chap010 jpm-f2011(1)
TRANSCRIPT
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Property, Plant, and Equipmentand Intangible Assets: Acquisition
and Disposition
10
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
10 - 2
Equipment• Net purchase price• Taxes• Transportation costs• Installation costs• Modification to building
necessary to install equipment
• Testing and trial runs
Tangible Fixed AssetsLand (not depreciable)• Purchase price• Real estate commissions• Attorney’s fees• Title search• Title transfer fees• Title insurance premiums• Removing old buildings
10 - 3
Land Improvements
Separately identifiable costs of• Driveways• Parking lots• Fencing• Landscaping• Private roads
Buildings• Purchase price• Attorney’s fees• Commissions• Reconditioning
Tangible Fixed Assets
10 - 4
Examples of accounting for acquisition costs
• Read these two exercises before going to the next slides:
• Exercise 10-1 (page 537)
• Exercise 10-2 (page 537)
Exercise 10-1 (page 537)
Capitalized cost of land: Purchase price $60,000 Demolition of old building $4,000 Less: Sale of materials (2,000) 2,000 Legal fees for title investigation 2,000 $64,000 Capitalized cost of building: Construction costs $500,000 Architect's fees 12,000 Interest on construction loan 5,000 Total cost of building $517,000
Note: Property taxes are expensed in the period incurred.
Exercise 10-2
Machine: $45,000 + 2,200 + 700 + 1,000 = $48,900
Machine ..................................................... 48,900 Accounts payable .................................... 47,200 Cash ......................................................... 1,700
To record prepaid insurance for the machine.
Prepaid insurance........................................ 900 Cash ......................................................... 900
10 - 7
Natural Resources• Acquisition costs• Exploration costs• Development costs• Restoration costs
The initial cost of an intangible asset includes the purchase
price and all other costs necessary to bring it to
condition and location for use, such as legal and filing fees.
Intangible Assets• Patents• Copyrights• Trademarks• Franchises• Goodwill
Other Fixed Assets
10 - 8
Intangible Assets
Lack physicalsubstance.
Exclusive Rights.
IntangibleIntangibleAssetsAssets
IntangibleIntangibleAssetsAssets
10 - 9
Examples: Intangible Assets
• Exercise 10-5 (page 538)– Intangible Assets (in general)
• Exercise 10-7 (page 539)– Intangible Asset - Goodwill
Exercise 10-5 (page 538)
Organization Expense ($12,000 + 3,000) 15,000 Patent ($20,000 + 2,000) 22,000 Pre-opening Expense 40,000 Furniture 30,000 Cash 107,000
Exercise 10-7 (page 539)
Smith Corp. Net Assets (book value) $7,800,000 Adjustments to Fair Value: Receivables -200,000 PP&E 1,400,000 Intangibles 1,000,000 + 2,200,000 Apparent fair value received $10,000,000 Amount actually paid $11,000,000 “Extra” amount paid = Goodwill of $1,000,000
10 - 12
Several assets are acquired for a single price that maySeveral assets are acquired for a single price that maybe lower than the sum of the individual asset fair values.be lower than the sum of the individual asset fair values.Several assets are acquired for a single price that maySeveral assets are acquired for a single price that may
be lower than the sum of the individual asset fair values.be lower than the sum of the individual asset fair values.
Lump-Sum Purchases
Asset 2Asset 2Asset 1 Asset 3
Allocation of the lump-sum price is basedon relative fair values of the individual assets.
Allocation of the lump-sum price is basedon relative fair values of the individual assets.
Example:Exercise 10-8 (page 539)
10 - 13
Example of Lump-sum Acquisition
Exercise 10-8
10 - 14
Noncash Acquisitions of Fixed Assets
Rule: Rule: • The asset acquired is recorded at The asset acquired is recorded at the fair value
of the consideration given, or
• the fair value of the asset acquired ….
• whichever is more clearly evidentwhichever is more clearly evident
10 - 15
Examples of “Noncash Acquisitions”
E10-16 & 17 - do on your own
E10-19 – read page 541, then go to two next slides
Exercise 10-19 (parts 1 and 2 only)
1. purchase of equipment on account.
Equipment ($25,000 x 98%) ....................... 24,500 Accounts payable .................................... 24,500
2. acquisition of equipment in exchange for a note.
Equipment (determined below) .................. 24,545 Discount on note payable (difference) ........ 2,455 Note payable (face amount) ..................... 27,000
PV = $27,000 (.90909* ) = $24,545 * Present value of $1: n=1, i=10% (Table 2) Note: use Excel to do PV calculations
Exercise 10-19 (parts 3 & 4 only) 3. To record the exchange of old equipment for new equipment.
Equipment - new ($2,500 + 22,000) ........... 24,500 Loss ($6,000 - 2,500) .................................. 3,500 Accumulated depreciation ......................... 8,000 Cash ......................................................... 22,000 Equipment - old ....................................... 14,000
4. To record the acquisition of equipment by the issuance of stock.
Equipment .................................................. 24,000 Common stock ......................................... 24,000
10 - 18
Noncash acquisition: with equity securities (stock)
• Asset acquired is recorded at:– the fair value of the asset or – the market value of the securities, whichever is more
clearly evident.
