Financial Reporting II - Chapter 9

accretion expense

periodic expense recognized when updating the present value of a balance sheet liability

additions

Increase or extension of existing assets (ex. addition of a wing to a building, adding air conditioning)

asset retirement obligation (ARO)

legally required future cleanup or removal costs that a company must recognize when it uses long-lived tangible assets such as equipment, buildings, or industrial sites (ex. cost to purchase a landfill and remediation when the landfill is no longer in use)

avoidable interest

amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset

capital expenditure (asset)

achieve greater future benefits for the asset, such as increase useful life, enhanced quality of output, or increased quantity of output

capitalization period

period of time during which a company must capitalize interest. It begins with the presence of three conditions: 1.Expenditures for the 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.

commercial substance

future cash flows change as a result of the transaction.

contribution

often some type of asset (such as cash, securities, land, or buildings), services, or use of facilities, but it also could be the forgiveness of a debt

equipment

assets used in operations, such as store checkout counters, office furniture, factory machinery, and delivery trucks

fixed assets

long-term tangible resources - such as buildings, machinery, and equipment - that a business owns and uses in its operations for more than 1 year

historical cost

consists of acquisition price plus sales tax, costs incurred bringing the asset to its location (freight and shipping costs), and costs incurred getting the asset ready for its intended use (installing or testing)

improvements (betterments)

substitution of a better asset for the one currently used (ex. replacing a concrete floor for a wooden floor)

involuntary conversion

occurs when property is destroyed, stolen, or taken and the owner receives money or other property in return usually through insurance

land improvement

structural additions with limited lives that are made to land (driveways, parking lots, fencing, lighting, landscaping with a limited life such as plants, trees, sprinkler systems, retaining walls)

lump-sum price

company allocates the total cost among the various assets on the basis of their relative fair values

major repairs

an overhaul

nonmonetary assets

company may exchange one asset for another (ex. a company may exchange a piece of equipment for a piece of land)

ordinary repairs

to maintain plant assets in operating condition

plant assets

long-term tangible resources - like buildings, machinery, and equipment

property, plant, and equipment

include land, building structures (offices, warehouses, factories), and equipment (machinery, computers, furniture, tools, vehicles)

prudent cost

if for some reason a company ignorantly paid too much for an asset originally, it is theoretically preferable to charge a loss immediately

rearrangement and reinstallation costs

Movement of assets from one location to another

replacements

substitution of a similar asset (ex. a wooden floor for a wooden floor)

revenue expenditure (expenses)

maintain a given level of service and do not increase an asset’s future benefits

self-constructed asset

the employees are directly involved with the construction, such as a plant supervisor overseeing the construction

weighted-average accumulated expenditures

company weights the construction expenditures by the amount of time (fraction of a year or accounting period) that it can incur interest cost on the expenditure.