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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