Accounting: Depreciation and Asset Retirement
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productive assets that derive their value from long-term use in operations rather than from resale
Property, Plant and equipment
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How do you find the Asset retirement obligation?
(The sum total of the cash outflows times their probility)* present value caluation (1/((1+r)^n))
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using compisited dep is there a gain or loss?
No,
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group depereation rate for comp depereation
total dep/ total cost
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average life in group/comp deperation
total depereated base/total dep
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exchanging common stock for a asset journal entry (no excess or anything)
Asset debit (what it can be bought for/FV)
Common stock
Common stock
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for finding the gain or loss on a exchange do you include the cash in it?
NO you just use the fair value of the asset you are buying and compare it to the book value, you only add the cash to the fair value when you are caluating the value of the equipment for the journal entry
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For when there is a gain on a exchange that lacks commerical substiance and it less then 25% what do you do to find the gain?
Use the normal gain (FV - BV DO NOT LOWER THE FV BY THE CASH) and times it by the pertecentage
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Journal entry for non monentary exchange lacking commerical substiance cash given for exchange
Asset new Debit
Old asset (BV) credit
Cash debit
Old asset (BV) credit
Cash debit
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Journal entry for non monentary exchange lacking commerical substiance cash recevied form exchange (gain)
New asset debit (BV - cash + gain calculated)
Cash debit
Gain on exchange credit (calulated gain/loss)
Old asset (BV) credit
Cash debit
Gain on exchange credit (calulated gain/loss)
Old asset (BV) credit
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New asset debit (BV - cash - loss)
Cash debit
Loss on exchange debit
Old asset (BV) credit
Cash debit
Loss on exchange debit
Old asset (BV) credit
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When there is a loss for when there is a lack of commerical substance on a non monintery exchange how is the loss is recored?
no matter what it will still be the full loss
13
For lump sum pruchases when you get rid of part of what was in the lump (I.E a lump purchase to buy land and a building but you demoished the building) what do you do?
You will treat it like it was just a single purchase ingoring the partial lump sum caluation
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Which of the following is not a similarity in the accounting treatment for depletion and
straight-line depreciation?
a. The estimated life is based on economic or productive life.
b. Assets subject to either are reported as long-term assets on the balance sheet.
c. The rates may be changed upon revision of the estimated productive life used in the original
rate computations.
d. Both depletion and straight-line depreciation are based on time.
straight-line depreciation?
a. The estimated life is based on economic or productive life.
b. Assets subject to either are reported as long-term assets on the balance sheet.
c. The rates may be changed upon revision of the estimated productive life used in the original
rate computations.
d. Both depletion and straight-line depreciation are based on time.
Both depletion and straight-line depreciation are based on time.
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When you don't have a impariment loss for goodwill?
When book value (including goodwill) is less then the fair value (including goodwill)
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formlua for acutal interest
Consturtion loan interest * number of months til year/consturction end/12 + other loans *number of months til year/consturction end/12
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if you determine a gain or loss when the dep used is a declining one do you used the salvague value at all?
No
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all expenditures necessary to get the asset in condition and location for its intended use
Property, Plant and equipment Typircal acquistion
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broad term that includes machinery, computers, and other office equipment, vehicles, furniture, and fixtures
Typical acquisition: purchase price (less discounts), taxes, transportation, installation, testing, trial runs, and reconditioning
Typical acquisition: purchase price (less discounts), taxes, transportation, installation, testing, trial runs, and reconditioning
Equipment:
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real property used in operations (held for speculative investment or future use is reported as investments or other assets)
Typical acquisition: Purchase price, attorney’s fees, title, recording fees, commissions, back taxes, mortgages, liens, clearing, filling, draining, and removing old buildings
Typical acquisition: Purchase price, attorney’s fees, title, recording fees, commissions, back taxes, mortgages, liens, clearing, filling, draining, and removing old buildings
Land:
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enhancements to property such as parking lots, driveways, private roads, fences, landscaping, and sprinkler systems
Typical acquisition: separately identifiable costs and depreciation over periods of benefit from their use
Examples: cost of parking lots, driveways, private roads, fences, and sprinkler systems
Typical acquisition: separately identifiable costs and depreciation over periods of benefit from their use
Examples: cost of parking lots, driveways, private roads, fences, and sprinkler systems
Land improvements
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structures that include warehouses, plant facilities and office buildings
Typical acquisition: purchase price, attorney’s fees, commissions and reconditioning
Typical acquisition: purchase price, attorney’s fees, commissions and reconditioning
Buildings:
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productive assets that are physically consumed in operations such as timber, mineral depots and oil and gas reserves
Typical acquisition acquisition, exploration, development and restoration costs
Typical acquisition acquisition, exploration, development and restoration costs
Natural resources:
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productive assets that lack physical substance and have long-term but typically uncertain benefits. Companies can ever purchase them from other entities or develop them internally.
