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Acct 302- chapter 10 notes

Terms in this set (34)

property, plant, and equipment are also called
plant assets or fixed assets (because of durable nature)
what are the 3 major characteristics of PPE
1. used in operations & NOT for resale
2. long term in nature and usually depreciated
3. possess physical substance (not intangible)
what is historical cost valuation
measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use (could include: shipping, taxes, customs, tariffs, installation, etc)
main reason for historical cost valuation (2)
1. its reliable
2. companies should not anticipate gains and losses but should recognize gains and losses only when an asset is sold. (record something at the price you actually bought/sold it, not what you could have bought/sold it for)
the cost of land includes all expenditures to acquire it and ready it for its use. what are some examples of these costs?
- purchase price
- closing costs; such as title to the land, attorney's fees, and recording fees
- costs of grading, filling, draining, and clearing
- assumption of any liens, mortgages, or encumbrances on the property
- additional land improvements having an INDEFINITE life
land acquired and held for speculation is classified as ___________
an investment
land held by a real estate concern for resale should be classified as _________
inventory
cost of buildings includes all expenditures related directly to acquisition or construction. some of these costs include:
- materials, labor, and OH costs incurred during construction
- professional fees and building permits, blue prints
- excavation would be included if needed to construct the building; would NOT be land
costs of equipment include all expenditures incurred in acquiring the equipment and preparing it for use. Some of these costs include:
- purchase price
- freight and handling charges
- insurance on the equipment while in transit
- cost of special foundations if required
- assembling and installation costs
- cost of constructing trial runs
for self constructed assets, costs include:
materials, direct labor, & OH
what are the 2 ways companies handle OH?
- assign no fixed OH
- assign a portion of all OH to the construction process (will use this one)
does GAAP require capitalizing actual interests (with modifications)?
yes
capitalization considers what 3 items?
1. qualifying assets
2. capitalization period
3. amount to capitalize
what do qualifying assets require?
a period of time to get them ready for their intended use
What are the 2 types of qualifying assets?
1. assets under construction for a company's own use
2. assets intended for sale or lease that are constructed or produced as discrete projects (projects need to have a definite beginning and a definite end. ex: ships, airplanes, real estate development)
the capitalization period begins when what 3 things happen?
when does it end?
1. expenditures for the asset have been made
2. activities for readying the asset are in progress.
3. interest costs are being incurred

ends when the asset is substantially complete and ready for use
how do you figure out what amount to capitalize?
capitalize whichever is less; the actual interest (cost of interest that your company incurred on all of your debt for the year or reporting period), or the avoidable interest (the amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset)
weighted average accumulated expenditures =
actual expenditures x capitalization period (from the date the expenditure was paid)
companies should record PPE at:
- at the FV of what they gave up, or
- at the FV of the asset received, whichever is more clearly evident
weighted average interest rate =
total interest/total principal
For the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, what interest rate do you use?
the weighted average interest rate
For the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets, what interest rate do you use?
the interest rate on the specific borrowings (specific loan)
how should you recognize a cash discount?
record discount not taken as a loss so that the asset is always recorded at a net value
what is deferred payment contracts and how should companies account for them?
when companies purchase plant assets on long term credit contracts using notes, mortgages, or bonds).
Companies account for assets purchased on long-term credit contracts at the present value of the consideration exchanged between the contracting parties at the date of the transaction.
how do you allocate costs among assets in a lump sum purchase?
on the basis of their relative fair values.
(fv of that asset / total fv of all the assets) x purchase price
lump sum purchase is also called
basket purchse
when companies acquire an asset by the issuance of stock, how can you indicate the cost of the asset acquired?
The market price of the stock issued is a fair indication of the cost of the asset acquired. the stock is a good measure of the current cash equivalent price.
what are non monetary assets?
assets whose price may change over time like, land, buildings, or equipment
how are exchanges of non monetary assets accounted for?
on the basis of the FV of the asset given up or the FV of the asset received
what is the meaning of commercial substance?
exchange has commercial substance if the future cash flows changes as a result of the transaction. that is, if the 2 parties' economic positions change, the transaction has commercial substance
True or false. List price is the same as Fair Market Value.
false
the formula for gain recognition =
cash received / (cash received + FV of other asset received) x total gain = recognized gain

total gain = FV of asset given up - BV of asset given up
in a lacks commercial substance, some cash received situation, how do you compute the basis of the new asset?
FV of new asset - gain deferred = basis of new machine
How much gain do you recognize:
1. Has commercial substance, gain is computed?
2. Has commercial substance, loss is computed?
3. Lacks commercial substance, gain computed, no cash involved?
4. Lacks commercial substance, gain computed, some cash received that is less than 25% of gain?
5. Lacks commercial substance, gain computed, some cash received that is more than 25% of the gain?
6. Lacks commercial substance, loss computed?
1. recognize entire gain
2. recognize entire loss
3. no gain recognized
4. recognize a portion of the gain using formula
5. both parties recognize entire gain
6. recognize entire loss
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