INTR EXAM 1

1. long term

2. tangible

3. used in operations

3 characteristics of PPE

condition, location

valuation of PPE: capitalize all costs neccesarry to get asset into _____ and _____ for intended use

asset xxx

cash xxx

journal entry for capitalization

historical cost

all PPE is valued at

land

property in use as a building site or other productive use

• acquisition price, transaction costs, site preperation costs

land improvement

site enhancements such as utilities, fences, landscaping

• has a definite life and the firm is responsible for

buildings and equiptment

• acquisition price

• cost of renovations

• cost of building permits

• interest paid during construction

• installation, assembly, testing, trial run costs

self constructed assets

• costs to construct PPE in accumulated in the CIP account

• costs to capitalize for this include: dm, dl, overhead, and interest costs

cip xxx

cash xxx

expenditure JE for sca

asset xxx

cip xxx

journal entry when sca is ready for use

interest

the cost of using money

debit:

cip xxx

int exp xxx

credit:

cash/int payable

capitilized interest je

1. must be under construction

2. must be for firms own use or a project for a discrete sale

to qualify as a sca for capitilization of interest you must meet these three criteria

1. expenditures have been made

2. firm is actually incurring interest costs

3. actively getting asset ready for use

capitilzation period begins when these 3 things are true

actual interest

the total amount of interest due to the bank for either general debt, a project specific loan, or both

avoidable interest

interest that could have been avoided by not contructing the asset

waae x interest rates

avoidable interest =

weighted average accumulated interest

total expenditures made in constructing the asset, adjusted for when the expenditure was made during the year

historical cost

we value ppe at ______ which is the fair value on the date of purchase of either

• the asset given up or

• the asset received

• whichever is more clearly evident and reliable

gross method

value ppe at full price, assuming the discount is not taken

net method

value ppe net of the discount, assuming the discount is taken

pv of future payments

for deferring payment (N/P), you should value the asset at ________

net method

initially record at net method without interest

gross method

initially record at gross amount including interest

machine xxx

NP xxx

for deferring payments: the first entry you make using the net method

debit:

machine xxx

discount on np xxx

credit

np xxx

for deferring payments: the first entry you make using the gross method

lump sum purchase

purchase a group of assets for one price. the purchase price represents the total book value for all the assets

proportional method

for a lump sum purchase: when you have the fair value for all assets, allocate total purchase price based on relative fair values

incremental method

for a lump sum purchase: if the value of one asset is unknown- value known assets at fair value and remaining purchase price to unknown asset

FMV

if acquiring assets by issuing stock, value asset at the ____ of stock being issued

debit:

• asset (fmv of stock)

credit

• common stock (par)

• APIC-CS (FMV of stock - par)

journal entry for for buying asset by issuing stock

asset (fmv)

contribution revenue (fmv)

journal entry for receiving asset as a gift

debit:

• contribution expense (FMV)

• acc dep

credit

• asset (HC)

• gain (FMV - BV)

journal entry for giving asset as a gift

sales price - book value

gain/loss on the disposal of ppe =

debit:

• cash

• acc dep

• loss

credit

• gain

• ppe

typical journal entry for disposal of ppe

nonmonetary exchange

like disposal of ppe, but receive another ppe asset in return instead of cash

FMVgiven up - BV given up

gain/loss in nonmonetary exchange =

commercial substance

if future cash flows change

immediate recognition

nonmonetary exchange: losses

immediate recognition

nonmonetary exchange: gain, hcs

immediate recognition

nonmonetary exchange: gain, lcs, >= 25% cash

partial gain

nonmonetary exchange: gain, lcs, receiving less than 25% cash

no gain

nonmonetary exchange: gain, lcs,paying less than 25% cash

no gain

nonmonetary exchange: gain, lcs, no cash

fmvgivenup + cash paid (-cash received) - any deferred gain

record new asset at in nonmonetary exchange:

