1 property, plant, and equipment: acquisition and disposal c hapter 9 an electronic presentation by...
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Property, Plant, and Property, Plant, and Equipment: Equipment:
Acquisition and Acquisition and DisposalDisposal
Property, Plant, and Property, Plant, and Equipment: Equipment:
Acquisition and Acquisition and DisposalDisposal
Chapter9
An electronic presentation by Douglas Cloud
Pepperdine University
An electronic presentation by Douglas Cloud
Pepperdine University
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1. Identify the characteristics of property, plant, and equipment.
2. Record the acquisition of property, plant, and equipment.
3. Determine the cost of assets acquired by the exchange of other assets.
4. Compute the cost of a self-constructed asset, including interest capitalization.
ObjectivesObjectives
ContinuedContinuedContinuedContinued
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5. Record costs subsequent to acquisition.
6. Record the disposal of property, plant, and equipment.
7. Understand the disclosures of property, plant, and equipment.
8. Explain the accounting for oil and gas properties (Appendix).
ObjectivesObjectives
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Characteristics of Property, Plant, and Equipment
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:
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Acquisition of Property, Plant, and Equipment
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 $5,000 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 $5,000 on the purchase. During installation,
uninsured damages of $500 are incurred.
What is the cost of What is the cost of the machine?the machine?
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Acquisition of Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
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 5,000 Cost of machine $108,500
Contract price $100,000 Discount not taken (2,000 )Transportation cost 2,500 Installation and testing 3,000 Sales tax 5,000 Cost of machine $108,500
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Acquisition of Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
Machine 108,500Repair Expense 500Discounts Lost 2,000 Cash 111,000
The company does not include the $500 damage as part of the cost of the
machinery because it was not a necessary cost.
The company does not include the $500 damage as part of the cost of the
machinery because it was not a necessary cost.
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• Contract price• Costs of closing the
transaction, obtaining the title, options, legal fees, title search, insurance, past due taxes
Acquisition of Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
Cost of LandCost of Land
• Cost of surveys• Clearing and grading
property to get it ready for its intended use
• Razing old buildings (net of salvage)
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• Landscaping• Streets• Sidewalks• Sewers
Acquisition of Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
Cost of Land ImprovementsCost of Land Improvements
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Contract price Remodeling and reconditioning Excavating for the specific
building Architectural and building
permit costs Capitalized interest Certain unanticipated costs
Acquisition of Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
Cost of BuildingsCost of Buildings
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Acquisition of Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
Lump-Sum PurchasesLump-Sum Purchases
A company pays $120,000 for land and a building. The land and building are appraised
at $50,000 and $75,000, respectively.
A company pays $120,000 for land and a building. The land and building are appraised
at $50,000 and $75,000, respectively.
Appraisal Relative Fair Value Value x Total Cost = Allocated Cost
Land $ 50,000 $50,000/$125,000 x $120,000 = $ 48,000Building 75,000 $75,000/$125,000 x $120,000 = 72,000Total $125,000 $120,000
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Acquisition of Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
Deferred PaymentsDeferred Payments
A 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%.
A 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)
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Acquisition of Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
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
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Assets Acquired by Exchange of Other Assets
Assets Acquired by Exchange of Other Assets
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.
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Assets Acquired by Exchange of Other Assets
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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Assets Acquired by Exchange of Other Assets
Assets Acquired by Exchange of Other Assets
DissimilarDissimilar
Company A
Cost $100,000Accum. depr. 54,000Fair value 40,000
Equipment 40,000Accum. depr. 54,000Loss 6,000 Building 100,000
Cost $40,000
No boot involved
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Assets Acquired by Exchange of Other Assets
Assets Acquired by Exchange of Other Assets
DissimilarDissimilar
Company B
Cost $60,000Accum. Depr. 32,000Fair value 40,000
Building 40,000Accum. Depr. 32,000 Equipment 60,000 Gain 12,000
Cost $40,000
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Assets Acquired by Exchange of Other Assets
Assets Acquired by Exchange of Other Assets
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
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Assets Acquired by Exchange of Other Assets
Assets Acquired by Exchange of Other Assets
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 100,000Cost $35,000
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Assets Acquired by Exchange of Other Assets
Assets Acquired by Exchange of Other Assets
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 Cost $40,000
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Nonmonetary Productive Asset ExchangesNonmonetary Productive Asset Exchanges
Are Similar Productive
Assets Used in the Same Line
of Business Being
Exchange?
Yes
No Account for Assets at Fair Value. Recognize
Gains and Losses
Is the Boot 25% of the Total Value of the
Exchange?
Yes
No
Next slide
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Nonmonetary Productive Asset ExchangesNonmonetary Productive Asset Exchanges
Is Boot Received?
YesIs FV BV?
Yes
Cost = FV - Boot Received
Loss = FV - BV
No
Cost = BV + Gain - Boot Received
Gain = Boot Boot + FV
(FV - BV)ContinuedContinuedContinuedContinued
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Nonmonetary Productive Asset ExchangesNonmonetary Productive Asset Exchanges
Is Boot Received?
