Karteikarten
Quiz 4
Karten in diesem Stapel (36)
- 1Property, Plant & Equipment (Fixed or Plant Assets)Assets acquired for use in operations and not for resale.
Long-term in nature and usually depreciated, except for land.
Possess physical substance. - 2Historical CostThe usual basis for valuation of PP&E - the cash or equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.
Any and all costs necessary to get the asset ready to use. - 3Fair Value in PP&ESubsequent to acquisition, companies should NOT write up PP&E to reflect fair value when it is above cost. Historical cost involves actual transactions and is more reliable. Companies should not anticipate gains and losses, but should recognize only when sold.
- 4Components of Cost - LandAll expenditures made to acquire the land and prepare it for use are included in the cost of land.
Any amounts recovered from preparing the land for use is deducted from the land account.
Landscaping considered permanent. - 5Land ImprovementsImprovements with limited lives (e.g., fences, parking lots) are recorded separately as Land Improvements and depreciated over their estimated lives.
- 6Components of Cost - BuildingsAll expenditures related directly to acquisition or construction are capitalized as part of the building cost. Costs necessary to acquire or construct - both implicit and explicit.
Includes attorney/architect fees, building permits, interest on construction loans, taxes, all costs incurred beginning with excavation and ending with completion of the building. - 7Components of Cost - EquipmentAll expenditures incurred in acquiring the equipment and preparing it for use are included.
Purchase price, freight charges, insurance WHILE IN TRANSIT, assembly and installation costs, and costs of conducting trial runs. - 8Self-Constructed AssetsAssets include the construction of an office building.
Because there is no seller, there is an issue as to how to determine the asset's value
- Material and Direct Labor
- Allocate overhead on a pro-rata basis - 9Interest CapitalizationInterest cost incurred during the construction of plant assets is part of the cost of acquiring the assets and preparing them for their intended use.
Interest costs should be capitalized and depreciated over the expected useful life of the assets involved - 10Steps to Determine the Amount of Interest to be Capitalized1 - Determine which assets qualify for capitalization of interest - qualifying assets
2 - Determine the capitalization period
3 - Compute the expenditures made during the capitalization period.
4 - Compute avoidable interest
5 - Compute the actual interest cost incurred
6 - Interest cost to be capitalized is the lesser of actual or avoidable interest. - 11Qualifying Assets for Interest CapitalizationFixed Assets - Assets for a company's own use (office building, machinery)
Inventory - Assets intended for sale (ships, real estate developments) - 12Capitalization Period - for Interest CostsBegins when:
- Expenditures for the asset have been made
- Activities for readying the asset are in progress
- Interest costs are being incurred (implicitly or explicitly)
Ends when:
- The asset is substantially complete and ready for use. - 13Avoidable InterestInterest the company could have avoided had it not constructed the asset.
Companies have discretion over the treatment of construction loans v. other debt and can create a weighted average interest rate that includes construction loans with other debt or isolate construction loans from other debt. Follow isolate method:
- Deduct amount of any construction loan and apply the wtd avg interest rate of existing debt to balance of wtd avg accumulated expenditures.
- For any construction loan, apply interest rate of construction loan to amount of loan outstanding for period. - 14Cash DiscountsFixed assets should be recorded at the current cash equivalent price at the date of acquisition, net of any discount
- 15Deferred-Payment ContractsAssets purchased on long-term credit contracts should be accounted for at the present value of the consideration exchanged at the date of the transaction.
When no interest rate is stated, or if the specified rate is unreasonable, an appropriate rate should be imputed - account for present value. - 16Lump-Sum PurchasesTotal cost should be allocated on the basis of relative fair values of the assets acquired. To determine FV, a company should use the market, income, or cost valuation approach.
The company should assume the highest and best use of the asset in determining the fair value. - 17Costs Subsequent to AcquisitionIn general, costs incurred to achieve greater future benefits should be capitalized, but expenditures that simply maintain a given level of service should be expensed.
- 18To capitalize costs, one of three conditions must be present:- The USEFUL LIFE of the asset must be increased.
- The QUANTITY (productivity) of units produced from the asset must be increased.
- The QUALITY (efficiency) of the asset must be enhanced. - 19AdditionsAny additions should be capitalized because a new asset is created.
- 20Improvements and ReplacementsIf the expenditure increases the future service potential of an asset, a company should capitalize it.
- If the carrying value of the old component is known, the substitution approach is used.
- If the carrying value of the old asset is unknown, the cost of the new asset is capitalized and the cost of the old asset remains in the accounting records.
- If the carrying value of the old asset is unknown, and the new asset only extends the useful life, depreciation is recaptured. - 21Substitution ApproachThe method used when the book value of an old component of an asset is unknown - which removes the cost of the old asset and replaces it with the cost of the new asset.
- 22Depreciation RecaptureThe method used when the book value of the old asset replaced is unknown AND the new asset neither improves the quantity or quality of the original asset but only EXTENDS THE USEFUL LIFE.
Debit the expenditure to Accumulated Depreciation in order to recapture depreciation. - 23Rearrangement and Reinstallatione.g., When a company re-arranges its production floor to improve efficiency.
Treatment depends on whether the book value of the OG installation is known (treated as replacement) or unknown.
If unknown, capitalize the new costs to be amortized over the future periods expected to benefit. - 24RepairsOrdinary repairs should be expensed in the period incurred.
Major repairs should be treated as an addition, improvement, or replacement. - 25Dispositions of Plant AssetsDepreciation up to the date of disposition must be recorded.
Cost and accumulated depreciation must be removed from the books.
Record any cash received.
Recognize any gain or loss. - 26Sale of Plant AssetsThe gain or loss is the difference between the asset's selling price and its BOOK VALUE.
- 27Involuntary Conversione.g., fire, theft, forced sale (eminent domain)
Gains or losses are the same in any other type of disposition regardless of whether any resulting cash proceeds are going to be reinvested in replacement assets. - 28AbandonmentThe gain or loss is the difference between the asset's scrap value (if any) and its book value.
- 29DepreciationNot a valuation, but a means of cost allocation.
The accounting process of allocation the cost of TANGIBLE ASSETS to expense in a rational and systematic manner to those periods expected to benefit from the use of the asset (i.e., it satisfies the matching principle). - 30Depreciable (Depreciation) BaseEqual to the original cost minus the estimated salvage value (also called the residual value).
- 31Estimated Service (Useful) LifeSubject to change.
An asset's physical life is limited by physical factors such as wear and tear. These factors set the outside limit for an asset's useful life.
An asset's service life or useful life is limited by economic factors such as inadequacy, supersession, or obsolescence. - 32InadequacyAsset no longer useful because the demands of the firm have changed.
- 33SupersessionReplacement of an asset with one that is more efficient.
- 34ObsolescenceAsset loses usefulness due to reasons other than inadequacy or supersession.
- 35Methods of DepreciationTwo covered in this course - Units-of-Production and Straight-Line.
In practice, the majority of companies use straight-line depreciation. - 36Units-of-Production MethodAn activity-based method that assumes that depreciation is a function of use.
The life of the asset is considered in terms of either the output it provides or an input measure of the number of the units of activity it works.
Estimate for units of output often difficult to measure.
Method not appropriate in situations where depreciation is a function of time instead of activity.
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- Accountant A311 Karteikarten am Quiz 4, erstellt von Adrianna Gabhart am 30/10/2024.
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- Adrianna Gabhart
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