FMVnew + cash received (-cash paid)

in a nonmonetary exchange: if FMVgivenup isn’t given, it is

depreciation

allocation of depreciable cost over the assets useful life. not a valuation method, but a cost allocation

cost

historical cost of an asset

depreciation expense

allocation cost of using up asset to a period

accumulated depreciation

the sum of all prior depreciation expense

depreciable cost

cost of asset - net salvage value

net salvage value

expected fmv of asset at end of life - estimated cost of disposal

bookvalue/ net book value/ carrying value

cost - accumulated depreciation

(cost - nsv) / estimated useful life

straight line depreciation expense =

(1/useful life) x 2

double declining rate =

t / sum of years x (cost - salvage value)

sum of years digits depreciation expense =

capitalize

• costs to improve the asset that result in greater future benefits

  • extend assets useful life

  • make assets more productive/efficient

  • improves quality of asset’s output

expense as incurred

• costs to simply maintain the asset’s current condition

impairment

reduction in the recoverable amount of ppe below its net book value

1. significant decrease in fmv of an asset

2. significant change in the asset’s use

3. legal/regulatory changes

3 indicators of impairment

impairment loss

sum of FCF < BV

no impairment loss

sum of FCF > BV

NBV - FMV

asset held for use impairment loss =

impairment loss xxx

acc dep xxx

journal entry for impairment loss

FMV

for asset held for use, after recording an impairment loss, the new NBV =

(cost of asset - new a/d - salvage value)/ remaining years from beg of period

for asset held for use, the depreciation expense for the next year =

no

for an asset held for use, if the fair value later increases, can you write the asset value up

net book value - net realizable value

asset held for sale: impairment loss =

fv - cost of disposal

nrv =

nrv

asset held for sale: after recording impairment loss, the new nbv =

no

asset held for sale: can you depreciate the next year

the new nrv

asset held for sale: if the assets fmv later increases, you can write the asset value up to

initial impairment loss

asset held for sale: only record recovery up to the amount of

acc dep xxx

gain on recovery xxx

asset held for sale: recovery journal entry

intangible assets

• lack physical form

• not financial instruments

• generally long term assets

• ex. patents, customer lists, franchise rights

research

costs to develop new knowledge

development

translating new knowledge into products/processes

capitalize

valuation: purchased tangible asset

capitalization

valuation: purchased intangible asset

capitalization

valuation: purchased research and devlopment

capitalize

valuation: internally generated tanigble asset

expense as incurred, capitalize legal fees

valuation: internally generated intangible asset

expense as incurred, capitalize materials/equiptment/facilities with an alternate future use

valuation: internally generated research and development

• uncertain benefits

• hard to value objectively

• lack of control

should an internally developed intangible asset be captialized?

pro expensing arguments

• better matching of revenues and expenses

• incentivize r and d

• consistency with purchased intangible or tangible assets

• clear market value

should an internally developed intangible asset be captialized?

pro capitalization benefits

amortization

what depreciation is to tangible, _____ is this to intangible

over the lesser of useful or legal life using straight line with no residual value

capitalized intangibles with a definitie life: Amortizie?

no

indefinitie lived intangible assets: amortize?

amort exp xxx

asset xxx

journal entry for amortization

purchase price - the fair value of identifiable net assets

goodwill =

goodwill

• unidentifiable intangiblle asset

• cannot be sold seperately→ recognized when entire business unit is sold

• valuation = residual value

• seperate balance sheet line item

recoverability test then write down to FV

impairment for definitie lived intangibles:

qualitative assesment then FV test

impairment for indefinite lived intangibles

bond

promise to repay a fixed amount at a future date plus periodic interest payments, if any

payment due on the final day of contract

face/maturity/par/principal value is

stated/nominal/coupon rate

rate to determine contractual cash payment, stated annually

stated rate x face value

coupon/interest payment amount =

market/yield/effective rate

current prevailing market interest rate

• rate of return a bond investor would be willing to pay based on a firms riskiness

=

=

bond issued at par:

• MR _ SR

• cash proceeds __ Face amount

greater than

less than

bond issued at duscount:

• MR _ SR

• cash proceeds __ Face amount