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Intermediate Accounting, Ch 10 Terms

luzser1800 Accounting Intermediate English 97 cards

Cards in this deck (97)

  1. 1Describe property, plant, and equipmentthe major characteristics of property, plant, and equipment are as follows:
    1) they are acquired for use in operations and not for resale
    2) they are long-term in nature and usually subject to depreciation
    3) they possess physical substance
  2. 2Identify the costs to include in initial of property, plant, and equipment: Cost of landIncludes all expenditures made to acquire land and to ready it for use. Land costs typically include: (1) the purchase price, (2) closing costs, such as title to the land, attorney's fees, and recording fees, (3) costs incurred in getting the land in condition for its intended use, such as grading, filling, draining, and clearing, (4) assumption of any liens, mortgages, or encumbrances on the property, (5) any additional land improvements that have an indefinite life
  3. 3Identify the costs to include in initial of property, plant, and equipment: Cost of BuildingsIncludes all expenditures related directly to their acquisition or construction. These costs include (1) materials, labor, and overhead costs incurred during construction, and (2) professional fees and building permits
  4. 4Identify the costs to include in initial of property, plant, and equipment: Cost of equipmentIncludes the purchase price, freight and handling charges incurred, insurance on the equipment while in transit, cost of special foundations if required, assembling and installation costs, and costs of conducting trial runs
  5. 5Describe the accounting problems associated with self-constructed assetsindirect costs of manufacturing create special problems because companies cannot easily trace these costs directly to work and material orders related to the constructed assets. Companies might handle these costs in one of two ways, (1) assign no fixed overhead to the cost of the constructed asset, or (2) assign a portion of all overhead to the construction process. Companies use the second method extensively
  6. 6Describe the accounting problems associated with interest capitalizationonly actual interest (with modifications) should be capitalized. The rationale for this approach is that during construction, the asset is not generating revenue and therefore companies should defer (capitalize) interest cost. Once construction is completed, the asset is ready for its intended use and revenues can be recognized. Any interest cost incurred in purchasing an asset that is ready for its intended use should be expensed
  7. 7Understand accounting issues related to acquiring and valuing plant assets: Cash Discountswhether taken or not, they are generally considered a reduction in the cost of the asset; the real cost of the asset is the cash or cash equivalent price of the asset
  8. 8Describe the accounting treatment for the disposal of property, plant, and equipmentregardless of the time of disposal, companies take depreciation up to the date of disposition and then remove all accounts related to the retired asset. Gains or losses on the retirement of plant assets are shown in the income statement along with other items that arise from customary business activities. Gains or losses on involuntary conversions, if unusual and infrequent, may be reported as extraordinary items
  9. 9Understand accounting issues related to acquiring and valuing plant assets: Deferred-payment contractsCompanies account for assets purchased on long-term credit contracts at the present value of the consideration exchanged between the contracting parties
  10. 10Understand accounting issues related to acquiring and valuing plant assets: Lump-sum purchaseallocate the total cost among the various assets on the basis of their relative fair values
  11. 11Understand accounting issues related to acquiring and valuing plant assets: Issuance of stockif the stock is actively traded, the market price of the stock issued is a fair indication of the cost of the property acquired. If the market price of the common stock exchanged is not determinable, establish the fair values of the property and use it as the basis for recording the asset and issuance of the common stock
  12. 12Understand accounting issues related to acquiring and valuing plant assets: Exchanges of nonmonetary assetsthe accounting for exchanges of nonmonetary assets depends on whether the exchange has commercial substance
  13. 13Understand accounting issues related to acquiring and valuing plant assets: Contributionsrecord at the fair value of the asset received, and credit revenue for the same amount
  14. 14Major characteristics of PPE : They are acquired for use in operations and not for resaleonly assets used in normal business operations are classified as property, plant, and equipment. For example, an idle building is more appropriately classified separately as an investment. Land developers or subdividers classify land as inventory
  15. 15Major Characteristics of PPE: They are long-term in nature and usually depreciatedProperty, plant, and equipment yield services over a number of years. Companies allocate the cost of the investment in these assets to future periods through periodic depreciation charges. The exception is land, which is depreciated only if a material decrease in value occurs, such as a loss in fertility of agricultural land because of poor crop rotation, drought, or soil erosion
