11
ACQUISITION AND DISPOSITION OF ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENTPROPERTY, PLANT, AND EQUIPMENT
22
JOIN KHALID AZIZJOIN KHALID AZIZ
FRESH CLASSESFRESH CLASSES ICap module b & dICap module b & d
FINANCIAL ACCOUNTING, FINANCIAL ACCOUNTING, ECONOMICS & COST ECONOMICS & COST ACCOUNTINGACCOUNTING
INDIVIDUAL & GROUPSINDIVIDUAL & GROUPS
33
JOIN KHALID AZIZJOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.KARACHI, PAKISTAN.
44
1.1. Describe property, plant, and equipment.Describe property, plant, and equipment.
2.2. Identify the costs to include in initial valuation of Identify the costs to include in initial valuation of property, plant, and equipment.property, plant, and equipment.
3.3. Describe the accounting problems associated with self-Describe the accounting problems associated with self-constructed assets.constructed assets.
4.4. Describe the accounting problems associated with interest Describe the accounting problems associated with interest capitalization.capitalization.
5.5. Understand accounting issues related to acquiring and Understand accounting issues related to acquiring and valuing plant assets.valuing plant assets.
6.6. Describe the accounting treatment for costs subsequent Describe the accounting treatment for costs subsequent to acquisition.to acquisition.
7.7. Describe the accounting treatment for the disposal of Describe the accounting treatment for the disposal of property, plant, and equipment.property, plant, and equipment.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
55
AcquisitionAcquisition
Acquisition costs: Acquisition costs: Land, buildings, Land, buildings, equipmentequipment
Self-constructed Self-constructed assetsassets
Interest costsInterest costs
ObservationsObservations
ValuationValuation Cost Subsequent Cost Subsequent to Acquisitionto Acquisition DispositionsDispositions
Cash discountsCash discounts
Deferred Deferred contractscontracts
Lump-sum Lump-sum purchasespurchases
Stock issuanceStock issuance
Nonmonetary Nonmonetary exchangesexchanges
ContributionsContributions
Other valuation Other valuation methodsmethods
SaleSale
Involuntary Involuntary conversionconversion
Miscellaneous Miscellaneous problemsproblems
AdditionsAdditions
Improvements Improvements and and replacementsreplacements
RearrangemeRearrangement and nt and reinstallationreinstallation
RepairsRepairs
SummarySummary
Acquisition and Disposition of Acquisition and Disposition of Property, Plant, and Equipment Property, Plant, and Equipment
Acquisition and Disposition of Acquisition and Disposition of Property, Plant, and Equipment Property, Plant, and Equipment
66
“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
LO 1 Describe property, plant, and equipment.LO 1 Describe property, plant, and equipment.
77
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, reasons include:
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 2 Identify the costs to include in initial LO 2 Identify the costs to include in initial valuation of property, plant, and valuation of property, plant, and equipment.equipment.
APB Opinion No. 6 states, “property, plant, and equipment should not be
written up to reflect appraisal, market, or current values which are
above cost.”
APB Opinion No. 6 states, “property, plant, and equipment should not be
written up to reflect appraisal, market, or current values which are
above cost.”
88
Includes all costs to acquire land and ready it for use. Costs typically include:
Cost of Land
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 2 Identify the costs to include in initial LO 2 Identify the costs to include in initial valuation of property, plant, and valuation of property, plant, and equipment.equipment.
(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.
99
Includes all costs related directly to acquisition or construction.
Costs typically include:
Cost of Buildings
LO 2 Identify the costs to include in initial LO 2 Identify the costs to include in initial valuation of property, plant, and valuation of property, plant, and equipment.equipment.
(1) materials, labor, and overhead costs incurred
during construction and
(2) professional fees and building permits.
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
1010
Include all costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
Cost of Equipment
LO 2 Identify the costs to include in initial LO 2 Identify the costs to include in initial valuation of property, plant, and valuation of property, plant, and equipment.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.
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
1111
E10-1 (variation): The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. Determine how the following should be classified:
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
(a) Money borrowed to pay building contractor
(b) Payment for construction from note proceeds
(c) Cost of land fill and clearing
(d) Delinquent real estate taxes on property assumed
(e) Premium on 6-month insurance policy during construction
(f) Refund of 1-month insurance premium because construction completed early
ClassificationClassification
Notes Notes PayablePayableBuildingBuilding
LandLand
LandLand
BuildingBuilding
(Building)(Building)
LO 2 Identify the costs to include in initial LO 2 Identify the costs to include in initial valuation of property, plant, and valuation of property, plant, and equipment.equipment.
