Property, Plant and Equipment: Acquisition and Disposal C hapter 10 An electronic presentation by Norman Sunderman Angelo State University An electronic

Property , Plant and Equipment:

Acquisition and Disposal

Chapter 10

An electronic presentation by Norman Sunderman Angelo State University

An electronic presentation by Norman Sunderman Angelo State University

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Intermediate AccountingIntermediate Accounting 10th edition 10th edition

Nikolai Bazley JonesNikolai Bazley Jones

2

Characteristics of Property, Plant, and Equipment

1. The asset must be held for use and not for investment.

2. The asset must have an expected life of more than one year.

3. The asset must be tangible in nature.

To be included in the property, plant, and equipment category, an asset must have three characteristics:

3

Acquisition of Property, Plant, and Equipment

Determination of CostDetermination of Cost

Devon Company purchases a machine with a contract price of $100,000 on terms of 2/10, n/30. The company does not take the cash discount and incurs transportation costs of

$2,500, as well as installation and testing costs of $3,000. Sales taxes total $7,000 on the

purchase. During installation, uninsured damages of $500 are incurred.

Devon Company purchases a machine with a contract price of $100,000 on terms of 2/10, n/30. The company does not take the cash discount and incurs transportation costs of

$2,500, as well as installation and testing costs of $3,000. Sales taxes total $7,000 on the

purchase. During installation, uninsured damages of $500 are incurred.

What is the cost of the machine?What is the cost of the machine?What is the cost of the machine?What is the cost of the machine?

4

Determination of CostDetermination of Cost

Contract price $100,000 Discount not taken (2,000)Transportation cost 2,500 Installation and testing 3,000 Sales tax 7,000 Cost of machine $110,500

Contract price $100,000 Discount not taken (2,000)Transportation cost 2,500 Installation and testing 3,000 Sales tax 7,000 Cost of machine $110,500


5

Machine 110,500Repair Expense 500Discounts Lost 2,000 Cash 113,000

The company does not include the $500

damage because it was not a necessary

cost.

The company does not include the $500

damage because it was not a necessary

cost.


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Contract priceCosts of closing the

transaction, obtaining the title, options, legal fees, title search, insurance, past due taxes

Contract priceCosts of closing the

transaction, obtaining the title, options, legal fees, title search, insurance, past due taxes


Cost of LandCost of Land

Cost of surveysClearing and

grading property to get it ready for its intended use

Razing old buildings (net of salvage)

Cost of surveysClearing and

grading property to get it ready for its intended use

Razing old buildings (net of salvage)

7

LandscapingStreetsSidewalksSewers

Cost of Land ImprovementsCost of Land Improvements


8

Contract price Remodeling and

reconditioning Excavating for the specific

building Architectural and building

permit costs Capitalized interest Certain unanticipated costs

Contract price Remodeling and

reconditioning Excavating for the specific

building Architectural and building

permit costs Capitalized interest Certain unanticipated costs

Cost of BuildingsCost of Buildings


9

Deferred PaymentsDeferred Payments

Antush Company purchases equipment by issuing a $10,000 non-interest-bearing 5-year note. A $2,000 payment will be made at the end of each year. The

market rate for obligations of this type is 12%.

Antush Company purchases equipment by issuing a $10,000 non-interest-bearing 5-year note. A $2,000 payment will be made at the end of each year. The

market rate for obligations of this type is 12%.

Equipment 7,210Discount on Notes Payable 2,790 Notes Payable 10,000

($2,000 x 3.604776)


10

Assets Acquired by DonationAssets Acquired by Donation

The City of Julesberg (a governmental unit) donates land worth $20,000 to the

Klemme Company.

The City of Julesberg (a governmental unit) donates land worth $20,000 to the

Klemme Company.

Land 20,000 Donated Capital 20,000

(by a governmental unit)


11

Assets Acquired by DonationAssets Acquired by Donation

The CEO of Hrouda Company donates a building worth $50,000 to the company.

The CEO of Hrouda Company donates a building worth $50,000 to the company.

Building 50,000 Gain from Donation of Land 50,000 (by a nongovernmental unit)


The gain is reported in the Other section of the income statement.

12

Start-up CostsSOP No. 98-5 requires that a company

expense costs of start-up activities incurred. Start-up costs are costs related to one-time activities for

opening a new facility, introducing a new product etc.

SOP No. 98-5 requires that a company expense costs of start-up activities incurred. Start-up costs are costs related to one-time activities for

opening a new facility, introducing a new product etc.

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The general exchange principle is that the cost of a nonmonetary asset

acquired in exchange for another nonmonetary asset is the fair value

of the asset surrendered.

