Accounting for Property, Plant and Equipment and Intangible AssetsAcquisition and Disposition – Part 1INTERMEDIATE ACCOUNTING I

CHAPTER 10

TYPES OF ASSETSFor financial reporting purposes, long-lived, revenue-producing assets typically are classified in two categories:

¨ Property, plant, and equipment. Assets in this category include land, buildings, equipment, machinery, autos, and trucks. Natural resources such as oil and gas deposits, timber tracts, and mineral deposits also are included.

Intangible assets. Unlike property, plant, and equipment and natural resources, these assets lack physical substance and the extent and timing of their future benefits typically are highly uncertain. They include patents, copyrights, trademarks, franchises, and goodwill.

COSTS TO BE CAPITALIZED To capitalize an expenditure means to

record the purchase as an asset rather than an expense.

Costs are capitalized, rather than expensed, if they are expected to produce benefits beyond the current period.

Property, plant, and equipment and intangible assets can be acquired through purchase, exchange, lease, donation, self-construction, or a business combination.

If purchased, the initial capitalized cost includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

Property, plant and equipmentSee page 531

Intangible assetsSee page 531

Asset Descriptions and Typical Acquisition Costs

Brief Exercise 10–1, page 566

Note: Personal property taxes on the machine for the period after acquisition are not part of acquisition cost. They are expensed in the period incurred.

Capitalized cost of the machine: 

Purchase price $35,000Freight 1,500Installation 3,000Testing 2,000

Total cost $41,500 

Brief Exercise 10–2, page 566 

Capitalized cost of land: 

Purchase price $600,000Broker’s commission 30,000Title insurance 3,000Miscellaneous closing costs 6,000Demolition of old building 18,000

Total cost $657,000  

All of the expenditures, including the costs to demolish the old building, are included in the initial cost of the land.

Exercise 10–5, page 569

Organization cost expense ($12,000 + 3,000) 15,000Patent ($20,000 + 2,000) 22,000Pre-opening expenses 40,000Furniture 30,000

Cash 107,000

 

LUMP-SUM PURCHASES

A group of various assets acquired for a single sum.

The purchase price is allocated in proportion to the relative fair values of the assets acquired.

 

The Smyrna Hand & Edge Tools Company purchased an existing factory for a single sum of $2,000,000. The price included title to the land, the factory building, and the manufacturing equipment in the building, a patent on a process the equipment uses, and inventories of raw materials. An independent appraisal estimated the fair values of the assets (if purchased separately) at $330,000 for the land, $550,000 for the building, $660,000 for the equipment, $440,000 for the patent and $220,000 for the inventories. The lump-sum purchase price of $2,000,000 is allocated to the separate assets as follows:

  Asset Allocated Cost

Calculation

Land $300,000 ($2,000,000 X .15)

Building 500,000 ($2,000,000 X .25)

Equipment 600,000 ($2,000,000 X .30)

Patent 400,000 ($2,000,000 X .20)

Inventories 200,000 ($2,000,000 X .10)

Total $2,000,000

Fair valuesLand $ 330,000 15% (330,000/2,200,000)Building 550,000 25 (550,000/2,200,000)Equipment 660,000 30 (660,000/2,200,000)Patent 440,000 20 (440,000/2,200,000)Inventories 220,000 10 (220,000/2,200,000)Total $2,200,000100%

 

LUMP-SUM PURCHASES: Example

Brief Exercise 10–3, page 566

Cost of land and building: 

Purchase price $600,000Broker’s commission 30,000Title insurance 3,000Miscellaneous closing costs 6,000

Total cost $639,000

Asset

Fair Value

Percent of Total Fair Value

InitialValuation(Percent x $639,000)

Land $420,000 60% $383,400Building 280,000 40 255,600Total $700,000 100% $639,000

The total must be allocated to the land and building based on their relative fair values:

Brief Exercise 10–3, additional requirement

Journalize the lump-sum purchase

Asset

Fair Value

Percent of Total Fair Value

InitialValuation(Percent x $639,000)

Land $420,000 60% $383,400Building 280,000 40 255,600Total $700,000 100% $639,000

Debit Credit

Land 383,400

Building 255,600

Cash 639,000

Each asset is debited for its allocated value of the purchase price.

NONMONETARY EXCHANGES

An asset acquired in a nonmonetary exchange generally is

recorded at the fair value of the assets exchanged.

If we can't determine the fair value of either asset in the

exchange, the asset received is valued at the book value of the asset given.

In exchanges that lack commercial substance, the asset

received is valued at the book value of the asset given.

Brief Exercise 10–11, page 567 

Pickup trucks = Fair value of machinery plus cash paid$17,000 + 8,000 = $25,000

 Loss on exchange = Book value – Fair value$20,000 – 17,000 = $3,000

Journal entry:

Pickup trucks (determined above) 25,000Accumulated depreciation (account balance) 45,000Loss (determined above) 3,000

Cash 8,000Machinery (account balance)65,000

Problem 10–8, page 579 (Case A only)

Requirement 1Book value less fair value = loss on exchange $12,000 – 9,000 = $3,000 loss Fair value of old tractor + cash given = Initial value of new

tractor $9,000 + 20,000 = $29,000

Journal entry (not required):

New tractor ($9,000 + 20,000) 29,000Accumulated depreciation—old asset (account balance) 16,000Loss ($12,000 – 9,000) 3,000

Cash 20,000Old tractor (account balance) 28,000

 

Problem 10–8, page 579

Requirement 2Fair value less book value = gain on exchange $14,000 – 12,000 = $2,000 gain Fair value of old tractor + cash given = Initial value of new tractor $14,000 + 20,000 = $34,000 

Journal entry (not required):

New tractor ($14,000 + 20,000) 34,000Accumulated depreciation—old asset (account balance) 16,000

Cash 20,000Old tractor (account balance) 28,000Gain ($14,000 – 12,000) 2,000

 

DISPOSITION OF ASSETS

When assets are sold, a gain or loss is recognized for the difference between the consideration received and the asset's book value.

When assets are retired, a loss is recognized for the remaining book value of the asset.

Depreciation, depletion, or amortization must be brought up to date prior to recording the asset disposition or exchange.

Brief Exercise 10–10, page 567

Proceeds $16,000Less book value: $80,000

(71,000) 9,000Gain on sale of equipment $ 7,000

Journal entry: 

Cash 16,000Accumulated depreciation (account balance) 71,000Gain (difference)7,000Equipment (account balance)80,000

Brief Exercise 10–10, alternate assumption

Journal entry: 

Accumulated depreciation (account balance) 71,000Loss (book value) 9,000Equipment (account balance) 80,000

Assume the equipment was abandoned rather than sold.

Recall that when plant assets are discarded, a loss will always be recognized in the amount of the asset’s book value.

Accounting for Property, Plant and Equipment and Intangible AssetsAcquisition and Disposition – Part 1INTERMEDIATE ACCOUNTING I - CHAPTER 8

END OF PRESENTATION