ACC-370 Chapter 9 Concepts

What are the characteristics of Property, Plant, and Equipment?

Property, Plant, and Equipment are long-term, physical, used in operations, and depreciated except for land.

What are examples of Property, Plant, and Equipment?

Examples include land, buildings, equipment, machinery, tools, and furniture.

Why do companies use historical cost for Property, Plant, and Equipment?

Historical cost is reliable and prevents recognizing gains before they occur.

What is included in the historical cost of an asset?

Purchase price plus costs to bring the asset to its location plus costs to prepare it for intended use.

What is the memory trick for historical cost?

Price + Place + Prepare.

What costs are included in the cost of land?

Purchase price, closing costs, grading, clearing, and permanent improvements.

Are land improvements depreciated?

Yes, because they have limited useful lives.

How is land held for speculation classified?

It is classified as an investment.

How is land held for resale by a real estate company classified?

It is classified as inventory.

What costs are included in the cost of equipment?

Purchase price, sales tax, freight, insurance during transit, installation, and testing.

How are recurring equipment costs treated?

They are expensed immediately, such as annual insurance and vehicle licenses.

What costs are included in the cost of a building?

Construction costs, permits, excavation, labor, contractor fees, and required environmental or community costs.

Are general administrative overhead costs included in the cost of a building?

No, because they are not directly related to construction.

What is an Asset Retirement Obligation?

A legal obligation to restore, dismantle, or remove a long-term asset in the future.

How is an Asset Retirement Obligation initially recorded?

At its fair value, which is the present value of expected cleanup or removal costs.

What is accretion expense?

The expense that increases the Asset Retirement Obligation liability each year.

Where is accretion expense reported?

It is reported as an operating expense on the income statement.

Which assets qualify for interest capitalization?

Assets under construction for the company's own use or discrete projects built for sale or lease.

When does the interest capitalization period begin?

When expenditures start, construction is in progress, and interest is being incurred.

When does the interest capitalization period end?

When the asset is ready for its intended use.

What amount of interest is capitalized?

The lesser of avoidable interest or actual interest incurred.

What is avoidable interest?

Interest that could have been avoided if the company had not made expenditures for the asset.

What method is used to compute avoidable interest?

The weighted-average accumulated expenditures method.

Can interest revenue reduce interest cost?

No, interest revenue cannot be offset against interest cost.

What is the general valuation rule for Property, Plant, and Equipment?

Value is based on the fair value of what is given up or what is received, whichever is more clearly evident.

How is an asset valued in a deferred-payment contract?

It is valued at the present value of future payments.

How is a lump-sum purchase allocated among multiple assets?

It is allocated based on the relative fair values of each asset.

How is Property, Plant, and Equipment valued when stock is issued?

Using the market price of the stock on the agreement date.

What does commercial substance mean in an exchange?

Future cash flows change significantly because of the exchange.

How are losses treated in asset exchanges?

Losses are always recognized immediately.

How are gains treated when an exchange has commercial substance?

The full gain is recognized.

How are gains treated when an exchange lacks commercial substance and no cash is received?

No gain is recognized; the gain is deferred.

How are gains treated when an exchange lacks commercial substance but cash is received?

A partial gain is recognized.

What is the twenty-five percent cash rule?

If cash received is twenty-five percent or more of total fair value, the full gain is recognized.

What is the formula for partial gain recognition?

(Cash received ÷ [Cash received + Fair value of assets received]) × Total gain.

What is the rule for capitalizing costs after acquisition?

Costs are capitalized only if they increase useful life, production capacity, or quality.

How are additions treated?

Additions are always capitalized.

How is a replacement treated when the carrying amount of the old asset is known?

Remove the old asset, record any gain or loss, and record the new asset.

How is a replacement treated when the carrying amount is unknown and useful life is extended?

Debit accumulated depreciation.

How is a replacement treated when capacity or quality increases and carrying amount is unknown?

Capitalize the new cost.

How are rearrangement or reinstallation costs treated?

Capitalize if they benefit future periods; expense if minor.

How are ordinary repairs treated?

They are expensed immediately.

How are major overhauls treated?

They are capitalized and depreciated.

What is the first step when disposing of Property, Plant, and Equipment?

Update depreciation up to the date of disposal.

How do you compute gain or loss on disposal?

Selling price minus book value.

What is an involuntary conversion?

A forced disposal caused by events such as fire, flood, theft, or government condemnation.

How are gains or losses from involuntary conversions treated?

They are recognized immediately.

How is an unconditional contribution recorded?

The asset is recorded at fair value and contribution revenue is recognized immediately.

What two criteria define a conditional contribution?

There must be a measurable barrier and a right of return if the barrier is not met.

When is revenue recognized for a conditional contribution?

When the barrier is overcome.

What is an exchange transaction in contribution accounting?

A transfer where the donor receives equal value in return.

How are exchange transactions accounted for?

Using normal revenue-recognition rules rather than contribution rules.

What is the memory trick for historical cost?

Price + Place + Prepare.

What is the memory trick for capitalizing versus expensing?

Improve means capitalize; maintain means expense.

What is the memory trick for identifying qualifying assets for interest capitalization?

Constructed for own use or a discrete project under construction