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Flashcards in Property, Plant and Equipment Deck (50)
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1
Q

What are the requirements for an asset to be included in plant assets?

A
  1. Be currently used in operations;
  2. Have a useful life extending more than one year beyond the balance sheet date; and
  3. Have physical substance. Intangible assets are different from plant assets in that they have no physical substance.
2
Q

There are 4 categories for plant assets. what are they?

A

Plant and Equipment
Land Improvements
Land
Natural Resources

3
Q

What items are included in plant and equipment?

A

This category of fixed assets is composed of buildings, machinery, and equipment. These assets have a finite useful life and can also be referred to as depreciable assets

4
Q

What items are included in land improvements?

A

This asset differs from land in that it has a finite useful life and is depreciated. Examples of land improvements include parking lots, fencing, external lighting, and some landscaping.

5
Q

What items are included in land?

A

This category includes the site of a manufacturing facility, the site of administrative offices, and the site of any storage warehouses. Any plot of land in which a company has constructed facilities specifically related to primary business operations is included in this category.

It is the only asset in the plant asset category that is not depreciated or amortized

6
Q

What items are included in natural resources?

A

Include such items as a gravel pit, a coal mine, a tract of timber land, and an oil well. This category of assets will produce income until all the natural resources are extracted and sold. These assets are frequently referred to as depletable assets.

7
Q

When are costs capitalized to plant assets?

A

If the estimated time of benefit is related to the current and future accounting periods, the expenditure is capitalized.

If the estimated time of benefit is related to the current accounting period only, the expenditure is recorded as an expense

If the expenditure is immaterial, the company will account for the expenditure in the most expedient way possible

8
Q

What is included in the cost of a plant asset?

A

The acquisition cost of property, plant, and equipment includes two components, the cash equivalent price or negotiated acquisition cost and the so-called get ready costs.
The get ready costs include all costs incurred to get the asset on the company’s premises and ready for use.

9
Q

How do you determine the gain in an exchange where money is present?

A

Boot Received / (Boot received + FMV of assets received ) * Total Gain = gain recognized

10
Q

How do you value plant assets?

A

In general, plant assets should be valued at the market value of consideration given in exchange, or at the market value (cash equivalent price) of the asset acquired, whichever is more readily determinable and reliable.

Cash Purchase - cash equivalent price
Credit Purchase - PV of future cash payments
Issuance of Securities - FMV of security or FMV of asset aquired
Donated Assets - FMV
Group Purchase = Allocate to individual assets

11
Q

How to you value self constructed assets?

A

It includes 4 components:
Labor – The direct labor charges related to the construction of the asset will be capitalized
Material – The direct materials related to the construction of the asset will be capitalized.
Overhead – The overhead charges related to the construction of the asset will be capitalized.
Interest Cost Incurred During the Construction Period –Capitalization of interest is allowed only when assets are constructed.

If the total cost of construction exceeds market value, a loss is recognized for the difference and the asset is recorded at market value.

12
Q

Why is interest during construction capitalized?

A

The justification for interest capitalization is that had the construction not taken place, the funds used in construction could have been used to reduce interest bearing debt. This avoidable interest is the amount of interest that would have been avoided had the construction not taken place. In a sense, the construction then caused that amount of interest, which therefore should be included in the cost of the asset constructed.

13
Q

Is interest capitalized on construction of inventory items?

A

Interest is not capitalized on the construction or manufacture of inventory items, even if the inventory requires significant time for completion

14
Q

What is required for interest to be capitalized?

A

Qualifying expenditures have been made
Activities that are necessary to get the asset ready for its intended use are in progress
Interest cost is being incurred

15
Q

What steps are taken to compute capitalized interest?

A

The two steps are: (1) compute average accumulated expenditures, and (2) apply the appropriate interest rate(s).

AAE = average cash (or other qualifying expenditures) investment in the project during the period. This is the amount of debt that could have been retired during the period.

This is the amount of interest to be capitalized, subject to the limitation that capitalized interest cannot exceed actual interest cost for the period.