1212
E10-1 (variation): The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. Determine how the following should be classified:
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
(g) Architect’s fee on building
(h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000)
(i) Commission fee paid to real estate agency
(j) Installation of fences around property
(k) Cost of razing and removing building
(l) Proceeds from salvage of demolished building
(m) Cost of parking lots and driveways
(n) Cost of trees and shrubbery (permanent)
Costs of:Costs of:
BuildingBuilding
LO 2 Identify the costs to include in initial LO 2 Identify the costs to include in initial valuation of property, plant, and valuation of property, plant, and equipment.equipment.
LandLand
LandLand
Land Land ImprovementsImprovements
LandLand
(Land)(Land)
Land Land ImprovementsImprovementsLandLand
1313
Self-Constructed Assets
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
Costs typically include:
(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.
LO 3 Describe the accounting problems associated with self-LO 3 Describe the accounting problems associated with self-constructed assets.constructed assets.
1414
Three approaches have been suggested to account for the interest incurred in financing the construction.
Interest Costs During Construction
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Capitalize no Capitalize no interest interest during during
constructionconstruction
Capitalize actual Capitalize actual costs incurred costs incurred
during construction during construction (with modification)(with modification)
Capitalize Capitalize all costs all costs of fundsof funds
GAAPGAAP
$ 0$ 0 $ ?$ ?Increase to Cost of AssetIncrease to Cost of AssetIllustration 10-1Illustration 10-1
1515
GAAP requires — capitalizing actual interest (with modification).
Consistent with historical cost — all costs incurred to bring the asset to the condition for its intended use.
Capitalization considers three items:
1. Qualifying assets.
2. Capitalization period.
3. Amount to capitalize.
Interest Costs During Construction
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
1616
Require a period of time to get them ready for
their intended use.
Two types of assets:
Assets under construction for a company’s own
use.
Assets intended for sale or lease that are
constructed or produced as discrete projects.
Qualifying Assets
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
1717
Capitalization Period
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Begins when:
1. Expenditures for the asset have been made.
2. Activities for readying the asset are in progress .
3. Interest costs are being incurred.Ends when:
The asset is substantially complete and ready for use.
1818
Amount to Capitalize
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Capitalize the lesser of:
1. Actual interest costs
2. Avoidable interest - the amount of interest
that could have been avoided if expenditures
for the asset had not been made.
1919
Interest Capitalization Illustration: KC Corporation borrowed $200,000 at 12% interest from State Bank on Jan. 1, 2011, for specific purposes of constructing special-purpose equipment to be used in its operations. Construction on the equipment began on Jan. 1, 2011, and the following expenditures were made prior to the project’s completion on Dec. 31, 2011:
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Actual Expenditures:
J anuary 1, 2011 $100,000
April 30, 2011 150,000
November 1, 2011 300,000
December 31, 2011 100,000
Total expenditures $650,000
Other general debt existing on Jan. 1, 2011:
$500,000, 14%, 10-year bonds payable
$300,000, 10%, 5-year note payable
2020
Step 1 - Determine which assets qualify for capitalization of interest.
Special purpose equipment qualifies because it requires a period of time to get ready and it will be used in the company’s operations.
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Step 2 - Determine the capitalization period.
The capitalization period is from Jan. 1, 2011 through Dec. 31, 2011, because expenditures are being made and interest costs are being incurred during this period while construction is taking place.
2121
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
WeightedAverage
Actual Capitalization Accumulated Date Expenditures Period Expenditures
J an. 1 100,000$ 12/ 12 100,000$ Apr. 30 150,000 8/ 12 100,000 Nov. 1 300,000 2/ 12 50,000 Dec. 31 100,000 0/ 12 -
650,000$ 250,000$
Step 3 - Compute weighted-average accumulated expenditures.
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.
2222
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Step 4 - Compute the Actual and Avoidable Interest. Selecting Appropriate Interest Rate:
1. For the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings.
2. For the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period.
2323
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Accumulated I nterest Avoidable
Expenditures Rate I nterest
200,000$ 12% 24,000$
50,000 12.5% 6,250
250,000$ 30,250$
Step 4 - Compute the Actual and Avoidable Interest.
