Intermediate 2

  1. PPE
    • For actual use - if not classify as an investment
    • "operational assets" actually used in business
    • life > 1 year
    • tangible
  2. Valuation
    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
  3. Leasehold improvements
    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
  4. Asset Retirement Obligation (ARO)
    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
  5. Non cash aquisitions
    • 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
  6. Commercial Substance
    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
  7. Capitalizing interest
    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)
  8. When capitalization can take place
    • 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
  9. Steps for capitalizing interest
    • 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
  10. costs after aquisition
    will capitalize if it exends the life of the asset greater than one year.

    • repairs are expensed
    • added additions are capitalized
  11. Improvement / betterment
    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
  12. Defined Contribution Plan

    • 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
  13. Defined benefit plan
    • the benefit is defined
    • formula : % * years of service * highest salary
    • will receive this amount per year from the time you tretire till you die
  14. Vested obligation
    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
  15. accumulated obligation
    include both the vestes and the currently unvested employees at current salary levels
  16. Projected Benefit Obligation (PBO)
    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
  17. Plan Assets
    • not on the balance sheet
    • will disclose in footnotes the change in the assets

    • begining balance
    • + actual return
    • + contributions
    • - benefits
    • =ending balance
  18. Service cost
    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
  19. Pensions
    what is reported on the financial statements
    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
  20. Pension Expense
    • + 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
  21. accumulated benefit obligation
    the actuarial present value of all the benefits attributed by the pension benefit formula to employee service rendered before a specified date
  22. actual return on plan assets
    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
  23. assumptions
    estimates of the occurrence of future events affecting pension costs, such as mortality, withdrawal, disablement and retirement, changes in compensation, and discount rates
  24. corridor
    10% of the greater of the actual projected benefit obligation or the fair value of the plan assets
  25. expected return on 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
  26. interest cost
    the increase in the projected benefit obligation due to the passage of time
  27. prior service cost
    the cost of retroactive benefits granted in a plan amendment or at the initial adoption of the plan
  28. Coumpound Interest
    the interest that accrues on both the principal and the past unpaid accred interest
  29. future value of Ordinary annulity
    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
  30. future value of an Annuity Due
    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.
  31. Present value of an Ordinary annuity
    one period before the first payment
  32. Present value of an annuity due
    is determined on the date of the first cash flow in the series
  33. Uses of Time Value money
    • receiveables and payables
    • bonds
    • leases
    • pensions
    • sinking funds
    • asset valuations
    • installment contracts
Card Set
Intermediate 2
test 2