Intangible assets:
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all expenditures necessary to get the asset in condition and location for its intended used (purchase price + all other costs necessary to get the asset ready for use)
Intangible typical acquistion
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exclusive 20-year right to manufacture a product or use a process
Typical acquisitions: purchase price, legal fees, filling fees, not including internal RnD
Typical acquisitions: purchase price, legal fees, filling fees, not including internal RnD
patents
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exclusive rights to benefit form a creative work such as a song, fil, painting, photograph or book (70 years)
Typical acquisitions: purchase price, legal fees, filling fee, not including internal RnD
Typical acquisitions: purchase price, legal fees, filling fee, not including internal RnD
Copyrights:
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exclusive right to display a word, a slogan, a symbol or an emblem that distinctively idenfitifes a company, product or a service
Typical acquisition: purchase price, legal fees, filling fees, not including internal RnD
Typical acquisition: purchase price, legal fees, filling fees, not including internal RnD
Trademarks(trade names):
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a contractual arrangement under which a franchisor grants the franchisee the exclusive right to use the franschior’s trademark or tradenmae and certain product rights
Typical acquisition franchise fee plus any legal fees
Typical acquisition franchise fee plus any legal fees
Franchises
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cost incurred to develop or purchase computer software to be sold, leased, or otherwise marked (or to develop computer software to be used internally:
Typical acquisitions: costs incurred after technological feasibility but before product release (or costs incurred after application development stage is reached for internal software)
Typical acquisitions: costs incurred after technological feasibility but before product release (or costs incurred after application development stage is reached for internal software)
Software development costs:
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developed technologies or in-process RnD purchased in a business acquisition
Typical acquisitions: Fair value of the RnD on the date of acquisition
Typical acquisitions: Fair value of the RnD on the date of acquisition
Acquired research and development
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The unique value of the company as a whole over and above all identifiable assets
Typical acquisition excess of the fair value of the consideration given for a company over the fair value of the identifiable net assets acquired
Typical acquisition excess of the fair value of the consideration given for a company over the fair value of the identifiable net assets acquired
Goodwill
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goodwill formula
the excess of acquisition price over the fair value of identifiable net assets (A at fair value -L at fair value=net assets).
34
a debit and is found by subtracting total own assets - liabilities and cash expenses
Goodwill on the balance sheet/normal account is
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If acquisition price is greater then net asset own equity fair value=
goodwill
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should equals the generate the future cash from it but it hard to quantified
RND cost in theory:
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all expenditures made to acquire land and ready it for its intended use. Special assessments for local improvements such as pavements, street lights, sewers, and drainage systems should also be included because they are relatively permanent in nature. In additional permanent improvements should also be included in the land account.
Cost of Land-
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A company may incur obligations associated with the disposition of property, plant, and equipment and natural resources. This is defined as an existing legal obligation associated with the dispositionetirement of a tangible, long-lived asset
Example: Oil and gas exploration company might be required to restore land to its original condition after extraction is completed
Example: Oil and gas exploration company might be required to restore land to its original condition after extraction is completed
Asset retirement obligation:
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GAAP requires that an existing legal obligation associated with the retirement of a tangible, long-lived asset be recognized as a liability and measured at fair value, if value can be reasonably estimated
GAAP and asset retirement obligation
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Journal entry (example coal mine)
Coal mine debit
Cash credit (Every cost minus restoration cost/Asset retirement liability)
Asset retirement liability credit (calculated amount * (1/(1+r)^n or just the calculated amount’s PV)
Cash credit (Every cost minus restoration cost/Asset retirement liability)
Asset retirement liability credit (calculated amount * (1/(1+r)^n or just the calculated amount’s PV)
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Journal entry for asset retirement liability EST increase
Accretion expense debit
Asset retirement liability (Current value in it times rate)
Asset retirement liability (Current value in it times rate)
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Journal entry for asset retirement end of life/pay off
Asset retirement liability debit (total ESt amount)
Loss debit (Actual restoration cost - EST cost)
Cash: credit
Loss debit (Actual restoration cost - EST cost)
Cash: credit
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Discounted at the credit–adjusted risk–free rate. When discounting remember that N = the time from the starting of the project to the year in which restoration is to start. The ARO is adjusted every period for interest (accretion(additional expense that accrues as an operating expense)). The difference between the ARO balance and the actual cost will create a gain (loss
Natural resources and Asset retirement obligation
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Intangible assets with finite useful lives are
amortized and subject to an impairment test
45
Intangible assets with indefinite useful lives are:
not amortized; subject to just an impairment test (everything is subject to it other than cash)
46
refers to acquiring a group of assets for a single sum.