Avoidable Avoidable InterestInterest
I nterest Actual
Debt Rate I nterest
Specific Debt 200,000$ 12% 24,000$
General Debt 500,000 14% 70,000
300,000 10% 30,000
1,000,000$ 124,000$
Weighted-average interest rate on general
debt
Actual InterestActual Interest
$100,000 $800,000
= 12.5%
2424
Step 5 – Capitalize the lesser of Avoidable interest or Actual interest.
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Avoidable interest 30,250$
Actual interest 124,000
Journal entry to Capitalize Interest:
Equipment 30,250
Interest expense30,250
2525
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Comprehensive Illustration: On November 1, 2009, Shalla Company contracted Pfeifer Construction Co. to construct a building for $1,400,000 on land costing $100,000 (purchased from the contractor and included in the first payment). Shalla made the following payments to the construction company during 2010.
2626
JOIN KHALID AZIZJOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.KARACHI, PAKISTAN.
2727
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Pfeifer Construction completed the building, ready for occupancy, on December 31, 2010. Shalla had the following debt outstanding at December 31, 2010.
Compute the weighted-average accumulated expenditures during 2010.
2828
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Compute the weighted-average accumulated expenditures during 2010.
Illustration 10-4Illustration 10-4
Solution on notes page
2929
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Compute the avoidable interest.Illustration 10-5Illustration 10-5
Solution on notes page
3030
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Compute the actual interest cost, which represents the maximum amount of interest that it may capitalize during 2010,
Illustration 10-6Illustration 10-6
The interest cost that Shalla capitalizes is the lesser of $120,228 (avoidable interest) and $239,500 (actual interest), or $120,228.
3131
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Shalla records the following journal entries during 2010:January 1 Land 100,000
Building (or CIP) 110,000Cash 210,000
March 1 Building 300,000Cash 300,000
May 1 Building 540,000Cash 540,000
December 31Building 450,000Cash 450,000
Building (Capitalized Interest) 120,228Interest Expense 119,272
Cash 239,500
3232
Acquisition of PP&EAcquisition of PP&EAcquisition of PP&EAcquisition of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
At December 31, 2010, Shalla discloses the amount of interest capitalized either as part of the nonoperating section of the income statement or in the notes accompanying the financial statements.
Illustration 10-7Illustration 10-7
Illustration 10-8Illustration 10-8
3333
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.
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
3434
Cash Discounts — whether taken or not — generally considered a reduction in the cost of the asset.
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.
Issuance of Stock — The market value of the stock issued is a fair indication of the cost of the property acquired.
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
3535
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Ordinarily accounted for on the basis of:
the fair value of the asset given up or
the fair value of the asset received,
whichever is clearly more evident.
Exchanges of Nonmonetary Assets
Companies should recognize immediately any gains or losses on the exchange when the transaction has commercial substance.
3636
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Accounting for Exchanges
* If cash is 25% or more of the fair value of the exchange, recognize entire gain because earnings process is complete.
Illustration 10-Illustration 10-1010
3737
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Companies recognize a loss immediately
whether the exchange has commercial substance
or not.
Rationale: Companies should not value assets at
more than their cash equivalent price; if the loss
were deferred, assets would be overstated.
Exchanges - Loss Situation
3838
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Illustration: Information Processing, Inc. trades its used machine for a new model at Jerrod Business Solutions Inc. The exchange has commercial substance. The used machine has a book value of $8,000 (original cost $12,000 less $4,000 accumulateddepreciation) and a fair value of $6,000. The new model lists for $16,000. Jerrod gives Information Processing a trade-in allowance of $9,000 for the used machine. Information Processing computes the cost of the new asset as follows.
Illustration 10-Illustration 10-1111
3939
Equipment 13,000
Accumulated Depreciation—Equipment 4,000
Loss on Disposal of Equipment 2,000
Equipment
12,000
Cash
7,000
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Illustration: Information Processing records this transaction as follows:
Illustration 10-Illustration 10-1212Loss on
Disposal
4040
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Exchanges - Gain Situation
Has Commercial Substance. Company usually
records the cost of a nonmonetary asset acquired in
exchange for another nonmonetary asset at the fair
value of the asset given up, and immediately
recognizes a gain.
