Chapter 11

Acquisition and Disposition of Property, Plant, and Equipment

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1. Overview of TopicOperational assets

◦fixed assets, intangibles, and natural resourcesCharacteristics of fixed assetsAccounting over life cycle

◦acquisition costs (chapter 10)———asset goes into operation ————

◦depreciation (chapter 11)◦costs subsequent to acquisition (chapter 10)

———asset goes out of operation ————◦disposals and exchanges (chapter 10)

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2. Acquisition CostHistorical costComponents of cost

◦purchase price + all reasonable and necessary costs to prepare asset for intended use

◦ land – closing costs, title search, attorney fees, preparing land for use

◦building – construction cost, architect fees, contract admin fees, attorney fees

◦equipment – freight, installation, testing, discounts

ExampleACCT-3030 3

2a. Acquisition CostSelf constructed assets

◦ raw materials, labor, overhead◦can never exceed price charged by outsider

Cash discountsMaterialityDeferred payment contractLump sum purchaseDonated assetsAsset retirement obligation

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2b. Acquisition Cost Capitalization of interest

◦ when done for self constructed assets (not land) assets constructed for you assets (inventory) constructed as discrete project

◦ amount capitalized avoidable interest

◦ amount capitalized = WAE x IR WAE are weighted by months

◦ interest rate used specific interest rate weighted average rate

◦ amount capitalized cannot exceed actual interest◦ interest income◦ example

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3. Costs Subsequent to AcquisitionGeneral concepts

◦ any cost should be capitalized if it extends the life of the asset, or improves the asset

Recording expenditure◦ can debit

fixed asset account accumulated depreciation

◦ can use substitution approach new asset approach reduce accumulated depreciation approach

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3. Costs Subsequent to AcquisitionRepairs and maintenanceAdditionsImprovements and replacementsReinstallation or rearrangementMateriality threshold

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4. Disposition of Fixed AssetsSell, retire, or abandonment

◦accounted for sameAccounting

1. Update depreciation to date of disposal

2. Remove original cost of asset and accumulated depreciation from the books

3. Difference between book value of asset and proceeds recorded as gain or loss

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4. Disposition of Fixed AssetsExample

◦ On Jan 2, 2013 purchase new asset:cost: $40,000, life: 5 years, no salvage, use SL

◦ On March 29, 2017 sell asset for $9,000

Depr Exp 2,000 Accum Depr 2,000

Cash 9,000Accum Depr 34,000 Gain on Sale 3,000 Equipment 40,000

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5. Exchange of Nonmonetary AssetsTerms

◦monetary asset represent a fixed claim to a specific number of

dollars in future (e.g., cash, A/R, securities)

◦nonmonetary asset value is capable of changing in number of

dollars (e.g., fixed assets, inventory)

◦boot money paid or received in an exchange of

assetsACCT-3030 10

5a. Exchange of Nonmonetary Assets

RulesGeneral valuation rule

◦Cost of new asset acquired equals FMV of asset given up plus boot paid or

minus boot received or, use FMV of asset acquired if more

clearly evident

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5b. Exchange of Nonmonetary Assets

If exchange lacks commercial substance or FMV not determinable◦ cost of new asset equals

BV given up plus boot paid or minus boot received

◦ gain not allowed to be recognized (unless boot is received – then partial recognition of gain)

commercial substance means◦ company expects a change in future cash flows as result of

exchange

◦ change is significant relative to FMV of assets exchanged

ExamplesACCT-3030 12