Term
| Describe property, plant and equipment |
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Definition
Aka plant assets and fixed assets. PP and E include land building structures, and equipment. 3 major characteristics:
1- They are acquired for use in operations and not for resale.
2- they are long term in nature and usually depreciated. exception is land
3- They possess physical substance- differentiates from intangible assets. |
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Term
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Definition
- used to evaluate pp and e
- measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for use.
Ex: Purchase price, freight costs, sales taxes, instalment costs, improvements if they provide future service potential. otherwise they should expense these costs immediately. |
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Term
| companies should not write up pp and e to reflect fair value when it is above cost because: |
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Definition
1.) Historical costs involves actual, not hypothetical, transactions and so is the most reliable.
2) Companies should not anticipate gains and losses but should recognize gains and losses when the asset is sold. |
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Term
| If the fair value of pp and e is less than carrying amount: |
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Definition
the asset may be written down. When asset is impaired, and when asset is being held for sale.
- long lived asset measured at lower of its carrying amount or fair value less cost to sell.
- Long lived asset not depreciated. |
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Term
| How do you determine cost of land? |
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Definition
All expenditures made to acquire land and ready it for use are considered part of the land cost.
- purchase price
- closing costs, such as title to land, attorneys fees, and recording fees.
- costs incured to get land in condition for use, grading filling, etc.
- Assumption of any liens, mortgages, o encumbrances
- any additional land improvements that have an indefinate life. |
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Term
| salvage value does what to the price of land? |
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Definition
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Term
| what are special assessments? |
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Definition
| pavements, street lights, sewers, landscaping etc, charge cost to land account. |
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Term
| how are improvements with limited lives treated? |
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Definition
| - private driveways, fences, walks, etc as land improvements and depreciated over estimated lives. |
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Term
| generally land is a part of pp and e, however |
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Definition
| if purpose of acquiring land is speculative, a company classifies land as an investment. If held for resale, then inventory. |
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Term
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Definition
should include all expenditures related directly to their acquisition or construction
- include materials labor and overhead costs incurred during contruction
- professional fees and permits
- all costs from excavation to completion.
- all costs getting an asset ready for use are costs of that asset ( ie : tearing down building is for land, not buildings) |
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Term
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Definition
- includes delivery equipment, office equipment, machinery,furniture and fixtures, factory equipment, etc.
- cost of asset includes purchase price, freight and handling charges, insurance on equipment in transit, cost of special foundations required, assembling and installation, and trial runs |
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Term
| What are self constructed assets? |
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Definition
- when companies contruct their own assets
- assignment of indirect costs created problems ( power heat, property taxes, etc) |
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Term
| Companies can handle indirect costs in one of two ways: |
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Definition
1.) Assign no fixed overhead to the cost of the constructed asset: indirect overhead fixed in nature. same costs regardless, therefore would overstate income. Company would assign to the cost of the constructed asset variable overhead costs that increase as a result of contruction.
2.)Assign a portion of all overhead to the construction process aka full costing approach - assigns portion of all overhead to construction process. Understates .initial cost of asset Should use pro rata portion of the fixed overhead to determine its cost. better matching. |
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Term
| If the allocated overhead results in recording construction costs in excess of the costs that an outside independant producer would charge: |
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Definition
| the company should record the excess overhead as a period loss rather than captilize it. avoids capitalizing the asset at more than probable market value. |
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Term
| what are the three approaches to interest costs? |
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Definition
1.) Capitilize no interest during construction - interest cost of financing. cash has implicit interest cant be ignored.
2.)Charge construction with all costs of funds employed whether identifiable or not. cost of contruction should include cost of financing. criticism - imputing the cost of capital is subjective and outside framework of historical cost system.
3.)Capitlize only actual interest costs incurred during construction - only capitlizes interest costs through debt financing. Company that uses debt financing wil have an asset of higher cost than a company that uses stock financing. critics say that cost of asset should be the same no matter what its financed with. |
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Term
| GAAP requires which approach? |
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Definition
| capitlizing actual interest with modification. this method follows the concept that the historical cost of an asset includes interest. rationale, during construction asset not generating revenues. Company shoulld defer interest costs. |
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Term
| to implement the general approach companies need to consider what three items? |
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Definition
1.) qualifying assets
2.) Capitalization period
3.) Amount to capitalize |
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Term
| what are qualifying assets? |
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Definition
| to qualify for interest capitalization, assets must require a period of time to get them ready for their intended use. A company capitalizes interest costs starting with first expenditure reated to asset. continues till asset is ready. |
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Term
| What are some exampes of non qualifying assets? |
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Definition
- assets that are in use or ready for their intended use
- assets that the company does not use in its earnings activties and that are not undergoing the activities necessary to get them ready for use. |
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Term
| What is the capitalization period? |
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Definition
period of time during which a company must capitlize interest, has 3 conditions
1) expenditures for the asset have been made
2) Activities that are necessary to get the asset ready are in progress
3) Interest is being incurred
interest capitalization continues as long as these three conditions are present. |
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Term
| what is the amount to capitalize? |
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Definition
| - limited to the lower of actual interest cost incurring during the period or avoidable interest. |
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Term
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Definition
the amount of interest cost during the period that a company could theoretically avoid had it not made expenditures for the asset.
- GAAP requires interest capitalization for a qualifying asset only if its effect, compared with the effect of expensing interest, is material. |
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Term
| companies determine potential amount of interest that it may capitalize by: |
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Definition
| multiplying the interest rates by the weighted average accumulated expenditures for qualifying assets during the period. |
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