  16. 16Major Characteristics of PPE: They possess physical substanceProperty, plant, and equipment are tangible assets characterized by physical existence or substance. This differentiates them from intangible assets, such as patents or goodwill. Unlike raw material, however, property, plant, and equipment do not physically become part of a product held for resale
  17. 17Historical cost: defmeasures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use
  18. 18historical cost: ExCompany allocates costs ( purchase price, freight costs, sales taxes, and installation costs of a productive asset as part of the asset's cost)
  19. 19Should not write up PPE to reflect fair value when it is above cost, because1) Historical cost involves actual, not hypothetical, transactions and so is the most reliable
    2) Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold
  20. 20Cost of landall expenditures made to acquire land and ready it for use
    typically include:
    1) the purchase price
    2) closing costs, such as title to the land, attorney's fees, and recording fees
    3) costs incurred in getting the land in condition for its intended use, such as grading, filling, draining, and clearing
    4) assumption of any liens, mortgages, or encumbrances on the property
    5) any additional land improvements that have an indefinite life
  21. 21Removal of Old Buildingsclearing, grading, and filling- is a land cost because this activity is necessary to get the land in condition for its intended purpose
  22. 22reductions in the price of landsalvage receipts on the demolition of an old building or the sale of cleared timber
  23. 23back taxes and linens (cost of land)the cost of land is paid for it, plus encumbrances
  24. 24special assessmentspavements, street lights, sewers, and drainage systems should be charged to land account because they are relatively permanent in nature
  25. 25land held for resaleshould classify as inventory, it is an investment
  26. 26Costs of buildingincludes all expenditures related directly to their acquisition or construction, all costs incurred from excavation to completion
    Ex:1) materials, labor and overhead costs incurred during construction
    2) professional fees and building permits
  27. 27Cost of EquipmentCost of Equipment includes the purchase price, freight and handling charges incurred, insurance on the equipment while in transit, cost of special foundations if required, assembling and installation costs, and costs of conducting trial runs
    includes all expenditures incurred in acquiring the equipment and preparing it for use
  28. 28Self-constructed assetwithout a purchase price or contract price, the company must allocate costs and expenses to arrive at the cost of...
  29. 29Self-constructed direct/indirectDirect: traced costs directly to work and material orders related to the fixed assets constructed with no problem
    Indirect: Overhead or burden, includes power, heat, light, insurance, property taxes on factory buildings and equipment, factory supervisory labor, depreciation of fixed assets, and supplies are a problem
  30. 30Indirect costs: Assign no fixed overhead to the cost of the constructed assetthe major argument for this treatment is that indirect overhead is generally fixed in nature. It does not increase as a result of a company constructing its own plant or equipment. This approach assumes that the company will have the same costs regardless of whether it constructs the asset or not. Therefore, to charge a portion of the overhead costs to the equipment will normally reduce current expenses and consequently overstate income of the current period. However, the company would assign to the cost of the constructed asset variable overhead costs that increase as a result of the construction
  31. 31Indirect costs: Assign a portion of all overhead to the construction processthis approach is called a full-costing approach, follows the belief that costs should attach to all products and assets manufactured or constructed. Under this approach, a company assigns a portion of all overhead to the construction process, as it would to normal production. Advocates say that failure to allocate overhead costs understates the initial cost of the asset and results in an inaccurate future allocation
  32. 32a pro rata portionto determine its cost a company should assign this
    companies use this treatment extensively because many believe that it results in a better recognition of these costs in periods benefited
  33. 33allocated overhead results in excess construction costsIf the allocated overhead results in recording construction costs in excess of the costs that an outside independent producer would charge, the company should record the excess overhead as a period loss rather than capitalize it. This avoids capitalizing the asset at more than its probable fair value
  34. 34Interest costs during construction: Capitalize no interest charges during constructionunder this approach, interest is considered a cost of financing and not a cost of construction. Some contend that if a company had used stock (equity) financing rather than debt, it would not incur this cost. The major argument against this approach is that the use of cash, whatever its source, has an associated implicit interest cost, which should not be ignored
