Wiley - Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment

Chapter 10-1

Acquisition and Disposition Acquisition and Disposition of Property, Plant, and of Property, Plant, and

EquipmentEquipment

Acquisition and Disposition Acquisition and Disposition of Property, Plant, and of Property, Plant, and

EquipmentEquipment

ChapteChapter r

1010

Chapter 10-2

“Used in operations” and not for resale.

Long-term in nature and usually depreciated.

Possess physical substance.

Property, plant, and equipment includes land, buildings, and equipment (machinery, furniture, tools).

Major characteristics include:

Property, Plant, and EquipmentProperty, Plant, and EquipmentProperty, Plant, and EquipmentProperty, Plant, and Equipment

Chapter 10-3

At acquisition, cost reflects fair value.

Historical cost is reliable.

Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold.

Valued at Historical Cost - measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.

reasons include:

Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E

Chapter 10-4

Includes all costs to acquire land and ready it for use. Costs typically include:

Cost of Land


(1) the purchase price;

(2) closing costs, such as title to the land, attorney’s fees, and recording fees;

(3) costs of grading, filling, draining, and clearing;

(4) assumption of any liens, mortgages, or encumbrances on the property; and

(5) Additional land improvements that have an indefinite life.

Chapter 10-5

Includes all costs related directly to acquisition or construction.

Costs typically include:

Cost of Buildings


(1) materials, labor, and overhead costs incurred during construction and

(2) professional fees and building permits.

(3) Generally companies consider all costs from excavation to completion when buildings are constructed

Chapter 10-6

Include all costs incurred in acquiring the equipment and preparing it for use.


Cost of Equipment


(1) purchase price,

(2) freight and handling charges

(3) insurance on the equipment while in transit,

(4) cost of special foundations if required,

(5) assembling and installation costs, and

(6) costs of conducting trial runs.

Chapter 10-7

E10-1 (Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. Determine how they should be classified:


Chapter 10-8

Self-Constructed Assets



(1) Materials and direct labor

(2) Overhead can be handled in two ways:

1. Assign no fixed overhead

2. Assign a portion of all overhead to the construction process.

Companies use the second method extensively.

(3) Interest costs?

Chapter 10-9

Three approaches have been suggested to account for the interest incurred in financing the construction.

Interest Costs During Construction


Capitalize no Capitalize no interest interest during during

constructionconstruction

Capitalize actual Capitalize actual interest costs interest costs

incurred during incurred during construction (with construction (with

modification)modification)

Capitalize Capitalize all costs all costs of fundsof funds

GAAPGAAP

$ 0$ 0 $ ?$ ?Increase to Cost of AssetIncrease to Cost of Asset

Illustration 10-1

Chapter 10-10

Step 1 - Determine which assets qualify for capitalization of interest.

must require a period of time to get them ready for their intended use


Step 2 - Determine the capitalization period.

The capitalization period begins when expenditures are being made and if interest costs are being incurred during the period while construction is taking place.

Chapter 10-11


Step 3 - Compute weighted-average accumulated expenditures. (BE 10-2)

A company weights the construction expenditures by the amount of time (fraction of a year or accounting period) that it can incur interest cost on the expenditure.

Doing so allows for a single interest rate to be applied to the weighted amount of costs that are tied up in the construction.

Chapter 10-12


Step 4 - Compute the Avoidable Interest.

Selecting Appropriate Interest Rate to apply to the weighted average accumulated expenditure: (BE 10-3 & 4)

1.First use the interest rate incurred on the specific borrowings (up to specific debt amount outstanding).

2.For the portion of weighted-average accumulated expenditures that is greater than any specific debt incurred, use a weighted average of interest rates incurred on all other outstanding debt during the period.

Chapter 10-13

Step 5 – Capitalize the lesser of Avoidable interest or Actual interest incurred on all debt of the company.


Journal entry to Capitalize Interest:

Equipment XXXX

Interest expenseXXXX

Chapter 10-14

Interest capitalization Exercises, Problems

Ex 10-7, Ex 10-8, P 10-7

See handout for comprehensive problem (in additional materials section of

Blackboard)


Chapter 10-15

Companies should record property, plant, and equipment:

at the fair value of what they give up or

at the fair value of the asset received,

whichever is more clearly evident.

Generally

ValuationValuationValuationValuation

Chapter 10-16

Deferred-Payment Contracts — Assets, purchased through long term credit, are recorded at the present value of the consideration exchanged.

Lump-Sum Purchases — Allocate the total cost among the various assets on the basis of their fair market values.

(See BE 10-6)

Issuance of Stock — The market value of the stock issued is a fair indication of the cost of the property acquired.

Valuation- Other IssuesValuation- Other IssuesValuation- Other IssuesValuation- Other Issues

Chapter 10-17


If commercial substance is met (means that future cash flows change as a result of the transaction)

- exchanges of non-monetary assets has similar treatment & recognition of gains & losses as a regular sale of PP&E for cash.

If no commercial substance, then any gains must be deferred

-partial recognition of gain if some cash received with the exchange

Exchanges of Nonmonetary Assets

Chapter 10-18

Summary of Gain and Loss Recognition on Exchanges of Nonmonetary Assets Lacks Commercial Substance


Chapter 10-19

EX 10-19, P 10-9


Chapter 10-20

Costs Subsequent to AcquisitionCosts Subsequent to AcquisitionCosts Subsequent to AcquisitionCosts Subsequent to Acquisition

Recognize costs subsequent to acquisition as an asset when the costs can be

measured reliably and

it is probable that the company will obtain future economic benefits.

Future economic benefit would include increases in

1. useful life,

2. quantity of product produced, and

3. quality of product produced.

Chapter 10-21


Additions

Improvements and Replacements

Rearrangement and Reinstallation

Repairs

Major Types of Expenditures

Chapter 10-22


Illustration 10-Illustration 10-2121

Summary

Chapter 10-23


EX 10-22 & 24

Chapter 10-24

Disposition of Plant AssetsDisposition of Plant AssetsDisposition of Plant AssetsDisposition of Plant Assets

Sale of Plant Assets

Example Sim City Corporation owns machinery that cost $20,000 when purchased on January 1, 2004. Depreciation has been recorded at a rate of $3,000 per year, resulting in a balance in accumulated depreciation of $9,000 at December 31, 2006. The machinery is sold on September 1, 2007, for $10,500. Prepare journal entries to (a) update depreciation for 2007 and (b) record the sale.

Chapter 10-25

(a) update depreciation for 2007

(b) record the sale


Chapter 10-26

Ex 10-24


Chapter 10-27

IFRS Revaluation of PP&EIFRS Revaluation of PP&EIFRS Revaluation of PP&EIFRS Revaluation of PP&E

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Wiley - Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment