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IA2 Chapter ten

Acquisition and Disposition of PPE

charteristics of PPE acquired for use in operations & not for resale, long-term in nature and usually depreciable; possess physical substance
historical cost cost of obtaining asset & how much to make it ready for its intended use
when are gains/losses recognized? when the asset is sold exception: fair value of the PPE is less than its carrying amount, the asset may be written down
cost of land all expenditures made to acquire land and ready it for use are considered part of the land cost 1)purchase price; 2) closing costs, 3) costs incurred, 4) assumption of any liens, mortgages and 5) any additional land improvements
costs of land are capitalized when? land is not producing revenue
cost of buildings all expenditures related directly to their acquisition 1) materials, labor, and overhead costs incurred during construction; 2) professional fees and building permits
cost of equipment acquiring the equipment and preparing it for use
self-constructed areas must allocate costs/expenses to arrive at the cost
3 ways to handle interest costs during construction 1)capitalize no interest charges during construction; 2) charge construction with all costs of funds emloyed; 3)capitalize only actual interest costs incurred during construction - GAAP required
capitalize means defer
capitalization requirements qualifying assets, capitalization period, amount of capitalize
qualifying assets under construction for own use, assets intended for sale/lease; must require a period of time to get assetes ready for their intended use
capitalization period date we start until the date of use; 1)expenditures made, 2) activities necessary, 3) interest cost incurred
amount to capitalize lesser of actual interest costs or 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 of worse off?
exchange has commerical 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
special issues related to interest capitalization (expenditures for land) land: purchase of land with intention of developing it for a particular use (capitalize); purchase of land as a site for a strcuture, only capitalize construction not land
special issues related to interest capitalization (interest revenue) companies should not net or offset interest revenue against interest cost
cash discounts take the dicounts
deferred payment contracts account for assets at the present value of the consideration
lump-sum purchases fair value
exchanges of nonmonetary assets exchange of nonmonetary assets on the basis of the fair value of the asset given up or the fair value of the asset received; should recognize immediately gains/losses
recognized gain (cash received/cash received + fair value of other assets received) x total gain
companies should recognize contributions received as... revenues in the period received
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, replacements/improvements, rearrganement/reinstallation, and repairs
additions capitalize any addition because a new assets is created
rearrganement/reinstallation capitalize new costs, but if costs are immaterial, expense them
repairs ordinary: expense cost of repairs when incurred; major: as appropriate, treat as an addition, improvement, ot replacement
improvements/replacements CV known: remove cost and acc. dep. on old asset, recognizing any gain or loss. Capitalize cost of improvement/replacement.CV unknown: debit acc. dep. or capitalized cost
disposition of assets bring depreciation up to date
Created by: SweetCheeks0707



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