  35. 35Interest costs during construction: Charge construction with all costs of funds employed, whether identifiable or notthis method maintains that the cost of construction should include the cost of financing, whether by cash, debt, or stock. Its advocates say that all costs necessary to get an asset ready for its intended use, including interest, are part of the asset's cost. Interest, whether actual or imputed, is a cost, just as are labor and materials. A major criticism of this approach is that imputing the cost of equity capital (stock) is subjective and outside the framework of an historical cost system
  36. 36Interest costs during construction: Capitalize only the actual interest costs incurred during constructionthis approach agrees in part with the logic of the second approach--that interest is just as much a cost as are labor and materials. But this approach capitalizes only interest costs incurred through debt financing. (That is, it does not try to determine the cost of equity financing.) Under this approach, a company that uses debt financing will have an asset of higher cost than a company that uses stock financing. Some consider this approach unsatisfactory because they believe the cost of an asset should be the same whether it is financed with cash, debt, or equity
  37. 37GAAP- capitalize only the actual interest costs incurred during constructionmethod follows the concept that the historical cost of acquiring an asset includes all costs (including interest) incurred to bring the asset to the condition and location necessary for its intended use
    to implement consider: qualifying assets, capitalization period, amount to capitalize
  38. 38Qualifying assetsto qualify for interest capitalization, assets must require a period of time to get them ready for their intended use
    starts with first expenditure related to asset, and continues until the asset is at its intended use
    ex: assets under construction for a company's own use (buildings, plants, large machinery) and assets intended for sale or lease that are constructed or otherwise produced as discrete projects (ships or real estate developments
  39. 39not qualify for interest capitalization1) assets that are in use or ready for their intended use
    2) assets that the company does not use in its earnings activities and that are not undergoing the activities necessary to get them ready for use
    EX: land remaining undeveloped and assets not used because of obsolescence, excess capacity, or need for repair
  40. 40capitalization periodthe period of time during which a company must capitalize interest
    conditions:
    1) expenditures for the asset have been made
    2) activities that are necessary to get the asset ready for its intended use are in progress
    3) interest cost is being incurred
    continues as these are present
  41. 41avoidable interestis the amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset
  42. 42amount to capitalizethe amount of interest to capitalize is limited to the lower of actual interest cost incurred during the period or avoidable interest
  43. 43potential amount of interest that it may capitalizemultiply the interest rate by the weighted-average accumulated expenditures for qualifying assets during the period
  44. 44Weighted-average accumulated expendituresa company weights the construction expenditures by the amount of time (fraction of a year or accounting period) that it can incur interest cost on the expenditure
  45. 45Interest Rate principles1) for the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets, USE THE INTEREST RATE INCURRED ON THE SPECIFIC BORROWING
    2) for the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, USE A WEIGHTED AVERAGE OF INTEREST RATES INCURRED ON ALL OTHER OUTSTANDING DEBT DURING THE PERIOD
  46. 46Weighted average interest rateTotal Interest / Total principal
  47. 47Expenditures for land for particular useinterest costs associated with those expenditures qualify for interest capitalization
  48. 48Expenditures for land for a structureinterest costs capitalized during the period of construction are part of the cost of the plant, not the land
  49. 49expenditures for land for lot saleit includes any capitalized interest cost as part of the acquisition cost of the developed land. However, it should NOT capitalize interest costs involved in purchasing land held for speculation because the asset is ready for its intended use
  50. 50Interest revenuecompanies should not net or offset interest revenue against interest cost; companies should capitalize the interest incurred on qualifying assets whether or not they temporarily invest excess funds in short-term securities
  51. 51Valuation of PPEcompanies should record PPE at the fair value of what they give up or at the fair value of the asset received whichever is more clearly evident
  52. 52long-term creditto properly reflect cost, companies account or assets purchased on long-term credit contracts at the present value of the consideration exchanged between the contracting parties at the date of the transaction
  53. 53Lump-sum pricethe company allocates the total cost among the various assets on the basis of their relative fair values when purchased at lump sum. assumption is that costs will vary in direct proportion to fair value
  54. 54Issuance of stockthe par or stated value of such stock fails to properly measure property cost when companies acquire property by issuing securities.