4141
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Illustration: Interstate Transportation Company exchanged a number of used trucks plus cash for a semi-truck. The used trucks have a combined book value of $42,000 (cost $64,000 less $22,000 accumulated depreciation). Interstate’s purchasingagent, experienced in the second-hand market, indicates that the used trucks have a fair market value of $49,000. In addition to the trucks, Interstate must pay $11,000 cash for the semi-truck. Interstate computes the cost of the semi-truck as follows. Illustration 10-Illustration 10-
1313
4242
Semi-truck 60,000
Accumulated Depreciation—Trucks 22,000
Trucks 64,000
Gain on disposal 7,000
Cash 11,000
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Illustration: Interstate records the exchange transaction as follows:
Illustration 10-Illustration 10-1414
Gain on Disposa
l
4343
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Exchanges - Gain Situation
Lacks Commercial Substance—No Cash
Received. Now assume that Interstate
Transportation Company exchange lacks commercial
substance. That is, the economic position of
Interstate did not change significantly as a result of
this exchange. In this case,
Interstate defers the gain of $7,000 and reduces the
basis of the semi-truck.
4444
Semi-truck 53,000
Accumulated Depreciation—Trucks 22,000
Trucks 64,000
Cash 11,000
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Illustration: Interstate records the exchange transaction as follows:
Illustration 10-Illustration 10-1515
4545
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Exchanges - Gain Situation
Lacks Commercial Substance—Some Cash
Received. When a company receives cash
(sometimes referred to as “boot”) in an exchange
that lacks commercial substance, it may immediately
recognize a portion of the gain. The general formula
for gain recognition when an exchange includes
some cash is as follows: Illustration 10-Illustration 10-1616
4646
JOIN KHALID AZIZJOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.KARACHI, PAKISTAN.
4747
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Illustration: Queenan Corporation traded in used
machinery with a book value of $60,000 (cost $110,000
less accumulated depreciation $50,000) and a fair value
of $100,000. It receives in exchange a machine with a
fair value of $90,000 plus cash of $10,000.
Illustration 10-Illustration 10-1717
4848
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
The portion of the gain a company recognizes is the ratio of
monetary assets (cash in this case) to the total consideration
received.
Illustration 10-Illustration 10-1818
Solution on Solution on notes pagenotes page
4949
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Queenan would record the following entry.Illustration 10-Illustration 10-
1919
Cash 10,000
Machine 54,000
Accumulated Depreciation—Machine 50,000
Machine 110,000
Gain on disposal of machine4,000
5050
E10-19 variation: Carlos Arruza Company exchanged equipment used in its manufacturing operations plus $3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Arruza LoBiancoEquipment (cost) $28,000 $28,000 Accumulated Depreciation 19,000 10,000Fair value of equipment 15,500 12,500Cash given up 3,000
Instructions: Prepare the journal entries to record the exchange on the books of both companies.
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
5151
Calculation of Gain or Loss
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Arruza LoBiancoFair value of equipment received $12,500 $15,500 Cash received / paid 3,000 (3,000)Less: Bookvalue of equipment
($28,000-19,000) (9,000)($28,000-10,000) (18,000)
Gain or (Loss) on Exchange $6,500 ($5,500)
When a company receives cash (sometimes referred to as “boot”) in an exchange that lacks commercial substance, it may immediately recognize a portion of the gain.
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
5252
Has Commercial Substance
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Arruza:Equipment 12,500Cash
3,000Accumulated depreciation 19,000
Equipment28,000
Gain on exchange6,500
LoBianco:Equipment 15,500Accumulated depreciation 10,000
Equipment28,000
Cash3,000
Loss on exchange 5,500
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
5353
Lacks Commercial Substance
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Arruza:Equipment (12,500 – 5,242) 7,258Cash
3,000Accumulated depreciation 19,000
Equipment28,000
Gain on exchange1,258
Cash ReceivedCash Received
Cash Received + FMV of Assets Cash Received + FMV of Assets ReceivedReceived
xx Total Total GainGain
== Recognized Recognized GainGain
$3,000$3,000
$3,000 + $12,500$3,000 + $12,500xx $6,500$6,500 == $1,258$1,258
Deferred gain = $6,500 – 1,258 = Deferred gain = $6,500 – 1,258 = $5,242$5,242
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
5454
Lacks Commercial Substance
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
LoBianco (no change):Equipment 15,500Accumulated depreciation 10,000
Equipment28,000
Cash3,000
Loss on exchange 5,500Companies recognize a loss immediately whether the exchange has commercial substance or not.
