Mastering Cost of Natural Resources, PP&E, and Intangible Assets, can be done by properly accounting for it. Natural resource are benefits upon physical consumption and determined by (Purchase price + cost to transport) or by DEAR (Development, Exploration, Acquisition, and Restoration if developed). For Restoration, consider Asset Retirement Obligations or AROs. To help with AROs, consider SRMP being Scope, Recognition, Measurement, and PV Calculations to determine ARO.
Note that the entries for AROs will be the need to debit DEA of DEAR, Credit Cash, and Credit ARO after adjusting for the PV of the Weighted Average future cash flows). You will need to Dr. Accretion Expenses of the PV of the Restoration Cash Flows, if financing Restoration Costs, and Cr. The AROs. Once full expense is going to be known and paid out, you will Debit ARO (and if there is a loss, the loss), while Cr. Cash (if there is a gain, then CR. Gain). In relation to capitalizing costs for PP&E and intangible assets, equipment can be capitalized using Purchase Price, Freight, Insurance, Project Related Expenses, and Trial Runs. For building PP&E, you will have PARR being Purchase Price, Attorney fees, Real Estate Commissions, and Reconditioning Costs. A cost of land, you can consider PARTRAE being Purchase Price, Attorney Fees, Real Estate Commissions, Title Costs, Recording Fees, Any Back Taxes, mortgages, or liens and Expenditures of removing, restoring, filling, and etc. associated. Proceeds from salvaged materials however, will reduce the cost of land and capitalized amount. For land improvements, they are estimatable, identifiable, and can be capitalized over a depreciated useful life. Lump sum purchases refer to acquisitions of a group of assets: If Fair Value (“FV”) identifiable, then provide allocation to determine potential values of an asset. Use individual asset weights of FV to determine potential adjustment in determining asset selling price. Goodwill will equal FV assets – FV liabilities, where Dr. of assets, Dr. Goodwill, and Cr. Cash occurs. Donation Assets will be Dr. Building/Asset, Cr. Cash – Donation of Asset REVENUE, and Cr. Donation of Asset REVENUE. In Exchanges, it is important to note the entries when trying to match FVs. Gains or losses will be determined by FV – BV of asset sold. Dr. New Equipment, Depreciation, and potential Losses Cr. Old equipment, Cash, and potential gains. If a lack of commercial substance exists, a gain occurs if BV is used to record the exchange, and FV if loss (this is unlikely). Now, let us discuss Self Constructed Assets. A corporation may decide to construct an asset rather than buying an existing one, therefore, it is necessary to account for (i) determining the amount of indirect OH to be allocated to construction and (ii) deciding proper treatment of interest. OH allocation should include the “incremental costs only” and should take a “full cost” (aka as absorption costing) approach. While for interest capitalization, it should be capitalized and then allocated as depreciation. Interest capitalization implications include: (1) Qualifying Asset being assets constructed for a company’s own use and/or potential discrete projects for sale/rent/lease (only interests incurred during construction is eligible for capitalization); (2) Period of Capitalization, which begins when construction starts and first expenditure is made during time interest is being incurred; (3) Average Accumulated Expenditures being the approximate of average debt for construction. Therefore, the steps of interest capitalization are (1) Determining Weighted Average Accumulated Expenditures, (2) Calculating the amount of interest to be capitalized, and (3) Compare Calculated Interest with Actual Interest. So, consider in the year Jan 1, Mar 31, June 30 expenditures of $100, $200, and $300K, respectively. Time weighted average for step one will be (100 * 12/12) + (200 * (9/12) + (300* 6/12), equaling Time Weighted Expenditure of $400K. The project will incur more expenditures next year, so the interest is able to be capitalized. Assuming 10% interest, step two will be taking the Time Weighted $400K multiplying by 10% giving us $40K. If the cost of the building was $600K (the sum of the previously stated expenditures), then Accumulated Expenditures will be $640K. Then you will compare calculated interest with actual interest from other interest-bearing debt. Assuming they had actual interest that was greater than the 40K from the other sources, you will use the $40K or the lower amount (which is the case here). If you were to continue into the following year, you will carry the $640 balance + any following year expenditures (repeating the same process as the expenditures from this year) to further know how much interest to capitalize.
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