Intermediate 2

• For actual use - if not classify as an investment
• "operational assets" actually used in business
• life > 1 year
• tangible

Historical Cost - "capitalize all costs that are necessary to bring that asset to the location and condition for it's intended use"

Would we being doing this if we had not aquired the asset, if no, then it is included in the price of the asset

Any Costs incurred to get the land level will be capitalized

we will expense any unforeseeable circumstances for example a fire, while building a building

Improvements on a lease

Will amortize for the shorter of the life of the lease of the life of the asset

• d: leasehold imporovements xxx
• c: cash xxx

when there is going to be a particular cost to restore the asset to the position it needs to be in to be sold or disposed of

We'll know the amount it will take and present value that back to today with an appropriate interest rate

• will add this amount to the asset
• d: asset xxx
• c: ARO xxx

• aquire an asset, don't pay in cash
• ex: treade equipment for stock
• the fair market value of either asset given up or asset recieved, whichever is easier to determine

use FMV on the date of transaction

Are the parties any better off before or after the exhange?

There was a difference before and after the exchange, we will recognize all losses, regognize all gains

If there is no commercial substance we will recognize the losses but defer the gains

If "cash flows change after exchange", then there is commercial substance, recognize all gains and losses

if no commercial substance defer all gains unless party has a gain and recieved cash "boot" - recognize the gain that comes from cash, unless cash >= 25% of transaction, recognize all gains

we will capitalize interest during the construction period for assets that are built for our own use or assests that are consrtucted for sale or lease ( not capitalized on routine manufactured items or inventory)

• 1. expenditures have been made
• 2. activities are in process that are necessary to get the asset ready for its intended use
• 3. interest expense is being incurred

• 1. calculate the average accumulated construction expenditure - if expenditures are evenly incurred use simple average, if expenditures are not evenly incurred use weighted average
• 2. determine the interestrates and multiply by the average accumulated expenditure (#1) first interest rate for from construction specific debt, then use weighted average of all other long term debt
• 2.5 compare what we got in #2 with actual interest incurred. Capitalize the smaller amount

• d: construction in progress
• c: interest expense

Note: keep track of Construction in progress T account, will be easier to find the average accumulated constuction expenditure

also if construction doesn't cover a full year will need to prorate based on the months

will capitalize if it exends the life of the asset greater than one year.

• repairs are expensed
• added additions are capitalized

1. Substitution - only works if we have recorded that asset conceptually from the start - substitution for new engine for an old engine, this is conceptually good, but in practice hard

2. reduce accumluated depreciation - debit accum dep, gives you more room to depreciate, usually at the same rate

3. increase asset - debit asset, increase the value of the asset

EASY

• Employer agrees to put some % of the employees salary in to investment (401k)
• risk is on the employee

• Empoyer puts some amount in to plan
• d: pension expense xxx
• c: cash xxx

• the benefit is defined
• formula : % * years of service * highest salary
• will receive this amount per year from the time you tretire till you die

include only employees who have vested (usually based on the companies policy

the actuarial present value of the vested benefits, which are those benefits that the employees have the right to receive if the employee no longer works for the employer

include both the vestes and the currently unvested employees at current salary levels

the actuarial present value, at a specified date, of all the benefits attributed by the pension benefit formula to employee service rendered prior to that date

This is what we use

both vested and unvested but at projected future salaries most conservative, gives us the largest obligation

• Not on the Balance sheet
• will disclose in the footnotes the change in the obligation

• Begining balance
• + Prior Service Cost
• = Adjusted balance
• + service expense
• + interest expense (PBO*Discount Rate)
• - benefits paid
• +- changes in actuarial assumptions(+ for losses, - for gains)
• = ending balance

• not on the balance sheet
• will disclose in footnotes the change in the assets

• begining balance
• + actual return
• + contributions
• - benefits
• =ending balance

adding another year of employment by the employee

the actuarial present value of benefits attributed by the pension benefit formula to services of employees during the current period

Income statement - pension expense

• Balance Sheet -
• - funded status of plan = plan assets - PBO (+ plan is overfunded - prepd pension, - underfunded - accrued pension liability)
• - OCI - prior service costs unamortized, gains and losses on plan

• + service cost
• + interest cost (PBO* discount rate)
• + amortization of prior service cost
• - expected return on the plan assets
• +- gains and losses (2 calculations)
• = Pension Expense

the actuarial present value of all the benefits attributed by the pension benefit formula to employee service rendered before a specified date

the difference between the fair value of the plan assets at the end of the period and the fair value at the beginning of the period, adjusted for contributions and payments of benefits during the period

estimates of the occurrence of future events affecting pension costs, such as mortality, withdrawal, disablement and retirement, changes in compensation, and discount rates

10% of the greater of the actual projected benefit obligation or the fair value of the plan assets

an amount calculated by applying the expected long-term rate of return on plan assets to the fair market value of the plan assets at the beginning of the period

the increase in the projected benefit obligation due to the passage of time

the cost of retroactive benefits granted in a plan amendment or at the initial adoption of the plan

the interest that accrues on both the principal and the past unpaid accred interest

future value of an ordinary annuity is going to be determined on the bate of the last payment.

Last payment has no interest

End of period problem

Payment is made at the begining of the period

one period after the last cash flow

the last payment has interest

if not given and annuity due table, use ordinary table and look up the value of n + 1 at the % then subtract 1 from the number found on the table.

one period before the first payment

is determined on the date of the first cash flow in the series

• receiveables and payables
• bonds
• leases
• pensions
• sinking funds
• asset valuations
• installment contracts