CPA Financial Accounting and Reporting (FAR) : Property, Plant and Equipment
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Capitalizing 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?
$1,200,000
$1,308,000
$1,254,000
$1,218,000
$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 : Capitalizing 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?
$200,000
$240,000
$140,000
$0
$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 : Capitalizing 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?
$23,900
$20,000
$20,900
$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 : Capitalizing Property, Plant, And Equipment
Of the following statements regarding the IFRS revaluation model is incorrect?
Revaluation can be performed on individual fixed assets only or on classes of assets
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 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 : Capitalizing Property, Plant, And Equipment
Which of the following two costs of purchasing a machine would be capitalized?
Insurance on machine while in transit
Testing and preparation of machine in use
Neither
Both
Both
Any cost incurred to acquire and make ready for use is capitalized.
Example Question #6 : Capitalizing 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:
Other comprehensive income
Reduction of facility cost
Continuing operations
Discontinued operations
Continuing operations
A net gain from selling one asset to acquire another is part of continuing operations as other revenues and gains.
Example Question #1 : Asset Retirement Obligations
Which of the following is untrue regarding asset retirement obligations?
If a company acquires a fixed asset to which an asset retirement obligation is attached, the company should recognize a liability as of the acquisition date
When estimating the fair value of an asset retirement obligation, a company should use a discounted cash flow model using a rate that factors in market risk
A business should recognize the fair value of an asset retirement obligations when it incurs the liability and if it can make a reasonable estimate of its fair value
If the fair value of an asset retirement obligation cannot initially be obtained, the liability can be recorded at a later date when the fair value is available
When estimating the fair value of an asset retirement obligation, a company should use a discounted cash flow model using a rate that factors in market risk
Companies do not need to discount cash flows when estimated asset retirement obligations.
Example Question #2 : Asset Retirement Obligations
Which of the following would be included in the journal entry to retire a fixed asset?
A debit to depreciation expense
A debit to accumulated depreciation
A credit to accumulated depreciation
A credit to sales revenue
A debit to accumulated depreciation
When an asset is retired, the asset value and its related accumulated depreciation are reverse. This means a debit will be booked to accumulated depreciation to clear the account.
Example Question #3 : Asset Retirement Obligations
Which of the following is not a common method of asset disposal?
Scrap
Conversion
Sale
Exchange
Conversion
The most common methods of asset disposal are sale, scrap, and exchange.
Example Question #4 : Asset Retirement Obligations
Of the following assets, which is an intangible that is subject to a recoverability test when testing for impairment?
R&D costs for a patent
A trademark with indefinite useful life
A patent
Goodwill
A patent
The recoverability test is only performed on intangible assets with a limited life. A patent generally has a limited life.
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