The general exchange principle is that the cost of a nonmonetary asset

acquired in exchange for another nonmonetary asset is the fair value

of the asset surrendered.

Nonmonetary Asset Exchanges

14

Recognize Portion of Gain

End

YES

NO

Gain Recognize Losses EndNO

YESAssets

Similar EndRecognize GainsNO

YES

Boot

Received Gain Not Recognized EndNO

Recognize Gains & Losses EndYES

Exchange of AssetsBoot > 25% of

value of exchange

Determine Gain or Loss

15

Assets Acquired by Exchange of Other Assets

DissimilarDissimilar

Company A Company B

Cost $100,000Accum. depr. 54,000Fair value 40,000


16


Company A


Equipment 40,000Accum. depr. 54,000Loss 6,000 Building 100,000

Book value $46,000Fair value 40,000Loss $6,000


17


Company A

Equipment 40,000Accum. depr. 54,000Loss 6,000 Building 100,000

Cost $40,000 Book value $46,000Fair value 40,000Loss $6,000


18


Company B

Cost $60,000Accum. Depr. 32,000Fair value 40,000

Building 40,000Accum. Depr. 32,000 Equipment 60,000 Gain 12,000


Book value $28,000Fair value 40,000Gain $12,000

19


Company B

Cost $40,000Book value $28,000Fair value 40,000Gain $12,000


Building 40,000Accum. Depr. 32,000 Equipment 60,000 Gain 12,000

Gain on tractor given and building (dissimilar asset)

received, recorded.

20

Dissimilar with BootDissimilar with Boot

Company A Company B

Cost $100,000Accum. depr. 54,000Fair value 40,000Cash received 5,000

Cost $60,000Accum. depr. 32,000Fair value 35,000Cash paid 5,000


21


Company A


Equipment 35,000Accum. depr. 54,000Cash 5,000Loss 6,000 Building 100,000



22


Company A Equipment 35,000Accum. depr. 54,000Cash 5,000Loss 6,000 Building 100,000

Cost $35,000


23


Company B

Cost $60,000Accum. Depr. 32,000Fair value 35,000Cash paid 5,000

Building 40,000Accum. Depr. 32,000 Equipment

60,000 Cash

5,000 Gain

7,000



24


Company BBuilding 40,000Accum. Depr. 32,000 Equipment

60,000 Cash

5,000 Gain

7,000

Cost

$40,000



25

Exchange of Similar Assets

Company A Company B



Boot Paid by Company Incurring a GainBoot Paid by Company Incurring a Gain

26


Company A


Equipment 35,000Accum. Depr. 54,000Loss 6,000Cash 5,000 Equipment 100,000



27


Company A

Equipment 35,000Accum. Depr. 54,000Loss 6,000Cash 5,000 Equipment 100,000 Cost = $35,000



28

Company B



Equipment 33,000Accum. Depr. 32,000 Equipment 60,000 Cash 5,000

$28,000 + $5,000

$28,000 + $5,000

$28,000 + $5,000

$28,000 + $5,000



29

Company B


Equipment 33,000Accum. Depr. 32,000 Equipment 60,000 Cash 5,000

$28,000 + $5,000

$28,000 + $5,000

$28,000 + $5,000

$28,000 + $5,000



Cost = $33,000

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Boot Received by Company Incurring a GainBoot Received by Company Incurring a Gain

Company A Company B




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Gain Recognized When Boot Received

X Total Gain = Boot

Boot + FMV of Asset Received

Amount of Gain

Recognized

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Gain = ($30,000 - $20,000) =$1,000$3,000

$3,000 + $27,000

Book value $20,000Fair value 30,000Total gain $10,000

X Total Gain = Boot

Boot + FMV of Asset Received

Amount of Gain

Recognized

Company A

33

Equipment 18,000Accum. Depr. 80,000Cash 3,000 Equipment 100,000 Gain 1,000

Company A




34

Equipment 18,000Accum. Depr. 80,000Cash 3,000 Equipment 100,000 Gain 1,000

Company A



Cost = $18,000

35

Company B


Boot Paid by Company Incurring a LossBoot Paid by Company Incurring a Loss

Equipment 30,000Accum. Depr. 32,000Loss 1,000 Equipment 60,000 Cash 3,000



36

Company B

Boot Paid by Company Incurring a LossBoot Paid by Company Incurring a Loss

Equipment 30,000Accum. Depr. 32,000Loss 1,000 Equipment 60,000 Cash 3,000



Cost = $30,000

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1. Are dissimilar productive assets exchanged?2. Does the boot equal or exceed 25% of the

value of a similar asset exchange?3. For exchanges of similar productive assets, is

there a loss?4. For exchange of similar productive assets

between two dealers or between two nondealers in which there is a gain, is cash received or paid?

