Characteristics of Property, Plant and Equipment • They are acquired for use in operations and not for resale. • They are long-term in nature and usually depreciated. • They possess physical substance. • They are valued at HISTORICAL cost.
What is included in the cost of land? - purchase p...
ACG 3131 Final Exam Questions and
Correct Answers
Characteristics of Property, Plant and Equipment ✅• They are acquired for use in
operations and not for resale.
• They are long-term in nature and usually depreciated.
• They possess physical substance.
• They are valued at HISTORICAL cost.
What is included in the cost of land? ✅- purchase price
- closing costs
- costs incurred in getting the land in condition for its intended use
- assumption on any liens, mortgages, encumbrances
- Additional land improvements that have an indefinite life
- cost of demolition - salvage value = cost of preparing land. ****
What is included in cost of buildings? ✅- Materials, labor and overhead.
-Professional fees and building permits.
What is included in the cost of equipment? ✅• Purchase price
• Freight
• Handling charges
• Insurance while in transit
• Cost of special foundations
• Assembly and installation costs
• Cost of conducting trial runs
What are the three steps for calculating capitalized interest for constructed PP&E? ✅1.
Calculate weighted-average accumulated expenditures.
2. Calculate actual and avoidable interest. (Whichever is lower is capitalized)
3. Journal entry to record capitalized interest expense.
How do you calculate weighted-average accumulated expenditures? ✅Construction
expenditures x amount of time that it can incur interest (fraction of a year)
How do you calculate actual interest? ✅Principal x interest rate
How do you calculate avoidable interest? ✅Weighted-Average Accumulated
Expenditures x Interest Rate
What is the journal entry to record capitalized interest and interest expense? ✅Debit:
Buildings (Capitalized interest)
, Debit: Interest Expense
Credit: Cash
What is the journal entry for the acquisition of PP&E through an exchange of
nonmonetary assets? ✅Debit: New Equipment
Debit: Accumulated Depreciation of Old Equipment
Credit: Old Equipment
Credit: Gain on Exchange
How to compute/recognize losses and gains? ✅1. Compute the total gain/loss. (Fair
value - Book value)
2. If a loss is computed, recognize entire loss.
3. If a gain is computed and it has commercial substance, recognize the entire gain. If a
gain does NOT have commercial substance and no cash is involved then NO gain is
recognized.
What to do with gains for each of the 3 commercial substance scenarios?
✅Commercial Substance - recognize gains and losses
No Commercial Substance (no cash) - defer gains, recognize losses
No Commercial Substance (cash) - partial gain, defer remaining, recognize losses
How do you calculate book value? ✅Historical Cost - Accumulated Depreciation of
Machinery
How to calculate a gain or loss associated with a sale of a plant asset? ✅Fair Value -
Book Value
What is the journal entry for updating depreciation expense? ✅Debit: Depreciation
Expense
Credit: Accumulated Depreciation
What is the journal entry for the sale of a plant asset? ✅Debit: Cash (for amount
received)
Debit: Accumulated Depreciation (for full amount)
Credit: Plant Asset (Historical Cost of Equipment, Machinery, etc.)
Credit: Gain on Disposal of Plant Asset
What are examples of involuntary conversions? ✅E.g. fire, flood, theft or
condemnation.
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