Lump-sum purchases
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Valuation of these lump-sum purchased assets differs when 2
Each asset is indistinguishable
Assets have different characteristics and different useful lives. Allocate the lump-sum acquisition price among the separate items
Assets have different characteristics and different useful lives. Allocate the lump-sum acquisition price among the separate items
48
companies can also acquire assets without paying cash at the time of the purchase by
Noncash acquisitions
49
Deferred payments (notes payable) for equipment
Standard journal entry
Standard journal entry
Equipment debit
NP credit
NP credit
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Journal entry for when market rate is not equal to stated rate (equipment)
Equipment debit
Discount on NP debit
Notes payable credit
Discount on NP debit
Notes payable credit
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Journal entry for amortization of discount: (equipment note)
Interest expense (Mr*CV) debit
Discount on NP credit
Discount on NP credit
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Donated assets
Journal entry
Journal entry
Asset debit
Revenue credit
Revenue credit
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at the fair value of the assets given or the fair value of the assets received whichever is more clearly evident
Assets acquired in noncash transactions are valued
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Steps for exchange of assets: 4
Record the new asset at fair value.
Remove the old asset’s book value (Cost − Accumulated Depreciation).
Record any cash paid or received to equalize fair values.
Record any gain or loss:
Remove the old asset’s book value (Cost − Accumulated Depreciation).
Record any cash paid or received to equalize fair values.
Record any gain or loss:
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Fair Value > Book Value
Gain
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Book Value > Fair Value
Loss
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(change in expected cash flow) First thing you do for exchange of assets it is gains and losses are always recognized(gain is the excess of fair value of your asset over its book value (cost-A/D); loss is the excess of book value over fair value of your asset)
Commercial substance:
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(no change in expected cash flows) Losses are always recognized. Total Gain is deferred if no cash is received; if cash is received recognize gain to the extent of cash received: cash(boot) received/cash received + F.V. of asset received (fair value of exchange) x gain = gain recognized. If cash (boot) received/cash received + F.V. of asset received ratio is equal to or greater than 25%, then the entire gain is recognized
Lack of commercial substance :
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: A company might decided to construct an asset for its own use rather than buy an existing one. Identifying the cost is difficult because there is no external transaction to establish an exchange price
Self-constructed assets:
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Two critical issues with self-constructed assets:
Determining the amount of indirect manufacturing costs (overhead) to be allocated to the construction
Deciding on the proper treatment of interest (actual or implicit) incurred during construction
Deciding on the proper treatment of interest (actual or implicit) incurred during construction
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cost of self constructed assets includes overhead: variable and fixed cost; some capitalize just variable cost (incremental overhead) and some advocate full cost both variable and fixed overhead) GAAP likes this approach.
Fixed Overhead:
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the treatment of manufacturing overhead cost and it allocation
Inclusion of only the incremental overhead costs
Full-cost approach
Inclusion of only the incremental overhead costs
Full-cost approach
Overhead allocation:
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(also known as absorption costing) is an accounting method that assigns all direct and indirect manufacturing costs—including direct materials, direct labor, variable overhead, and fixed manufacturing overhead—to the end product or service.
Full-cost approach
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capitalized and then allocated as depreciation
Interest Capitalization:
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Interest Capitalization qualifying assets 2
• Asset built for a company’s own use
• Assets built on a discrete basis for sale or lease
• Assets built on a discrete basis for sale or lease
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Interest Capitalization process
1. Determine weighted average of AAE
2. Calculate the amount of interest to be capitalized
3. Compare the calculated interest capitalized with actual interest incurred and used the lower amount
2. Calculate the amount of interest to be capitalized
3. Compare the calculated interest capitalized with actual interest incurred and used the lower amount
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Starts when expenditures are initially experienced (labor, materials, overhead) and ends when the project is completed or substantially completed. Months between the date of expenditure and the date interest capitalization stops (completion of project) or end of the year, whichever comes first.
Period of Capitalization:
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the dollar amount used to determine the amount of interest that would have been avoided if the project had not been undertaken.
Average Accumulated Expenditures (AAE)
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the interest rate on specific borrowing for the project is used first. The weighted average interest rate will be used for the AAE in excess of specific borrowing.
