Property, Plant & Equipment

Capitalize

• Land: price, closing costs, clearing, demolition of old building. Not depreciated.
• Equipment: price, tax, freight-in, installation, testing.
• Lump-sum: allocate by relative fair values.
• Interest: lesser of avoidable (on weighted-average accumulated expenditures) and actual interest.

Depreciation

• Double-declining balance: book value × 2/life — ignore salvage in the rate, stop at salvage.
• Sum-of-the-years'-digits: (cost − salvage) × remaining life ÷ n(n + 1)/2.
• Change in life, salvage, or method → prospective (change in estimate).

Exchanges

• Commercial substance → fair value; gains and losses in full.
• No commercial substance → carrying amount; no gain (unless cash received: proportional gain); losses always recognized.

Impairment (held for use)

1. Carrying amount > undiscounted cash flows? If yes →
2. Loss = carrying amount − fair value.

No reversals under US Generally Accepted Accounting Principles (GAAP). Held for sale: lower of carrying amount or fair value less costs to sell, no depreciation, recoveries allowed up to prior losses.

Exam traps

• Interest capitalization stops when the asset is ready for its intended use, and doesn't apply to inventory produced routinely.
• Assets donated to a business are recorded at fair value, with the credit to revenue or gain.
• Ordinary repairs are expensed; only additions, improvements and replacements that extend life or capacity are capitalized.
• After an impairment, the written-down amount is the new cost basis — depreciate it over the remaining life.