Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10

TYPES OF ASSETS For financial reporting purposes, long-lived, revenue- producing assets typically are classified in two categories:  Property, plant, and equipment. Assets in this category include land, buildings, equipment, machinery, autos, and trucks. Natural resources such as oil and gas deposits, timber tracts, and mineral deposits also are included.  Intangible assets. Unlike property, plant, and equipment and natural resources, these assets lack physical substance and the extent and timing of their future benefits typically are highly uncertain. They include patents, copyrights, trademarks, franchises, and goodwill.

COSTS TO BE CAPITALIZED  To capitalize an expenditure means to record the purchase as an asset rather than an expense.  Costs are capitalized, rather than expensed, if they are expected to produce benefits beyond the current period.  Property, plant, and equipment and intangible assets can be acquired through purchase, exchange, lease, donation, self- construction, or a business combination.  If purchased, the initial capitalized cost includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

Property, plant and equipment See page 531 Intangible assets See page 531 Asset Descriptions and Typical Acquisition Costs

Brief Exercise 10–1, page 566 Note: Personal property taxes on the machine for the period after acquisition are not part of acquisition cost. They are expensed in the period incurred. Capitalized cost of the machine: Purchase price$35,000 Freight1,500 Installation3,000 Testing 2,000 Total cost$41,500

Brief Exercise 10–2, page 566 Capitalized cost of land: Purchase price$600,000 Broker’s commission30,000 Title insurance3,000 Miscellaneous closing costs6,000 Demolition of old building 18,000 Total cost$657,000 All of the expenditures, including the costs to demolish the old building, are included in the initial cost of the land.

Exercise 10–5, page 569 Organization cost expense ($12, ,000)15,000 Patent ($20, ,000)22,000 Pre-opening expenses 40,000 Furniture30,000 Cash 107,000

LUMP-SUM PURCHASES  A group of various assets acquired for a single sum.  The purchase price is allocated in proportion to the relative fair values of the assets acquired.

The Smyrna Hand & Edge Tools Company purchased an existing factory for a single sum of $2,000,000. The price included title to the land, the factory building, and the manufacturing equipment in the building, a patent on a process the equipment uses, and inventories of raw materials. An independent appraisal estimated the fair values of the assets (if purchased separately) at $330,000 for the land, $550,000 for the building, $660,000 for the equipment, $440,000 for the patent and $220,000 for the inventories. The lump-sum purchase price of $2,000,000 is allocated to the separate assets as follows: AssetAllocated Cost Calculation Land$300,000($2,000,000 X.15) Building 500,000($2,000,000 X.25) Equipment 600,000($2,000,000 X.30) Patent 400,000($2,000,000 X.20) Inventories 200,000($2,000,000 X.10) Total$2,000,000 Fair values Land$ 330,00015%(330,000/2,200,000) Building550,00025 (550,000/2,200,000) Equipment660, (660,000/2,200,000) Patent440, (440,000/2,200,000) Inventories 220, (220,000/2,200,000) Total$2,200,000100% LUMP-SUM PURCHASES: Example

Brief Exercise 10–3, page 566 Cost of land and building: Purchase price$600,000 Broker’s commission30,000 Title insurance3,000 Miscellaneous closing costs 6,000 Total cost$639,000 Asset Fair Value Percent of Total Fair Value Initial Valuation (Percent x $639,000) Land$420,000 60%$383,400 Building 280, ,600 Total$700, % $639,000 The total must be allocated to the land and building based on their relative fair values:

Brief Exercise 10–3, additional requirement Journalize the lump-sum purchase Asset Fair Value Percent of Total Fair Value Initial Valuation (Percent x $639,000) Land$420,000 60%$383,400 Building 280, ,600 Total$700, % $639,000 DebitCredit Land383,400 Building255,600 Cash639,000 Each asset is debited for its allocated value of the purchase price.

NONMONETARY EXCHANGES An asset acquired in a nonmonetary exchange generally is recorded at the fair value of the assets exchanged.  If we can't determine the fair value of either asset in the exchange, the asset received is valued at the book value of the asset given.  In exchanges that lack commercial substance, the asset received is valued at the book value of the asset given.

Brief Exercise 10–11, page 567 Pickup trucks = Fair value of machinery plus cash paid $17, ,000 = $25,000 Loss on exchange = Book value – Fair value $20,000 – 17,000 = $3,000 Journal entry: Pickup trucks (determined above) 25,000 Accumulated depreciation (account balance)45,000 Loss (determined above) 3,000 Cash 8,000 Machinery (account balance)65,000

Problem 10–8, page 579 (Case A only) Requirement 1 Book value less fair value = loss on exchange $12,000 – 9,000 = $3,000 loss Fair value of old tractor + cash given = Initial value of new tractor $9, ,000 = $29,000 Journal entry (not required): New tractor ($9, ,000)29,000 Accumulated depreciation—old asset (account balance)16,000 Loss ($12,000 – 9,000) 3,000 Cash 20,000 Old tractor (account balance)28,000

Problem 10–8, page 579 Requirement 2 Fair value less book value = gain on exchange $14,000 – 12,000 = $2,000 gain Fair value of old tractor + cash given = Initial value of new tractor $14, ,000 = $34,000 Journal entry (not required): New tractor ($14, ,000) 34,000 Accumulated depreciation—old asset (account balance) 16,000 Cash 20,000 Old tractor (account balance) 28,000 Gain ($14,000 – 12,000) 2,000

DISPOSITION OF ASSETS  When assets are sold, a gain or loss is recognized for the difference between the consideration received and the asset's book value.  When assets are retired, a loss is recognized for the remaining book value of the asset.  Depreciation, depletion, or amortization must be brought up to date prior to recording the asset disposition or exchange.

Brief Exercise 10–10, page 567 Proceeds$16,000 Less book value:$80,000 (71,000) 9,000 Gain on sale of equipment$ 7,000 Journal entry: Cash16,000 Accumulated depreciation (account balance) 71,000 Gain (difference) 7,000 Equipment (account balance) 80,000

Brief Exercise 10–10, alternate assumption Journal entry: Accumulated depreciation (account balance) 71,000 Loss (book value) 9,000 Equipment (account balance) 80,000 Assume the equipment was abandoned rather than sold. Recall that when plant assets are discarded, a loss will always be recognized in the amount of the asset’s book value.

Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I - CHAPTER 8 END OF PRESENTATION