16
Q

What are the two methods that can be used to determine interest capitalization?

A

Weighted Average and Specific Method

17
Q

How do you calculate interest with the weighted average method?

A

Capitalizes interest using the weighted average rate on all interest bearing debt.

18
Q

How do you calculate interest with the specific method?

A

Capitalizes the interest on specific construction loans first. Then, if needed, capitalize interest on all other debt based on the average interest rate for that debt

19
Q

When is interest capitalized for land?

A

A. For land used as a building site, the cost of the land is included in AAE for the building, and interest is capitalized to the building; (The land is not being constructed.)
B. For land developed for sale, interest is capitalized to the land;
C. For land held for speculation, no interest is capitalized because the land is in its condition of intended use, and there is no asset under construction.

20
Q

How do you capitalize interest for partial year computations?

A

Interest rate – adjust the interest rate for the fraction of the year the debt is outstanding
Expenditures – weight by the percent of the period invested in the project. An expenditure occurring at the beginning of the second month of a quarter receives a weight of 2/3.

21
Q

When is a post-acquistion cost of an asset capitalized?

A

if, as a result of the expenditure, the asset is:

  1. More productive (provides more benefits); or
  2. Has a longer useful life.

Otherwise it is expensed

22
Q

Are asset repairs capitalized?

A

Repairs keep the asset in an ordinarily efficient operating condition. Repairs do not typically extend the life of the asset or increase its value. Repairs are typically expensed in the period incurred.

23
Q

How do you treat a capitalized addition to an asset?

A

If an integral part of the larger asset, depreciate the addition over the shorter of its useful life or the remaining useful life of the larger asset.
If not, depreciate the addition over its useful life.

24
Q

How do you treat a capitalized modification to an asset?

A
  1. Substitution: remove the accumulated depreciation and original cost of the old component, recognize the loss, and capitalize the post-acquisition expenditure to the larger asset. This alternative is available only if the accounting system maintained records of the old component cost and accumulated depreciation.
  2. Increase the larger asset account by the post-acquisition cost. This approach is used when the productivity rather than the useful life of the larger asset is enhanced, and when the accounting system does not maintain records of the old component cost and accumulated depreciation.
  3. Debit accumulated depreciation. This approach is used when the expenditure increases the useful life of the larger asset. The debit to accumulated depreciation turns back the clock on the life of the larger asset. This approach is suited especially to extraordinary repairs.

For each of these three approaches, the post-acquisition cost is depreciated over the shorter of its useful life or remaining useful life of the larger asset

25
Q

What is depreciation?

A

is a systematic and rational allocation of capitalized plant asset cost to time periods.

26
Q

Why do we depreciate?

A

Assets wear out over time;

Assets become obsolete.

27
Q

Define Book Value

A

Original cost less accumulated depreciation to date.

28
Q

Define Depreciable Cost

A

Total depreciation to be recognized over the life of the asset. This amount equals original cost less salvage value.

29
Q

Define Minimum Book Value

A

Salvage value

30
Q

What is the equation for the straight line depreciation method?

A

Cost - Salvage Value / Useful Life

Annual depreciation is the same each year.

31
Q

What is the equation for the service hours depreciation method?

A

The life of the asset is defined in terms of service hours, and the depreciation rate per service hour is calculated by using the formula shown below. The number of total service hours the asset will provide must be estimated and used as the denominator.
Depreciation rate = (Cost-Salvage Value) / (Useful Life in Service Hours)
Depreciation for any given year is calculated by multiplying the service hours for the year by this constant depreciation rate per service hour

32
Q

What is the equation for the units of output depreciation method?

A

The life of the asset is defined in terms of units of output, and the depreciation rate per unit of output is calculated using the formula shown below. The number of total units the asset will produce must be estimated and used as the denominator.
Depreciation rate = (Cost - Salvage Value) / (Useful Life in Units of Production)
Depreciation for any given year is calculated by multiplying the units of output for the year by this constant depreciation rate per unit of output.

