WGU D104 Units 2-3

D104 Units 2-3 Leave the first rating Students also studied Terms in this set (55) Social SciencesEconomics Finance Save Intermediate Accounting II D104; Pr...16 terms AcidApplesPreview

D104 EXAM 2 REVIEW

31 terms ericblake1999 Preview WGU D104 Intermediate Accounting...144 terms kristineburrow Preview Pre-Ass 135 term chr acquired for use in operations and not for resale, long- term in nature and usually depreciated, and possess physical substance.Major characteristics of PP&E

• purchase price
• closing costs (title to the land, attorney's fees, and

recording fees)

• costs for getting land ready for its intended use

(grading, filling, draining, and clearing)

• assumption of liens, mortgages, encumbrances on

property

• land improvements with indefinite life

Land Costs Reductions in the cost of the landHow are proceeds from getting the land ready for its intended use accounted for?Improvements with limited lives, such as private driveways, walks, fences, and parking lots.What are considered land improvements?If the major purpose of acquiring and holding land is speculative Why would a company classify land as an investment?If the land is held for resaleWhen should a company classify land as inventory?Materials, labor, and overhead costs incurred during construction, professional fees and building permits, and all costs incurred, from excavation to completion.Building Costs

purchase price, freight and handling charges, insurance on equipment while in transit, cost of special foundations, assembling/installation costs, and trial run costs.Equipment Costs

• Assign no fixed overhead to the cost of the

constructed asset.

• Assign a pro rata portion of all overhead to the

construction process.How do companies assign indirect costs to self-constructed assets?The company should record the excess overhead as a period loss rather than capitalize it.What if the allocated overhead results in recording construction costs in excess of the costs that an outside independent producer would charge?

$72,700Watauga Company had the following events:

Purchase of equipment on July 1, 2017 for $70,000 Sales tax on the purchase was $700 Other costs of freight charges of $800 Insurance during shipping of $ 150 Repairs of $1,300 for damage during installation Installation costs of $1, 050 What is the cost of the equipment?Capitalize no interest charges during construction, charge construction with all costs of funds employed, whether identifiable or not, and capitalize only actual interest costs incurred during construction (GAAP) How do companies account for interest incurred in financing the construction of PP&E?Qualifying assets, Capitalization period, and Amount to capitalize Using the GAAP approach to interest capitalization, what are the three items to consider?Assets that require a period of time to get them ready for their intended use.Qualifying Assets Expenditures for the asset have been made.Activities that are necessary to get the asset ready for its intended use are in progress.Interest cost is being incurred.

• Conditions of Capitalization Period

Lower of actual interest cost incurred during the period or avoidable interest Amount to Capitalize amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset Avoidable Interest a company weights construction expenditures by the fraction of a year or accounting period that it can incur interest cost on the expenditure. Ex. March 1

$240,000*10/12=$200,000

Weighted-Average Accumulated Expenditures

Interest rate incurred on the specific borrowings What interest rate should be used for the portion of weighted-average accumulated expenditures that is less than or equal to amounts borrowed specifically to finance construction of the assets?weighted average of interest rates incurred on all other outstanding debt during the period What interest rate should be used for the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets?Total Interest/Total PrincipalWeighted-average interest rate formula capitalized during the period of construction as part of the cost of the plant, not the land.Interest capitalization if land is purchased as a site for a structure (such as a plant site)?Not capitalizedInterest capitalization if land is purchased and held for speculation?Companies should not net or offset interest revenue against interest cost Should companies offset interest revenue against interest cost when determining the amount of interest to capitalize as part of the construction cost of assets?At the present value based on a known or imputed interest.How do companies account for assets purchased on long-term credit contracts?allocates the total cost among the various assets on the basis of their relative fair values How do companies account for assets purchased at a single lump-sum price?(fair value/total fair value)*lump-sumLump-sum formula The market value of the securitiesWhat is the cost of property acquired by the issuance of securities, which are actively traded on an organized exchange, equal to?if a company ignorantly paid too much for an asset originally, it is theoretically preferable to charge a loss immediately Prudent Cost Capitalize cost of addition to asset account.Additions Expenditure Remove cost of and accumulated depreciation on old asset, recognizing any gain or loss. Capitalize cost

Improvements and Replacements Expenditures: Carrying Value Known

useful life extended, debit accumulated depreciation for cost quantity or quality of productivity is increased, capitalize cost to asset account.

Improvements and Replacements Expenditures: Carrying Value Unknown

account for cost as a replacement carrying value known Rearrangement and Reinstallation: original installation cost known Benefits future periods, capitalize as an assetRearrangement and Reinstallation: original installation cost unknown new cost material benefit is questionable, expense the cost when incurred Rearrangement and Reinstallation: original installation cost unknown new cost immaterial

Ordinary: Expense cost of repairs when incurred.

Major: treat as an addition, improvement, or replacement

Repairs An asset's service is terminated through fire, flood, theft, condemnation or some other manner not intended by the owner of the asset Involuntary Conversion Lack of physical existence and Not financial instruments Intangible Assets 2 Characteristics

Purchased: Capitalize cost

Internally Created: Expense cost except for direct costs,

such as legal costs.

Amortization: Over useful life

Impairment Test: Recoverability and then Fair Value

Limited Life Intangibles

Purchased: Capitalize cost

Internally Created: Expense cost except for direct costs,

such as legal costs.

Amortization: None

Impairment Test: Fair Value only

Indefinite Life Intangibles Marketing Customer Artistic Contract Technology Goodwill

• Major Categories of Intangibles

The difference between fair value of the net tangible and identifiable intangible assets and the purchase price of the acquired business.Goodwill Fair market value of the assets acquired is higher than the purchase price of the assets. Purchaser records the excess amount as a gain.Bargain Purchase Carrying amount of a long-lived asset (PP&E or intangible asset) is not recoverable.Impairment carrying amount of asset - fair value of impaired asset Impairment Loss Formula

Limited life: Recoverability test, then fair value test

Indefinite life other than goodwill: Fair value test

Goodwill: Fair value test on reporting unit

Impairment Test for Intangibles Compares fair value of intangible asset with the asset's carrying amount. If fair value is less than carrying amount, the company recognizes an impairment.Fair Value Test