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Wiley CPAexcel Exam Review 2014 Focus Notes: Financial Accounting and Reporting by Ray Whittington

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Focus on: Fixed Assets—Module 11

PROPERTY, PLANT, AND EQUIPMENT

General Rule

Capitalized amount = Cost of asset + Costs incurred in preparing it for its intended use

Cost of asset = Fair market value (FMV) of asset received or
Cash paid + FMV of assets given

Gifts:

Asset (FMV) xx
Income
xx

Other capitalized costs for assets acquired by gift or purchase:

Shipping
Insurance during shipping
Installation
Testing

Land and Building

Total cost:

  • Purchase price
  • Delinquent taxes assumed
  • Legal fees
  • Title insurance

Allocation to land and building—Relative Fair Market Value Method

FMV of land
+ FMV of building
= Total FMV

Land = FMV of land ÷ Total FMV × Total cost

Building = FMV of building ÷ Total FMV × Total cost

Capitalization of Interest

Capitalize on:

  • Assets constructed for company’s use
  • Assets manufactured for resale resulting from special order

Do not capitalize on:

  • Inventory manufactured in the ordinary course of business

Interest capitalized:

  • Interest on debt incurred for construction of asset

Interest on other debt that could be avoided by repayment of debt

Computed on:

  • Weighted-average accumulated expenditures

Costs Incurred After Acquisition

Capitalize if:

  • Bigger—The cost makes the asset bigger, such as an addition to a building
  • Better—The cost makes the asset better, such as an improvement that makes an asset perform more efficiently
  • Longer—The cost makes the asset last longer, extends the useful life

Do not capitalize:

Repairs and maintenance

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