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Property, Plant, and Equipment: Acquisition and Disposal

C. 9. hapter. Property, Plant, and Equipment: Acquisition and Disposal. An electronic presentation by Douglas Cloud Pepperdine University. Objectives. 1. Identify the characteristics of property, plant, and equipment. 2. Record the acquisition of property, plant, and equipment.

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Property, Plant, and Equipment: Acquisition and Disposal

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  1. C 9 hapter Property, Plant, and Equipment: Acquisition and Disposal An electronic presentation by Douglas Cloud Pepperdine University

  2. Objectives 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. Continued

  3. Objectives 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).

  4. 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:

  5. Acquisition of Property, Plant, and Equipment Determination 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. What is the cost of the machine?

  6. Acquisition of Property, Plant, and Equipment Determination 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

  7. The company does not include the $500 damage as part of the cost of the machinery because it was not a necessary cost. Acquisition of Property, Plant, and Equipment Machine 108,500 Repair Expense 500 Discounts Lost 2,000 Cash 111,000

  8. Acquisition of Property, Plant, and Equipment • Contract price • Costs of closing the transaction, obtaining the title, options, legal fees, title search, insurance, past due taxes Cost of Land • Cost of surveys • Clearing and grading property to get it ready for its intended use • Razing old buildings (net of salvage)

  9. Acquisition of Property, Plant, and Equipment Cost of Land Improvements • Landscaping • Streets • Sidewalks • Sewers

  10. Acquisition of Property, Plant, and Equipment Cost of Buildings • Contract price • Remodeling and reconditioning • Excavating for the specific building • Architectural and building permit costs • Capitalized interest • Certain unanticipated costs

  11. AppraisalRelative Fair Value Value x Total Cost = Allocated Cost Land $ 50,000 $50,000/$125,000 x $120,000 = $ 48,000 Building 75,000 $75,000/$125,000 x $120,000 = 72,000 Total $125,000 $120,000 Acquisition of Property, Plant, and Equipment Lump-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.

  12. ($2,000 x 3.604776) Equipment 7,210 Discount on Notes Payable 2,790 Notes Payable 10,000 Acquisition of Property, Plant, and Equipment Deferred 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%.

  13. Acquisition of Property, Plant, and Equipment Assets Acquired by Donation The City of Julesberg (a governmental unit) donates land worth $20,000 to the Klemme Company. Land 20,000 Donated Capital 20,000

  14. 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.

  15. Assets Acquired by Exchange of Other Assets Dissimilar Company A Company B Cost $100,000 Accum. depr. 54,000 Fair value 40,000 Cost $60,000 Accum. depr. 32,000 Fair value 40,000

  16. Cost $40,000 Assets Acquired by Exchange of Other Assets Dissimilar Company A Equipment 40,000 Accum. depr. 54,000 Loss 6,000 Building 100,000 Cost $100,000 Accum. depr. 54,000 Fair value 40,000 No boot involved

  17. Cost $40,000 Assets Acquired by Exchange of Other Assets Dissimilar Company B Building 40,000 Accum. Depr. 32,000 Equipment 60,000 Gain 12,000 Cost $60,000 Accum. Depr. 32,000 Fair value 40,000

  18. Assets Acquired by Exchange of Other Assets Dissimilar with Boot Company A Company B Cost $100,000 Accum. depr. 54,000 Fair value 40,000 Cash received 5,000 Cost $60,000 Accum. depr. 32,000 Fair value 35,000 Cash paid 5,000

  19. Cost $35,000 Assets Acquired by Exchange of Other Assets Dissimilar with Boot Company A Equipment 35,000 Accum. depr. 54,000 Cash 5,000 Loss 6,000 Building 100,000 Cost $100,000 Accum. depr. 54,000 Fair value 40,000 Cash received 5,000

  20. Cost $40,000 Assets Acquired by Exchange of Other Assets Dissimilar with Boot Company B Building 40,000 Accum. Depr. 32,000 Equipment 60,000 Cash 5,000 Gain 7,000 Cost $60,000 Accum. Depr. 32,000 Fair value 35,000 Cash paid 5,000

  21. Yes Yes Next slide No Nonmonetary Productive Asset Exchanges Is the Boot  25% of the Total Value of the Exchange? No Are Similar Productive Assets Used in the Same Line of Business Being Exchange? Account for Assets at Fair Value. Recognize Gains and Losses

  22. Cost = FV - Boot Received Loss = FV - BV Yes Is Boot Received? Yes Cost = BV + Gain - Boot Received Gain = Boot Boot + FV No (FV - BV) Nonmonetary Productive Asset Exchanges Is FV BV? Continued

  23. Cost = FV Loss = FV - BV Yes No No Cost = BV Gain Not Recognized No Is Boot Received? Yes Cost = FV + Boot Paid Loss = FV - BV Cost = BV + Boot Paid Gain Not Recognized Yes No Nonmonetary Productive Asset Exchanges Is FV BV? Is Boot Paid? Is FV BV?

