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chapter10 outline Fall 2010

chapter10 outline Fall 2010 - Accounting 340 Howard Bunsis...

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Accounting 340 – Howard Bunsis Chapter 10 - Acquisition and Disposition of Property Plant and Equipment I. Property, Plant, and Equipment A. Characteristics 1. Possess physical substance. 2. Acquired for use and not resale. 3. Long-term in nature. 4. Subject to depreciation, except for land. B. T0hese assets are initially recorded at historical cost, which includes the amount of cash and the FMV of other items that are given up to obtain the asset. Also, the expenditures to get the asset ready to use are included in the cost. C. Gains and losses are not recognized until the asset is exchanged or sold. Exception is SFAS 121 (chapter 11). II. S0elf-Constructed Assets – making your own stuff A. The interest that could have been avoided if the project would not have been constructed is capitalized to an asset account. B. Arguments concerning capitalization 1. Improves the process of matching costs and revenues because the capitalized interest is depreciated as part of the asset in a systematic manner as the asset is being used to generate revenue. 2. Increases net income. Why? Lower expenses. C. Assets that qualify for capitalization of interest 1. Assets under construction for own use whether self-constructed or constructed by others. 2. Assets intended for resale that are being constructed as discrete projects (ships, shopping centers, motion pictures). D. T0he amount of interest to be capitalized is the avoidable interest or the amount that theoretically could have been avoided if expenditures for the asset had not been made. Avoidable Interest = WAE X Interest Rate E. Steps for Interest Capitalization 1. Determine weighted-average accumulated expenditures (WAE) a. Weighted-average accumulated expenditures are the average amount of funds tied up in the project during the year. They represent the amount the firm had to borrow to support the cash expenditures for the project during the year on an annualized basis. b. Multiply each expenditure by the following fraction: number of months from expenditure date to the end of project / 12. 1
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c. Sum the amounts from step (i). 2. D00etermine the appropriate interest rates a. Identify the interest rate for specific debt, the debt incurred explicitly for the construction project. b. Identify the interest rate for the general debt, all other debt outstanding. If there is more than one issue of general debt, calculate the weighted-average interest: Total interest incurred Total principal c. The interest rates are applied based on the following priorities: (1) Use specific debt interest rate for amount where weighted average accumulated expenditures are less than or equal to the amount of specific debt.
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