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Assets, activities and Master Glossary in the FASB Codification

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1. Locate the Master Glossary in the FASB Codification, and answer the following questions:
a. What is the formal definition in the glossary of the term "Activities" as it relates to property, plant & equipment?
b. PFW Company is constructing a specialized machine for use in manufacturing its product. Construction had been ongoing for several months when, on April 1, one of its suppliers experienced a labor strike. The materials purchased from this supplier at a cost of $50,000 were critical to the manufacture of the machine. In order to keep construction on schedule PWF opted to pay $100,000 to purchase the same materials on a rush order from another supplier. Based on the definition above, should PFW capitalize the full $100,000 of material cost to the machine, or should it capitalize only $50,000 and report the remaining $50,000 as an extraordinary loss?
2. What are the Codification topic and subtopic numbers for Capitalization of Interest?

3. According to the objectives for this subtopic:
a. What is the effect on earnings if a company fails to capitalize the interest cost associated with acquiring an asset? (Provide the Codification reference for your answer)
b. Does that mean that income would be too high (overstated) or too low (understated) in the year that the interest expense was incurred?

4. What is an example of an asset for which Interest shall not be capitalized? (Provide the Codification reference for your answer)

5. Companies often elect not to capitalize interest costs for the construction of property, plant & equipment if those amounts are under a certain minimum threshold level (the amounts are deemed immaterial). GAAP specifically permits that treatment for minor items in inventory and individual items of property, plant & equipment on what grounds? (Provide the Codification reference for your answer)

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Solution Summary

Defines the term "activities" as it relates to property, plant and equipment. Also examines capitalization of interest and other capital-related decisions.

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Quest Tech: Multiple arrangement revenue recognition

Quest Tech, Inc. manufactures and sells specialized data storage equipment and services to entertainment and media companies. The equipment is used to efficiently store large data files. Quest Tech is currently marketing its latest equipment, which includes the Company's new patented technology that significantly increases its storage efficiency and reduces data corruption risk to a low level. Quest Tech entered into a contract with Dynamic Co., which operates several data centers throughout the world.
Please consider the following additional facts and write a position paper documenting Quest Tech's revenue recognition considerations and conclusions in three pages or less. You can use FASB.org for the information or any other research tool.
- Quest will deliver five data storage units to Dynamic. Dynamic may purchase additional units at a discount of 35% off the list price.
- Quest Tech will provide maintenance services for a period of 1 year. Dynamic has the option to extend these services on an annual basis.
- Quest Tech will install the Equipment no later than 30 days after delivery.
- Dynamic will pay to Quest Tech the sum of $5,000,000 upon execution of this agreement.
- In the event Dynamic renews the maintenance services, Dynamic will pay to Quest Tech the sum of $1,000,000 upon each annual renewal. Other vendors provide installation services, but Quest Tech does not provide installation services separately.
- Quest Tech's competitors sell similar equipment for $1,000,000 per unit.

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