property, plant and equipment: acquisition and disposal c hapter 10 an electronic presentation by...
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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
Acquisition of Property, Plant, and Equipment
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.
Acquisition of Property, Plant, and Equipment
6
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
Acquisition of Property, Plant, and Equipment
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
Acquisition of Property, Plant, and Equipment
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
Acquisition of Property, Plant, and Equipment
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)
Acquisition of Property, Plant, and Equipment
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)
Acquisition of Property, Plant, and Equipment
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)
Acquisition of Property, Plant, and Equipment
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.
13
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
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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
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Assets Acquired by Exchange of Other Assets
DissimilarDissimilar
Company A Company B
Cost $100,000Accum. depr. 54,000Fair value 40,000
Cost $60,000Accum. depr. 32,000Fair value 40,000
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DissimilarDissimilar
Company A
Cost $100,000Accum. depr. 54,000Fair value 40,000
Equipment 40,000Accum. depr. 54,000Loss 6,000 Building 100,000
Book value $46,000Fair value 40,000Loss $6,000
Assets Acquired by Exchange of Other Assets
17
DissimilarDissimilar
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
Assets Acquired by Exchange of Other Assets
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DissimilarDissimilar
Company B
Cost $60,000Accum. Depr. 32,000Fair value 40,000
Building 40,000Accum. Depr. 32,000 Equipment 60,000 Gain 12,000
Assets Acquired by Exchange of Other Assets
Book value $28,000Fair value 40,000Gain $12,000
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DissimilarDissimilar
Company B
Cost $40,000Book value $28,000Fair value 40,000Gain $12,000
Assets Acquired by Exchange of Other Assets
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
Assets Acquired by Exchange of Other Assets
21
Dissimilar with BootDissimilar with Boot
Company A
Cost $100,000Accum. depr. 54,000Fair value 40,000Cash received 5,000
Equipment 35,000Accum. depr. 54,000Cash 5,000Loss 6,000 Building 100,000
Assets Acquired by Exchange of Other Assets
Book value $46,000Fair value 40,000Loss $6,000
22
Dissimilar with BootDissimilar with Boot
Company A Equipment 35,000Accum. depr. 54,000Cash 5,000Loss 6,000 Building 100,000
Cost $35,000
Assets Acquired by Exchange of Other Assets
23
Dissimilar with BootDissimilar with Boot
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
Assets Acquired by Exchange of Other Assets
Book value $28,000Fair value 35,000Gain $7,000
24
Dissimilar with BootDissimilar with Boot
Company BBuilding 40,000Accum. Depr. 32,000 Equipment
60,000 Cash
5,000 Gain
7,000
Cost
$40,000
Assets Acquired by Exchange of Other Assets
Book value $28,000Fair value 35,000Gain $7,000
25
Exchange of Similar Assets
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
Boot Paid by Company Incurring a GainBoot Paid by Company Incurring a Gain
26
Boot Paid by Company Incurring a GainBoot Paid by Company Incurring a Gain
Company A
Cost $100,000Accum. depr. 54,000Fair value 40,000Cash received 5,000
Equipment 35,000Accum. Depr. 54,000Loss 6,000Cash 5,000 Equipment 100,000
Exchange of Similar Assets
Book value $46,000Fair value 40,000Loss $6,000
27
Boot Paid by Company Incurring a GainBoot Paid by Company Incurring a Gain
Company A
Equipment 35,000Accum. Depr. 54,000Loss 6,000Cash 5,000 Equipment 100,000 Cost = $35,000
Exchange of Similar Assets
Book value $46,000Fair value 40,000Loss $6,000
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Company B
Cost $60,000Accum. depr. 32,000Fair value 35,000Cash paid 5,000
Boot Paid by Company Incurring a GainBoot Paid by Company Incurring a Gain
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
Book value $28,000Fair value 35,000Gain $7,000
Exchange of Similar Assets
29
Company B
Boot Paid by Company Incurring a GainBoot Paid by Company Incurring a Gain
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
Book value $28,000Fair value 35,000Gain $7,000
Exchange of Similar Assets
Cost = $33,000
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Boot Received by Company Incurring a GainBoot Received by Company Incurring a Gain
Company A Company B
Cost $100,000Accum. depr. 80,000Fair value 30,000Cash received 3,000
Cost $60,000Accum. depr. 32,000Fair value 27,000Cash paid 3,000
Exchange of Similar Assets
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Gain Recognized When Boot Received
X Total Gain = Boot
Boot + FMV of Asset Received
Amount of Gain
Recognized
32
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
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Equipment 18,000Accum. Depr. 80,000Cash 3,000 Equipment 100,000 Gain 1,000
Company A
Cost $100,000Accum. depr. 80,000Fair value 30,000Cash received 3,000
Boot Received by Company Incurring a GainBoot Received by Company Incurring a Gain
Exchange of Similar Assets
34
Equipment 18,000Accum. Depr. 80,000Cash 3,000 Equipment 100,000 Gain 1,000
Company A
Boot Received by Company Incurring a GainBoot Received by Company Incurring a Gain
Exchange of Similar Assets
Cost = $18,000
35
Company B
Cost $60,000Accum. depr. 32,000Fair value 27,000Cash paid 3,000
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
Exchange of Similar Assets
Book value $28,000Fair value 27,000Loss $1,000
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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
Exchange of Similar Assets
Book value $28,000Fair value 27,000Loss $1,000
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
38
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.
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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.
42
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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