FAR 2D - PP&E

Question 1

What is the formula for Double-Declining Balance (DDB) Depreciation?

ESTV: Degressive Abschreibung oder degressiver Abschreibungssatz

Answer 1

2 × (Straight-Line Depreciation Rate) × (Beginning Book Value).

DDB ignores salvage value, but stops wieh book value = salvage value

ESTV Abschreibungstabelle: Degressive Abschreibung oder degressiver Abschreibungssatz

Example An asset costs $10,000 with a useful life of 5 years.

1st Year Depreciation: Depreciation = 2 × (1 / 5) × 10,000 = 4,000
2nd Year Depreciation: Depreciation = 2 × (1 / 5) × 6,000 = 2,400

Question 2

How do you calculate depreciation using the Sum-of-the-Years-Digits Method?

Answer 2

(Remaining Life / Sum of the Years) × (Cost - Salvage Value).

Example: An asset costs $20,000, has a salvage value of $2,000, and a useful life of 5 years.
Sum of Years: 1 + 2 + 3 + 4 + 5 = 15
Depreciation for the 1st year: Depreciation = (5 / 15) × (20,000 - 2,000) = 6,000
Depreciation for the 2nd year:
Depreciation = (4 / 15) × (20,000 - 2,000) = 4,800

Question 3

What is the formula for Straight-Line Depreciation?

Answer 3

(Cost - Salvage Value) / Useful Life.

Question 4

When can interest be capitalized during construction?

Answer 4

Interest is capitalized during the construction of qualifying assets, using the weighted average interest rate on accumulated expenditures.

Question 5

What costs are included in the capitalization of land?

Answer 5

Purchase price, legal fees, demolition costs, and site preparation costs.

Question 6

What is the key difference between Group and Composite Depreciation?

Answer 6

Group depreciation applies to homogeneous assets, while composite depreciation applies to heterogeneous assets.

Homogeneous: Identical trucks, identical computers.
Heterogeneous: Equipment in factory with different machines and lifespans

Question 7

How do you conduct the recoverability test for impairment on PP&E?

Answer 7

Compare the carrying amount with undiscounted future cash flows. If carrying amount > future cash flows, impairment occurs.

Question 8

How is an impairment loss calculated?

Answer 8

Impairment Loss = Carrying Value - Fair Value (discounted cash flows).

Question 9

How are donated assets measured and recorded?

Answer 9

Donated assets are measured at fair value and recorded as revenue, except when donated by a government.

Question 10

When does interest capitalization cease for a self-constructed asset?

Answer 10

Interest capitalization stops once the asset is ready for use or sale.

Question 11

Can impairment losses for assets held for sale be reversed?

Answer 11

Yes, impairments for assets held for sale can be reversed, but only up to the original carrying value.

Question 12

How do you calculate new depreciation when switching to the straight-line method?

Answer 12

New Depreciation = (Remaining Book Value - Salvage Value) / Remaining Useful Life.

Example: An asset has a remaining book value of $30,000, a salvage value of $5,000, and 3 years of remaining useful life.
New Depreciation: Depreciation = (30,000 - 5,000) / 3 = 8,333.33 per year

Question 13

How do you measure a long-lived asset classified as held for sale?

Answer 13

Measure at the lower of carrying amount or fair value less cost to sell.

Question 14

What is the general rule for capitalizing vs expensing costs related to PPE?

Answer 14

Capitalize costs that result in future economic benefits (e.g., extending useful life); expense routine repairs.

Question 15

When can interest be capitalized for self-constructed assets?

Answer 15

Interest can be capitalized for self-constructed assets during the construction period using the weighted average interest rate.

Question 16

How are individual asset disposals handled under group/composite depreciation?

Answer 16

No gain or loss is recognized on individual disposals. The carrying value is reduced by the proceeds received.

Question 17

Which depreciation methods ignore salvage value?

Answer 17

Only Double Declining Balance Method (DDB)
Salvage value is ignored in the calculation until the book value approaches the salvage value.

Question 18

How are proceeds from asset disposals handled in composite depreciation?

Answer 18

The net carrying value is reduced by the cash proceeds received, with no gain or loss recognized.

Question 19

How is interest capitalized for construction projects?

Answer 19

Interest is capitalized by applying the interest rate to accumulated expenditures during the construction period.

Question 20

What is the formula for capitalized interest on construction projects?

Answer 20

Capitalized Interest = (Interest Rate) × (Weighted Average Accumulated Expenditures).

Example:
A company has two loans:
Loan 1: $100,000 at 6% interest
Loan 2: $200,000 at 8% interest
The company spent $250,000 on construction, with accumulated expenditures of $120,000.
Weighted Average Interest Rate: (100,000 × 6% + 200,000 × 8%) / (100,000 + 200,000) = 7.33%
Capitalized Interest: Capitalized Interest = 7.33% × 120,000 = $8,796

Question 21

📦How should the cost be allocated for a lump-sum purchase of dissimilar assets?

Answer 21

✅ Allocate the total amount paid to each asset based on its relative fair value.

Question 22

When disposing of an asset under group or composite depreciation, how do you record the journal entry, and is there a gain or loss?

Answer 22

🔄 No Gain or Loss Recorded:

Group or composite depreciation assumes gains and losses average out over time.
Individual disposals do not recognize gains or losses.

💳 Journal Entry:
💵 Debit: Accumulated Depreciation (full amount on asset)
💰 Debit: Cash (if proceeds are received)
🏷️ Credit: Asset Account (original cost)

📌 Key Concept:
The difference between cost and accumulated depreciation is adjusted directly in the Accumulated Depreciation account (so accumulated depreciation is like the plug).