interest captalization interest rates
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Capitalized amount is equal to:
ower of avoidable interest and actual interest
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Journal entry for just accumulation interest capitalized
Construction in progress debit (capitalized interest)
Interest payable/cash credit (capitalized interest)
Interest payable/cash credit (capitalized interest)
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Journal entry for just accumulation actual interest in regard to interest capitalization
Interest expense debit (actual interest)
Interest payable credit (actual interest)
Note at the end of the year you need to do a adjusting entry for the interest capitalized that year so
Construction in Process/Buildings debit (capitalized interest)
Interest expense credited (capitalized interest)
Interest payable credit (actual interest)
Note at the end of the year you need to do a adjusting entry for the interest capitalized that year so
Construction in Process/Buildings debit (capitalized interest)
Interest expense credited (capitalized interest)
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Journal entry for accumulation and payment
Construction in progress debit (capitalized interest)
Interest expense debit (Actual interest - capitalized interest)
Cash credit (capitalized interest)
Interest expense debit (Actual interest - capitalized interest)
Cash credit (capitalized interest)
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Journal entry for when construction is finished
Buildings debit (total that was occur in construction in progress)
Construction in progress credit
Construction in progress credit
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indicates the level of sales generated by the company’s investment in fixed assets
Fixed-Asset turnover ratio
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Fixed-Asset turnover ratio formlua
Net sales/ Average fixed assets
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The higher the fix asset ratio is:
the more efficiently a company is using it PPE to generate net sales
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The lower the fix asset ratio:
the less effective the company is at using it PPE to generat net sales
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interest expense for real estate/PPE related accounts when dealing with ARO
Accretion expense
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RND rules
When it is internelly generated: when a expensed is incurred
When RND by the company is for sale for others: captialized as inventory and carried forward until the project is completed
RnD acquire in a business acquisition: developed (reach technological feasibility) and in process technology (not researched technological feasibility and indefinite-life intangible asset) are capitalized at their fair value
materials and equipment to be capitalized as RND must have a alternative used
When RND by the company is for sale for others: captialized as inventory and carried forward until the project is completed
RnD acquire in a business acquisition: developed (reach technological feasibility) and in process technology (not researched technological feasibility and indefinite-life intangible asset) are capitalized at their fair value
materials and equipment to be capitalized as RND must have a alternative used
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When acquired assets for RnD journal entry
Materials debit
Equipment debit
Cash/N/P credit
Equipment debit
Cash/N/P credit
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When assets have an alternative used journal entry
RnD debit
Accm Dep credit
Materials credit
Accm Dep credit
Materials credit
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Start-costs are expensed:
as they incurred
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should be expensed until technological feasibility; costs incurred after technological feasibility, but before the software is available for general release to customers are capitalized as an intangible asset. Internal use software and web dev costs during the preliminary project stage are expensed, and cost incurred during the application development stage
Software development costs
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: intangible assets if two criteria are satisfied, if not it is a service contract and are implementation costs are captalized
Cloud computing arrangement
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Cloud computing arrangement certiera 2
Customer has a contractual right to take possession of the software without significant penalty
Software on it own
Software on it own
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Is pre paid insurance it’s own account?:
yes, a current asset account (debit)
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What do you do to the salvage value (land context):
subtract the amount from the capitalization of land
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Are pro-rated taxes for the period after acquisition is included?:
No The pro-rated property taxes for the period after acquisition are not included in the initial valuation of the land and building. They are recorded instead as prepaid taxes and expensed over the related period.
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Do you include property taxes in capitalization?:
No
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Is the ARO (asset retirement liability) included in the initial worth of the asset?:
Yes, you will credit it with the cash/ AP used to buy the asset being the cost to buy it
92
For exchanging a asset for a new asset what you record the old asset cost as when removing it from your inventory if it has AD?:
It original cost, do not use the book value cause you are already taking out the ADA from it in the entry
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For gain/loss on sale for a exchange how do you find it?:
The old asset’s fair value - the asset’s book value
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How to find the fair value of a asset in a exchange?:
The fair value of what is being traded + any additional costs to make the trade happened - any other cash/asset gain in exchange
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For recording giving away a asset in a exchange what do you record it as if it has no AD (like land):
Book Value
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What you do for if the exchange has commercial substance:
You will have a gain/loss on exchange of the asset and is consider the ‘normal’ way for these notes
97
What you do for if the exchange is not commercial substance (not receiving cash):
The new asset FV will use the book value of the asset being traded + any cash receive
98
What you do if the exchange is not commercial substance but cash is receive?:
you will have a gain/loss recognized but the formula will be different where you multiply it by the (cash receive/ total fair value), along with that the fair value of the asset being received formula will be BV of what was given - cash receive + the gain. Think of it is that you are selling part of that asset
