Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA 10-1 Property, Plant, and Equipment and Intangible Assets: Acquisition and Disposition Chapter 10

10-2 Long-lived, Revenue-producing Assets Tangible Property, Plant, Equipment & Natural Resources Tangible Property, Plant, Equipment & Natural Resources Intangible No Physical Substance Intangible No Physical Substance Types of Assets Expected to Benefit Future Periods General Rule for Cost Capitalization The initial cost of an asset includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

10-3 Equipment  Net purchase price  Taxes  Transportation costs  Installation costs  Testing and trial runs Costs to be Capitalized Land (not depreciable)  Purchase price  Real estate commissions  Attorney’s fees  Title search  Title transfer fees  Title insurance premiums  Removing old buildings

10-4 Costs to be Capitalized Land Improvements Separately identifiable costs of  Driveways  Parking lots  Fencing  Landscaping  Private roads Buildings  Purchase price  Attorney’s fees  Commissions  Reconditioning

10-5 Natural Resources  Acquisition costs  Exploration costs  Development costs  Restoration costs The initial cost of an intangible asset includes the purchase price and all other costs necessary to bring it to condition and location for use, such as legal and filing fees. Costs to be Capitalized Intangible Assets  Patents  Copyrights  Trademarks  Franchises  Goodwill

10-6  An exclusive right recognized by law and granted by the U.S. Patent Office for 20 years.  Holder has the right to use, manufacture, or sell the patented product or process without interference or infringement by others.  R & D costs that lead to an internally developed patent are expensed in the period incurred. Intangible Assets ─ Patents Torch Inc. has developed a new device. Research and development costs totaled $30,000. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees. What is Torch’s patent cost? Torch’s cost for the new patent is $3,000. The $30,000 R & D cost is expensed as incurred.

10-7 Copyrights  A form of protection given by law to authors of literary, musical, artistic, and similar works.  Copyright owners have exclusive rights to print, reprint, copy, sell or distribute, perform, and record the work.  Generally, the legal life of a copyright is the life of the author plus 70 years. Trademarks  A symbol, design, or logo associated with a business.  If internally developed, trademarks have no recorded asset cost.  If purchased, a trademark is recorded at cost.  Registered with U.S. Patent Office and renewable indefinitely in 10-year periods. Intangible Assets

10-8 Occurs when one company buys another company. The amount by which the consideration exchanged exceeds the fair value of net assets acquired. Only purchased goodwill is an intangible asset. A contractual arrangement where the franchisor grants the franchisee exclusive rights to use the franchisor’s trademark within a certain area for a specified period of time. Goodwill Franchise Intangible Assets Goodwill is not amortized.

10-9 Noncash Acquisitions  Issuance of equity securities  Deferred payments  Donated assets  Exchanges  Issuance of equity securities  Deferred payments  Donated assets  Exchanges 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. 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.

10-10 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.

10-11 Exchanges General Valuation Principle: 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 assets fair value is used except in rare situations in which the fair value cannot be 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 or loss is recognized.

10-12 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.

10-13 Self-Constructed Assets When self-constructing an asset, two accounting issues must be addressed:  Overhead allocation to the self-constructed asset.  Incremental overhead only  Full-cost approach  Proper treatment of interest incurred during construction Interest that could have been avoided if the asset were not constructed and the money used to retire debt. Asset constructed:  For a company’s own use.  As a discrete project for sale or lease. Under certain conditions, interest incurred on qualifying assets is capitalized.

10-14 Capitalization begins when  construction begins  interest is incurred, and  qualifying expenses are incurred. Capitalization ends when  the asset is substantially complete and ready for its intended use, or  when interest costs no longer are being incurred. Interest Capitalization

10-15 Interest is capitalized based on Average Accumulated Expenditures (AAE). Qualifying expenditures (construction labor, material, and overhead) weighted for the number of months outstanding during the current accounting period. If the qualifying asset is financed through a specific new borrowing... use the specific rate of the new borrowing as the capitalization rate. If there is no specific new borrowing, and the company has other debt... use the weighted average cost of other debt as the capitalization rate. Interest Capitalization

10-16 If specific new borrowing had been insufficient to cover the average accumulated expenditures... Specific new borrowing AAE... Capitalize this portion using the 10 percent specific borrowing rate. Other debt... Capitalize this portion using the 12 percent weighted- average cost of debt. Interest Capitalization

10-17 Research and Development (R&D) Research  Planned search or critical investigation aimed at discovery of new knowledge... Development  The translation of research findings or other knowledge into a plan or design... Most R&D costs are expensed as incurred. (Must be disclosed if material.) Research  Planned search or critical investigation aimed at discovery of new knowledge... Development  The translation of research findings or other knowledge into a plan or design... Most R&D costs are expensed as incurred. (Must be disclosed if material.)  R&D costs incurred under contract for other companies are capitalized as inventory and carried forward into future years.  Costs of assets purchased for R&D purposes are expensed in the period unless they have alternative future uses.  R&D costs incurred under contract for other companies are capitalized as inventory and carried forward into future years.  Costs of assets purchased for R&D purposes are expensed in the period unless they have alternative future uses.

10-18 Start of R&D Activity Technological Feasibility Date of Product Release Sale of Product Costs Expensed as R&D Costs Capitalized Operating Costs  All costs incurred to establish the technological feasibility of a computer software product are treated as R&D and expensed as incurred.  Costs incurred after technological feasibility is established and before the software is available for release to customers are capitalized as an intangible asset.  All costs incurred to establish the technological feasibility of a computer software product are treated as R&D and expensed as incurred.  Costs incurred after technological feasibility is established and before the software is available for release to customers are capitalized as an intangible asset. Software Development Costs

10-19 Software Development Costs Balance Sheet  The unamortized portion of capitalized computer software cost is an asset. Income Statement  Amortization expense associated with computer software cost.  R&D expense associated with computer software development cost. Balance Sheet  The unamortized portion of capitalized computer software cost is an asset. Income Statement  Amortization expense associated with computer software cost.  R&D expense associated with computer software development cost. Disclosure  Amortization of capitalized computer software costs starts when the product begins to be marketed.  Two methods, the percentage-of-revenue method and the straight-line method, are compared and the method producing the largest amount of amortization is used.  Amortization of capitalized computer software costs starts when the product begins to be marketed.  Two methods, the percentage-of-revenue method and the straight-line method, are compared and the method producing the largest amount of amortization is used.

10-20 End of Chapter 10