ACC 211: Ch. 10
Terms
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- Property, plant, and equipment is also known as what?
- Plant assets, fixed assets
- What are the three major characteristics of property, plant, and equipment?
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1. Acquired for use in operations and not for resale.
2. Long-term in nature, and usually subject to depreciation.
3. Posses physical substance. - An idle building is appropriately recorded as what?
- Investment
- Land held by land developers or subdividers is appropriately recorded as what?
- Inventory
- How is historical cost for an asset measured?
- Historical cost is measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.
- How are costs incurred after an asset’s acquisition treated?
- Any related costs incurred after the asset’s acquisition, such as additions, improvements, or replacements, are added to the asset’s cost if they provide future service potential. Otherwise they are expensed immediately.
- Why should cost be the basis used at the acquisition date?
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1. At the date of acquisition, cost reflects fair value.
2. Historical cost involves actual, not hypothetical, transactions and as a result is the most reliable.
3. Gains and losses should not be anticipated but should be recognized when the asset is sold. - Define the cost of land.
- The cost of land includes all expenditures made to acquire land and to ready it for use.
- What does the cost of land typically include?
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1. The purchase price
2. Closing costs
3. Costs incurred in getting the land in condition for its intended use
4. Assumption of any liens, mortgages, or encumbrances on the property
5. Any additional land improvements that have an indefinite life. - How is the removal of old buildings recorded?
- Removal of old buildings-clearing, grading, and filling-are considered land costs because these costs are necessary to get the land in condition for its intended purpose.
- How are proceeds obtained in the process of getting land ready for use recorded?
- Any proceeds obtained in the process of getting the land ready for its intended use are reductions in the price of the land.
- What are special assessments?
- Property improvements installed, maintained, and replaced by the local government body, such as pavements, street lights, sewers, and drainage systems.
- How are special assessments recorded?
- Special assessments for local improvements are usually charged to Land.
- What are land improvements?
- Land improvements are improvements with limited lives, such as private driveways, walks, and fences.
- How are land improvements recorded?
- They are recorded separately as Land Improvements so they can be depreciated over their estimated lives.
- If the major purpose of acquiring land is speculative, how is it recorded?
- Inventory
- How should taxes, insurance, and other direct costs incurred while holding land as Inventory be recorded?
- They should be capitalized because the revenue on the investment has not been received yet.
- How should interest costs involved in purchasing land held for speculation be recorded?
- They should not be capitalized because the asset is ready for its intended use.
- How should assets be valued when purchased?
- An asset should be recorded at the fair market value of what is given up or at the fair market value of the asset received, whichever is more clearly evident.
- Define the cost of buildings.
- Expenditures related directly to their acquisition or construction.
- What is included in the cost of buildings?
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1. Materials, labor, and overhead costs incurred during construction.
2. Professional fees and building permits. - Define equipment.
- Equipment includes delivery equipment, office equipment, machinery, furniture and fixtures, furnishings, factory equipment, and similar fixed assets.
- Define the cost of equipment.
- Costs are all expenditures incurred in acquiring the equipment and preparing it for use.
- What is included in the cost of equipment?
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1. Purchase price
2. Freight and handling charges incurred
3.Insurance on the equipment while in transit
4. Cost of special foundations if required
5. Assembling and installation costs
6. Costs of conducting trial runs. - What are self-constructed assets?
- Assets constructed by the company itself.
- Self-constructed assets include what two types of costs?
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1. Materials and direct labor costs.
2. Indirect costs. - Indirect costs are also called what?
- overhead, burden
- What is overhead?
- Overhead include costs for power, heat, light, insurance, property taxes on factory buildings and equipment, factory supervisory labor, depreciation of fixed assets, and supplies.
- How should overhead costs be allocated to self-constructed assets?
- Assign a portion of all overhead to the construction process.
- Assigning a portion of all overhead to the construction of assets upholds what accounting concept?
- Matching Principle, since the practice matches costs with revenues
- If the overhead costs are greater than what would be charged by an independent producer, how should the excess overhead be recorded?
- The excess overhead should be recorded as a period loss rather than be capitalized, as this keeps the price at the lower of cost or market.
- What is the idea of prudent cost?
- If for some reason you were ignorant about a certain price and paid too much for the asset originally, it is theoretically preferable to charge a loss immediately. “Gains†should not be recognized in this manner.
- What is the general rule-of-thumb for deciding whether to capitalize or expense additional costs after plant assets are installed and ready for use?
- In general, costs incurred to achieve greater future benefits should be capitalized, and expenditures that simply maintain a given level of service should be expensed.
- What are the four major types of expenditures that are incurred relative to existing assets?
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1. Additions
2. Improvements and replacements
3. Rearrangements and reinstallation costs
4. Repairs - How are additions recorded?
- Any addition to plant assets is capitalized because a new asset has been created.
- Broadly speaking, what are improvements and replacements?
