FAR 8 - PP&E

Question 1

Cost of land includes?

Answer 1

+ Purchase Price

+ Surveying

+ Clearing, grading, & landscaping

+ Cost of razing/demolishing old building

• Proceeds from sale of scraps

= Cost of land

Question 2

Asset Retirement Obligation (ARO)

Answer 2

Obligation to restore an asset to a specific condition prior to abandonment resulting in a liabilitiy recognized at its fair value when the obligation is incurred.

• Liability recorded at FMV
• If FMV not given, based on PV of expected future costs
• Liability increases each year based on discount rate

Question 3

Accretion Expense

Answer 3

Increase in an obligation, such as an ARO, resulting from the passage of time, generally calculated using the effective interest method.

Journal Entry:

DR: Accreation Expense

CR: ARO Liability

Question 4

When should interest costs be capitalized?

&

What is the amount to be capitalized?

Answer 4

1. If asset is constructed for company’s own use
2. Asset manufactured for resale resulting from a special order

Capitalized: Weighted avg accum expenditures x interest rate

Question 5

What are the four Depreciation Methods

Answer 5

1. Straight Line
2. Double Declining
3. Sum of the years Digits
4. Units of Production

Question 6

Straight Line Method

vs.

Double Declining

Answer 6

SL = (Cost - Salvage Value) / Useful Life

Double Declining = Twice the SL Rate

DD Year 2 Calculation = (Cost - Depr Exp) * SL%

NOTE: In DD, salvage value is ignored

Question 7

Sum of the Years Digits (SYD)

Answer 7

+ (Cost - Salvage Value)

x ( # years left in asset’s life / sum of years in asset’s life)

= Depreciation Expense

SYD = N(N+1) / 2

Question 8

Units of Production (UOP)

Answer 8

+ (Cost - Salvage Value)

x (hours this year / total estimated hours)

= Depreciation Expense

Note: “Cost - SV” & “Total Hrs” are constant values

Question 9

Depletion

Answer 9

(Units Extracted/Total Expected Recoverable Units)

x (Cost - SV)

= Depletion

or

Yr: 1

(Cost - SV / Total Volume) x Units Extracted = Depletion

Yr: 2

(BV/CV Estimated Volume Left) x Units Extracted = Dep

Question 10

Impairment of Long-lived Assets

HELD FOR USE

Answer 10

Two Step Process:

1. CV > Expected Future Cash Flow (top see if impaired)
2. CV > FMV (to calculate amount to write down)

DR: Impairment Loss

CR: Accumulated Depreciation

Question 11

Impairment of Long-lived Assets

HELD FOR SALE

Answer 11

• Impaired if CV > NRV
• When assets are no longer being used for operations, asset is reclassified to Other Assets.
• When transferred, asset is valued at the LOWER OF its CV or NRV
• Asset is NOT Depreciated
• Asset can be written up or down; if writen up, its value can NOT be greater than the original Carrying amount.

Question 12

Exchanges with Commercial Substance

(Unlike)

Answer 12

Recognize all Gains & Losses

Recognize new asset at FMV.

FMV will be any of the three:

1. FMV given up + cash paid (-cash recv)

2. FMV of asset received

3. BV given up + cash paid (-cash recv)

Question 13

Exchanges Lacking Commercial Substance

Answer 13

• Record new asset at LOWER OF:
  
  • FMV given up + cash paid (-cash recv)
  • FMV of asset received
  • BV given up + cash paid (-cash recv)
• Recognize all Losses
• Defer all gains, unless BOOT is RECEIVED​
  
  • ​Gain to be calculated based on boot to total consideration received***

GAIN CALCULATION:
+ FMV Asset received

+ Cash/Boot Received

= Total Consideration Received***

• Book Value Given up

= Total Gain

x Boot Consideration (Cash Received/Total Condr Rer’d)

= Gain (to be recognized)

JOURNAL ENTRY:

DR: New Asset (PLUG)
DR: Cash (boot received)

CR: Old Asset (BV)

CR: Gain ( based on boot/total consideration)

NOTE: If boot received is 25% greater than or equal of the total consideration received, all of the gain is recognized.

Question 14

Capitalized Interest Calculation

Answer 14

+ Annual Expenditure

x (Prorated over the year % = 1/# yrs)

= Avg Current Expenditure

+ Prior Year Spending

= Avg accumulated expend

x Interest Rate of Loan

= Capitalized Interest

Question 15

Costs Incurred After Aquisition

(Capital Expenditure)

Bigger, Better, Longer

Answer 15

Bigger - DR: Asset, CR: Cash

Better - DR: Asset, CR: Cash

Longer : DR: Accum Depr, CR: Cash

Question 16

Aquisition Costs (intended use)

To be Capitalized

Answer 16

• purchase price
• legal fees
• delinquent taxes
• title insurance
• transportation (freight in)
• installation
• test run
• sales taxes

Question 17

Process of determining an impairment loss - 3 steps

Answer 17

1. Review events or changes in circumstances for possible impairment.
2. Apply recoverability test. If sum of the expected future net cash flows from asset is less than CV of asset, impairment has occured.
3. Impairment loss is adjusting the CV to FV of asset.

Question 18

How is an asset recognized if it is aquired for a noninterest bearing note?

Answer 18

When an asset is acquired in exchange for a noninterest bearing note, the equipment is measured at its fair value, if it can be determined. Otherwise, the present value of the payments called for by the note is used.