Long Lived Assets

• Types• Cost determination• Balance sheet presentation• Disposal

Types:

• Land• Buildings and equipment (plant assets)• Intangible assets• Natural resources

Cost Determination:

• Acquisition or production cost plus• Costs needed to get asset ready for its

intended use– Transportation– Installation– Modification

X Co incurred the following cost: equipment price: $10,000; 2% cash discount; Freight in $4,000; installation & testing $2,000; repair of part broken during installation $700. The equipment should be recorded at a cost of

A. $ 16,500B. $ 15,800C. $ 16,700D. $ 16,000

Cost of Self Constructed Assets

• Material• Labor• Overhead • Interest incurred during construction (FAS

34)

Interest Capitalization

1. Determine applicable interest rate2. Determine the weighted average

expenditures (WAE)3. Determine avoidable interest4. Determine actual interest incurred5. Capitalize the lower of avoidable or

actual interest

Exercise 10-10

1. Situation 1- Determine the amount of interest to be capitalized

2. Situation 3 Determine the amount of interest to be capitalized

Lump Sum purchases

Allocate the price paid in relation to the Fair Market Value of each asset.

1. E 10-13 – the land should be recorded at what cost?

2. E 10-13 – the building should be recorded at what cost?

Asset acquired for non interest bearing note – MUST be

discounted!

• E 10 – 14 Determine the cost at which the equipment should be recorded

Balance Sheet Presentation:

• Land, Goodwill at historical cost (unless written down for impairment)

• All other assets: Book value (BV):• Cost – accumulated depreciation (or

amortization or depletion)

Balance Sheet Presentation:

• Equipment 100,000• Less accumulated depreciation (54,000)• Equipment (net) $46,000• Or:Equipment (net) $46,000 (see note xx)

Disposal (Methods):

• Retire (junk) -- always loss• Sell -- gain or loss• Trade in (for similar) -- only loss

recognized, otherwise new asset shown at book value of old

Trade (Exchange)

• Two part process: • part 1 remove old asset from books• Part 2 record new asset and any gain or

loss• NEW RULE (SFAS 153) UP 2-8 in your

text book

Non Monetary Exchange with Commercial Substance

• That means that there is a change in the company’s expected future cash flows associated with the items exchanged.

• You must be told• Cost of New asset is determined as equal

to the FMV of asset given up (traded in) plus any cash paid. Gain or loss is recognized

Non Monetary Exchange without Commercial Substance

• That means that there is NO change in the company’s expected future cash flows associated with the items exchanged.

• You must be told• Cost of New asset is determined as equal

to the FMV of asset given up (traded in) plus any cash paid. If loss, recognize. Gains are deferred (use book value instead of FMV)

Work UP 10-3 Case a Garrison would record the following

A. New crane as $198; gain of $18B. New crane as $ 190; gain of 8C. New crane as $ 190; loss of 8D. New crane as $ 190; loss of 18

Work UP 10-3 Case d Garrison would record the following

A. New crane as $198; gain of $18B. New crane as $ 190; gain of 7C. New crane as $ 183; no gain/lossD. New crane as $ 183; loss of 7

Disposal:

• Get cost and accumulated depreciation off the books

• Determine gain or loss• Gain (Loss): Cash received – Book value

(cost – accumulated depreciation)

Disposal:

• Example:

Cost: 100,000Accumulated Depreciation 54,000Book value 46,000Sold for 38,000Loss: 8,000

Disposal:

• Example (journal entry):

Dr. cash 38,000Dr. accumulated depreciation54,000Dr. loss 8,000

Cr. Equipment 100,000

Answers

1. (slide 4) B2. (slide 7) – 1 $80,0003. (slide 7) – 2 $385,0004. (slide 8) – 1 $350,0005. (slide 8) – 2 $ 1,

050,000

6. (slide 9) $ 576,7657. (slide 16) C8. (slide 17) C