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Chapter 10 acquisition and disposition of property, plant, and equipment Sommers – ACCT 3311

Chapter 10 acquisition and disposition of property, plant, and equipment Sommers – ACCT 3311. Noncash Acquisitions. 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 evident.

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Chapter 10 acquisition and disposition of property, plant, and equipment Sommers – ACCT 3311

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  1. Chapter 10acquisition and disposition of property, plant, and equipmentSommers – ACCT 3311

  2. Noncash Acquisitions 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 evident. • Issuance of equity securities • Deferred payments • Donated Assets • Exchanges

  3. Noncash Acquisitions Issuance of Equity Securities • 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 are actively traded, market value can be easily determined. • 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. Donated Assets • On occasion, companies acquire assets through donation. • The receiving company is required to record • The donated asset at fair value. • Revenue equal to the fair value of the donated asset.

  4. Example 5 On January 1, 2011, Byner Company purchased a used tractor. Byner paid $5,000 down and signed a noninterest-bearing note requiring $25,000 to be paid on December 31, 2013. The fair value of the tractor is not determinable. An interest rate of 10% properly reflects the time value of money for this type of loan agreement. The company’s fiscal year-end is December 31. • Prepare the journal entry to record the acquisition of the tractor. • How much interest expense will the company include in its 2011 and 2012 income statements for this note? • What is the amount of the liability the company will report in its 2011 and 2012 balance sheets for this note?

  5. Example 5: Continued Prepare the journal entry. How much interest expense will the company include in its 2011 and 2012 income statements for this note? What is the amount of the liability the company will report in its 2011 and 2012 balance sheets for this note?

  6. Dispositions Steps: • Update depreciation to date of disposal. • Remove original cost of asset and accumulated depreciation from the books. • Record what you received. • The difference between book value of the asset and the amount received is recorded as a gain or loss.

  7. Exchanges Generally 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 • In the exchange of operational assets, fair value is used except in rare situations in which the fair value cannotbe determined or the exchange lacks commercial substance. • 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.

  8. Example 6 Southern Company owns a building that it leases. The building’s fair value is $1,400,000 and its book value is $800,000 (original cost of $2,000,000 less accumulated depreciation of $1,200,000). Southern exchanges this for another building owned by the Eastern Company. The building’s book value on Eastern’s books is $950,000 (original cost of $1,600,000 less accumulated depreciation of $650,000). Eastern also gives Southern $140,000 to complete the exchange. The exchange has commercial substance for both companies. Prepare the journal entries to record the exchange on the books of Southern.

  9. Example 6: Continued Southern Company owns a building that it leases. The building’s fair value is $1,400,000 and its book value is $800,000 (original cost of $2,000,000 less accumulated depreciation of $1,200,000). Southern exchanges this for another building owned by the Eastern Company. The building’s book value on Eastern’s books is $950,000 (original cost of $1,600,000 less accumulated depreciation of $650,000). Eastern also gives Southern $140,000 to complete the exchange. The exchange has commercial substance for both companies. Prepare the journal entries to record the exchange on the books of Eastern.

  10. Discussion Questions Q10–16 Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for each situation.

  11. Discussion Questions Q10–16 Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchangelacks commercial substance. Explain to Stan the differences in accounting for each situation.

  12. Exchange Lacks Commercial Substance • When exchanges are recorded at fair value, any gain or loss is recognized for the difference between the fair value and book value of the asset(s) given-up. To preclude the possibility of companies engaging in exchanges of appreciated assets solely to be able to recognize gains, fair value can only be used in legitimate exchanges that have commercial substance. A nonmonetary exchange is considered to have commercial substance if the company: • expects a change in future cash flows as a result of the exchange, and • that expected change is significant relative to the fair value of the assets exchanged.

  13. Example 7 The Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the land currently is worth $72,000. Tinsley gave $14,000 in cash to complete the transaction. What is the fair value of the new parcel of land received by Tinsley?

  14. Example 7: Continued The Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the land currently is worth $72,000. Tinsley gave $14,000 in cash to complete the transaction. Prepare the journal entry to record the exchange assuming the exchange has commercial substance.

  15. Example 7: Continued The Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the land currently is worth $72,000. Tinsley gave $14,000 in cash to complete the transaction. Prepare the journal entry to record the exchange assuming the exchange lacks commercial substance.

  16. Accounting for Contributions When a company contributes a non-monetary asset, it should record the amount of the donation as an expense at the fair value of the donated asset. Example:Kline Industries donates land to the city of Los Angeles for a city park. The land cost $80,000 and has a fair value of $110,000. Kline Industries records this donation as follows. Contribution Expense 110,000 Land 80,000 Gain on Disposal of Land 30,000 LO 5

  17. Discussion Questions Q10–19 What accounting treatment is normally given to the following items in accounting for plant assets? (a) additions, (b) major repairs, (c) improvements and replacements.

  18. Discussion Questions Q10–19

  19. Disposition of PP&E • A company may retire plant assets voluntarily or dispose of them by • Sale. • Involuntary conversion. Depreciation must be taken up to the date of disposition.

  20. Example 8 Sale of Plant Assets • Example: Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2009. 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, 2012. The machinery is sold on September 1, 2013, for $10,500. • Prepare journal entries to • update depreciation for 2013 and • record the sale.

  21. Example 8: Continued a) Depreciation for 2013 b) Record the sale

  22. Disposition of PP&E Involuntary Conversion 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.

  23. E10-25 On April 1, 2014, Gloria Estefan Company received a condemnation award of $430,000 cash as compensation for the forced sale of the company’s land and building, which stood in the path of a new state highway. The land and building cost $60,000 and $280,000, respectively, when they were acquired. At April 1, 2014, the accumulated depreciation relating to the building amounted to $160,000. On August 1, 2014, Pavlova purchased a piece of replacement property for cash. The new land cost $90,000, and the new building cost $400,000. Prepare the journal entries to record the transactions on April 1 and August 1, 2014.

  24. E10-25: Continued April 1 August 1

  25. Example 9 On January 1, 2011, the Haskins Company adopted the dollar-value LIFO method for its one inventory pool. The pool’s value on this date was $660,000. The 2011 and 2012 ending inventory valued at year-end costs were $690,000 and $760,000, respectively. The appropriate cost indexes are 1.04 for 2011 and 1.08 for 2012. Calculate the inventory value at the end of 2011 and 2012 using the dollar-value LIFO method.

  26. Example 9: Continued 2011 Ending Inventory at Base Year Cost Inventory Layers at Base Year Cost Inventory Layers Converted to Cost

  27. Example 9: Continued 2012 Ending Inventory at Base Year Cost Inventory Layers at Base Year Cost Inventory Layers Converted to Cost

  28. Example 10 Mercury Company has only one inventory pool. On December 31, 2011, Mercury adopted the dollar-value LIFO inventory method. The inventory on that date using the dollar-value LIFO method was $200,000. Inventory data are as follows: Ending Inventory at Ending Inventory at Year Year-End Costs Base Year Costs 2012 $231,000 $220,000 2013 299,000 260,000 2014 300,000 250,000 Compute the inventory at December 31, 2012, 2013, and 2014, using the dollar-value LIFO method.

  29. Example 9: Continued 2012 Calculation of Cost Index Inventory Layers Converted to Cost

  30. Example 9: Continued 2013 Calculation of Cost Index Inventory Layers Converted to Cost

  31. Example 9: Continued 2014 Calculation of Cost Index Inventory Layers Converted to Cost

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