No
Is FV BV?
Is Boot Paid?
No
Yes
Cost = FVLoss = FV - BV
NoCost = BVGain Not Recognized
Is FV BV? Cost = FV
+ Boot Paid
Loss = FV - BV
Yes
Cost = BV + Boot Paid
Gain Not Recognized
No
Yes
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Exchange of Similar AssetsExchange 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
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Exchange of Similar AssetsExchange of Similar Assets
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 Cost = $35,000
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Exchange of Similar AssetsExchange of Similar Assets
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
Cost = $33,000
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Exchange of Similar AssetsExchange of Similar Assets
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
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Exchange of Similar AssetsExchange of Similar Assets
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
Click on button to see how gain was calculated.
Boot Received by Company Incurring a GainBoot Received by Company Incurring a Gain
Cost = $18,000
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Boot Received by Company Incurring a GainBoot Received by Company Incurring a Gain
Company B
Cost $60,000Accum. depr. 32,000Fair value 27,000Cash paid 3,000
Exchange of Similar AssetsExchange of Similar Assets
Equipment 30,000Accum. Depr. 32,000Loss 1,000 Equipment 60,000 Cash 3,000 Cost = $30,000
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Summary of Productive Asset Exchanges
Summary of Productive Asset Exchanges
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
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Self-ConstructionSelf-ConstructionSelf-ConstructionSelf-Construction
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.
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Capitalization of InterestCapitalization of InterestCapitalization of InterestCapitalization 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 InterestCapitalization of InterestCapitalization of InterestCapitalization of Interest
Interest cannot be capitalized for the following types of assets:
1. Inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis.
2. Assets that are in use or ready for their intended use.
3. Assets that are not being used in the earning activities of the company and are not undergoing the activities necessary to get them ready for use.
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Capitalization of InterestCapitalization of Interest
Cia Company started a building project on January 1, 2004 and completed it on December 31, 2005.
Cia Company started a building project on January 1, 2004 and completed it on December 31, 2005.
($0 + $1,000,000) ÷ 2
Capitalized Interest, 2004
$500,000 x 10% = $50,000
During 2004, $1 million was spent on the project and in 2005, $2.9 million was spent.
During 2004, $1 million was spent on the project and in 2005, $2.9 million was spent.
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Capitalization of InterestCapitalization of Interest
Capitalized Interest, 2005
$1,500,000 x 10% = $150,000$1,000,000 x 12.6% = $126,000
$276,000
(12% x $4,000,000/$10,000,000) + (13% x $6,000,000/$10,000,000)
During 2004, $1 million was spent on the project and in 2005, $2.9 million was spent.
During 2004, $1 million was spent on the project and in 2005, $2.9 million was spent.
Amounts borrowed and outstanding: $1.5 million at 10% was borrowed specifically for the project.
Amounts borrowed and outstanding: $1.5 million at 10% was borrowed specifically for the project.
Amounts borrowed for other purposes: $4 million at 12% and $6 million at 13%
Amounts borrowed for other purposes: $4 million at 12% and $6 million at 13%
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Fixed Overhead CostsFixed Overhead Costs
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.
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Costs Subsequent to AcquisitionCosts 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--
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AdditionsAdditions
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.
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Improvements and ReplacementsImprovements 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 65,000
Substitution MethodSubstitution Method
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Improvements and ReplacementsImprovements and Replacements
A capital expenditure of $50,000 is incurred in replacing a roof on a factory building.
A capital expenditure of $50,000 is incurred in replacing a roof on a factory building.
Accumulated Depreciation 50,000 Cash 50,000
Reduce Accumulated DepreciationReduce Accumulated Depreciation
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Improvements and ReplacementsImprovements and Replacements
A capital expenditure of $50,000 is incurred to enlarge a factory.
A capital expenditure of $50,000 is incurred to enlarge a factory.
Factory 50,000 Cash 50,000
Increase the Asset AccountIncrease the Asset Account
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Disposal of Property, Plant,and Equipment
Disposal of Property, Plant,and Equipment
A 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.
A 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.
Depreciation 1,000 Accumulated Depreciation 1,000
To bring depreciation to point of sale.
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Disposal of Property, Plant,and Equipment
Disposal of Property, Plant,and Equipment
A 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.
A 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.
Cash 600Accumulated Depreciation 9,000Loss on Disposal 400 Machine 10,000
To record disposal of machine for $600.
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Disclosure of Property,Plant, and Equipment
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.
LandBuilding and
leasehold improvements
Machinery and equipment
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Oil and Gas PropertiesOil and Gas Properties
Successful-efforts
approach?
Successful-efforts
approach?Full-cost method?
Full-cost method?
Click here to skip Appendix material
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Oil and Gas PropertiesOil and Gas Properties
Once a company selects a method, a company must follow specific SEC accounting rules.
Once a company selects a method, a company must follow specific SEC accounting rules.
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Chapter9
The EndThe EndThe EndThe End
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Click on button to return to Slide 28
Gain = ($30,000 - $20,000) = $1,000$3,000
$3,000 + $27,000
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