    if trading of the stock is active, the market price of the stock issued is a fair indication of the cost of the property acquired. The stock is a good measure of the current cash equivalent price
  55. 55exchange of nonmonetary assetsbasis of the fair value of the asset given up or the fair value of the asset receive, whichever is clearly more evident; companies should recognize immediately any gains or losses on the exchange; the rationale for immediate recognition is that most transactions have commercial substance, and therefore gains and losses should be recognized
  56. 56commercial substanceif the two parties economic positions change
  57. 57Type: Commercial Substancerecognize gains and losses immediately
  58. 58Type: Lacks Commercial substance--no cash receivedDefer gains; recognize losses immediately
  59. 59Type: Lacks Commercial substance---cash receivedrecognize partial gain; recognize losses immediately
  60. 60exchange lacks commercial substanceif the company receives no cash in such an exchange, it defers recognition of a gain. If the company receives cash in such an exchange, it recognizes part of the gain immediately
  61. 61Exchanges: Loss Situationrecognizes the loss immediately
    Rationale: companies should not value assets at more than their cash equivalent price. If the loss were deferred, assets would be overstated. Therefore, companies recognize a loss immediately whether the exchange has commercial substance or not
  62. 62Loss Situation JEEquipment XXX
    Accumulated Depreciation-Equipment XXX
    Loss on Disposal of Equipment XXX
    Equipment XXX
    Cash XXX
  63. 63loss on disposal of machinefair value
    Less: Book Value
    =Loss on disposal
  64. 64Exchanges: Gain Situation with Commercial substancea company usually records the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset at the fair value of the asset given up and immediately recognizes a gain. The company should use the fair value of the asset received only if it is more clearly evident than the fair value of the asset given up
  65. 65Gain Situation with commercial substance JETrucks (semi) XXX
    Accumulated Depreciation-Trucks XXX
    Trucks (used) XXX
    Gain on Disposal of Trucks XXX
    Cash XXX
  66. 66Gain on disposal of truckFair Value
    Cost of used truck
    Less: Accumulated depreciation
    Book Value
    =Gain on disposal
  67. 67Exchanges: Gain Situation lacks commercial substance no cashthe company recognizes the gain (reflected in the basis of the semi-truck) through lower depreciation expense or when it later sells the semi-truck, not at the time of the exchange
  68. 68Gain Situation lacks commercial substance no cash JETrucks (semi) XXX
    Accumulated Depreciation-Trucks XXX
    Trucks (used) XXX
    Cash XXX
  69. 69Gain Situation computationsFair value
    Less: Gain deferred
    = Basis of semi-truck
    Book Value
    Plus: Cash paid
    = Basis of semi-truck
  70. 70Exchanges: Gain Situation lacks commercial substance some cashreceives a "boot" in an exchange that lacks commercial substance, it must immediately recognize a portion of the gain
  71. 71Gain Situation lacks commercial substance some cash JECash XXX
    Machinery (new) XXX
    Accumulated Depreciation-machinery XXX
    Machinery (old) XXX
    Gain on Disposal of Machinery XXX
  72. 72Recognized Gain equationcash received (boot) /
    cash received (boot) + Fair value of other assets received
    *Total gain
  73. 73Total gain on exchange-calculationFair value of machine given up
    Less: Book value of machine given up
    =total gain
  74. 74rationale of partial gainbefore a nonmonetary exchange that includes some cash, a company has an unrecognized gain, which is the difference between the book value and the fair value of the old asset. When the exchange occurs, a portion of the fair value is converted to a more liquid asset. The ratio of this liquid asset to the total consideration received is the portion of the total gain that the company realizes. Thus, the company recognizes and records that amount
  75. 75Contributionsome type of asset, such as cash, securities, land, buildings, or use of facilities, but it also could be the forgiveness of a debt
  76. 76nonreciprocal transferstransfer assets in one direction
  77. 77assets as donationsvaluation of asset should be zero. However, a departure from the historical cost principle seems justified; the only costs incurred (legal fees and other relatively minor expenditures) are not a reasonable basis of accounting for the assets acquired. To record nothing is to ignore the economic realities of an increase in wealth and assets. Therefore, companies use the fair value of the asset to establish its value on the books
