Property, Plant, & Equipment Flashcards
(49 cards)
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 Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest
Alterations to existing facilities or additional equipment that extend the life or increase the efficiency of these assets are capitalized.
How are Research and Development costs recorded?
They are expensed in the period incurred and are not capitalized.
Which expenditures are included in the cost of a building?
All expenditures to get the building into ‘working condition’ are ready for use
Which expenditures are included in the cost of land?
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 a “fair” and then donating the property which is then recorded at “fair value”
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
When is an asset considered to be impaired? How is impairment loss calculated?
When the undiscounted future cash flows (NOT fair value) are less than the carrying value of the asset.
Carrying Value - Fair Value = Impairment Loss
Note: impaired assets that recover their value can’t be written back up once written down
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?
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.
How are costs for developing software recorded?
Expenses prior to technological feasibility are expensed as R&D.
After technological feasibility, but prior to production, costs are capitalized.
Expenses incurred during production are charged to inventory.
Expenses incurred training on internal use software are expensed.
What is the acquisition cost for assets purchased on a deferred payment plan?
Cash equivalent price
If unavailable, use imputed interest rate to record asset at PV of future payments
What is the acquisition cost for assets purchased by the issuance of securities?
FV of asset or FV of securities issued, whichever is more clearly determinable
What is the acquisition cost for assets in a group purchase?
Lump sum should be allocated according to each asset’s FV
What is the general boundary between nonmonetary and monetary transactions?
If cash received is at least 25% of the FV in the exchange, then it is a monetary transaction
What are nonreciprocal transfers?
Transfers of assets or services in one direction
Examples:
- enterprise to owners
- enterprise to another entity in enterprise
- entity’s reacquisition of outstanding stock
How should nonmonetary assets from nonreciprocal transfers be recorded?
Recorded at FV
Credit to APIC – Donated Services for gifts from governments
Credit to Revenue for gifts from others
Where does ordinary accounting guidance for nonmonetary transactions NOT apply?
Exchange of a business for a business
Transfer of nonmonetary assets between companies under common control (e.g. parent and subsidiary)
Stock issued or received in stock dividends or stock splits
Transfers of assets to an entity for an ownership interest
Pooling assets to find or produce oil or gas
Transfers of financial assets
Involuntary conversions, such as destruction or theft
When should nonmonetary exchanges be based on recorded amounts rather than fair value?
- If FV of neither asset exchanged can be reasonably determined
- If it is an exchange of something the company ordinarily sells for an asset to be sold in the same line of business
- If the transaction lacks commercial substance
How does asset impairment affect transactions with no commercial substance?
Normally assets received are recorded at CV of assets given up
If one asset is impaired, then the company giving that asset should recognize the impairment (as a loss), and record the asset received at the impaired value
For nonmonetary exchanges with boot, how do you calculate the portion of BV sold for the company receiving the boot?
If boot is received, the received asset might be recorded at a lower carrying value than otherwise
(BV of old asset) x [boot / (boot + BV of new asset)] = portion of consideration sold
How are gain and loss determined for nonmonetary exchanges with boot?
Giver of boot does not recognize either
For recipient of boot, if cash received > portion of asset sold, then gain. Otherwise, loss.
If the recipient of boot in a nonmonetary exchange has a gain, how is the transaction recorded?
BV of old asset - portion of BV sold = recorded amount for new asset
Debit: new asset
Debit: Cash
Credit: old asset
Credit: Gain
