PP&E
Examples with commercial and w/o commercial substance
You can recognize a loss, but not a gain with transactions that lack commercial substance
Can you explain what an asset retirement obligation is?
Certain long-lived tangible assets purchased or leased for business operations may create a future liability at the end of the asset's useful life. For example, if a company leases a manufacturing plant, it may be legally required to restore the plant to a specific condition upon termination of the lease. This type of liability is called an asset retirement obligation (ARO). An ARO is generally recorded at the fair value (FV) of the liability. The FV usually equals the present value (ie, discounted cash flows) of the future payments required to satisfy the obligation (Choice B). Undiscounted cash flows would not be used. When an ARO is recorded, the liability is offset by capitalizing (increasing) the asset (Choice C). In accounting period of an asset's useful life, an accretion expense is recorded to increase the ARO liability due to the passage of time (Choice A). The accretion expense can be thought of as the interest cost associated with the liability until the future obligation is satisfied. Things to remember:An asset retirement liability (ARO) represents a future obligation associated with the retirement of an asset used in operations. Initially, the ARO is recorded at the fair value of the liability, with a corresponding increase to the cost of the asset. An accretion expense is recorded over the asset's useful life to increase the liability for costs associated with the passage of time until the obligation is satisfied.
When cash flows are not expected to change from the exchange of assets, would this be considered an exchange that has or has not commercial substance? How do you record the new asset?
Nonmonetary exchange that lacks commercial substance The amount recorded for the new asset will be the carrying value of the old asset plus any recognized gain. Any loss resulting from such a transaction would be recognized in full, but gain is not recognized unless boot is received, and then only partially.
How do you account for a change in accounting estimate for an asset's life? Continued...
Notice how the depreciation life is the original minus years used up, plus the extension years.
Under IFRS, tell me about the revaluation model?
Under the IFRS revaluation model, an asset is periodically revalued to its fair value as of the date of revaluation. Decreases are recognized in income. Increases, to the extent that they reverse previously recognized decreases, are also recognized in income. Any increases that exceed previously recognized decreases are reported in other comprehensive income.
When do you and not capitalize interest costs for the construction of an asset?
You can't capitalize borrowed money to build inventory, but you can with IFRS Capitalize interest will never exceed actual interest expense
Will these increase or decrease beginning Asset Retirement Obligation? 1) Accretion Expense 2) Present Value of associated ARO 3) Payments of previously recorded Asset Retirement Obligations 4) undiscounted estimates Finch Co. reported a total asset retirement obligation of $257,000 in last year's financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year's balance sheet?
1) Accretion expense will increase the ARO balance 2) Associated balances from other AROs will increase the balance 3) Payments will reduce. 4) ignore, not relevant. Answer: $264,000 The $257,000 beginning balance of the asset retirement obligation (ARO) will be increased by accretion, which is comparable to interest, of $26,000, increasing the ARO to $283,000. It will be further increased by the $68,000 present value of the AROs associated with the new assets, increasing the ARO to $351,000. It will be reduced by payments of $87,000, resulting in an ending balance of $264,000.
How is impairment loss determined?
1) Compare CV of the asset to undiscounted future cash flows 2) If undiscounted future cash flows is less than the CV then the asset is impaired. 3) Write the CV down to the FMV and book the loss. Do not write the asset down to the undiscounted future cash flow amount, unless under IFRS
What are some examples of land improvements?
1) Drainage and irrigation 2) Fencing 3) Landscaping 4) Parking lots and walkways
Can you solve this? Sylvester Co. takes out a 12% loan of $500,000 on 1/1/2014 to finance construction of a building for the company's own use. Construction begins immediately, and $600,000 is spent on the construction at an even pace during 2014. Another $400,000 is spent at an even pace during 2015, with construction completed on 12/31/2015. No other construction loans are taken out. Sylvester incurred unrelated interest expenses of $10,000 and $15,000 in 2014 and 2015, respectively, on loans that bear interest at 10%. How much interest can Sylvester capitalize in 2014 and 2015?
