CPA Financial Accounting and Reporting (FAR) : Capitalizing Property, Plant, and Equipment
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Example Questions
Example Question #1 : Property, Plant And Equipment
On January 2, Year 1, a company borrows $1.2 million on a note due in 10 years. Each year interest of 9% of the principal must be paid. Proceeds from the loan are used to finance the construction of a building. All proceeds are spent evenly throughout the year and the building is complete at the end of Year 1. At what amount is the building capitalized?
$1,218,000
$1,200,000
$1,308,000
$1,254,000
$1,254,000
The capitalized cost of the building will include the principled borrowed as well as the average interest cost for the year. Total interest paid for the year is equal to $1.2M x 9% = $108K. Because the funds were spent evenly throughout the year, interest is averaged to best capture the cost of the building ($0 interest at the start of the year + $108K interest at the end of the year divided by 2 = $54K.) Therefore, the total capitalized cost is equal to $1.2M + $54K.
Example Question #2 : Property, Plant And Equipment
On January 1, Year 1, the Morgan Corporation borrowed $3 million at an interest rate of 8% per year. The company immediately began construction on a warehouse using the borrowed money. Work was performed evenly throughout the year and the warehouse was completed at the end of Year 1 at a total cost of $2.5 million. What amount of interest should Morgan recognize as interest expense in Year 1?
$0
$140,000
$200,000
$240,000
$140,000
All of the interest on the portion of the loan not used for construction will be expensed in the current year ($500K x 8%). In addition, the portion of interest on the construction funds that is not capitalized should also be expensed. This is calculated by taking the average interest paid (because costs were incurred evenly throughout the year) and expensing the uncapitalized portion. Average interest is equal to $100K ($2.5M x 8% divided by 2). Therefore, total interest expense is $40K + $100K.
Example Question #3 : Property, Plant And Equipment
Nico, Inc purchased equipment by making a down payment of $3,000 and issuing a note payable for $20,000. A payment of $5,000 is to be made at the end of each year for 4 years. The applicable rate of interest is 7%. The present value of an ordinary annuity factor for 4 years at 7% is 4.18, and the present value for the future amount of a single sum of 1 dollar for 4 years at 7% is 0.645. Installation charges were $1,500. What is the capitalized cost of the equipment?
$20,000
$20,900
$23,900
$25,400
$25,400
The capitalized cost of the equipment will include the down payment of $3K, the installment charges of $1,500, and the PV of the note payable. The note payable will be paid annually in 4 installments so the PV factor for an annuity should be used. The PV will be calculated as $5K annual payment x 4.18 = $20,900. Therefore, the capitalized cost of the equipment will be $3K + $1,500 + $20,900.
Example Question #4 : Property, Plant And Equipment
Of the following statements regarding the IFRS revaluation model is incorrect?
Further revaluation is necessary when the carrying value of revalued fixed assets differs materially from fair value
Revaluation gains are reported in other comprehensive income
Revaluation can be performed on individual fixed assets only or on classes of assets
Revaluation losses are reported on the income statement
Revaluation can be performed on individual fixed assets only or on classes of assets
Under IFRS, if an individual fixed asset is revalued, then the entire class of fixed assets to which that asset belongs must be revalued.
Example Question #5 : Property, Plant And Equipment
Which of the following two costs of purchasing a machine would be capitalized?
Neither
Testing and preparation of machine in use
Insurance on machine while in transit
Both
Both
Any cost incurred to acquire and make ready for use is capitalized.
Example Question #6 : Property, Plant And Equipment
Proceeds received on the sale of a facility used to purchase a new facility should be reported as a gain from:
Continuing operations
Discontinued operations
Other comprehensive income
Reduction of facility cost
Continuing operations
A net gain from selling one asset to acquire another is part of continuing operations as other revenues and gains.
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