General improvements to leased property should be capitalized as leasehold improvements and amortized in accordance with the straight-line method over the shorter of:
of their expected useful life or the lease term.
Property, plant, and equipment are conventionally presented in the balance sheet at:
Historical cost less depreciated portion thereof.
The cost of the group of assets acquired (lump-sum purchase price) must be allocated to individual assets based on their:
relative fair values.
These assets are known variously as property, plant, and equipment; fixed assets; or plant assets:
- PPE are tangible. They have physical existence.
- PPE may be either personal property (something movable, e.g., equipment) or real property (such as land or a building).
- PPE are used in the ordinary operations of an entity and are not held primarily for investment, resale, or inclusion in another product. But they are often sold.
- PPE are noncurrent. They are not expected to be used up within 1 year or the normal operating cycle of the business, whichever is longer.
Under IFRS, investment property is property (land, a building or part of a building, or both) held to earn rental income, for capital appreciation, or both. Investment property may be accounted for according to what 2 methods:
(1) the cost model and carried at historical cost minus accumulated depreciation and impairment losses or
(2) the FV model and carried at its FV (Under the FV model, investment property is measured at FV, and gain or loss from a change in its FV is recognized immediately in profit or loss)
Under IFRS, an entity may choose what kind of methods to account for an entire class of PP&E:
(1) the cost model (an asset is carried at historical cost minus AD and impairment losses)
(2) the revaluation model. It must apply that policy to an entire class of PPE. ( Under the revaluation model, an asset is carried at a revalued amount equal to FV at the revaluation date minus any subsequent AD and impairment losses)
Under IFRS, investment property accounted for in accordance with the fair value model is measured at the end of each reporting period at its
An entity that chooses the fair value model as its accounting policy for investment property must measure all of its investment property at fair value at the end of the reporting period. The best evidence of fair value usually consists of current prices in an active market for similar property in the same location and condition.
Under IFRS, an entity that has elected to use the revaluation model for property, plant, and equipment (PPE) may revalue PPE as often as
Anytime the determination is made.
Revaluation is needed whenever fair value and the asset’s carrying amount differ materially. If an item of PPE is revalued, all of the items in its class (e.g., land, buildings, or office equipment) also should be revalued.
Which of the following statements is false about an item of property, plant, and equipment (PPE)?
A.Under U.S. GAAP, such an item may be carried at an amount above its historical cost.
B.Under U.S. GAAP, such an item may be carried at its historical cost.
C.Under IFRS, such an item may be carried at an amount above its historical cost.
D.Under IFRS, such an item may be carried at its fair value.
Answer (A) is correct.
Under U.S. GAAP, items of PPE cannot be carried above their historical cost. They are carried at historical cost minus accumulated depreciation and impairment losses.
Pine City owned a vacant plot of land zoned for industrial use. Pine gave this land to Medi Corp. solely as an incentive for Medi to build a factory on the site. The land had a fair value of $300,000 at the date of the gift. This nonmonetary transaction is most likely to be reported by Medi as
A.A credit to retained earnings.
B.A memorandum entry.
C.Other comprehensive income.
Answer (D) is correct.
In general, contributions received ordinarily should be accounted for as revenues and gains at fair value.
A contributed plant asset for which the fair value has been determined, and for which incidental costs were incurred in acceptance of the asset, should be recorded at an amount equal to its
Fair value and incidental costs incurred.
A contributed plant asset should be debited at its fair value plus any incidental costs necessary to make the asset ready for its intended use. Contributions received ordinarily should be credited as revenues or gains in the periods they are received. However, a credit to a revenue or gain is not required for contributions by governments to business enterprises.
Under IFRS: Investment property accounted for according to the fair value model is ______________. Investment property accounted for according to the cost model _______.
An entity purchased new machinery from a supplier before the entity’s year end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under both GAAP and IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase?
Freight-in cost associated with the purchase of machinery should be capitalized, and interest costs incurred from a loan taken to finance the purchase should be expensed as incurred.
A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In Year 1, the company acquired the land for $100,000. At the end of Year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of Year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the Year 2 change in fair value?
A.By recognizing $15,000 in other comprehensive income.
B.By recognizing $15,000 in profit or loss.
C.By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.
D.By recognizing $10,000 in other comprehensive income.
By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.
In Year 2, the revaluation increase for the land is $15,000 ($105,000 fair value – $90,000 carrying amount). A revaluation increase must be recognized in other comprehensive income and accumulated in equity as a revaluation surplus. However, the increase must be recognized in profit or loss to the extent it reverses a decrease of the same asset that was recognized in profit or loss. In Year 1, the carrying amount of the asset was reduced by $10,000 ($100,000 – $90,000). This reduction was recognized in profit or loss (as there was no credit in revaluation surplus for the asset at that time). Thus, $10,000 of the increase in Year 2 must be recognized in profit or loss. The remaining $5,000 ($15,000 – $10,000) of the increase is recognized in other comprehensive income as a revaluation surplus.
Interest may be capitalized on certain equity-method investments and other assets. Thus, interest may be capitalized on
Equity method investments in activities in progress necessary to the commencement of the planned principal operations when the activities include the use of funds to acquire qualifying assets.
The relevant guidance applies to investments in joint ventures, unconsolidated subsidiaries, and investees accounted for under the equity method. If these investees are in the process of commencing planned principal operations, and they are using funds to acquire qualifying assets for their operations, interest may be capitalized as part of the investment.
A company is constructing an asset for its own use. Construction began in Year 3. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in Year 3 and Year 4 at the end of each quarter. The total amount of interest cost capitalized in Year 4 should be determined by applying the interest rate on the specific new borrowing to the
Average accumulated expenditures for the asset in Year 3 and Year 4.
An asset constructed for an entity’s own use qualifies for capitalization of interest if (1) relevant expenditures have been made, (2) activities necessary to prepare the asset for its intended use are in progress, and (3) interest is being incurred. The capitalized amount is determined by applying an interest rate to the average qualifying expenditures accumulated during the period. These expenditures in any given period include those incurred in that period plus those incurred in the construction of the asset in all previous periods. Thus, the total interest cost capitalized in Year 4 equals the interest rate on the specific new borrowing times the average accumulated expenditures for the asset in Year 3 and Year 4.
On January 2, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payments of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of 10 years and estimated salvage value of $5,000. What number is used for depreciation?
The cash equivalent price of the machinery (present value), reduced by the salvage value, equals the depreciable base. The excess of the total cash to be paid over the cash equivalent price of the machinery will be recognized as interest expense, not depreciation.
What kind of depreciation method should be used by Group Depreciation and Composite Depreciation?
Both composite and group depreciation use the straight-line method. Both methods aggregate groups of assets. The composite method is used for a collection of dissimilar assets with varying useful lives, whereas the group method deals with similar assets. Each method involves the calculation of a total depreciable cost for all the assets included in one account and of a weighted-average estimated useful life.