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Flashcards in Fixed Assets Deck (40)
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1

How are Research and Development costs recorded?

They are expensed in the period incurred and are not capitalized.

2

Which expenditures are included in the cost of a building?

All expenditures to get the building into working condition are ready for use

3

Which expenditures are included in the cost of land?

All expenditures to get the land ready for its intended use:

Title & County Fees

Clearing of Land - Dirt work etc.

Demolition and removal of old buildings (minus any scrap or salvage)

Note: capitalized land costs are not depreciated

4

In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.

The new asset is recorded at the book value of the asset given up.

The only gain that can be recognized is any boot (cash) received.

5

In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange.

The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.

6

How is donated property recorded by the donee?

Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose

Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value

7

How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

8

How is double-declining balance (DDB) depreciation calculated?

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.

9

How is Sum of Year's Digits (SYD) depreciation calculated?

(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense

For example the depreciation factor for the third year of a 10-year asset would be:

: 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5%

Remaining useful life : 8 SYD : 55

10

How is straight line depreciation calculated?

(Cost - Salvage Value) / Useful life : depreciation expense

11

When is an asset considered to be impaired? How is impairment loss calculated?

When the un-discounted future cash flows are less than the carrying value of the asset.

Carrying Value - Fair Value : Impairment Loss

Note: impaired assets that recover their value can't be written back up once written down

12

How are legal fees to defend a patent amortized?

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent's economic life.

If unsuccessful they are expensed immediately.

13

What are the two steps for testing goodwill impairment?

Compare the CV to the FV. If FV is greater than CV no impairment exists you're done.

If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.

14

How are costs for developing software recorded?

Expenses prior to technological feasibility are expensed as R&D.

After technological feasibility but prior to production costs are capitalized.

Expenses incurred during production are charged to inventory.

Expenses incurred training on internal use software are expensed.

15

What expenditures are included in the cost of equipment?

All expenditures to get the asset into working condition and ready for use:

Purchase price + liabilities assumed
Shipping
Taxes
Insurance
Installation
Testing
Legal fees
Construction loan interest

Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.

16

Accounting for additions to PPE

extensions, enlargements, expansions

DEBIT: ASEET ACCOUNT

17

Repairs and maintenance - ORDINARY

to maintain normal operating condition
do not add materially to use value
do not extend useful life

EXPENSE

18

Repairs and maintenance-MAJOR

not recurring large expenditures

1. increase quality or output - DEBIT: ASSET
2. extend useful life - DEBIT: ACCUM DEPN

19

Replacement of major component - BV of old component known

If BV of old component is known,
record the disposal first and recognize gain or loss on old asset
for the new component - DEBIT: ASSET

20

Replacement of major component - BV of old component NOT known

Increases the use value - DEBIT ASSET
Extends useful life - DEBIT ACCUM DEPN

21

Reinstallations/rearrangements

Material cost and greater efficiency - DEBIT ASSET
No measurable future benefit - EXPENSE

22

Physical usage depreciation method

Annual depreciation =

current activity/output
___________________ x depreciation base
otal output (net of SV)

23

GRAPH

SL - straight
DDB - curve
SYD - slant

24

Inventory depreciation method

based on appraisal values of beginning and ending inventories

beginning inventory
= cost of new acquisitions
-- ending inventory
= depreciation expense for the month/year

25

Composite method

use straight line
group - similar assets
composite - dissimilar assets
use average service life of a group

Compute straight line depreciation for each asset type
Total all gross base, depreciation base (net of SV),
annual SL depreciation

COMPOSITE RATE =total depn. per asset type
--------------------------------------------
total GROSS asset cost

Composite life =depreciation base / sum of SL
depreciation

NOTE: depreciation is recorded until the BV of the composite group is reduced to SV. Close respective asset type salvage value when retired.

NO GAINS AND LOSSES ON DISPOSAL !!!!!

Cash
Accumulated depreciation
Asset

Total group asset carrying value is reduced by the amount of cash received from the disposal.

26

Assets to be disposed of

Record at NRV (FV-selling cost)
Impairment can be recovered only up to carrying amount prior to impairment

Loss on planned disposition
Asset to be disposed of
Accumulated Depn
Asset

Impairment test

= if carrying value is less than the sum
of FUTURE UNDISCOUNTED cash
flows

Impairment loss = CV - NRV

27

Impairment journal entry

Impairment loss
Accumulated depreciation

28

Depletion of natural resources
Important (came out in the exam)

Depletion base = total cost - exploring, drilling,
excavating and other preparatory costs

= units extracted / total expected recoverable
units
X depletion base

29

Revision of depletion rate
like change in estimate
Unit rate computation

due to uncertainties in the recovery of natural resources

COMPUTATION OF UNIT DEPLETION RATE FOR THE YEAR

original cost xx
additional cost incurred xx
total costs xx
residual value xx
depletion taken PY's xx (xx)
__________
Carrying value xx
Divide by:
units extracted current year
+ units recoverable at YEnd xx
____________
= UNIT DEPLETION RATE XX

30

READ FIXED ASSETS - IFRS WILEY (XEROX FILE)

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