ACCT 3723: CHAPTER 10
58 Cards in this Set
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3 major characteristics of property, plant, and equip
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1. "used in operations"- not for resale
2. Long-term in nature and usually depreciated
3. Possess physical substance
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An idle building would or would not be PPE?
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no- more of an investment
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PPE possess physical substance but DO NOT physically...
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become a part of a resale product (like raw materials would)
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PPE and are valued at
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historical cost
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historical costs for PPE can include
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purchase price, freight in costs, sales tax and installation costs
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historical cost for valuing PPE includes any cost that...
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makes it ready for use
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5 costs included in the cost of land (what you value it at)
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1. purchase price
2. closing costs, such as title to the land, attorney's fees and recording fees
3. costs of grading, filling, draining, and clearing
4. assumption of any liens, mortgages, or encumbrances on the property
5. additional land improvements that have an indefinite life (p…
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land improvments with limited lives (like private driveways, wals, fences and parking lots) should be recorded how
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recorded seperately from the "land" account. these costs will be depreciated over the life of the land
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if a land isn't generating revenue for you (like rental property would) then how to record costs for taxes and insurance for the land?
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capitalize them to land account ing PPE because they're not generating revenue like normal operations so they aren't necessarilly expenses
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land held by a real estate concern for resale should be classified as
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inventory
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if a co. purchases land with the intention of building something new on it and the land has an old building on it, then how do you record the costs of demolition less the salvage value of the building?
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as a cost of getting the land ready for it's intended use (aka capitalize it to land account not the new building)
-aka, all costs of getting an asset ready for its intended use are costs of that asset
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5 normal costs included in cost of building
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materls, labor and overhead costs incurred during construction
and professional fees and building permits
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6 regular costs included in acquiring equipment and preparing it for use
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-purchase price
-freight and handling charges (aka transportation costs)
- insurance on in transit equip.
- costs of special foundations if needed
- assembling and installation costs
- costs of conducting trial runs
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classify: money borrowed to pay building contractor
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notes payable
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: payment for construction from note proceeds
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building
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: cost of land fill and clearing
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land
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: deliquent realestate taxes on property assumed
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land
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: premium on a 6-month insurance policy during construction
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building
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: A refund of 1-month insurance premium because construction completed early
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building
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: architects fee on building
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building
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: cost of rela estate purchased as a plant site (land $200K and building $50K)
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land
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: commission fee paid to real estate agency when land is worth more than building
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land
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: installation of fences around property
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land improvements (limited life so they will be depredciated)
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classify expenditure or receipt as they're related to land, land improvements and buildings acquired for use in a business enterprise: cost of razing and removing the building
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land- making it ready for use
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Self-constructed assets usually lack a purchase price or contract price so the two costs normally included in the valuing of the asset are
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1. materials and direct labor
2. Overhead
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Overhead for self-constructed assets can be handeled in two ways
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1. assign no fixed overhead
2. assign a portion of all overhead to the construction process (full costing approach) -most common
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3 approaches for accounting for interest incurred in financing the construction of PPE
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1. capitalize no interest charges during construction (doesn't increase cost to asset)
2. Capitalize all costs of funds employed whether identifiable or not (interest is included in getting asset ready for its use) -can be from equity or debt financing
3. Capitalize only the the interes…
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1. capitalize no interest charges during construction (doesn't increase cost to asset)
2. Capitalize all costs of funds employed whether identifiable or not (interest is included in getting asset ready for its use) -can be from equity or debt financing
3. Capitalize only the the interes…
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1. qualifying asset
2. capitalization period
3. amount to capitalize
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In order for an asset to qualify for interest capitalization it must require
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-a period of time to get them ready for their intended use
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period of time during which a company must capitalize interest
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capitalization period
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3 conditions that must be met to be considered beginning "the capitalization period"
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1. expenditures for the asset have been made
2. activities for the readying the asset are in progress
3. interest costs are being incurred
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the capitalization period ends when
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the asset is substantially complete and ready for use
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the amount of interest to capitalize is limited to the lesser of:
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1. actual interest costs incurred during the period (intrst expense on all outstanding debt)
2. avoidable interest- the amount of interest expense that could have been avoided if expenditures for the asset has not been made
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how to compute weighted-avg accumulated expenditures (step 3 after determining if asset qualifies and what the cap period is)
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multiply each actually expenditure by its cap. period (months out of 12 months it incurs interest) and then add up the results to get weighted avg acculated expenditures
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after finding weighted after accumlated expenditures then what step is next
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computing the actual and avoidable interest
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How to find actual interest
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1. find interest on specific construc. debt (use its interest rate)
2. Use each general debts interest rates to find their actual interest for the period
3. Add up interest in 1 with interest in 2 to get actual interest for period
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How to find weighted avg interest rate on general debt
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total amount of interest from general debt for period
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total principal
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How to find amount of avoidable interest
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take the amount by which weighted avg accumulated expenditures exceed the specific loan and multiple it by the weighted average interest rate on other debt.
