Chapter 11 Codification Exercises

CODIFICATION EXERCISES CE11-1 (a) The master glossary provides two entries for amortization: Amortization The process of reducing a recognized liability systematically by recognizing revenues or reducing a recognized asset systematically by recognizing expenses or costs. In pension accounting, amortization is also used to refer to the systematic recognition in net pension cost over several periods of amounts previously recognized in other comprehensive income, that is, prior service costs or credits, gains or losses, and the transition asset or obligation existing at the date of initial application of Subtopic 715-30. Amortization The process of reducing a recognized liability systematically by recognizing revenues or by reducing a recognized asset systematically by recognizing expenses or costs. In accounting for postretirement benefits, amortization also means the systematic recognition in net periodic postretirement benefit cost over several periods of amounts previously recognized in other comprehensive income, that is, gains or losses, prior service cost or credits, and any transition obligation or asset. (b) Impairment is the condition that exists when the carrying amount of a long-lived asset (asset group) exceeds its fair value. (c) Recoverable amount is the current worth of the net amount of cash expected to be recoverable from the use or sale of an asset. (d) According to the glossary, the term activities is to be construed broadly. It encompasses physical construction of the asset. In addition, it includes all the steps required to prepare the asset for its intended use. For example, it includes administrative and technical activities during the preconstruction stage, such as the development of plans or the process of obtaining permits from governmental authorities. It also includes activities undertaken after construction has begun in order to overcome unforeseen obstacles, such as technical problems, labor disputes, or litigation. LO: 3, Bloom: K, Difficulty: Simple, Time: 15-20, AACSB: Communication, Technology, AICPA BB: Technology, AICPA FC: Reporting, Research, Technology, AICPA PC: Communication CE11-2 According to FASB ASC 360-10-40-4 through 6 (Impairment or Disposal of Long-Lived Assets . . . Long-Lived Assets to Be Exchanged or to Be Distributed to Owners in a Spinoff): 40-4 For purposes of this Subtopic, a long-lived asset to be disposed of in an exchange measured based on the recorded amount of the nonmonetary asset relinquished or to be distributed to owners in a spinoff is disposed of when it is exchanged or distributed. If the asset (asset group) is tested for recoverability while it is classified as held and used, the estimated future cash flows used in that test shall be based on the use of the asset for its remaining useful life, assuming that the disposal transaction will not occur. In such a case, an undiscounted cash flows recoverability test shall apply prior to the disposal date. In addition to any impairment losses required to be recognized while the asset is classified as held and used, an impairment loss, if any, shall be recognized when the asset is disposed of if the carrying amount of the asset (disposal group) exceeds its fair value. The provisions of this Section apply to nonmonetary exchanges that are not recorded at fair value under the provisions of Topic 845. 11-71 CE11-2 (Continued) 40-5 A gain or loss not previously recognized that results from the sale of a long-lived asset (disposal group) shall be recognized at the date of sale. 40-6 See paragraphs 360-10-35-47 through 35-48 for guidance related to the disposition of an asset upon its abandonment. LO: 3, Bloom: K, Difficulty: Simple, Time: 10-15, AACSB: Communication, Technology, AICPA BB: Technology, AICPA FC: Reporting, Research, Technology, AICPA PC: Communication CE11-3 According to FASB ASC 360-10-35-1 through 10 (Subsequent Measurement): 35-1 This Subsection addresses depreciation of property, plant, and equipment, and the acquisition accounting for an interest in the residual value of a leased asset. 35-2 This guidance addresses the concept of depreciation accounting and the various factors to consider in selecting the related periods and methods to be used in such accounting. 35-3 Depreciation expense in financial statements for an asset shall be determined based on the asset’s useful life. 35-4 The cost of a productive facility is one of the costs of the services it renders during its useful economic life. Generally accepted accounting principles (GAAP) require that this cost be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility. This procedure is known as depreciation accounting, a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation, not of valuation. 35-5 See paragraph 360-10-35-20 for a discussion of depreciation of a new cost basis after recognition of an impairment loss. 35-6 See paragraph 360-10-35-43 for a discussion of cessation of deprecation on long-lived assets classified as held for sale. 35-7 The declining-balance method is an example of one of the methods that meet the requirements of being systematic and rational. If the expected productivity or revenue-earning power of the asset is relatively greater during the earlier years of its life, or maintenance charges tend to increase during later years, the declining-balance method may provide the most satisfactory allocation of cost. That conclusion also applies to other methods, including the sum-of-the-years’digits method, that produce substantially similar results. 55-8 In practice, experience regarding loss or damage to depreciable assets is in some cases one of the factors considered in estimating the depreciable lives of a group of depreciable assets, along with such other factors as wear and tear, obsolescence, and maintenance and replacement policies. 11-72 CE11-3 (Continued) 35-9 If the number of years specified by the Accelerated Cost Recovery System of the Internal Revenue Service (IRS) for recovery deductions for an asset does not fall within a reasonable range of the asset’s useful life, the recovery deductions shall not be used as depreciation expense for financial reporting. 35-10 Annuity methods of depreciation are not acceptable for entities in general. LO: 1, 2, Bloom: K, Difficulty: Simple, Time: 15-20, AACSB: Communication, Technology, AICPA BB: Technology, AICPA FC: Reporting, Research, Technology, AICPA PC: Communication CE11-4 According to FASB ASC 210-10-S99 (Balance Sheet-Overall-SEC Materials) SEC Rules, Regulations, and Interpretations >> Regulation S-X >>> Regulations, S-X Rule 5-02, Balance Sheets S99-1 The following is the text of Regulation S-X Rule 5-02, Balance Sheets. The purpose of this rule is to indicate the various line items and certain additional disclosures which, if applicable, and except as otherwise permitted by the Commission, should appear on the face of the balance sheets or related notes filed for the persons to whom this article pertains (see § 210.4–01(a)). Assets And Other Debits 13. Property, plant and equipment. – (a) State the basis of determining the amount. – (b) Tangible and intangible utility plant of a public utility company shall be segregated so as to show separately the original cost, plant acquisition adjustments, and plant adjustments, as required by the system of accounts prescribed by the applicable regulatory authorities. This rule shall not be applicable in respect to companies which are not required to make much a classification. 14. Accumulated depreciation, depletion, and amortization of property, plant and equipment. The amount is to be set forth separately in the balance sheet or in a note thereto. LO: 5, Bloom: K, Difficulty: Simple, Time: 10-15, AACSB: Communication, Technology, AICPA BB: Technology, AICPA FC: Reporting, Research, Technology, AICPA PC: Communication 11-73