ACCT Ch 10

how to handle indirect costs

(1) assign no fixed overhead to the cost of the constructed asset or (2) assign a portion of all overhead to the construction process (full costing approach) pro rata portion

what do most people think about interest capitalization from a conceptual viewpoint

companies should either capitalize no interest cost of all interest costs, actual or imputed.

cost of buildings

(1) materials labor and oh costs incurred during construction (2) professional fees and building permits

how to account for interest costs during construction

(1) capitalize no interest charges during construction (2) charge construction with all costs of funds employed, whether identifiable or not (3) capitalize only the actual interest costs incurred during construction (GAAP requires)

cost of land

(1) purchase price (2) closing costs (title to land, attorney's fees, recording fees) (3) costs in incurred in readying for use (4) assumption of any liens, mortgages, or encumbrances on the property (5) any additional land improvements that have an indefinite life

how to select interest rates applies in weighted avg accumulated borrowings

(1) use the interest rate incurred on specific borrowings (2) use a weighted average of interest rates incurred on all other outstanding debt during the period (total interest/total principle)

major characteristics of PPE

1) acquired for use in ops, not for resale 2) long-term and usually depreciated 3) possess physical substance

how should companies record PPE

at the fair value of what they give up or at the fair value of the asset received, whichever is more clearly evident.

self-constructed assets

company must allocate costs and expenses to arrive at the cost since there's no purchase or contract price. Materials and direct labor used in construction pose no problem because they can be directly traced, but the assignment of indirect costs of manufacturing creates problems.

costs subsequent to acquisition

costs incurred to achieve greater future benefits should be capitalized, while those that simply maintain a given level of services should be expensed.

nonreciprocal transfers

donations or gifts. often some type of asset or forgiveness of debt. use fair value of asset. FASB's position is that in general, companies should recognize contributions received as revenues in the period received. if companies pledge an asset unconditionally, the company should report the contribution expense and related payable immediately. If it's conditional, the company recognizes expense in the period benefitted by the contribution, generally when it transfers the asset.

repairs

expenditures that maintain assets in condition for operation. ordinary repairs are charged to an expense account in the period incurred, on the basis that it is the primary period benefitted. Major repairs should be handled like an addition, improvement, or replacement.

when would you not depreciate?

if asset held for sale (bc not generating revenues)

writing down assets

if fair value of ppe less than caring amount.

prudent cost concept

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

additions

increase or extension of existing assets. capitalize any addition to plant assets because a new asset is created (new win to hospital, new ac to office)

special issues related to interest capitalization

interest costs capitalized during the period of construction are part of the cost of the plant, not of the land. conversely, if the company develops land for lot sales, it includes any capitalized interest cost as part of the acquisition cost of the developed land. However, it should not capitalize interest costs involved in purchasing land held for speculation because the asset is ready for its intended use. companies should not net or offset interest revenue against interest cost.

amount of interest to capitalize

limited to the lower of actual interest cost incurred during the period or avoidable interest.

historical cost

measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.

cash discounts

more popular approach says to take the discount as a reduction in the cost of the asset even if they don't pay in time. other approach think that failure to take the discount shouldn't always be considered a loss.

rearrangement and reinstallation

movement of assets from one location to another. if original cost and accumulated depreciation is known, it can be reported like a replacement. If not, it should capitalize the new costs as an asset to be amortized.

qualifying assets

must require a period of time to get them ready for their intended use. assets that qualify for interest cost capitalization include assets under construction for company's own use and assets intended for sale or lease that are constructed or otherwise produced as discrete projects. Examples that don't qualify are in use or ready for use and assets that the company doesn't use in its earnings activities and that are not undergoing the activities necessary to get them ready for use.

in order for costs to be capitalized

one of these must be true (1) useful life increased (2) quantity produced from asset must increase (3) quality of units produced must enhance

capitalization period

period of time during which a company must capitalize interest. It begins with the presence of three conditions: (1) expenditures for the asset have been made (2) activities that are necessary to get the asset ready for its intended use are in progress (3) interest cost is being incurred interest capitalization continues as long as these three conditions are present. The capitalization period ends when the asset is substantially complete and ready for its intended use.

overhead or burden

power, heat, light, insurance, property taxes on factory buildings and equipment, factory supervisory labor, depreciation of fixed assets, and supplies. all indirect costs of manufacturing.

cost of equipment

purchase price, freight and handling charges incurred, insurance on equipment while in transit, cost of special foundations if required, assembling and installation costs, and costs of conducting trial runs. Equipment can include delivery equipment, office equipment, machinery, furniture and fixtures, furnishings, factory equipment, and similar fixed assets.

improvements and replacements

substitution of an improved asset for an existing one. if an expenditure increases future service potential, it should be capitalized. can use the substitution approach, capitalize the new cost, or charge to accumulated depreciation.

avoidable interest

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

what if there's an old building on the site of a newly proposed building?

the cost of demolition minus its salvage value is a cost of getting the land ready for its intended use and relates to the land rather than to the new building

deferred-payment contracts (notes, mortgages, bonds, etc)

to properly reflect cost, companies account for assets purchased on long-term credit contracts at the present value of the consideration exchanged between the contracting parties at the date of the transaction.