Operational Assets: Acquisition and Disposition Sid Glandon, DBA, CPA Assistant Professor of Accounting
Types of Operational Assets Property, plant and equipment Land, buildings, machinery, equipment Trucks and autos Natural resources Intangible assets Patents, copyrights, trademarks, franchises Goodwill
Acquisition of Land Cost of land Improvements with limited life Purchase price Removal of old buildings Preparing land for use Special assessments Improvements with limited life Land improvements
Acquisition of Buildings All costs of acquisition Materials, labor and overhead costs Professional fees and building permits
Acquisition of Equipment Costs include Purchase price Delivery costs Set up and installation
Natural Resources Valuation Acquisition costs Exploration costs Development costs Restoration costs
Asset Retirement Obligations Recognized as a liability Measured at fair value Present value of estimated future cash outflows Increases the carrying value of the asset The liability increases each year for interest
Intangible Assets Purchased-recorded at purchase cost Finite useful life assets are amortized Indefinite useful life assets are tested for impairment Internally developed intangibles Not recorded on the books Costs are expensed as incurred
Purchased Intangible Assets Patents 20 years Copyrights Life of creator plus 70 years Trademarks Indefinite renewals for 10-year periods Franchises Contractual agreement
Goodwill Purchase cost only Not separable from the going concern Indefinite life Not subject to amortization Subject to annual impairment testing
Example: Fact Pattern
Net Assets
Journal Entry
Valuation Lump sum purchase Noncash acquisitions Deferred payment contracts Issuance of debt or equity Donated assets
Example: Lump Sum Purchase
Allocation of Purchase Price
Journal Entry to Record Purchase
Dispositions of Plant Assets Sale of plant assets Record depreciation to date of sale Record gain or loss on sale Involuntary Conversion Gains or losses are reported as an extraordinary item
Exchanges Fair value can be determined Fair value is established as either The fair value of the asset given up, or The fair value of asset acquired New asset is recorded at fair value Gains and losses are recognized Fair value can not be determined Asset received is valued at the book value of asset given up plus cash paid or minus cash received
Example: Fair Value Determined Spencer Company traded a GMC van for a Ford panel truck. This is considered an exchange of nonmonetary assets. The company had originally paid $65,000 for the GMC van and had taken depreciation up to the date of exchange of $20,000. The fair value of the Ford panel truck was $40,000. Spencer Company received $10,000 in cash in the exchange.
Example: Fair Value Unknown Spencer Company traded specialized manufacturing equipment for a unique piece of machinery. This is considered an exchange of nonmonetary assets. The company had originally paid $85,000 for the specialized manufacturing equipment and had taken depreciation up to the date of exchange of $45,000. The company is unable to determine the fair value for either asset. Spencer Company paid $10,000 in cash in the exchange.
Self-Constructed Assets Costs include Materials Direct labor Allocated fixed overhead costs Capitalized interest cost during construction
Amount of Interest to Capitalize Weighted-average accumulated expenditures Weighted-average interest rate Avoidable interest Actual interest cost Capitalized interest
Example: Fact Pattern
Schedule of Construction Costs
Total Debt
Weighted-Average Accumulated Expenditures
Weighted-Average Interest Rate General Debt
Avoidable Interest
Actual Interest
Journal Entry
T-Account Analysis Construction in Process
Research and Development Prior to commercial production R & D costs are expensed Start of commercial production Not considered R & D May be expensed, or Included in cost of inventory