  78. 78FASB position on contributionscompanies should recognize contributions received as revenues in the period received, measure at the fair value
  79. 79Promise immediately? unconditionaldepends only on the passage of time or on demand by the recipient for performance, the company should report the contribution expense and related payable immediately
  80. 80Promise immediately? conditionalthe company recognizes expense in the period benefited by the contribution, generally when it transfers the asset
  81. 81prudent costconcept states that if for some reason a company ignorantly paid too much for an asset originally, it is theoretically preferable to charge a loss immediately
  82. 82Costs subsequent to acquisitioncosts incurred to achieve greater future benefits should be capitalized, whereas expenditures that simply maintain a given level of services should be expensed
  83. 83costs subsequent to acquisition: conditionsone of three must be present
    1) the useful life of the asset must be increased
    2) the quantity of units produced from the asset must be increased
    3) the quality of the units produced must be enhanced
  84. 84additionsincrease or extension of existing assets; companies capitalize any addition to plant assets because a new asset is created
  85. 85improvements and replacementssubstitution of an improved asset for an existing one
  86. 86rearrangement and re-installationmovement of assets from one location to another
  87. 87repairsexpenditures that maintain assets in condition for operation
  88. 88difference between improvements and replacementsimprovement: betterment-is the substitution of a better asset for the one currently used (say, a concrete floor for a wooden floor)
    replacement: the substitution of a similar asset (a wooden floor for a wooden floor
  89. 89Substitution Approachuse if the carrying amount of the old asset is available. it is simple matter to remove the cost of the old asset and replace it with the cost of the new asset
    -if company cannot determine carrying amount of the old asset, it adopts one of other two approaches
  90. 90capitalize the new costanother approach capitalizes the imporvement and keeps the carrying amount of the old asset on the books. The justification for this approach is that the item is sufficiently depreciated to reduce its carrying amount almost to zero. Although this assumption may not always be true, the differences are often insignificant. Companies usually handle improvements in this manner
  91. 91charge to accumulated depreciationin cases when a company does not improve the quantity or quality of the asset itself but instead extends its useful life, the company debits the expenditure to accumulated depreciation rather than to an asset account. The theory behind this approach is that the replacement extends the useful life of the asset and thereby recaptures some or all of the past depreciation. The net carrying amount of the asset is the same whether debiting the asset or accumulated depreciation
  92. 92if the expenditure increase the future service potential of the asset...a company should capitalize it
    handled 3 ways: use the substitution approach, capitalize the new cost, charge to accumulated depreciation
  93. 93rearrangement and re-installation costsif estimated original installation cost and the accumulated depreciation to date-handles as a replacement
    otherwise, should capitalize the new costs as an asset to be amortized over the future periods expected to benefit (material)
    If immaterial, if they cannot be separated from other operating expenses, or if their future benefit is questionable, the company should immediately expense them
  94. 94ordinary repairscharged to expense account in the period incurred, on the basis that it is the primary period benefited
    -used to maintain plant assets in operation conditions
  95. 95major repairsuch as overhaul, several periods will benefit
    -handled as an addition, improvement or replacement
  96. 96Disposition of PPEdepreciation is an estimate of cost allocation and not a process of valuation. The gain or loss is really a correction of net income
  97. 97Sale of plant assetscompanies record depreciation for the period of time between the date of the last depreciation entry and the date of sale
    records depreciation to the date of sale:
    Depreciation Expense
    Accumulated Depreciation

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Description
Intermediate Acct, Ch 10, Kieso, 15th Ed.
Created by
luzser1800
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