Land has been purchased and you have just completed construction of a new building. Included among the construction costs were accrued property taxes. How are these taxes accounted?
It’s considered construction cost allocated to the land portion. It is not a prepaid expense.
Donated fixed assets are measured at which value for the entity? What journal entry accts are used?
Fair market value
[DR] Fixed Asset (using fair market value)
… [CR] Gain on nonreciprocal transfer
IFRS uses two methods to value its fixed assets. What are they?
True / False: When revaluation under IFRS is used, the revaluation method is applied to each individual asset.
It is applied to a class of fixed assets, not to individual items
Classes can include land and buildings, machinery, furniture and fixtures, office equipment, etc.
When revaluation under IFRS is used, how are adjustments to fair value accounted?
The revaluation of each class of assets is accounted separately.
IF the initial revaluation is a loss… it goes on the Income Statement
… IF the subsequent revaluation is a gain, you must first recover the loss, and then any remaining gain goes to OCI
IF the initial revaluation is a gain… it goes to OCI
… IF the subsequent revaluation is a loss, you must first remove the gain from OCI and then any remaining loss goes to the I/S.
An entity tests for impairment using IFRS and determines impairment exists. In a previous revaluation a gain existed. How is the impairment accounted?
The gain is first removed from OCI and then remaining loss due to impairment goes against the Income Statement.
Cost of land includes what items?
Price of the land
Brokers’ commissions, deed transfer fees, etc.
Any clearing of the land, grading, draining of swamps, removal of old buildings
reduce the cost of land by any amounts received for items sold from the land including old buildings for scrap, timber from the cleared trees, etc.
Obligations assumed from the buyer including mortgages and back (accrued) taxes
When a basket purchase includes both land and a building, how is the cost of the purchase allocated?
Based on the ratio of appraised values.
What costs are included in the purchase of equipment?
All costs to purchase and get the equipment ready for use. A few examples include
Insurance during shipping
Training of personnel
Modifications to the building to prepare for installation
Construction period interest
Less any discounts
After equipment is up and running, when are expenditures on the equipment (1) capitalized vs (2) expensed? What are the journal entry accts for a capitalized expenditure?
If the expenditure increases the life or efficiency of the equipment, especially if it’s an addition
Routine maintenance or and expenditure that keeps the item running, but doesn’t improve the equipment is expensed.
If the expense covers more than one period (such as a few months), allocate over the periods it will help.
A capital improvement is made to a building (the old roof is replaced by a new roof). How is this accounted if (1) the carrying value of the old asset is known vs (2) if the carrying value is unknown? What are the journal entry accts for each situation?
The carrying value is known
Remove the asset from the books and recognize and gain or loss (treat as if sold)
[DR] Accumulated Depreciation
[DR] Loss on disposal of asset OR
… [CR] Gain on disposal of asset
… [CR] Asset
The carrying value is unknown
Instead of adding an asset, you increase the original asset’s value by decreasing the accumulated depreciation account by the amount of the cost of the improvement.
[DR] Accumulated Depreciation
… [CR] A/P (or cash) for the cost of the improvement.
What is the process for determining the weighted average amount of accumulated expenditures for a building constructed by a company?
Take the initial expenditure x (number of months/12) without new expenditure
Add new expenditure to the previous x (number of months/12) without new expenditure
Continue adding costs…
How does one calculate the weighted average or Interest Rate for Excess Expenditures for a building constructed by a company?
List all borrowings by the company, EXCEPT do not include loans specific for construction
Total all face values of the borrowings
Determine a pro-rata amount for each borrowing (cost of borrowing / total of all face values of the borrowings
Multiply the pro rata amount times each borrowing’s interest rate.
Weighted Avg: All pro rata interest rates together
True / False: Construction related interest should be capitalized not only for buildings you are constructing for your own company, but also for buildings you may construct for other companies
What is the avoidable interest? How is it calculated?
The amount of interest that could have been avoided if you were not working on a construction project.
Apply an interest rate to the weighted average amount of accumulated expenditures
When does the capitalization of interest period during construction stop
At the end of the project when it is ready for use OR
During intentional delays, such as when the market tanks and the building won’t be worth what it should so your company decides to stop construction until the market improves. [A decision by your company is the key.]