Four IssuesFour Issues

Summary of Productive Asset Exchanges

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The cost of materials, labor, and overhead

used in the self-construction of

property, plant, and equipment intended

for a firm’s production process are added to the cost of the asset.

The cost of materials, labor, and overhead

used in the self-construction of

property, plant, and equipment intended

for a firm’s production process are added to the cost of the asset.

Self Construction

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Capitalization of Interest

A company is required to capitalize interest on assets that are constructed for its own use or constructed as

discrete products.

A company is required to capitalize interest on assets that are constructed for its own use or constructed as

discrete products.

40

Capitalization of Interest-Qualifying Assets

Must be built for the company’s own use, or be constructed as discrete projects

Must require a period of time to get them ready for their intended use. If land is to be used as a building site, the interest becomes part of the building cost.

Qualifying expenditures were made.

41

Capitalization of Interest-Qualifying Assets

The amount to be capitalized is the actual interest incurred.

Construction and related activities occurred for substantially the entire period.

Interest cost was incurred, not imputed.Interest earned on idle funds does not offset

capitalized interest.

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There are three alternatives for a company to include fixed overhead costs in the cost of a self-constructed asset.

There are three alternatives for a company to include fixed overhead costs in the cost of a self-constructed asset.

1. Allocate a portion of total fixed overhead to the self-constructed asset.

2. Include only incremental fixed overhead in the cost of the self-constructed asset.

3. Include no fixed overhead in the cost of the self-constructed asset.

Fixed Overhead Costs

43

Costs Subsequent to Acquisition

Extending the life of the asset.Improving the productivity.Producing the same product at

lower cost.Increasing the quality of the

product.

Extending the life of the asset.Improving the productivity.Producing the same product at

lower cost.Increasing the quality of the

product.

The future economic benefits of a productive asset or product can be increased by--

44

The cost of an addition represents a new asset

and therefore is capitalized.

The cost of an addition represents a new asset

and therefore is capitalized.

Additions

45

Improvements and Replacements

A company decides to replace its oil furnace with a gas furnace. The oil furnace is carried on the books

at a cost of $50,000 with an accumulated depreciation of $30,000. The scrap value of the old

furnace is $5,000, and the new furnace costs $70,000.

A company decides to replace its oil furnace with a gas furnace. The oil furnace is carried on the books

at a cost of $50,000 with an accumulated depreciation of $30,000. The scrap value of the old

furnace is $5,000, and the new furnace costs $70,000.

Furnace 70,000Accumulated Depreciation: Furnace 30,000Loss on Disposal of Furnace 15,000 Furnace 50,000 Cash 65,000Substitution MethodSubstitution Method

46

A capital expenditure of $60,000 is incurred in replacing a roof on a factory building.

A capital expenditure of $60,000 is incurred in replacing a roof on a factory building.

Accumulated Depreciation 60,000 Cash 60,000

Reduce Accumulated DepreciationReduce Accumulated Depreciation

Improvements and Replacements

47

A capital expenditure of $80,000 is incurred to enlarge a factory.

A capital expenditure of $80,000 is incurred to enlarge a factory.

Factory 80,000 Cash 80,000

Increase the Asset AccountIncrease the Asset Account

Improvements, Replacements and

Additions

48

Disposal of Property, Plant,and Equipment

Bean Company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being depreciated at $1,000 per year. On December 30,

the company sells the machine for $600.

Bean Company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being depreciated at $1,000 per year. On December 30,

the company sells the machine for $600.

Depreciation 1,000 Accumulated Depreciation 1,000

To bring depreciation to point of sale.To bring depreciation to point of sale.

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Cash 600Accumulated Depreciation 9,000Loss on Disposal 400 Machine 10,000

To record disposal of machine for $600.To record disposal of machine for $600.

Disposal of Property, Plant,and Equipment

Bean Company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being

depreciation at $1,000 per year. On December 30, the company sells the machine for $600.

Bean Company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being

depreciation at $1,000 per year. On December 30, the company sells the machine for $600.

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Disclosure of Property,Plant, and Equipment

APB Opinion No. 12 requires a company to

disclose the balances of its major classes of

depreciable assets by nature or function.

APB Opinion No. 12 requires a company to

disclose the balances of its major classes of

depreciable assets by nature or function.• Land

• Building and leasehold improvements

• Machinery and equipment

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Chapter10

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Property, Plant and Equipment: Acquisition and Disposal C hapter 10 An electronic presentation by Norman Sunderman Angelo State University An electronic