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IA2 Chapter 10
Acquisition and Disposition of PPE
| Question | Answer |
|---|---|
| characteristics of PPE | acquired for use in operations and not for resale, long-term in nature and usually dep., possessphysical substance |
| historical cost | cost of obtaining asset and how much to make it ready for its intended use (involves actual transactions and gains/losses only recognized when asset is sold) |
| cost of land | all expenditures made to aquire land and ready it for use are considered part of the land cost (purchase price, closing costs, costs incurred, assumptions of any liens, mortgages and any add. land improvements |
| Should costs for land be capitalized? | Costs are capitalized because land is not producing revenue |
| cost of buildings | all expenditures related directly to their acquisition (materials, labor, overhead costs incurred during construction, professional fees, and building permits) |
| cost of equipment | acquiring the equipment and preparing it for use |
| self-constructed assets | must allocate costs/expenses to arrive at the cost |
| 3 ways to capitalize interest costs during construction | capitalize no interest charges during construction; charge construction with all costs of funds employed, whether identifiable or not; capitalize only actual interest costs incurred during construction (GAAP requires) |
| What does capitalize mean and what is capitalized? | It means deferred and we capitalize things we construct, not things we buy |
| 3 capitalization requirements | qualifying assets, capitalization period, and amount to capitalize |
| qualifying assets | must require a period of time to get assets ready for their intended use; under construction for own use and assets intended for sale/lease |
| assets that do not qualify | assets that are in use or ready for their intended use; and assets that the company does not use |
| 3 conditions for capitalization period | expenditures made, activities necessary, interest costs incurred |
| amount to capitalize | lesser of actual interest costs, avoidable cost |
| companies should record ppe at the fair value of... | what they give up or at the fair value of the asset received |
| commercial substance | does it make you better or worse off? |
| exchange has commercial substance | recognize gains and losses immediately |
| exchange lacks commercial substance - no cash received | defer gains; recognize losses immediately |
| exchange lacks commercial substance - cash received | recognize partial gain; recognize losses immediately |
| weighted average accumlated expenditures | amount x capitalization period |
| weighted average interest rate | total interest/ total principal |
| avoidable interest | waae x interest rate |
| actual interest | debt x interest rate |
| expenditures for land related to interest capitalization | purchase of land with intention of developing it for a particular use (capitalize); purchase land as a site for a structure, only construction gets capitalized not land |
| interest revenue related to interest capitalization | companies should not net or offset interest revenue against interest cost |
| recognized gain | (cash received/(cash received+fair value of other assets)) x total gain |
| accounting for contributions | should recognize contributions received as revenues in the period received, nonmonetary is recorded as an expense |
| costs subsequent to acquisition | improvement to asset in any way should be capitalized, maintence of asset should be expensed |
| 4 major types of expenditures | additions, improvements/replacements, rearrangement/reinstallation, and repairs |
| additions | capitalize cost of addition to asset account |
| improvements and replacements | value known: Remove cost of and acc. dep. on old asset, recognizing any gain/loss. Capitalize cost of improvement/replacement.unknown value: debit acc.dep or capitalize cost of improvement |
| rearrangement/reinstallation | known: account of cost for original installation; unknown: capitalize as an asset, if immaterial expense |
| repairs | ordinary: expense cost of repairs when incurred, major: as appropriate, treat as an addition, improvement, or replacement |
| Disposition of PPE | take dep. up to the date of disposition |
Created by:
Nicole_Valentin@pba.
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