-add the above intrest amount to interest for the period from just the specific debt to get the total avoidable interest
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In journal entry for capitaling interest on PPE construction, where do you show actual and avoidable interest
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whichever is lowest will be capitalized to the asset (debited)
- the higher of the two will be credited as "cash"
-and the debited interest interest expense for the period will be the diff between actual and avoidable interest
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Companies should usually record property, plant and equipment (as in say historical cost is equal to ) at...
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1. the fair value of what they give up or,
2. the far value of the asset received
-or whichever is more clear
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how to report cash discount for PPE
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whether taken or not, generally they're recognized as a reduction in the cost of the asset
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PPE purchased on deferred payment contracts (longterm credit contractsm notes, mortagages, bonds, or equip obligations) should be recorded at
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the present value of the consideration exchanged at the date of the transaction
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if PPE is purchased with a lump sum price how do you value/record it?
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allocate the total cost among the various assets on the basis of their fair market values
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if a co. issues securities (like common stock) to acquire PPE how should how value it
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the market value of the stock issues is a fair indication of the cost of the property acquired (because mkt value=fair value) -if you don;t have market value of stock, then record asset at its fair value
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ordinarilly, companies account for the exchange of nonmonetary assets on the basis of :
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1. the fair value of the asset given up, or
2. the fair value of the asset received
-whichever is clearly more evident
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an exchange of nonmonetary assets has commercial substance if the future cash flows....
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change as a result of the transaction (the two parties economic positions change)
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how to account for gains/losses if: exchange has commercial substance
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recognize gains/losses immediatly
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how to account for gains/losses if: exchange lacks commercial substance and cash is not received
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defer gains- recognize losses immediatly
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how to account for gains/losses if: exchange lacks commercial substance but cash is received
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recognize partial gain; recognize losses immediaility
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if exchange lacks commerical substance and some cash is received and the cash is 25% or more of the fair value of the exchange then....
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recognize entire gain because earnings process is complete
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How do you know if their is a gain when exchanging nonmonetary assets?
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if fair value of asset you're trading is greater than the book value, you have a gain
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loss on disposal happens if
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fair value of used asset is less than book value of it
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when a gain is deffered because no cash was received and there was no commercial substance, how do you show it
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reduce fair value of new asset (still equal to fair value of what you gave up) by the amount of the gain
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formula to find amount of gain that will be recognized if exchange lacks commercial sub. but cash IS received
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(cash recieved (aka boot)/ cash received+ fair value of other assets recieved) X total gain
=recognized gain
-if the fraction part is 25% or greater, recognize whole gain
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companies should recognize PPE contributions received as...
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revenues in the period received
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Costs for PPE that come after acquisition can be capitlzed if the costs.... (2 requirements)
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1. can be measured reliably
2. it is probable the co will obtain future economic benefits
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3 ways a cost can be be considered to provide a "future ecnomic benefit" ----increases in,
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1. useful life,
2. quantity of product produced and,
3. quality of product produced
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4 major types of expenditures that commonly come after acquistion
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additions: increase or extension of existing assets
improvements and replacments: substituion of an improved asset for an exisiting one
rearrangement and reinstallments: moving asset from one location to another
reapairs: expenditures that maintain assets in conidtion for opertat…
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ACCT 3723: CHAPTER 10