2014: 36,000 and 2015: 75,000 Interest may be capitalized on an asset that is being constructed for the entity's own use in an amount that is based on the weighted average expenditures. In 2014, expenditures of $600,000 were incurred evenly over the year, resulting in weighted average expenditures of $300,000. Since Sylvester had a 12% construction loan of $500,000, 12% of $300,000 or $36,000 will be capitalized in 2014. For 2015, beginning construction costs were $600,000. In addition, $400,000 was incurred uniformly throughout the year, making the weighted average expenditures $800,000 for 2015. All of the interest on the construction loan, 12% x $500,000, or $60,000 will be capitalized. Interest on the remaining $300,000 is calculated at the entity's weighted average interest rate on unrelated debt, limited to actual interest incurred. As a result, the remaining $15,000 incurred in 2015 will be capitalized for a total of $75,000. Expanded explanation for 2015 interest: For 2015, beginning construction costs were $600,000. In addition, $400,000 was incurred uniformly throughout the year, making the weighted average expenditures $800,000 for 2015. With weighted average expenditures exceeding the loan amount in 2015, all the interest on the construction loan will be capitalized (12% x $500,000 = $60,000). Are we finished for 2015 interest? No, we are not. We financed some of the construction with debt that was not labeled "construction loan." We also may capitalize interest on other debt that could have been avoided by repayment of debt. Interest on the remaining $300,000 is calculated at the entity's weighted average interest rate on unrelated debt, limited to actual interest incurred. ($300,000 x 10% = $30,000) Actual interest incurred in 2015 on non-construction loans was $15,000. $30,000 is greater than $15,000. As a result, the remaining $15,000 of interest incurred in 2015 will be capitalized for a total of $75,000. ($60K + $15K = $75K)
What are and how do you account for depletable assets? ARO At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?
Accretion expense for asset retirement obligations (ARO) is recorded at the credit-adjusted risk free interest rate, not the risk-free interest rate. The ARO-related accretion expense for the year is $10,000, calculated by multiplying the fair value of the ARO at the beginning of the year by the credit-adjusted risk-free interest rate of 10% (100,000 X 10% = 10,000). Answer: $10,000 Accretion expense for asset retirement obligations (ARO) is recorded at the credit-adjusted risk free interest rate, not the risk-free interest rate. The ARO-related accretion expense for the year is $10,000, calculated by multiplying the fair value of the ARO at the beginning of the year by the credit-adjusted risk-free interest rate of 10% (100,000 X 10% = 10,000).
A good depreciation problem: A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners?
Answer: $120,000 The purchase price, plus any costs necessary to prepare the asset for its intended use, is the depreciable base of an asset. The carrying amount in the hands of former owners is immaterial. Since the depreciable base for most depreciation methods equals full cost minus estimated salvage value, the depreciable base of the asset is $120,000 (135,000 - 15,000 = 120,000).
Do you understand capitalized cost of equipment? Young Corp. purchased equipment by making a down payment of $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is .735. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment?
Answer: $24,980 The capitalized cost of the equipment includes both the cash paid to acquire the equipment and those costs necessary to get it ready for its intended use, as well as the present value of the scheduled annual payments. The total capitalized cost is $24,980 ((4,000 + 2,000 + 3,500 + (2.58 X 6,000)) = 24,980. The three annual payments beginning a year after acquisition represent an ordinary annuity, which is why the present value factor of an ordinary annuity is applied.
Understanding DDB, depreciation: X Company acquired a machine on January 2, 20X1 for $100,000. The machine, which is depreciated using the double-declining balance method, was estimated to have a 10-year useful life and a salvage value of $10,000. On January 1, 20X3, the company revised its estimations regarding the machine, assigning it a useful life of 5 years beginning from that date, with a salvage value of $15,000 at the end of 5 years. How much will X Company recognize as depreciation expense in 20X3?