Question 23

How do you determine the interest rate for capitalizing interest when there is no specific borrowing?

Answer 23

• 📊 Use the weighted-average interest rate of all general borrowings outstanding during the construction period.
• 🧮 Formula: (Total Interest on all Debt) ÷ (Total Principal of all Debt)
• 🏗️ Apply this rate to the average accumulated expenditures for the qualifying asset.
• 🚫 Do not use individual loan rates unless the loan is specifically tied to the asset (specific borrowing).

Question 24

What is a key difference between IFRS and U.S. GAAP in valuing Property, Plant, and Equipment?

Answer 24

🏗️ Under IFRS, entities may choose between the cost model and the revaluation model for PP&E.
- 💵 Under U.S. GAAP, only the cost model is permitted.
- 📈 Revaluation increases under IFRS go to OCI, while decreases hit the income statement (unless reversing a previous increase).

Question 25

What costs are included in the capitalization of land?

Answer 25

- 💵 Purchase price of the land - 🧾 Legal fees, title fees, and delinquent taxes paid - 🏚️ Costs of demolition of old structures (net of salvage) - 📐 Survey and grading costs - 🚫 Do not include land improvements (e.g., paving, fences); those are capitalized separately - 🚫 Do not include debt issuance costs (separate asset amortized over life of debt)

Question 26

Are sales taxes and VAT included in the capitalized cost of PP&E?

Answer 26

- 🧾 **Nonrefundable sales tax** (e.g., U.S. state/local tax) is **included** in the cost of PP&E. - 💰 It’s part of the cost necessary to acquire and prepare the asset for use. - 🌍 **Refundable taxes (e.g., VAT in many countries)** are **excluded** from the capitalized cost. - 📄 Refundable VAT is recorded as a **receivable**, not part of the asset.

Question 27

How is nonrefundable sales tax recorded when purchasing PP&E?

Answer 27

- 🏗️ **Nonrefundable sales tax** is **included** in the cost of the asset (e.g., machinery). - 💸 If paid at purchase, **no separate "sales tax payable"** is recorded. - 🧮 Example: Buy machinery for $100,000 + $7,000 tax → Debit **Machinery $107,000**, Credit **Cash $107,000** - ⚠️ "Sales Tax Payable" is only used if the tax is unpaid or you’re the seller collecting tax.

Question 28

When does depreciation begin for a fixed asset like machinery?

Answer 28

- 🏁 Depreciation **begins when the asset is placed in service** — i.e., ready and available for use. - 🛠️ It does **not** start at the purchase date unless the asset is immediately usable. - 🧮 If installation or setup is needed, depreciation starts after that is complete.

Question 29

How is salvage value treated under the Double-Declining-Balance (DDB) depreciation method?

Answer 29

- 🚫 Salvage value is **ignored when calculating annual depreciation**. - 🛑 But: **Total depreciation cannot reduce the book value below salvage value**. - ⚖️ At the end of the asset’s useful life, if the book value is above salvage value, a final adjustment is made.

Question 30

How is depletion of natural resources like timber accounted for?

Answer 30

- 🪵 Natural resources (e.g., timber, oil, minerals) are subject to **depletion**, not depreciation. - 📦 Depletion cost is **allocated to inventory** as the resource is extracted for sale. - 💰 Depletion per unit = (Cost – Residual value) ÷ Estimated units extractable - ✅ Depletion is recognized as **COGS** when inventory is sold.

Question 31

What is “commercial substance” in a nonmonetary exchange?

Answer 31

- 💡 An exchange has **commercial substance** if it results in a **significant change in future cash flows**. - 🔄 Changes may be in risk, timing, or amount of cash flows. - 📈 If commercial substance exists → **recognize gains or losses** and record asset at **fair value**.

Question 32

How is a nonmonetary exchange without commercial substance accounted for?

Answer 32

- ❗ Do **not** recognize gains (unless boot is received and >25% of total FV). - 📉 Losses are always recognized. - 🧾 Record new asset at **book value of asset given up**.

Question 33

What happens if boot (cash) is involved in a nonmonetary exchange?

Answer 33

- 🪙 If **boot is paid** → usually still **no gain recognized**. - 💰 If **boot is received**, and **≥25%** of total FV → treat as a monetary exchange → recognize gain. - 💼 If boot is received but <25% → recognize a **partial gain**.

Question 34

How is an Asset Retirement Obligation (ARO) initially recognized?

Answer 34

- 📉 ARO is recorded at **fair value** (i.e., **PV of expected future retirement costs**). - 🧾 ARO liability is paired with a **corresponding increase in the asset’s cost**. - 📚 Governed by ASC 410-20.

Question 35

How is an Asset Retirement Obligation measured over time?

Answer 35

- 🕒 ARO liability increases due to **accretion expense** (unwinding of discount). - 🧾 Accretion expense is recorded as part of operating expense or other expense. - 🧮 The asset is depreciated over its useful life, including the ARO component.

Question 36

How do you calculate the ending balance of an Asset Retirement Obligation?

Answer 36

- 📊 Ending ARO = Beginning ARO + Accretion Expense + New AROs – Settlements - 💸 Settlement = cash paid to retire the obligation - ➕ New AROs = obligations from newly acquired assets (recorded at PV)

Question 37

How do you allocate a lump-sum purchase price between land and building?

Answer 37

- 📊 Use the **relative fair value method** based on current appraised values. - 🧮 Allocation % = Individual asset's appraised value ÷ Total appraised value - 💵 Multiply each asset’s % by the **total purchase price** to get its recorded cost. - 📌 Example: If land is 40% of appraised value, record land at 40% of total paid.