Chapter 10

  1. Historical cost
    Measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use
  2. Cost of land
    • typically includes:
    • purchase price
    • closing costs
    • grading/filling/draining
    • assumption of liens, mortgages
    • additional land improvements that have an indefinite life
  3. The effect of salvage receipts have what effect on the cost of land
    The salvage receipts decrease the cost of the land
  4. Cost of buildings
    All expenditures related directly to their aquisition or construction...materials, labor, overhead costs, professional fees, building permits, etc
  5. Where is the cost of demolishing an old building accounted for?
    The cost of demolition less its salvage value relates to land because it is being prepared for its intended use
  6. How are interest costs accounted for during construction?
    Capitalize actual interest- consistent with the concept that historical cost of acquiring an asset includes all costs (including interest) incurred to bring the asset to the condition and location necessary for its intended use
  7. 3 conditions that must exist for a company to capitalize interest
    • 1- Expenditures for teh asset have been made
    • 2- Activities that are necessary to get the asset ready for its intended use are in progress
    • 3- Interest cost is being incurred

    The capitalization period ends when the asset is substantially complete and ready for its intended use
  8. What is the proper amount of interest to capitalize?
    The lower of actual interest cost incurred during the period or avoidable interest
  9. 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
  10. Weighted-average accumulated expenditures
    Multiply each expenditure by the capitalization period, then sum the results to arrive at the weighted-average accumulated expenditures
  11. What interest rates are used with the weighted average accumulated expenditures?
    Determine how much of the accumulated expenditures was specifically borrowed for financing the construction and use the interest rate incurred on that specific borrowing

    For the rest of the outstanding debt, use a weighted average of interest rates incurred on all other outstanding debt during the period.
  12. Describe how to find a weighted-average interest rate
    • P I
    • 12%, 2-year note 600000 72000
    • 9%, 10-year note 2000000 180000
    • 7.5%, 20-year note 5000000 375000

    Total the principle and interest and then divide principal into interest for the weighted average interest rate.
  13. For a project, the avoidable interest was $100 and the actual interest was $200. What are the journal entries?
    The company capitalizes the lesser of the 2...$100 and expenses the remainder.

    • Building (capitalized interest) $100
    • Interest expense $100
    • Cash $200
  14. Where is capitalized interest reported?
    On the income statement under Other Expenses and losses: Interest Expense less: capitalized interest


    it can be disclosed in a note
  15. What is commercial substance?
    An exchange has commercial substance if the future cash flows change as a result of the transaction or the two parties' economic positions change
  16. When a nonmonetary exchange of assets has commercial substance, how is the accounting handled?
    The fair value of the asset given up or the fair value of the asset received is accounted for and companies should recognize immediately any gains or losses on the exchange
  17. Type of exchange:
    exchange lacks commercial substance- no cash received
    Defer gains; recognize losses immediately
  18. Type of exchange:
    lacks commercial substance-cash received
    recognize partial gain; recognize losses immediately

    *Losses cannot be deferred because then assets would be overvalued on the balance sheet

    *IF cash received is 25% or more of the FV of the xchange, recognize entire gain because earnings process is complete
  19. General rule for including costs of an asset
    Any costs to get the asset in place and ready to use
  20. Land account vs land improvement acct
    The land account is not depreciable. Land improvement is depreciable.
  21. When are gains and losses recognized in nonmonetary exchanges?
    • Always recognize a loss
    • Recognize a gain if xaction has commercial substance
    • Partially recognize a gain if xaction lacks commercial substance and cash is rec'd UNLESS cash= 25% or more of FV then recognize whole gain
    • Defer gains if xaction lacks commerical substance and no cash is rec'd
  22. Compute the amount of a partially recognized gain in a transaction that lacks commercial substance where cash was received (boot)
    [boot/(boot + FV)] x total gain =

    recognized gain
  23. When are repairs and improvements capitalized and/or expensed?
    If the expenditure increases the future service potential (increases useful life, efficiency, productivity, FMV) of the asset, a company should capitalize it. Ordinary repairs and replacements are expensed.
  24. When an asset is disposed, what must be up to date before the asset is taken off the books?
    Accumulated depreciation
  25. The gain or loss on disposal of an asset is really a correction of net income for the years during which a company used the fixed asset.
Card Set
Chapter 10
Property Plant and Equipment