Answer: $25,600 Under the double declining balance method, salvage value is ignored and depreciation expense is calculated by applying double the straight-line rate to the asset's carrying value. Depreciation in 20X1 would be 20% x $100,000 or $20,000, reducing the carrying value to $80,000. Depreciation in 20X2 would be 20% of $80,000 or $16,000, reducing the carrying value to $64,000. With a 5 year remaining life, depreciation in 20X3 would be $64,000 x 40% or $25,600.
Understanding capitalized equipment: On July 1, Year 1, X Company purchased equipment by paying a $20,000 down payment and signing a noninterest-bearing note for $360,000, calling for payments of $6,000 per month for the next 5 years. X also paid an additional $10,000 for delivery and installation. The equipment could have been purchased for $310,000 on the date of acquisition. The equipment has a 10-year useful life with no salvage value and will be depreciated on a straight-line basis. What will be the amount of depreciation recognized in Year 2?
Answer: $32,000
Can you answer this? A transportation company purchased a passenger bus for $100,000 on January 1, year 1. The company expects the bus to be used for 20 years if it follows a maintenance schedule of replacing the engine after 10 years and replacing the seats every eight years. It estimates that the current cost to replace the engine is $25,000 and the current cost to replace the seats is $10,000. The company uses straight-line depreciation and the bus has no residual value. The company considers any component equal to or greater than 10% of the overall cost to be significant. Under IFRS, how much depreciation expense should the company recognize for the bus for the year ended December 31, year 1?
Answer: $7,000 IFRS component depreciation requires that each significant cost of an asset be depreciated separately according to its useful life. The engine, valued at $25,000, would be depreciated over 10 years, or $2,500; the seats, valued at $10,000, over 8 years, or $1,250; and the remaining $65,000 cost of the bus over 20 years or $3,250 for a total of $2,500 + $1,250 + $3,250 = $7,000.
Lacking commercial substance but with 25% cash received: Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $5,000 cash in a transaction that lacked commercial substance. The fair value of the truck received was $15,000. At what amount should Amble record the truck received in the exchange?
Answer: 15,000 Losses are recognized (according to the conservatism principle), while gains are generally deferred. If cash is received, the recipient recognizes a proportionate amount of the gain. If the cash received is equal to or greater than 25% of the total consideration received (ie, cash plus FV of asset), then the transaction is viewed as a monetary exchange and all the gain is recognized. In this case, Amble, Inc. received $5,000 and a new truck with an FV of $15,000 in exchange for an old truck with a CV of $12,000. This results in an $8,000 ($20,000 − $12,000) gain. Normally, only a portion of the gain would be recognized. However, since the cash received equals 25% ($5,000 / $20,000) of the total consideration, all the gain is recognized. The new truck is recorded at $15,000, as shown in the following journal entry:
Do you understand boot received? Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $4,000 cash in a transaction that lacked commercial substance. The fair value of the truck received was $16,000. At what amount should Amble record the truck received in the exchange?
Answer: 9,600
Can you answer the image?
Answer: Although gains are not generally recognized in nonmonetary transactions that lack commercial substance, that is not the case when boot, such as cash, is received as part of the transaction. When cash is received, any gain is allocated between the nonmonetary portion and the monetary portion in proportion to the value of the proceeds. Since X received a machine worth $91,000 and cash of $14,000, or $105,000 in total, for a machine costing $75,000, the total gain is the difference of $30,000. The gain allocated to the cash portion will be $30,000 x $14,000/$105,000 or $4,000.
