ACC 311 Lecture 14: ACC CHAPTER 10 INTEREST

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apricotwoodchuck413

3 May 2018

School

University of Miami

Department

Accounting Business Administration

Course

ACC 311

Professor

andrewmcmartin

For unlimited access to Class Notes, a Class+ subscription is required.

Interest Costs During Construction

1. Capitalize no interest charges during construction.

2. Charge construction with all costs of funds employed, whether identifiable or not.

3. Capitalize only the actual interest costs incurred during construction.

a. GAAP REQUIRES THIS.

Companies consider:

● Qualifying assets

○ To qualify, assets must require a period of time to get them ready for their

intended use

○ Non-qualifying assets include:

■ Assets that are in use or ready for their intended use

■ Assets that the company does not use in its earnings activities and

that aren’t undergoing the activities necessary to get them ready for

use

● Capitalization Period

○ Begins with:

■ Expenditures for asset have been made

■ Activities that are necessary to get asset ready for its intended use

are in progress

■ Interest cost is being incurred

○ Continues as long as those conditions are present

● Amount to Capitalize

○ Avoidable interest: amount of interest cost during the period that a

company could technically avoid if it has not made expenditures for the

asset

○ Capitalize either avoidable interest or actual incurred: whichever is

lower

Weighted-Average Accumulated Expenditures

● Weights construction expenditures by the amount of time it can incur interest cost

on the expenditure

● PAGE 509

● Weighted average interest rate

● Total interest/total principal

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Document Summary

Interest costs during construction: capitalize no interest charges during construction, charge construction with all costs of funds employed, whether identifiable or not, capitalize only the actual interest costs incurred during construction, gaap requires this. To qualify, assets must require a period of time to get them ready for their intended use. Assets that are in use or ready for their intended use. Assets that the company does not use in its earnings activities and that aren"t undergoing the activities necessary to get them ready for use. Activities that are necessary to get asset ready for its intended use are in progress. Continues as long as those conditions are present. Avoidable interest: amount of interest cost during the period that a company could technically avoid if it has not made expenditures for the asset. Capitalize either avoidable interest or actual incurred: whichever is lower. Weights construction expenditures by the amount of time it can incur interest cost on the expenditure.

Related Questions

Can someone please provide the solutions. No explanation needed,just the answers so I can double check my work.

2. Firms with tangiblelong-term assets and less predictable cash flows, such as automanufacturers and steel companies, whose sales vary with changes ineconomic conditions, tend to use

a.	a more nearly equal mix of long-term debt and shareholdersâequity financing.
b.	a greater amount of long-term debt [80%] than shareholdersâequity financing [20%].
c.	a smaller amount of long-term debt [20%] than shareholdersâequity financing [80%].
d.	a greater amount of long-term debt [80%] than assets [20%].
e.	a greater amount of shareholdersâ equity [80%] than assets[20%].

3. During Year 3,Carrington Company made the following expenditures relating toplant machinery and equipment:

Â·	Continuing, frequent, and low cost repairs	$46,000
Â·	Special long-term protection devices were attached to tenmachines	11,000
Â·	A broken gear on a machine was replaced	5,000

How much should be charged to repairs and maintenance in Year3?

a.	$46,000
b.	$51,000
c.	$57,000
d.	$41,000
e.	none of the above

4. Which of the followingis/are not capitalized as an intangible asset?

a.	costs of an internally developed patent
b.	legal costs to defend a patent successfully
c.	goodwill acquired when a company purchases another company
d.	costs to purchase a patent
e.	none of the above

5. Repairs and maintenancedo not include

a.	the costs of restoring an asset's service potential afterbreakdowns.
b.	expenditures that increase the asset's life.
c.	routine costs such as for cleaning and adjusting.
d.	major tune-ups including labor and parts.
e.	All of the above are not considered to be repairs ormaintenance.

12. Sigma Company suffers a loss to itsbuilding in a fire and spends $100,000 on repairs and improvements.It judges that $80,000 of the expenditure replaces long-livedassets lost in the fire, and $20,000 represents improvements to thebuilding. Which of the following is the single journal entry thatSigma Company will make?

a.	Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 100,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .. 100,000
b.	Loss from Fire . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 100,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. 100,000
c.	Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 100,000 Building . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .. 20,000 Loss from Fire . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 80,000
d.	Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 20,000 Loss from Fire . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 80,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. 100,000
e.	Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 100,000 Loss from Fire . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 100,000

16. Firms treat expenditures as assetswhen they:

a.	have acquired rights to the future use of a resource as a resultof a past transaction or event.
b.	can reliably measure the cost of the expected benefits at thetime of initial recognition.
c.	can exercise the entityâs right to, or control of, thebenefit.
d.	can obtain the future service potential and control othersâaccess to it.
e.	all of the above

Clarion Realty

Clarion Realty has decided to construct its own office building.The construction will be partially financed through a constructionloan and any remainder will be financed from internally generatedfunds. The internal accountants have collected the followinginformation concerning the construction.