- Substitutions of one asset for another
- What is the difference between improvements and replacements?
- An improvement is the substitution of a better asset for the one currently used. A replacement is the substitution of a similar asset.
- What are the three ways of recording rearrangement and reinstallation costs?
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1. Handle as a replacement.
2. Capitalize as an asset to be amortized.
3. Expense immediately. - When would a rearrangement or reinstallation cost be handled as a replacement?
- When the original installation cost and the accumulated depreciation taken to date can be determined or estimated.
- When would a rearrangement or reinstallation cost be capitalized as an asset to be amortized?
- When the original installation cost and the accumulated depreciation taken to date can NOT be determined or estimated.
- When would a rearrangement or reinstallation cost be expensed?
- When theses costs are not material, cannot be separated from other operating expenses, or if their future benefit is questionable.
- What is another term for improvements?
- Betterments
- What are the two types of repairs?
- Ordinary repairs and major repairs
- How are ordinary repairs recorded?
- They are treated as ordinary operating expenses in the period in which they are incurred on the basis that it is the primary period benefited.
- How are major repairs recorded?
- If a major repair (such as an overhaul) occurs, several periods will benefit, and the cost should be handled as an addition, improvement, or replacement.
- How should interest incurred in financing the construction or acquisition of property, plant, and equipment be recorded?
- Capitalize only the actual interest costs incurred during construction.
- Assets that qualify for interest cost capitalization include:
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1. Assets under construction for an enterprise’s own use.
2. Assets intended for sale or lease that are constructed or otherwise produced as discrete projects. - Capitalization period begins when what three conditions are present?
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1. Expenditures for the asset have been made.
2. Activities that are necessary to get the assets ready for its intended use are in progress.
3. Interest cost is being incurred. - When does the capitalization period end?
- The asset is substantially complete and ready for its intended use.
- What is avoidable interest?
- It is the amount of interest cost during the period that theoretically could have been avoided if expenditures for the asset had not been made.
- How should interest revenue be recorded during the capitalization period?
- Interest revenue should NOT be netted with interest cost.
- What does it mean to capitalize an expenditure?
- It means to add it to assets instead of expenses.
- What is an involuntary conversion?
- When an asset is lost because of fire, flood, theft, or condemnation
- Where are involuntary conversions reported on an income statement?
- Extraordinary items
- When do interest costs associated with land qualify for interest capitalization?
- When that land is purchased with the intent of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.
- How should long-term credit contracts be valued?
- They should be accounted for at the present value of the consideration exchanged between the contracting parties at the date of the transaction.
- How are lump-sum purchases recorded?
- Allocate the total cost among the various assets on the basis of their relative fair market value.
- How should property acquired in exchange for stocks be valued?
- The market value of the stock issued is a fair indication of the cost of the property acquired because the stock is a good measure of the current cash equivalent price.
- How should a nonmonetary asset in exchange for another nonmonetary asset be valued?
- Accounting for the exchange of nonmonetary assets should be based on the fair value of the asset given up or the fair value of the asset received, whichever is more clearly evident.
- How should gains or losses on the exchange of dissimilar nonmonetary assets be recognized?
- Because the earnings process is complete, gains or losses on the exchange should be recognized immediately.
- How should gains or losses on the exchange of similar nonmonetary assets be recognized, with no cash received?
- Because the earnings process is not complete, gains should be deferred and losses should be recognized immediately.
- How should gains or losses on the exchange of similar nonmonetary assets be recognized, with cash received?
- Because the earnings process is partially complete, gains should be partially recognized and losses should be recognized immediately.
- Contributions are also known as what type of transfer?
- Nonreciprocal transfer
- How should contributions be valued and recorded?
- The fair value of the asset should be used to establish its value, and should be recognized as revenues in the period received.
- How are unconditional and conditional promises of contributions recorded?
- If the promise is unconditional, the contribution expense and related payable should be reported immediately. If the promise is conditional, the expense is recognized in the period benefited by the contribution, which is generally when the asset is transferred.
- What are the three approaches used to record improvements and substitutions?
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1. Substitution approach.
2. Capitalizing the new cost.
3. Charging to accumulated depreciation. - If the carrying value of an improvement or replacement is know, how is it recorded?
- Remove the cost and accumulated depreciation of the old asset, recognizing any gain or loss. Then capitalize the cost of the improvement or replacement.
- If the asset’s useful life is extended, how is an improvement or replacement recorded?
- Debit accumulated depreciation for the cost of the improvement or replacement.
- If the quantity or quality of the asset’s productivity is increased, how is an improvement or replacement recorded?
- Capitalize the cost of the improvement or replacement to the asset account.
- In order for major repair costs to be capitalized, one of three conditions must be present:
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1. The useful life of the asset must be increased.
2. The quantity of units produced from the asset must be increased.
3. The quality of the units produced must be enhanced.