Tell me about the treatment of capitalizing assets
As a company's long-term assets age, they may become less useful. In some cases, companies improve long-term assets by making expenditures to update them. The expenditures may enhance the asset by making it more efficient, giving it new capabilities, or extending its useful life beyond the original estimates. Expenditures of this kind are capitalized (ie, added to the asset's value) and are known as capital improvements. Expenditures that are not capital improvements are considered repairs and maintenance and are expensed. Repairs and maintenance are expected because they keep an asset in normal working condition; therefore, they are assumed to occur when estimating an asset's useful life. In this scenario, the truck's engine replacement and the installation of the rearview cameras are capital improvements. The engine extends the useful life of the truck and the cameras enhance the truck (ie, add a new capability). Oil changes and tire replacements are considered repairs and maintenance because they are expected costs of ownership to keep the vehicle in working condition. Things to remember: Expenditures to enhance (ie, add capabilities, improve efficiency) an existing asset or to extend its useful life are considered capital improvements and are capitalized (ie, added to the asset's value). Expenditures for repairs and maintenance are routine costs to keep assets in normal working condition and are expensed.
When does depreciation begin? A company issued a purchase order on December 15, year 1, for a piece of capital equipment that costs $100,000. The capital equipment was shipped from the vendor on December 31, year 1, and received by the company on January 5, year 2. The equipment was installed and placed in service on February 1, year 2. On what date should the depreciation expense begin?
Depreciation expense begins the date the asset is placed into service. February 1, year 2
When would an exchange lack commercial substance?
Even if a transaction lacks commercial substance, if you receive money then it is treated as a monetary transaction.
Can you answer this? What if the assets were held for sale? Last year, Katt Co. reduced the carrying amount of its long-lived assets used in operations from $120,000 to $100,000, in connection with its annual impairment review. During the current year, Katt determined that the fair value of the same assets had increased to $130,000. What amount, if any, should Katt record as restoration of previously recognized impairment loss in the current year's financial statements?
Impairment of a long-lived asset held for use in operations (ie, factory, equipment) can occur for a variety of reasons (eg, technological advancements). Impairment exists when the carrying value (CV) of an asset is not recoverable and a write-off is required. A long-lived asset is impaired if the undiscounted cash flows expected to result from the use and disposition of the asset are less than its CV (ie, recoverability test). However, the impairment loss is calculated as the CV minus the fair value (FV) of the asset. Once an impairment loss for a long-lived asset used in operations has been recorded, it cannot be restored (ie, permanent) wholly or partially (Choices B and D). Note: If the long-term asset is classified as held for sale, restoration of previous impairment losses is allowed up to the CV of the asset before reclassification. Things to remember:A long-lived asset is impaired if the undiscounted cash flows expected to result from the use and disposition of the asset are less than its carrying value. Once an impairment loss for a long-lived asset used in operations has been recorded, it cannot be restored wholly or partially.
Can you answer this? In a transaction that lacked commercial substance, Castor Company traded computer equipment with Pollux Company. Castor Company's computer had a carrying value of $34,000. In exchange, Castor Company received Pollux Company's computer, which had a fair value of $39,000, and $12,000 in cash. As a result of the exchange, what will Castor Company record as the computer acquired?
In an exchange that lacks commercial substance involving both like and unlike consideration, such as cash, the party receiving unlike consideration will recognize a portion of the gain realized, if any, and treat the nonmonetary portion as a separate transaction. Since Castor is receiving a computer worth $39,000 and cash of $12,000, for a total of $51,000, in exchange for a computer with a carrying value of $34,000, there is a total gain of $17,000. Castor will recognize the exchange as if it were two separate transactions. In the monetary portion, $12,000/$51,000 X $34,000, or $8,000 of the carrying value is being exchanged for cash of $12,000 resulting in a gain of $4,000. The remainder, $39,000/$51,000 X $34,000 or $26,000 of the carrying value is being exchanged for a computer worth $39,000. With $4,000 of the $17,000 total gain recognized, the resulting summarized journal entry will include a balancing debit for the new asset of $26,000, to go along with the $12,000 debit to cash and the $34,000 and $4,000 credits to the old asset and recognized gain, respectively.