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Gain recognized for when cash is received on a non commercial substance exchange formula
(FV of what was given - BV of what was given) * (Cash received / total fair value of what was received (in normal business the fair value of what was received is equal to fv of what was given)
100
If Cash received / total fair value of what was received Greater or equal 25% for a non commerical substance exchange
all gain is recognized
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If Cash received / total fair value of what was received it less then 25% for a non commerical substance exchange
formula of Gain recognized for when cash is received on a non commercial substance exchange
102
New asset’s fair value for when cash is receive on a non commercial substance exchange formula:
BV of what was given - cash receive + gain recognized
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For when a exchange lack commercial substance what do you use for the new assets value?:
Book value cause there is not change in money
104
For interest capitalization that happens in the middle of/not for a full year what do you do?:
To calculate the interest capitalization for that portion of the year you will multiple the capitalizaed interest (average accumulated expenditures for the year * weighted average of all debts) by the amount of months had pass over 12 months (so if it starts in July and carry over to March of the next year it would be 6/12 for the July year and 3/12 for the March year)
105
For capitalized interest when construction expenditures are split evenly across different years what you do?:
You will divide the construction expenditures by the amount of years it took and then do the capitalization by subtracting it from the construction loan and multiplied it by their given percentages (rate of the construction loan stay with the construction loan, weighted averaged of all other debts for the difference)
106
For interest capitalization when the construction loan is less then the average accumulated expenses what do you do?:
You will subtract the construction loan from the accumulated weighted expenses, then use the construction loan rate for that part and the average weight of all other debts for the difference
107
Do you include the construction loan in the weighted average of debts:
No cause you already including it when you calculating the interest
108
For interest capitalization when the construction loan is greater then or the average accumulated expenses what you do?:
You will multiply the accumulated weighted expenses by the construction loan interest rate
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How to do calculated the cost of a building when there is captalized interest?:
The accumulated expenses (not the weighted one) + the captalized interest
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When you are doing journal entires for capitalized interest payments for more then one year what do you do?:
used the capitalized interest for that year for the building account but for the interest expense you will subtract the actual interest by that occured in that year
111
What year do you add the accumulated expenditures to the average accumulated expensive chart:
The next year it occurred it your beginning amount for t
112
Do you used cash or interest payable when it is dueecorded/paid at the end of the period for interest capitalization?:
cash
113
Do you used cash or interest payable when it is dueecorded not at the end of the period for interest capitalization:
interest payable
114
If interest capitalization is not done what it effect on the income statement/Statement of retained earnings for the current period:
Overstates your interest expense (cause you use the lower of the actual interest and the calculated one) which cause your net income to be understanded, R.E will be understated. Note it will reverse for the next period then fix itself after that
115
How you capitalized RnD:
if it has a use to the company
116
What do you include in RND expense: 7
Research
Design work
Development
Testing
Wages specific to the RND
RND specific depereation expense (note it just the depereation if the equipment is used elsewere/do not spefificed it was just used for the RND)
Fees/expense from RND from other coampnines
Design work
Development
Testing
Wages specific to the RND
RND specific depereation expense (note it just the depereation if the equipment is used elsewere/do not spefificed it was just used for the RND)
Fees/expense from RND from other coampnines
117
How you record RND costs when it is tied to a patent?:
RND expense debit (all but depreciation)
Patent credit
Patent credit
118
How you record Depereation when it tied to RND?:
RND expense debit
A/D expense credit
A/D expense credit
119
Property, plant, and equipment and intangible assets are purchased with the expectation that they will provide future benefits, usually for several years. These assets are acquired to be used as part of revenue-generating operations. The acquisition cost of these assets should be allocated to periods benefited by their use
Cost Allocation:
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Deprecation is cost allocation for:
plant and equipment
121
Depletion is cost allocation for:
natural resources
122
Journal entry for depletion (coal mine example)
Coal inventory (depletion expense) debit
Coal mine credit
Coal mine credit
123
For sale of depletion expense journal entry (coal mine example)
COGS debit
Coal inventory
Coal inventory
124
What method is widely used to calculated periodic depletion and why?:
Activity based because the usefulness of natural resources is directly related to the amount extracted
125
Depletion base / estimated extracted units
Depletion per unit:
126
Amortization is cost allocation for:
intangible assets
127
Legal, regulatory, or contractual provisions often limit the useful life of an intangible asset. It might sometimes be less than the asset’s legal or contractual life
Useful life:
128
Expected residual value of an intangible asset usually is zero. The residual value is not zero if at the end of the asset’s useful life to the reporting entity the asset will benefit another entity
Residual value:
129
The method of amortization should reflect the pattern of use of the asset in generating benefits
Allocation method:
130
Amortization of capitalized software development costs begins when the product is available for general release to customers. The periodic amortization percentage is the greater of percentage-of-revenue method or straight-line method
Software development costs
131
Intangible assets not subject to amortization when and why?:
they are indefinite useful lives because if it is considered indefinite there is no foreseeable limit on the period of time over which the asset is expected to contribute to cash flows of the entity. Though this does not mean permanent with their useful lives being subject to impairment
132
Examples of indefinite-life intangible assets: 3
Goodwill
Trademarks
Tradenames
Trademarks
Tradenames
133
the amount of cost to be allocated over an asset’s service life. Estimating residual value for many assets can be very difficult due to the uncertainty about the future.