	Average Balance	Construction	Other
Year	Construction Account	Debt @ 6%	Debt @ 10%
1	$2,000,000	$1,000,000	$500,000
2	$4,000,000	$1,000,000	$250,000
3	$3,000,000	$800,000	$200,000

22. The amount, if any, of capitalizedinterest cost for Year 1 is

a.	$0
b.	$50,000
c.	$60,000
d.	$110,000
e.	$170,000

23. The amount, if any, of capitalizedinterest cost for Year 2 is

a.	$0
b.	$50,000
c.	$60,000
d.	$180,000
e.	$230,000

33. When a firm constructs its ownbuildings or equipment:

a.	it recognizes the labor, material, and overhead costs incurredas an asset.
b.	U.S. GAAP and IFRS require firms to include, or capitalize,interest costs during construction in the cost of aself-constructed asset.
c.	it recognizes the labor, material, and overhead costs incurredas a period expense.
d.	U.S. GAAP and IFRS require firms to expense interest costsincurred during construction of a self-constructed asset.
e.	both choices a and b are correct.

Read the 2015 annual report of Air France â KLM and answer the 20 questions asked regarding the accounting issues. Link is provided below:

http://www.airfranceklm.com/sites/default/files/publications/afkl_registration_doc_2015.pdf

1. Air France-KLM reports âConsolidated statement of recognized income and expensesâ for the year ended December 31, 2015. If this statement was a U.S. GAAP statement, what would be the title of this statement?

a. Consolidated statement of total net income

b. Consolidated statement of other comprehensive income

c. Consolidated statement of comprehensive income

d. Consolidated statement of recognized net income

2. What method does Air France-KLM use for the Statement of Cash Flows?

a. Indirect method

b. Direct method

c. Gross method

d. Net method

3. The basic and diluted earnings per share for the year ended December 31, 2015, indicates that Air France-KLM has:

a. no convertible debts.

b. some dilutive securities.

c. no preferred stocks.

d. some treasury stocks.

4. What method is used to account for investments in companies over which Air France-KLM can âexercise significant influence on financial and operating policy decisions?â

a. Cost method

b. Liability method

c. Equity method

d. Fair value method

5. Sale of passenger tickets is accounted for at the time of ticket sale as:

a. Sales revenue

b. Deferred revenue

c. Contingent asset

d. No recognition

6. How does Air France account for business combination costs other than those related to the issuance of debt or equity securities?

a. Expensed as incurred

b. Capitalized as incurred

c. Included in goodwill

d. Used to offset fair value of the acquisition

7. Which of the following is not an âaccumulated other comprehensive incomeâ item among those reported in the âreserves and retained earningsâ in the 2015 consolidated balance sheet of Air France-KLM?

a. Available for sale securities reserves.

b. Derivatives reserves.

c. Legal reserves.

d. Pension defined benefits reserves.

8. What is the carrying amount of investments in debt and equity securities that are classified as available-for-sale?

a. Fair value Cost

b. Amortized cost

c. Lower of cost or market

9. Inventories are carried at:

a. The lower of the first-in-first-out cost or net realizable value.

b. The first-in-first-out cost.

c. The lower of the weighted-average cost or net realizable value.

d. The weighted-average cost.

10. Air France-KLM classifies its frequent flyer programs as:

a. Noncurrent liability

b. Current liability

c. Current asset

d. Other debt

11. The followings are included in Air France-KLMâs intangible assets, except for:

a. Trademarks

b. Leased aircraft

c. Customer relationships

d. Slots for takeoff and landing

12. Air France-KLM reports bank overdrafts as:

a. A contra account to cash and cash equivalents.

b. A current liability.

c. An expense.

d. A bank deposits in transit.

13. Which method does Air France-KLM use to record depreciation expense for its flight equipment?

a. The activity-based method.

b. The sum-of-yearsâ-digit method.

c. The straight-line method.

d. The group method.

14. Which accounting standards does Air France-KLM use?

a. U.S. GAAP

b. French GAAP

c. Netherlands GAAP

d. International Financial Reporting Standards

15. As of December 31, 2015, what assets are held for sale?

a. Land

b. Aircraft

c. Equipment

d. Buildings

16. Which of the following is included in âincome from operating activitiesâ but not in âincome from current operations?

a. Sale of aircraft equipment

b. Research and development costs

c. Bad debt expense

d. Interest revenue

17. Which of the following is not true about accounting treatment for the overhaul cost of major airframe and engine?

a. The cost is treated as separate asset component.

b. The cost is capitalized.

c. The cost is depreciated over the remaining useful life.

d. The cost is expensed as incurred.