Can you answer this? Candy Co. exchanged inventory with Dandy Co. in a transaction that lacks commercial substance. Both Candy's and Dandy's inventory had fair values that exceeded their costs by 30%. Since Dandy's inventory was more valuable, however, Candy paid Dandy cash to compensate for the difference. Who, if anyone, will recognize a gain on the exchange?
In an exchange that lacks commercial substance involving like and unlike assets, such as cash, only the party receiving the unlike assets will recognize a gain. Since Candy paid cash to Dandy to compensate for a difference in the values of the inventory exchanged, only Dandy will recognize a gain on the exchange.
Would you capitalize current year taxes in the acquisition of PP&E?
No- You only capitalize delinquent taxes. Not current year.
Can you solve this? Hexaco Corp. exchanged a piece of land that was being held for investment purposes for an oil rig that it will use in its drilling operations. The land had a carrying value of $230,000 and a fair value of $250,000 on the date of the exchange. The oil rig received in exchange had a fair value of $200,000 and, as a result, Hexaco received an additional $50,000 in cash in the transaction. How much gain, if any, will Hexaco recognize on the exchange?
Since Hexaco is exchanging investment property for property that will be used in operations, the transaction does not lack commercial substance and will be recognized at fair value. Hexaco will recognize the oil rig at its $200,000 fair value and the cash received for a total of $250,000. With the land having a carrying value of $230,000, the difference represents a gain of $20,000.
Can you answer this? In January 20X4, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law to restore the land to its original condition at an estimated cost of $180,000. Vorst believes it will be able to sell the property afterwards for $300,000. During 20X4, Vorst incurred $360,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 20X4 income statement, what amount should Vorst report as depletion?
Since Vorst must restore the property to its original condition at an estimated cost of $180,000 and incurred $360,000 in preparing the mine for production, the total cost associated with the mine is $2,640,000 + $180,000 + $360,000 or $3,180,000. When the ore has been extracted, Vorst expects to receive $300,000 from the sale of the property, indicating a depletion base of $2,880,000. With expected production of 1,200,000 tons, depletion will be $2.40 per ton. In 20X4, depletion will be $2.40 x 60,000 tons or $144,000.
Can you solve this? Ott Co. purchased a machine at an original cost of $90,000 on January 2, year 1. The estimated useful life of the machine is 10 years, and the machine has no salvage value. Ott uses the straight-line method to calculate depreciation. On July 1, year 10, Ott sold the machine for $5,000. What is the amount of gain or loss on the disposal of the machine?
The 9.5 years of $9,000 in yearly depreciation reduced the carrying value by 9.5 * $9,000, or $85,500. Carrying value at the time of sale was therefore $90,000 - $85,500, or $4,500. With a $4,500 carrying value at the time of the sale and selling price of $5,000, there is a $500 gain upon disposal.
What is included in acquisition costs (intended use)?
The capitalized cost of the equipment includes both the cash paid to acquire the equipment and those costs necessary to get it ready for its intended use, as well as the present value of the scheduled annual payments. The total capitalized cost is $24,980 ((4,000 + 2,000 + 3,500 + (2.58 X 6,000)) = 24,980. The three annual payments beginning a year after acquisition represent an ordinary annuity, which is why the present value factor of an ordinary annuity is applied.
Can you answer this? Gold Co. purchased equipment from Marshall Co. on July 1. Gold paid Marshall $10,000 cash and signed a $100,000 noninterest-bearing note payable, due in three years. Gold recorded a $24,868 discount on notes payable related to this transaction. What is the acquired cost of the equipment on July 1?