Allocation base:
134
Formula allocation base
Initial value of the asset at its acquisition - residual (salvage) value
135
: A method should be selected that corresponds to the pattern of benefits received from the asset’s use to determine how much cost to allocate to periods over the asset’s service life. According to the U.S. GAAP, the chosen method should allocate the asset’s cost “as equitably as possible to the periods during which services are obtained from [its] use”. Method should produce cost allocation in a “systematic and rational manner”
Allocation method:
136
Allocation approaches: 2
time base
activity base
activity base
137
Allocates the depreciable base accordion to the passage of time
Time-based method
138
Allocates an equal amount of depreciable base to each year of the asset’s service life
Straight-line (SL) method
139
Straight line metod results in less deprecation in the earlier years of an asset’s life compared to accelerated methods resulting in
positive effect on net income in earlier years and negative effect on net income in later year
140
Declining pattern of depreciation, with higher depreciation in the earlier years of the asset’s life and lower depreciation in later years
Accelerated methods:
141
Why use accelerated method?:
Result in more depreciation in the earlier years of an asset’s life resulting in a taxation benefit derived through this greater deprecation deduction (do not have constraints in using different deprecation methods for financial reporting and tax reporting unlike LIFO)
142
Accerlated method where you multiplies beginning-of-year book value by an annual rate that is a multiple of the SL rate
(includes double decling (200%, (150%), ect)
(includes double decling (200%, (150%), ect)
Declining balance methods:
143
accerlated method where you multiplies depreciable base by a declining fraction (year/calculated denominator)
Sum-of-the-years’-digits (SYD) method:
144
– Sum-of-the-years’-digits (SYD) denominator formula
n(n+1)/2 n= number of years
remnber the year is the nominator
remnber the year is the nominator
145
Allocates depreciable base using a measure of the asset’s input or output
Activity-based method:
146
Why use activity-based method for depreciation cal
typically provides a better match of revenues and expenses
147
Computes a depreciation rate per measure of activity and then multiplies this rate by actual activity to determine periodic depreciation
Units-of-production method
148
: When acquisition and/or disposal occurs at times other than the beginning or the end of a company’s fiscal year.Depreciation, depletion, and amortization is recorded for the part of the year that the asset actually is used. Delt with by multiplying that eyar depereation/what ever by the months remaining over /12
Partial period depreciation
149
A convention where one-half of a full year’s depreciation is recorded in the year of acquisition and another half in the year of disposal
Half-year convention:
150
Gain or loss recognized for the difference between the consideration received and the asset’s book value:
Disposition
151
Disposition formlua
Selling price (consideration received) - book value of asset(OG cost - Accumulated depereation) =
152
Disposition: Journal entry (gain)
Cash debit
Accumulation depreciation debit
Asset (account balance) credit
Gain on sale of asset (difference) credit
Accumulation depreciation debit
Asset (account balance) credit
Gain on sale of asset (difference) credit
153
Disposition: Journal entry (loss)
Cash debit
Accumulation depreciation debit
loss on sale of asset (difference) debit
Asset (account balance) credit
Accumulation depreciation debit
loss on sale of asset (difference) debit
Asset (account balance) credit
154
group and composite deprecation methods depreciate assets collectively rather than individually to reduce recordkeeping costs
Group and composite deprecation methods
155
collection of depreciable assets that share similar service lives and other attributes
Group deprecation method:
156
collection of depreciable assets that are physically dissimilar but are aggregated anyway to gain the convenience of a collective depreciation calculation
Composite deprecation method:
157
Journal entry for actual gain or loss included in accumulated deprecation account (car cost 15k sold for 3k)
Cash debit 3k
Accumulated depreciation (difference) debit 12k
Vehicles credit 15k
Accumulated depreciation (difference) debit 12k
Vehicles credit 15k
158
According to GAAP, assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.
Impairment of value
159
Tested for impairment only if events or changes in
circumstances indicate that the book value of the asset or asset group may not be recoverable.
