-step process involved in computing capitalized interest.
(1) Compute average accumulated expenditure; and (2) Apply the appropriate interest rate(s).
List the conditions that must exist to capitalize interest.
Qualifying expenditures have been made; Construction is proceeding; Interest cost is being incurred.
Define "avoidable interest".
The amount of interest that would have been avoided had the construction not taken place.
What is not included in Average Accumulated Expenditures (AAE) until paid in cash?
Any unpaid construction input costs
If Average Accumulated Expenditures (AAE)
The difference between total interest cost and the amount of interest capitalized.
If Average Accumulated Expenditures (AAE) > total interest bearing debt, what is interest expense for the period?
All interest cost is capitalized and there is no reported interest expense for the period.
Where should the amount of interest paid be disclosed?
In the statement of cash flows, as either part of the statement, as a supplemental schedule or in a footnote.
If the proceeds from a specific construction loan are not fully used for financing construction until well into the construction phase, how is the interest handled?
The interest revenue is reported separately with no effect on interest capitalized.
If Average Accumulated Expenditures (AAE) > total interest-bearing debt, why is there no interest expense?
All debt could have been avoided if construction had not taken place.
Identify the three possible levels of influence over an investee for accounting purposes.
1. Not significant; 2. Significant influence, but not control; and 3. Control.
What is the basis for general guidelines for determining the level of influence over an investee?
The nature and extent of ownership.
Define "debt securities."
Securities representing the right of the Creditor to receive from the Debtor a principal amount at a specified future date and to receive interest as payment for providing use of funds.
What is the required accounting treatment when an investor has control of an investee?
Treat as a subsidiary and consolidate investee with investor (consolidated statements).
Define "equity securities."
Securities representing ownership or right to acquire ownership interest.
List the guidelines for determining no significant influence in an investment.
Investment is: 1. in Debt securities; 2. in Non-voting stock; 3. Temporary in nature; 4. Less than 20% ownership of voting stock.
List the investor's considerations in selecting the correct accounting for an investment.
1. The nature of the investment; 2. The extent of the investment; 3. Management's intent.
What is the classification of natural resources on the balance sheet?
What costs are included in the successful efforts method for exploration costs?
Only the cost of successful exploration efforts are capitalized to the natural resources account.
List the depletion rate formula.
List the depletion rate formula.
List the methods of accounting for exploration costs.
Successful Efforts; Full costing.
What costs are included in the full costing method for exploration costs?
All costs of exploring for the resource are capitalized to the natural resources account.
Refers to the allocation of the cost of the natural resource to inventory.
List the type of costs capitalized for natural resources.
Acquisition; Exploration; Development.
What investments are classified as available-for-sale?
Any debt or equity investments not classified as either Held-to-Maturity or Held-for-Trading. The Available-for-Sale category is the default category if an investment in debt or equity does not meet the requirements of either Held-to-Maturity or Held-for-Trading.
List the criteria for held-for-trading securities.
1. Applies to investments in Debt and Equity; 2. Investor buys for the purpose of selling in the near term.
What amounts are included in a gain or loss recognized on the sale of an available-for-sale investment?
The gain or loss recognized on the sale of an available-for-sale investment includes: 1. The difference between the carrying value of the investment and its selling price; and 2. Any unrealized gain or loss in Accumulated Other Comprehensive Income related to the securities sold.
Under what conditions can a debt security sold before maturity be considered held to maturity?
1. Sale is near enough to maturity date so that interest rate risk is substantially eliminated; 2. Sale occurs after investor has collected a substantial portion (at least 85%) of the principal outstanding at acquisition date.
What amounts should be included in the initial recording of a held-for-trading investment?
Purchase price of security; Directly related cost of acquisition, e.g., brokerage fee, transfer fee, etc.
How is interest earned on held-to-maturity investments reported in the income statement?
As an Other Income item in the income statement.
List the criteria for a held-to-maturity classification.
1. Debt security;2. Investor has intent to hold to maturity; 3. Investor has ability to hold to maturity.
How are available-for-sale investments accounted for and reported in financial statements?
1. Recognize interest income (one debt securities)/dividends (on equity securities); 2. Amortize discount or premium, if any, on debt securities; 3. Adjust investment to fair value at balance sheet date with any gain/loss reported as an item of other comprehensive income.
What method is used to amortize a premium or discount on a security?
Effective interest method or straight-line method if not materially different.
How are available-for-sale investments reported in the balance sheet?
At fair value (i.e., original cost +/- allowance to adjust to fair value) as either current or non-current asset (based on entity's policy).
What amounts should be included in the initial recording of a held-to-maturity investment?
1. Purchase price of security; 2. Directly related cost of acquisition, e.g., brokerage fee, transfer fee, etc.; 3. Accrued interest, if any, is not included in the cost of the investment.
At what cost are held-to-maturity securities carried and reported?
At amortized cost.
Where are unrealized holding gains and losses on investments held-for-trading reported?
In income (Income Statement) as part of Income from Continuing Operations.
How are held-for-trading investments carried and reported?
At fair value, with changes in fair value reported in current income.
Where are held-to-maturity investments reported on the statement of cash flows?
When would you increase the asset's account basis by the post-acquisition cost?
When the productivity of the asset is enhanced rather than the useful life extended.
List the accounting approaches for post-acquisition expenditures.
Substitution; Increase larger asset account by post-acquisition cost; Debit accumulated depreciation.
What is the general rule on when to capitalize post-acquisition expenditures?
If the asset becomes more productive or if it extends the asset's life.
What is the useful life for depreciating an addition?
If integral part of old asset, over shorter of addition's or old asset's useful life. If not, over addition's useful life.
Under International Financial Reporting Standards (IFRS) how is interest during construction accounted for?
Expensed or capitalized.
Under International Financial Reporting Standards (IFRS), what two methods can be used to adjust accumulated depreciation?
The proportional and reset methods.
How frequently do companies have to review depreciation policies under International Financial Reporting Standards (IFRS)?
They have to be reviewed annually.
What happens during the reset method?
Accumulated depreciation is reset to zero by closing it to the building account, and then the building is adjusted for the revaluation.
Under International Financial Reporting Standards (IFRS), is revaluation of Property, Plant, and Equipment (PPE) allowed?
Yes, revaluation is allowed.
Where is revaluation surplus reported under International Financial Reporting Standards (IFRS) until the Property, Plant, and Equipment (PPE) is sold?
It is reported in Equity.
How are donated items recorded?
Recorded at fair market value.
How is the price for group purchases recorded?
Total price is allocated to individual assets.
How is the cash equivalent price in the issuance of securities determined?
In fair value of asset acquired or of securities issued, whichever can be most clearly determined.