The cash equivalent cost is used when a nonmonetary element, such as a noninterest-bearing note payable (ie, discounted note payable), is part of the transaction. The cash equivalent price equals the cash down payment (if any) plus the present value (PV) of the note payable. Remember, interest is capitalized only as part of the asset's cost for self-constructed assets. When a note that does not bear interest is exchanged for a nonmonetary asset, such as a piece of equipment, the note is recorded at its fair value, its present value, or the fair value of the nonmonetary asset exchanged, based on the circumstances. Recording a discount of $24,868 on the $100,000 note payable indicates that its fair value or present value is the difference of $75,132. As a result, the cost of the asset is that amount plus the $10,000 down payment, or $85,132.
Can you answer this? In 20X4, Kilroy Company purchased land for a new office building at a purchase price of $325,000. There was an existing building on the site that was demolished at a cost of $12,000. Scrap from the demolition was sold for $3,500. The building was completed during 20X4. In addition, the following costs were incurred: Professional Fees: Attorneys for the purchase contract $7,500 Engineers to determine the required grading $18,000 Architects to design new building $40,000 Building permits $8,000 Construction of new building $1,275,000 In Kilroy's December 31, 20X4, financial statements, how will the above costs be reported?
The cost of an asset includes its purchase price and all costs incurred in preparing it for its intended use. As to the land, this will include the cost of the land, $325,000 and the legal fees incurred in negotiating and documenting the purchase, $7,500. Demolition, at a net cost of $12,000 -$3,500 or $8,500 and engineering fees of $18,000 will be added to the cost of the land as they are costs necessary to prepare the land for construction. Total land cost is therefore $359,000. Architect fees of $40,000, which are for the building plans, and building permits of $8,000 are added to the $1,275,000 in construction costs to make the total cost of the building $1,323,000.
Can you answer this? During 20X1, Clark Company manufactured equipment for its own use at a total cost of $2,400,000. The project required the entire year to complete and all costs were incurred uniformly throughout the year. At the beginning of the period, Clark was able to borrow $1,500,000 at 6% specifically for the purchase of materials and the manufacture of the equipment. The entire debt, with interest was repaid on December 31, 20X1, replaced with a long-term loan. Throughout 20X1, Clark Company had additional debt of $1,000,000 with a weighted average interest rate of 7%. If Clark Company capitalizes the maximum amount of interest allowable under GAAP, how much will Clark report as interest expense in 20X1?
The maximum amount of interest that may be capitalized under GAAP is based on the weighted average cumulative expenditures for the year. Since the equipment required a full year to manufacture and costs of $2,400,000 were incurred uniformly throughout the year, the weighted average costs incurred would be ($0 + $2,400,000)/2 or $1,200,000. Capitalized interest will first be on debt specific to the asset. Since the $1,500,000 borrowed exceeds weighted average expenditures, capitalized interest will be $1,200,000 x 6% or $72,000. The remaining interest on the $1,500,000 loan, consisting of $1,500,000 x 6% -$72,000 or $18,000, and the interest on the other debt, $1,000,000 x 7% or $70,000, or $88,000, will be recognized as expense.
If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?
The other asset group should be tested for an impairment loss before goodwill is tested Goodwill represents the excess of the fair value of a reporting unit over the fair value of its underlying net identifiable assets. In determining the fair value of a reporting unit's underlying net identifiable assets, any impaired identifiable assets must be written down to their fair values.
Sea Manufacturing Corp. is constructing a new factory building. During the current calendar year, Sea made the following payments to the construction company: January 2 $1,000,000 December 31 $1,000,000 Sea has an 8%, three-year construction loan of $3,000,000. What is the amount of interest costs that Sea may capitalize during the current year?
Things to remember:Interest on debt to finance construction of assets for the company's own use must be capitalized. The amount capitalized is the lesser of avoidable interest and actual interest incurred. Weighted average accumulated expenditures are calculated by multiplying payments during the year by the proportion of the year that the payments were outstanding.
What is the recoverability test?
To test whether an asset, such as a division of a company, has been impaired, the recoverability test is first conducted. The recoverability test entails comparing the expected future net undiscounted cash flows from the asset to the asset's carrying amount.If the recoverability test reveals that the asset is impaired, then the impairment amount is measured by comparing the asset's carrying amount to its fair value.
