Acquisition and Disposition of Property, Plant and Equipment

1. Acquisition and Disposition of Property, Plant and Equipment Chapter 10

2. They are tangible They are used in operations and not held for resale PP&E include: Land, building, structures and equipment, machinery, furniture and tools They are long term and are subject to depreciation (except land) What is PP&E

3. PPE is initially valued at historical cost. Historical cost includes: The asset�s cash or cash equivalent price, and The cost of readying the asset for use Acquisition Cost

4. Land costs include: purchase price closing costs, attorney fees, and recording fees costs of getting land ready for use (clearing, etc.) special assessments for local improvements assumption of liens or encumbrances, and additional improvements with an indefinite life Sale of salvaged materials reduces cost Improvements with limited lives are recorded as Land Improvements (and not as Land) Land Costs

5. Carnellian 2000 Carnellian Co. purchased land as a factory site for $400,000. The company paid $42,000 to tear down two old buildings on the site and salvaged lumber with a value of $7,000. Legal fees and title fees of $1,800 were paid to acquire the land. The company spent $30,000 to build an access drive with an estimated life of 15 years. Provide the journal entries necessary to record the above expenditures.

6. Building cost includes: costs of materials and labor, and overhead professional fees and building permits Cost of equipment includes: purchase price freight and handling charges costs of special foundation, installation, and initial testing. Buildings and Equipment Costs

7. Carnellian 2001 Carnellian paid a contractor $2 million to build a factory on their new site. They purchased manufacturing equipment for $600,000 and paid $75,000 to have the equipment shipped and installed. Testing of the equipment prior to use cost $15,000. To celebrate the opening of the new factory they had a party which cost $7,000. Provide the journal entries necessary to record the above expenditures.

8. These are assets constructed by the business for use in operations (not resale). The cost of self-constructed assets includes: cost of direct materials, cost of direct labor, variable manufacturing overhead, a pro rata portion of the fixed overhead, and interest costs incurred during construction (with modification). Self Constructed Assets

9. Three questions must be answered: Which assets are qualifying assets? What is the capitalization period? What is the amount of interest to be capitalized? Interest Capitalization

10. They must require a period of time to make them ready for use. There are two types of qualifying assets: Assets under construction for use in operations, and Discrete assets intended for sale or lease. Interest Capitalization - qualifying assets

11. Capitalization period begins when: expenditures for the asset have been made, and activities for readying the asset are in progress, and interest costs are being incurred Capitalization period ends when: The asset is substantially complete and ready for its intended use. Interest Capitalization - capitalization period

12. Capitalize the lesser of: actual interest costs avoidable interest Avoidable interest is the amount that could have been avoided if expenditures for the asset had not been made Interest Capitalization - amount to capitalize