160
impariment test process 2
recoveryability test
measurment
measurment
161
: occurs when the undiscounted sum of estimated future cash flows from an asset is less than the asset’s book value
Impaired asset
162
Expect net cash flows >= Book value
pass impairment (recoveryability) test meaning it will be undicounted so you can recover your book value through the expect ner cash flows
163
Expect net cash flow < Book value =
fail impairment(recoverbility) test meaning it will be discounted so you will not be able to recover your book value through expected net cash flows, so you record a impairment loss (Fv-BV) (debit) on the asset
164
estimates of cash flows are used to determine whether an impairment loss has occurred
undiscounted
165
estimates of cash flows often are used to estimate fair value to determine the amount of the loss
Discounted
166
record an impairment loss for the amount by which the asset’s fair value is less than its book value. When it happens the written-down book value becomes the new cost base for future cost allocation. (Debit)
If impaired
167
impaired fair value 3
The amount at which the asset could be bought or sold in a current transaction between willing parties
– If fair value is not determinable, it must be estimated
– Fair value often is estimated as the discounted present value of future cash flows
– If fair value is not determinable, it must be estimated
– Fair value often is estimated as the discounted present value of future cash flows
168
at the end of the year when you do your depereation in which you will write down the asset
When you account for impairment loss
169
Journal entry for when there is an impairment
Loss on impairment (Fair value/Fair market vlaue - Book value at then end of the period) Debit
Accumulated depreciation (debit)
Factory asset (decrease to fair value (OG cost - Fair value) ) credit
OR
Loss on impairment debit
A/D Credit
Note this method (2nd one) is how Dr.Gamble dose it with it being different form how the book dose it (frist one), see which method we are meant to use on the test, if not be safe and default to the frist one. Everway it will result in the same thing just the 2nd method is more theory base
Accumulated depreciation (debit)
Factory asset (decrease to fair value (OG cost - Fair value) ) credit
OR
Loss on impairment debit
A/D Credit
Note this method (2nd one) is how Dr.Gamble dose it with it being different form how the book dose it (frist one), see which method we are meant to use on the test, if not be safe and default to the frist one. Everway it will result in the same thing just the 2nd method is more theory base
170
What is the maximum impairment loss you can recover for the year and what the journal entry?:
BV - FV
Debit impairment loss
Credit asset
/
debit asset
credit gain on reversal of impairment loss
Debit impairment loss
Credit asset
/
debit asset
credit gain on reversal of impairment loss
171
How are indefinite-life intangible assets (other than goodwill) tested for impairment?
How are indefinite-life intangible assets (other than goodwill) tested for impairment?
Tested annually and more frequently if events indicate possible impairment. A company may perform an optional qualitative assessment first to avoid the quantitative test. If Fair Value < Book Value, recognize an impairment loss for the difference. The written-down book value becomes the new cost base for future cost allocation.
172
Is there a recoverability test for indefinite-life intangible assets other than goodwill?
No
173
Goodwill impairment testing 3
We compare the value of the reporting unit itself with its book value (use the book value of net assets)
If the fair value of the reporting unit is less than its book value, an impairment loss is indicated
If goodwill is tested for impairment at the same time as other assets of the reporting unit, the other assets must be tested first, and any impairment losses and asset write-downs are recorded prior to testing goodwill
If the fair value of the reporting unit is less than its book value, an impairment loss is indicated
If goodwill is tested for impairment at the same time as other assets of the reporting unit, the other assets must be tested first, and any impairment losses and asset write-downs are recorded prior to testing goodwill
174
If the fair value is greater then the book value then what happens for goodwill impairment testing?
there will be a impairment loss but it can’t exceed the book value of goodwill
175
Journal entry for when Fair value is less then book value for goodwill impairment
Loss on impairment of good will (Fv - BV) debit
Goodwill credit
Goodwill credit
176
These are assets that management has actively committed to immediately sell in their present condition and for which sale is probable
• These assets are not depreciated or amortized
• They are reported separately in the balance sheet
• These assets are not depreciated or amortized
• They are reported separately in the balance sheet
Assets to be sold
177
If book value exceeds fair value less cost to sell a asset what will there be
an impairment loss is recognized for the difference
178
Accounted for prospectively it reflected in the financial statements of the current and future periods
Change in estimates:
179
A disclosure note should describe the effect of a change in estimate for the current period on: 2
– Net income
– Related per share amounts
– Related per share amounts
180
Journal entry for change in estimate of deprecation
Deprecation expense debit
Accumulated deprecation credit
Accumulated deprecation credit
181
Change in accounting estimate that is achieved by a change in accounting principle. Accounted for in the same way as any other change in accounting estimate
Change in deprecation, amortization or depletion:
182
Change in depreciation, amortization, or depletion Requires a clear justification as to why the new method is preferable because
this change in estimate is a result of a change in accounting principle
183
Errors involving property, plant, and equipment and intangible assets include:
2
2
– Computational errors in the calculation of depreciation, depletion, or amortization
– Mistakes made in determining whether expenditures should be capitalized or expensed
– Mistakes made in determining whether expenditures should be capitalized or expensed
184
Treatment of material errors occurring in a previous year for depreciation/amortization/ect: 4
– Previous years’ financial statements are retrospectively restated
– Account balances are corrected
– If retained earnings requires correction, the correction is reported as a prior period adjustment
– A note describes the nature of the error and the impact of the correction on income
– Account balances are corrected
– If retained earnings requires correction, the correction is reported as a prior period adjustment
– A note describes the nature of the error and the impact of the correction on income
185
expensed when incurred because they are made in order to maintain a given level of benefits.
Repairs and Maintenance
186
adding a new major component to an existing asset should be capitalized.