Can you answer this? May Co. and Sty Co. exchanged nonmonetary assets. The exchange is not expected to significantly affect the future cash flows for either May or Sty. May paid cash to Sty in connection with the exchange. To the extent that the amount of cash exceeds a proportionate share of the carrying amount of the asset surrendered, a realized gain on the exchange should be recognized by
When a company is involved in a nonmonetary exchange that is not expected to significantly affect cash flows, it is a transaction that lacks commercial substance and will generally recognized at book value. When the transaction involves both monetary and nonmonetary assets, the entity receiving monetary consideration will treat it as two separate transactions, one monetary and one nonmonetary and will recognize gain on the monetary portion. Since Sty Co. is receiving cash, only Sty Co. may recognize a gain.
Can you solve this? A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange?
When a non-monetary exchange has commercial substance, all gains or losses are recognized immediately and the asset received is valued at the fair value, if known, of the asset given up, plus any cash paid or minus any cash received. Here, no cash was exchanged and the fair market value of the asset given up was $50,000. The asset received is therefore valued at $50,000 and a gain of $30,000 is recognized
What are the steps in the calculation of expensed interests for the construction of assets?
When constructing an asset for a company's own use, any expenditures necessary to make the asset ready for use must be capitalized as part of the asset's cost. For large assets (eg, buildings), debt financing may be required; therefore, the interest cost necessary for construction is capitalized as part of the asset's total cost. CP Notes: The avoidable interests makes sense because you would not have to pay the interest had you NOT built the asset. Therefore, it makes sense that the interest should be capitalized (expand the balance sheet). The amount of interest capitalized is the lesser of actual interest incurred and avoidable interest. Actual interest incurred is all interest for the company. Avoidable interest is the interest related to the construction project, and it is calculated as the weighted average accumulated expenditures (AAE) on the construction applied to the debt. AAE is calculated by multiplying all construction-related payments during the year by the proportion of the year that the payments were outstanding (ie, the period over which the debt was necessary). Things to remember:Interest on debt to finance construction of assets for the company's own use must be capitalized. The amount capitalized is the lesser of avoidable interest and actual interest incurred. Weighted average accumulated expenditures are calculated by multiplying payments during the year by the proportion of the year that the payments were outstanding.
When are long-lived assets required to be tested for impairment?
When events or changes in circumstances indicate that its carrying amount may not be recoverable. Long-lived assets are only required to be tested for impairment as a result of a triggering event, which is an event or change in circumstances indicating that the carrying value of the asset may not be recoverable. It is tested by comparing the carrying value to the recoverable amount and reduced to fair value if the recoverable amount is lower.
What are some of the key characteristics of an asset held for sale?
When management intends to sell a long-lived asset (eg, building) that is no longer being used in operations, the asset is generally reclassified as held-for-sale. The asset is transferred from property, plant, and equipment to either current assets or other assets on the balance sheet, depending on the intended holding period until the sale
Can you answer this? On January 1, 20X2, X Company made modifications to an asset used in its manufacturing operations in order to extend its useful life. The asset had an original cost of $30,000 and accumulated depreciation of $12,000, with a remaining useful life of 5 years. As a result of the modification, which cost $6,000, the remaining useful life was increased to 8 years. If X Company uses straight-line depreciation, in 20X2, X Company:
Will capitalize the cost of the modification and will recognize depreciation expense of $3,000. When costs are incurred to extend the useful life of a depreciable asset, the costs will be capitalized, increasing the carrying value of the asset, and the revised carrying value will be depreciated over the asset's extended useful life. At January 1, 20X2, the asset had a carrying value of $18,000. The $6,000 modification increases the carrying value to $24,000, which will be depreciated over the assets 8 year remaining useful life at the rate of $3,000 per year.
