ACG 3131 Chapter 10-11 Study Guide with Questions and Correct Answers
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Course
ACG 3131
Institution
ACG 3131
Additions increase or extension of existing assets, such as adding a wing to a hospital. Companies capitalize any addition to plant assets because a new asset is created.
Avoidable interest the amount of interest cost in a period that a company could theoretically avoid if it had not made expendit...
ACG 3131 Chapter 10-11 Study Guide
with Questions and Correct Answers
Additions ✅increase or extension of existing assets, such as adding a wing to a
hospital. Companies capitalize any addition to plant assets because a new asset is
created.
Avoidable interest ✅the amount of interest cost in a period that a company could
theoretically avoid if it had not made expenditures for an asset. When a company
capitalizes interest expense, the amount of interest to capitalize is limited to the lower of
actual interest cost incurred during the period or the amount of avoidable interest.
Capital expenditure ✅expenditure whose purpose is to create a new asset or to
increase an asset's future benefits. Such expenditures are to be capitalized, rather than
expensed.
Capitalization period ✅the period of time during which a company must capitalize
interest. The period lasts for as long as three conditions are present: expenditures for
the asset have been made, activities needed to prepare the asset for its intended use
are in progress, and interest cost is being incurred.
Commercial substance ✅in accounting for exchanges of nonmonetary assets, the
basis for measuring the gain or loss on an exchange. If the future cash flows change (if
the two parties' economic positions change) as a result of the transaction, the
transaction is said to have commercial substance, and the parties to the exchange
recognize a gain or loss on the exchange.
Fixed assets ✅assets of a durable nature used in the regular operations of a business.
Also called property, plant, and equipment, and plant assets.
Historical cost ✅the cash or cash equivalent price of obtaining an asset and bringing it
to the location and condition necessary for its intended use. Most companies use
historical cost as the basis for valuing property, plant, and equipment. Historical cost
typically includes the purchase price, freight costs, sales taxes, installation costs, and
any related costs incurred after the asset's acquisition (such as additions or
improvements) if they provide future service potential. Historical cost is allocated to
future periods through depreciation.
Improvements (betterments) ✅the substitution of a better asset for the one currently
used (say, a concrete floor in a factory for a wooden floor). If the expenditure for an
improvement increases future service potential of an asset, the company capitalizes the
cost of the improvement.
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