Construction Equipment and Asset Management Flashcards

A construction company trades in old equipment (book value $20,000) for new equipment (list price $80,000) and receives a $25,000 trade-in allowance. What is the recorded cost of the new equipment?

Answer: $55,000

The new equipment is recorded at the cash paid plus the fair value given up: $80,000 - $25,000 = $55,000.

Which costing approach charges equipment ownership costs (depreciation, insurance, taxes) to projects based on time on-site?

Answer: Ownership cost allocation

Ownership cost allocation distributes fixed equipment ownership costs to projects proportionally based on time the equipment is assigned.

An impairment loss on construction equipment must be recognized when:

Answer: The carrying amount exceeds the recoverable amount

Under ASC 360, an impairment loss is recorded when the carrying value of an asset exceeds its recoverable (fair) value.

What distinguishes a capital expenditure from a revenue expenditure for construction equipment?

Answer: Capital expenditures extend useful life or improve capacity; revenue expenditures maintain current condition

Capital expenditures are capitalized because they extend useful life or enhance capability, while revenue expenditures are expensed as routine maintenance.

In construction equipment lease-versus-buy analysis, which factor favors leasing?

Answer: Desire to avoid obsolescence risk

Leasing transfers obsolescence risk to the lessor, making it favorable when equipment technology changes rapidly.

Which financial ratio best measures a construction company's ability to replace aging equipment from internally generated funds?

Answer: Capital expenditure coverage ratio

The capital expenditure coverage ratio (operating cash flow / capital expenditures) shows whether the company generates enough cash to fund equipment replacement.