Accounting 305 - PSU - Module 3 Exam
1. What are included in "operating assets?": 1.) Tangible fixed assets (also referred to as property, plant, and
equipment)
2.) Natural resources
3.) Intangible assets
2. What are the characteristics assets classified as property, plant, & equip- ment?: a. Tangible in nature
b. Expected to be used for more than 1 year (or more than one operating cycle, whichever is longer)
c. Used in the production and sale of other assets, for rental to others or for administrative purpose
3. When an asset is capitalized, what costs are included in the cost of the asset?: The costs that are reasonable
and necessary to bring the asset to the location and condition required for its intended use.
Including: installation, delivery, special wiring, interest from the financing of con- structed assets, closing costs, and
sales tax.
4. What accounting principle is being applied when an asset meets the criteria to be capitalized as part of plant
and equipment, but its cost falls below a predetermined dollar amount?: MATERIALITY
- A materiality threshold for capitalization specifies that the firm immediately expense an asset that falls below a
predetermined fixed dollar limit (e.g., $1,000) rather than capitalize it as an asset.
5. How are the costs of individual assets acquired in a "basket purchase" determined?: When a firm acquires
homogeneous assets, it records the PPE at cost and includes it on the balance sheet, assigning an equal amount to each
asset. In basket purchases involving heterogeneous assets, the firm must properly allocate the total cost to the individual
accounts to be reported on the balance sheet (relative fair value method).
6. How is the cost of an operating asset determined if purchased under a deferred payment plan that has no
indication of an interest component?: If the asset's fair value is readily determinable or if the note is traded, the firm
records the acquired asset at the fair value of the consideration given (the note) or the fair value of the consideration
received (the asset), whichever value is more clearly evident. The difference between the face amount of the note and
fair value of the property (or the note) is called the discount and represents the amount of interest to be deferred over the
loan term.
7. Same situation as the previous question, but - What if there no clearly evident fair market value and either
there is no stated interest rate or the rate
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, Accounting 305 - PSU - Module 3 Exam
specified is unreasonable?: The firm must compute the present value of the note as an estimate of the asset's fair value.
The firm computes the fair value of the asset by discounting the note payable at an implied or imputed rate of interest
reflecting the market rate of interest that a borrower would incur today under similar terms and conditions.
8. What is avoidable interest? Should this interest incurred in conjunction with construction of a long term
operating asset be capitalized or expensed?: - Avoidable interest is the interest amount that the firm could have
avoided if it had not borrowed funds to construct the plant asset. The decision to capitalize or expense these costs
depends on the definition of an asset.
9. How does capitalization of interest affect net income of the construction period and subsequent periods?: The
net income of the construction period will be higher than if the interest had been expensed. If the interest is capitalized, it
increases the cost of the asset and reduces the amount of depreciation expense that is recognized each period. This means
that the net income of subsequent periods will be lower than if the interest had been expensed
10.What are qualifying assets?: Qualifying assets include assets constructed by others for the firm's use when
deposits and progress payments have been made.
11.During what periods are interest capitalized?: From the time of the initial expenditure to the time the asset
is ready for its intended use.
12.What is the difference in accounting treatment of "revenue expenditures" vs. "capital expenditures?":
Capital expenditures are costs incurred that provide a future economic benefit that wasn't expected before the expenditure.
Capital expen- ditures will increase the asset's book value (those that increase or enhance output will be added to the
asset account, those that extend life will reduce accumulated depreciation) and be included in cost allocation over the
remaining service life.
Revenue expenditures are expensed in the current period. These are expenditures that simply keep the asset in its normal
working condition or return it to its normal working condition, such as normal repairs and maintenance.
13.What is depreciation?: Depreciation is the systematic and rational allocation of the cost of a long-term plant asset
to expense over the asset's expected useful life.