18. How are financial assets accounted for if the Air France-KLM intends to sell them in the near future to realize capital gains?

a. At fair value with fair value changes recognized in the current period profit and loss

b. At fair value with fair value changes recognized as other comprehensive income

c. At cost with no recognition of fair value changes

d. At amortized cost with no recognition of fair value changes

19. Which of the following is not true about impairment test?

a. Tangible fixed assets, intangible assets, goodwill, and other assets with indefinite useful life are subject to an impairment test.

b. The impairment test is done at least once a year.

c. Recoverable value is the lower of the net realizable value and value in use.

d. The value in use is determined according to the discounted future cash flow method.

20. Which of the following is not an âother non-current income and expensesâ item?

a. Restructuring costs

b. Gains and losses on disposal of shares available for sale

c. Gains and losses on disposal of subsidiaries and affiliates

d. Gains and losses on sale of trading securities

Read the Interview for the Miss Peach Project below and write asystems requirement checklist with these five general catagories:Outputs, Inputs, Processes, Performance and controls.

In a prior interview, Miss Peach provided the informationsummarized below. She has also provided associated documentationshe thought might be helpful.

Payroll

Currently Miss Peach pays her students $3 each Monday usingpaper money for doing their assigned chores during the week. Shethen charges them $1 for rent on their desks. She also pays bonusesfor bringing in homework (about $8 a week) and for good behavior($1 a day).

This works pretty well as far as it goes, but Miss Peach wouldlike to model real life even more. With the new system, thestudents' pay would be posted to their bank accounts. In order forthe tax tables to work, Miss Peach will have to increase the weeklysalaries to about $150. Each week the students would receive anearnings statement that would list their gross pay (broken down bysalary, bonuses, and hourly pay), their current deductions (Federalincome tax, Social Security tax, Medicare tax, and Michigan stateincome tax), and their net pay deposited into their bank account.The rent for their desks would be inflated to $25 and would be anautomatic deduction from the students' weekly pay. There would alsobe a column indicating the year-to-date values.

Although Miss Peach currently does not pay an hourly wage, shewould like the option to do so at a later time.

Miss Peach has included a copy of her weekly earnings statementto be used as a model.

Earnings Statement

Kelly Elementary School

5150 Riverside Drive

Marshall, MI 49068

Period Ending:9/24/2004

Pay Date: 9/24/2004

Taxable Marital Status: Single

Exemptions/Allowances:

Federal: 1

State: 1

Pamela Peach

135 Grove Street

Marshall, MI 49068

Earnings	rate	hours	this period	year to date
Regular	650.00		650.00	2,600.00
	Gross Pay		650.00	2,600.00

Deductions	Statutory
	Federal Income Tax		-70.73	282.92
	Social Security Tax		-40.30	161.20
	Medicare Tax		-9.43	37.72
	MI State Income Tax		-22.88	91.52

	Other
	Direct Deposit		-506.66	2,026.64

	Net Pay		$0.00

Store

Currently Miss Peach opens the class store Monday, right afterpayday. She runs the store herself, but would like the new systemto support students running the store. She keeps the inventorystocked fairly well considering her limited time and resources. Shemostly uses standard school supplies (see list below), although shesometimes supplements the inventory with stickers and craftsupplies from her own pocket or items donated by parents. Currentlyno records are kept.

Although very popular with the students, Miss Peach finds thecurrent system way too chaotic. Her main goal is to use thecomputer to make it possible for the students to run the storethemselves. Shifting the responsibility for running the store toher students would make it into a learning experience for them. Italso would make it possible to open the store anytime a student isfinished with his or her regular activities.

General supplies include pencils, pens, crayons, markers, chalk,white paper, lined paper, notebooks, colored paper, tissue paper,construction paper, rulers, scissors, glue sticks, tape, brassfasteners, envelopes, paint, pipe cleaners, glue, and popsiclesticks.

Donated supplies include books, arts and craft materials (leftover cloth and yarn, toilet paper rolls, bottle caps), and sciencematerials (plastic yogurt containers, seeds, potting soil).

Miss Peach has included a copy of the paper receipt currentlybeing used in the school store to be used as a model.

4^th Grade StoreKelly Elementary School 5150Riverside Drive Marshall, MI 49068

Customer: ID Date:

Receipt

Qty	ID	Description	Each	Total




















		Subtotal
		Tax (6%)
		Debit Total

Signature:

Bank

Currently Miss Peach acts as the bank. All transactions are inpaper money and the only records are related to the normal gradingactivities of homework and behavior. She would like the new systemto allow students to have access to their bank accounts through anATM machine.

Through the ATM the students should be able to change theirpasswords, check their current balances, transfer funds between thechecking and savings accounts, and see or print listings of alltransactions for a period of time. Money in the savings accountshould accrue interest.

Miss Peach has included a copy of her bank checking and savingsaccount transaction histories to be used as a model.

Teachers Credit Union

Checking Account History

periwinklewalrus620

ACC 311 Lecture 14: ACC CHAPTER 10 INTEREST

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