• If the securities given are not actively traded:– the fair value of the asset received, as determined by
appraisal, – may be more clearly evident than the fair value of the
securities.
10 - 19
Noncash acquisition:Donated Assets
On occasion, companies acquire assets through donation.
The receiving company is required to: record the donated asset at fair value,
and revenue equal to the fair value of the
donated asset.
10 - 20
Noncash acquisition:Exchange of one asset for another
1) General Valuation Principle (GVP): Cost of asset acquired is: • fair value of asset given up (plus cash paid or minus cash
received) or• fair value of asset acquired, if it is more clearly evident
2) In the exchange of assets fair value is used except in rare situations in which the fair value cannot be
determined or the exchange lacks commercial substance.
3) When fair value cannot be determined or the exchange lacks commercial substance, the asset(s) acquired are
valued at the book value of the asset(s) given up, plus (or minus) any cash exchanged. No gain is recognized.
10 - 21
Dispositions (sales of fixed assets)
Key Points to Keep in Mind:
a)Update depreciation to date of disposal.
b)Remove original cost of asset and accumulated depreciation from the books.
c)The difference between book value of the asset and the amount received is recorded as a gain or loss.
10 - 22
Example: Exercise 10-13 (p.540)Exercise 10-13 (page 540)Sale of Equipment
Req #1 Cash 3,000 Acc. Depr - tractor 26,000 loss on sale xxxxx
tractor 30,000 gain on sale
BV = $4,000, cash received = $3,000
Req #2 Cash 10,000 Acc. Depr - tractor 26,000 loss on sale
tractor 30,000 gain on sale xxxxx
BV = $4,000, cash received = $10,000
10 - 23
Nonmonetary ExchangeExample: Exercise 10-18 (p. 540)
Req # 1:
What is the fair value of the new land?
Answer = fair value of what we gave up:
appraised value of old land $72,000
cash given up 14,000
$86,000
10 - 24
Nonmonetary ExchangeExample: Exercise 10-18 (p. 540)
• Req # 2– assuming commercial substance
• Req # 3– assuming no commercial substance
10 - 25
Nonmonetary ExchangeExample: Exercise 10-18 (p. 540)
Exercise 10-18
10 - 26
Self-Constructed Assets (pp. 521-526)
1) When self-constructing an asset, two accounting issues must be addressed:
a) overhead allocation to the self-constructed asset.
• incremental overhead only
• full-cost approach (generally accepted method)
b) proper treatment of interest incurred during construction
Interest that could have been avoided if the asset were not constructed and money used to retire debt.
Asset constructed: For a company’s own use.
As a discrete project for sale or lease.
2) Under certain conditions, interest incurred on qualifying assets is capitalized.
10 - 27
Capitalization begins when: • construction begins• interest is incurred, and• qualifying expenses are incurred.
Capitalization ends when:• the asset is substantially complete and
ready for its intended use, or• when interest costs no longer are being
incurred.
Interest Capitalization(pages 522-526)
10 - 28
Interest is capitalized based on Average Accumulated Expenditures (AAE).
Qualifying expenditures (construction labor, material, and overhead) weighted for the number of months outstanding
during the current accounting period.
If the qualifying asset is financed through a
specific new borrowing
. . . use the specific rate of the new borrowing as the capitalization rate.
If there is no specific new borrowing, and the
company has other debt
. . . use the weighted average cost of other debt as the capitalization rate.
Interest Capitalization
10 - 29
Int. Cap. Example:Exercise 10-24 (page 542)
Exercise 10-24
10 - 30
R&DResearch
• Planned search or critical investigation aimed at discovery of new knowledge . . .
Development• The translation of research findings or other knowledge
into a plan or design . . .
Most R&D costs are expensed as incurred. (Must be disclosed if material.)
Research• Planned search or critical investigation aimed at
discovery of new knowledge . . .
Development• The translation of research findings or other knowledge
into a plan or design . . .
Most R&D costs are expensed as incurred. (Must be disclosed if material.)
R&D costs incurred under contract for other companies are capitalized as inventory.
Costs of assets purchased for R&D purposes are expensed in the period unless they have other future uses.
R&D costs incurred under contract for other companies are capitalized as inventory.
Costs of assets purchased for R&D purposes are expensed in the period unless they have other future uses.
10 - 31
R&D Example: Exercise 10-25, p. 542
R & D Example
10 - 32
Start ofR&D
Activity
TechnologicalFeasibility
Date ofProductRelease
Sale of Product
CostsExpensed
as R&DCosts
CapitalizedOperating
Costs
All costs incurred to establish the technological feasibility of a computer software product are treated as R&D and expensed as incurred.
Costs incurred after technological feasibility is established and before the software is available for release to customers are capitalized (intangible asset)
All costs incurred to establish the technological feasibility of a computer software product are treated as R&D and expensed as incurred.
Costs incurred after technological feasibility is established and before the software is available for release to customers are capitalized (intangible asset)
Software Development Costs
10 - 33
U.S. GAAP vs. IFRS
• Except for software development costs incurred after technological feasibility,
• … all R&D expenditures are expensed
Research and Development Costs
• Research expenditures are expensed
• Development expenditures that meet specified criteria are capitalized as an intangible asset
End of Chapter 10