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
5555
Summary of Gain and Loss Recognition on Exchanges of Nonmonetary Assets Lacks Commercial Substance
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Illustration 10-Illustration 10-2020
5656
Valuation of PP&EValuation of PP&EValuation of PP&EValuation of PP&E
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Companies should use:
the fair value of the asset to establish its value
on the books and
should recognize contributions received as
revenues in the period received.
Accounting for Contributions
5757
Costs Subsequent to AcquisitionCosts Subsequent to AcquisitionCosts Subsequent to AcquisitionCosts Subsequent to Acquisition
LO 6 Describe the accounting treatment for costs subsequent to LO 6 Describe the accounting treatment for costs subsequent to acquisition.acquisition.
In general, costs incurred to achieve greater future benefits should be capitalized, whereas expenditures that simply maintain a given level of services should be expensed.
To capitalize costs, one of three conditions must be present:
Useful life of the asset must be increased.
Quantity of units produced from asset must be increased.
Quality of units produced must be enhanced.
5858
Costs Subsequent to AcquisitionCosts Subsequent to AcquisitionCosts Subsequent to AcquisitionCosts Subsequent to Acquisition
LO 6 Describe the accounting treatment for costs subsequent to LO 6 Describe the accounting treatment for costs subsequent to acquisition.acquisition.
Additions
Improvements and Replacements
Rearrangement and Reinstallation
Repairs
Major Types of Expenditures
5959
Costs Subsequent to AcquisitionCosts Subsequent to AcquisitionCosts Subsequent to AcquisitionCosts Subsequent to Acquisition
LO 6 Describe the accounting treatment for costs subsequent to LO 6 Describe the accounting treatment for costs subsequent to acquisition.acquisition.
Illustration 10-Illustration 10-2121
Summary
6060
Disposition of PP&EDisposition of PP&EDisposition of PP&EDisposition of PP&E
LO 7 Describe the accounting treatment for the LO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.disposal of property, plant, and equipment.
A company may retire plant assets voluntarily or
dispose of them by sale, exchange, involuntary conversion, or abandonment.
Depreciation must be taken up to the date of
disposition.
6161
Disposition of PP&EDisposition of PP&EDisposition of PP&EDisposition of PP&E
LO 7 Describe the accounting treatment for the LO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.disposal of property, plant, and equipment.
Sale of Plant Assets
BE10-14: Ottawa Corporation owns machinery that
cost $20,000 when purchased on July 1, 2007.
Depreciation has been recorded at a rate of $2,400 per
year, resulting in a balance in accumulated depreciation
of $8,400 at December 31, 2010. The machinery is sold
on September 1, 2011, for $10,500.
Prepare journal entries to
a) update depreciation for 2011 and
b) record the sale.
6262
a) Depreciation for 2011
Depreciation expense ($2,400 x 8/12) 1,600
Accumulated depreciation1,600
LO 7 Describe the accounting treatment for the LO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.disposal of property, plant, and equipment.
b) Record the sale
Cash 10,500
Accumulated depreciation 10,000
Machinery20,000
Gain on sale500
Disposition of Plant AssetsDisposition of Plant AssetsDisposition of Plant AssetsDisposition of Plant Assets
** $8,400 + $1,600 = $8,400 + $1,600 = $10,000$10,000
**
6363
Sometimes an asset’s service is terminated through some type of involuntary conversion such as fire, flood, theft, or condemnation.
Companies report the difference between the amount recovered (e.g., from a condemnation award or insurance recovery), if any, and the asset’s book value as a gain or loss.
They treat these gains or losses like any other type of disposition.
Involuntary Conversion
LO 7 Describe the accounting treatment for the LO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.disposal of property, plant, and equipment.
Disposition of Plant AssetsDisposition of Plant AssetsDisposition of Plant AssetsDisposition of Plant Assets
6464
If a company scraps or abandons an asset without any cash recovery, it recognizes a loss equal to the asset’s book value.
If scrap value exists, the gain or loss that occurs is the difference between the asset’s scrap value and its book value.
If an asset still can be used even though it is fully depreciated, it may be kept on the books at historical cost less depreciation.
Miscellaneous Problems
LO 7 Describe the accounting treatment for the LO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.disposal of property, plant, and equipment.
Disposition of Plant AssetsDisposition of Plant AssetsDisposition of Plant AssetsDisposition of Plant Assets
6565
JOIN KHALID AZIZJOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.KARACHI, PAKISTAN.