33
Q

What is the justification for using an accelerated depreciation method?

A

The theoretical justification for using an accelerated method is related to the matching principle. It is assumed the asset will be more productive in the earlier years.

Another justification is obsolescence. Assets subject to obsolescence (high-tech equipment for example) will provide most of their benefits early in their life.

34
Q

What is the equation for the sum of the years digits depreciation?

A

a. First, the sum of the years’ digits must be calculated by using the formula shown below.
N = useful life in years.
SYD =(N(N+1))/2 = 1 + 2 + … + N
SYD is the denominator of the fraction used each year to compute depreciation. The numerator is the number of years remaining at the beginning of the year.
Year 1 Depreciation: (N/SYD)(Cost - Salvage Value)
Year 2 Depreciation: ((N-1)/SYD)(Cost - Salvage Value))
Year N Depreciation: (1/(SYD))(Cost - Salvage Value))

35
Q

What is the equation for the double declining balance depreciation?

A

Depreciation in year 1 = Cost(2/N)
Depreciation in year 2 = (Cost - depreciation in year 1)(2/N)
This method differs from those discussed previously in three ways:
Salvage value is not used in the computation of depreciation
Annual depreciation is based on the beginning book value of the asset.
Each year, accumulated depreciation must be checked to ensure that book value does not fall below salvage value.

36
Q

What method is used when it is impractival to depreciate an asset on the individual basis?

A

Appraisal methods - Inventory or Group

37
Q

What is the inventory appraisal method?

A

This method is applied to groups of smaller homogenous assets. At the end of each year, the assets are appraised and recorded at market value. The appraisal is for the entire group which saves accounting costs

38
Q

What is the group or composite appraisal method?

A

This system applies the straight-line method to groups of assets rather than to assets individually. Accumulated depreciation records are not maintained by asset; rather, only a control account is used to accumulate depreciation. Gains and losses are not recorded. The entry to dispose of an asset plugs the accumulated depreciation account

The composite depreciation rate = (annual group SL depreciation) / (total original cost of group

39
Q

What is a natural resource?

A

A noncurrent asset that contains the cost of acquiring, exploring, and developing a natural resource deposit (e.g., timber, oil and minerals). It does not include the cost of extracting the resource.

40
Q

Define Acquistion Costs

A

The amount paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources.

41
Q

Define Exploration costs

A

The amount paid to drill or excavate or any other costs of searching for natural resources.

42
Q

Define Development Costs

A

The amount paid after the resource has been discovered but before production begins.

43
Q

What are the 2 methods to account for natural resource exploration costs?

A

Successful method and full cost

44
Q

What is the successful efforts method for exploration costs?

A

Only the cost of successful exploration efforts is capitalized to the natural resources account; unsuccessful efforts are expensed.

45
Q

What is the full costing method for exploration costs?

A

All costs of exploring for the resource are capitalized to the natural resources account. (The total amount capitalized cannot exceed the expected value of resources to be removed.)

46
Q

What is depletion?

A

After all costs are capitalized to the natural resources account, the resource begins to be removed and depletion is recorded. Depletion is the term used to refer to the allocation of the cost of the natural resource to inventory. Depletion is taken on the natural resource asset (sum of the three costs above less the residual value).

Depletion for a period = (depletion rate) x (number of units removed in period)
Depletion rate = (Natural resources account balance - residual value) / (total estimated units)

47
Q

What is an extraction cost?

A

Depreciation on removable assets, wages, and material costs pertaining to the extraction effort - these costs are debited to the inventory of resource, not to the natural resources account.

48
Q

What is a production cost (natural resource)

A

Additional processing costs after extraction - this cost also is debited to the inventory of resource, not to the natural resources account.

49
Q

Can PPE ever be revalued?

A

under IFRS, it can be revalued to fair value. Under Gaap it is not permitted.

50
Q

Can interest earned on construction funds be offset against interest costs?

A

Under IFRS, they can be offset. Under GAAP they are not allowed to be offset.