Additions
187
the placement of a major component of an asset. Three methods to record the replacement:
Substituion improvement
If the book value of the old component is not known,
Substituion improvement
If the book value of the old component is not known,
Improvements
188
The improvement can be recorded as both a disposition of the old component and the acquisition of the new component.
Substitution (improvement)
189
Journal entry for improvement (for disposition of old component)
Cash debit
Accumulated depreciation debit
Loss on disposal part debit
Equipment credit
—
New part debit
Cash credit
Accumulated depreciation debit
Loss on disposal part debit
Equipment credit
—
New part debit
Cash credit
190
Journal entry for improvement (for acquisition of new component)
Cash debit
Accumulated depreciation debit
Gain on disposal of part credit
Equipment credit
—
New part debit
Cash credit
Accumulated depreciation debit
Gain on disposal of part credit
Equipment credit
—
New part debit
Cash credit
191
If the book value of the old component is not known for a improvement
then you can either increase the asset account if it improves the efficiency/effectiveness of the asset or debit accumulated depreciation if it increases the life of the asset for the cost of the new component.
192
Entry for improves the efficency/effectinvess fr
Asset debit
Cash credit
Cash credit
193
Entry for an increase in the life of an asset from new part
A/D debit
Cash credit
Cash credit
194
For when the depreciation method/factor changes what you used to calculated the depreciation going forward?:
he book value on the date of the change - salave value/ new method
195
What do you do for a successful legal defense of a asset:
add it to the book value of the intangible asset
Asset debit
Cash credit
Asset debit
Cash credit
196
Amortaization journal entry
Amortization expense debit
Asset credit
Or if using accumulated amortization
Amortization expense debt
Accumulated amortization
Asset credit
Or if using accumulated amortization
Amortization expense debt
Accumulated amortization
197
What you check the book value against for the recovery part of the impariamnet test?:
Expected future net cash flow
198
What you use to find the loss on impairment assuming it fails the recovery test?:
Book value - fair value on the date of exchange and note after the impairment you will used the fair value as the book value for the asset’s and caluating desperation going forward
199
Impairment test is for what
assets other than cash
200
Fixed assets have:
: depreciation and impairment tests
201
What is the only desperation method when calculating desperation you include the residential/salvage value in the BV to calculate the depreciation
Double declining/ 150% decling/ the declining ones
202
or sum number of years when it partial year what you do?:
203
For sum number of years when it partial year what you do?:
For sum number of years when it partial year what you do?:
For the following years you will have the remindor of the amount of time in which it happened along with it for just that year (I.E if it in September if will be as follows year 1: 8/36 *270k*¼, year 2 last year (so 8)/36 * 270k * ¾ + current year (7)/36 * 270k * ¼, year 3 last year (so 7)/36 * 270k * ¾ + current year (6)/36 * 270k * ¼, ect). Reminder: the 270k comes from the book value (300,000) minus the salvageesidual value (30k), and 36 comes from n(n+1)/2, with n being the number of years (8); the starting numerator is the number of years (8).
204
For sum number of years when it partial year what you do?:
no
205
Under GAAP, are assets held for sale (disposal), do you have a restoration of previously recognized impairment loss?:
Yes, up to the original carrying amount before impairment
206
allow for most tangible assets and intangible assets (not goodwill) if the recoverable amount subsequently increases
IFRS recovery of impairment:
207
Do you include RND in intangibles on the balance sheet?:
No they are expensed immediately on the income statement, they go on the balance sheet after the RnD has finished
208
For amortization/depreciation, if the legal life is different from the estimated life which one do you use?:
the shorter of the two
209
For amortization/depreciation if a cost was added to a patent but the useful life dose not change what do you do?
After calculating the new value of the patent, you will divided it by it’s remaining life (I.e if the life was 8 years and two years have occurred you will divide by 6)
210
For amortization/depreciation if the useful life change what do you do?:
You will divided the remaining value of the asset by the remaining of the new useful life (I.E if the life was 9, 4 years passed and now it value at 6 it would be, 6 - 4 = 2)
211
How do you determine if goodwill has an impairment loss
If the book value of the net assets, including goodwill is less than the fair value of the corporation/company acquired
212
If a company's FV is 220 and the Book value of its assets, including goodwill, is 250 (without it, it is 200), does it have an impairment loss, and if so, what is it?:
Yes, it would be 220- 250 = 30
213
How do you determine goodwill when there is an impairment loss?:
You will subtract the impairment loss from the total amount of goodwill
214
If a company's FV is 270 and the Book value of their assets, including goodwill, is 250 (without it, it is 200), does it have an impairment loss, and if so, what is it?
There will be no impairment loss cause the fair value is bigger then the book value, including goodwill
215
If an error in depreciation/amt was discovered after the useful life what you do to correct it?:
Nothing cause it would had resolve on it own
216
Journal entry for addition/overhaul that changes dep base
A/D asset
Cash credit
Cash credit
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