  24. Exchange of Similar Assets Boot Paid by Company Incurring a Gain Company A Company B Cost $100,000 Accum. depr. 54,000 Fair value 40,000 Cash received 5,000 Cost $60,000 Accum. depr. 32,000 Fair value 35,000 Cash paid 5,000

  25. Cost = $35,000 Exchange of Similar Assets Boot Paid by Company Incurring a Gain Company A Equipment 35,000 Accum. Depr. 54,000 Loss 6,000 Cash 5,000 Equipment 100,000 Cost $100,000 Accum. depr. 54,000 Fair value 40,000 Cash received 5,000

  26. $28,000 + $5,000 Cost = $33,000 Exchange of Similar Assets Boot Paid by Company Incurring a Gain Company B Equipment 33,000 Accum. Depr. 32,000 Equipment 60,000 Cash 5,000 Cost $60,000 Accum. depr. 32,000 Fair value 35,000 Cash paid 5,000

  27. Exchange of Similar Assets Boot Received by Company Incurring a Gain Company A Company B Cost $100,000 Accum. depr. 80,000 Fair value 30,000 Cash received 3,000 Cost $60,000 Accum. depr. 32,000 Fair value 27,000 Cash paid 3,000

  28. Cost = $18,000 Exchange of Similar Assets Boot Received by Company Incurring a Gain Company A Equipment 18,000 Accum. Depr. 80,000 Cash 3,000 Equipment 100,000 Gain 1,000 Cost $100,000 Accum. depr. 80,000 Fair value 30,000 Cash received 3,000 Click on button to see how gain was calculated.

  29. Cost = $30,000 Exchange of Similar Assets Boot Received by Company Incurring a Gain Company B Equipment 30,000 Accum. Depr. 32,000 Loss 1,000 Equipment 60,000 Cash 3,000 Cost $60,000 Accum. depr. 32,000 Fair value 27,000 Cash paid 3,000

  30. 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 Issues

  31. Self-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.

  32. Capitalization of Interest A company is required to capitalize interest on assets that are constructed for its own use or constructed as discrete products.

  33. Capitalization 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.

  34. Capitalized Interest, 2004 $500,000 x 10% = $50,000 ($0 + $1,000,000) ÷ 2 Capitalization of Interest Cia Company started a building project on January 1, 2004 and completed it on December 31, 2005. During 2004, $1 million was spent on the project and in 2005, $2.9 million was spent.

  35. (12% x $4,000,000/$10,000,000) + (13% x $6,000,000/$10,000,000) Capitalization of Interest 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 for other purposes: $4 million at 12% and $6 million at 13% Capitalized Interest, 2005 $1,500,000 x 10% = $150,000 $1,000,000 x 12.6% = $126,000 $276,000

  36. Fixed Overhead Costs 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.

  37. Costs Subsequent to Acquisition The future economic benefits of a productive asset or product can be increased by-- • Extending the life of the asset. • Improving the productivity. • Producing the same product at lower cost. • Increasing the quality of the product.

  38. Additions The cost of an addition represents a new asset and therefore is capitalized.

  39. Improvements 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. Furnace 70,000 Accumulated Depreciation: Furnace 30,000 Loss on Disposal of Furnace 15,000 Furnace 50,000 Cash 65,000 Substitution Method

  40. Improvements and Replacements A capital expenditure of $50,000 is incurred in replacing a roof on a factory building. Reduce Accumulated Depreciation Accumulated Depreciation 50,000 Cash 50,000

  41. Improvements and Replacements A capital expenditure of $50,000 is incurred to enlarge a factory. Increase the Asset Account Factory 50,000 Cash 50,000

  42. Depreciation 1,000 Accumulated Depreciation 1,000 To bring depreciation to point of sale. 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.

  43. Cash 600 Accumulated Depreciation 9,000 Loss on Disposal 400 Machine 10,000 To record disposal of machine for $600. 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.

  44. Land Building and leasehold improvements Machinery 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.

  45. Oil and Gas Properties Successful-efforts approach? Full-cost method? Click here to skip Appendix material

  46. Oil and Gas Properties Once a company selects a method, a company must follow specific SEC accounting rules.

  47. C 9 hapter The End

  48. $3,000 $3,000 + $27,000 Gain = ($30,000 - $20,000) = $1,000 Click on button to return to Slide 28

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