14.Is it reasonable for different firms to have different estimates of useful life and scrap value for similar
operating assets?: Yes, it is reasonable for different firms to have different estimates of the useful life and scrap value for
similar operating assets. There are several reasons why this might be the case:
1. Difference in operating conditions
2. Difference in Maintenance Practices
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1. What are included in "operating assets?": 1.) Tangible fixed assets (also referred to as property, plant, and
equipment)
2.) Natural resources
3.) Intangible assets
2. What are the characteristics assets classified as property, plant, & equip- ment?: a. Tangible in nature
b. Expected to be used for more than 1 year (or more than one operating cycle, whichever is longer)
c. Used in the production and sale of other assets, for rental to others or for administrative purpose
3. When an asset is capitalized, what costs are included in the cost of the asset?: The costs that are reasonable
and necessary to bring the asset to the location and condition required for its intended use.
Including: installation, delivery, special wiring, interest from the financing of con- structed assets, closing costs, and
sales tax.
4. What accounting principle is being applied when an asset meets the criteria to be capitalized as part of plant
and equipment, but its cost falls below a predetermined dollar amount?: MATERIALITY
- A materiality threshold for capitalization specifies that the firm immediately expense an asset that falls below a
predetermined fixed dollar limit (e.g., $1,000) rather than capitalize it as an asset.
5. How are the costs of individual assets acquired in a "basket purchase" determined?: When a firm acquires
homogeneous assets, it records the PPE at cost and includes it on the balance sheet, assigning an equal amount to each
asset. In basket purchases involving heterogeneous assets, the firm must properly allocate the total cost to the individual
accounts to be reported on the balance sheet (relative fair value method).
6. How is the cost of an operating asset determined if purchased under a deferred payment plan that has no
indication of an interest component?: If the asset's fair value is readily determinable or if the note is traded, the firm
records the acquired asset at the fair value of the consideration given (the note) or the fair value of the consideration
received (the asset), whichever value is more clearly evident. The difference between the face amount of the note and
fair value of the property (or the note) is called the discount and represents the amount of interest to be deferred over the
loan term.
7. Same situation as the previous question, but - What if there no clearly evident fair market value and either
there is no stated interest rate or the rate
1/
9
, Accounting 305 - PSU - Module 3 Exam
specified is unreasonable?: The firm must compute the present value of the note as an estimate of the asset's fair value.
The firm computes the fair value of the asset by discounting the note payable at an implied or imputed rate of interest
reflecting the market rate of interest that a borrower would incur today under similar terms and conditions.
8. What is avoidable interest? Should this interest incurred in conjunction with construction of a long term
operating asset be capitalized or expensed?: - Avoidable interest is the interest amount that the firm could have
avoided if it had not borrowed funds to construct the plant asset. The decision to capitalize or expense these costs
depends on the definition of an asset.
9. How does capitalization of interest affect net income of the construction period and subsequent periods?: The
net income of the construction period will be higher than if the interest had been expensed. If the interest is capitalized, it
increases the cost of the asset and reduces the amount of depreciation expense that is recognized each period. This means
that the net income of subsequent periods will be lower than if the interest had been expensed
10.What are qualifying assets?: Qualifying assets include assets constructed by others for the firm's use when
deposits and progress payments have been made.
11.During what periods are interest capitalized?: From the time of the initial expenditure to the time the asset
is ready for its intended use.
12.What is the difference in accounting treatment of "revenue expenditures" vs. "capital expenditures?":
Capital expenditures are costs incurred that provide a future economic benefit that wasn't expected before the expenditure.
Capital expen- ditures will increase the asset's book value (those that increase or enhance output will be added to the
asset account, those that extend life will reduce accumulated depreciation) and be included in cost allocation over the
remaining service life.
Revenue expenditures are expensed in the current period. These are expenditures that simply keep the asset in its normal
working condition or return it to its normal working condition, such as normal repairs and maintenance.
13.What is depreciation?: Depreciation is the systematic and rational allocation of the cost of a long-term plant asset
to expense over the asset's expected useful life.
14.Is it reasonable for different firms to have different estimates of useful life and scrap value for similar
operating assets?: Yes, it is reasonable for different firms to have different estimates of the useful life and scrap value for
similar operating assets. There are several reasons why this might be the case:
1. Difference in operating conditions
2. Difference in Maintenance Practices
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