1 Property, Plant, and Equipment: Acquisition and Disposal C hapter 9

2 1.Identify the characteristics of property, plant, and equipment. 2. Record the acquisition of property, plant, and equipment. 3.Determine the cost of assets acquired by the exchange of other assets. 4.Compute the cost of a self-constructed asset, including interest capitalization. Objectives

3 5.Record costs subsequent to acquisition. 6.Record the disposal of property, plant, and equipment. 7.Understand the disclosures of property, plant, and equipment. 8.Explain the accounting for oil and gas properties (Appendix). Objectives

4 Characteristics of Property, Plant, and Equipment  The asset must be held for use and not for investment.  The asset must have an expected life of more than one year.  The asset must be tangible in nature. To be included in the property, plant, and equipment category, an asset must have three characteristics:

5 Acquisition of Property, Plant, and Equipment Determination of Cost Devon Company purchases a machine with a contract price of $100,000 on terms of 2/10, n/30. The company does not take the cash discount and incurs transportation costs of $2,500, as well as installation and testing costs of $3,000. Sales taxes total $5,000 on the purchase. During installation, uninsured damages of $500 are incurred. What is the cost of the machine?

6 Acquisition of Property, Plant, and Equipment Determination of Cost Contract price$100,000 Discount not taken(2,000) Transportation cost2,500 Installation and testing3,000 Sales tax 5,000 Cost of machine$108,500 Contract price$100,000 Discount not taken(2,000) Transportation cost2,500 Installation and testing3,000 Sales tax 5,000 Cost of machine$108,500

7 Acquisition of Property, Plant, and Equipment Machine108,500 Repair Expense500 Discounts Lost2,000 Cash111,000 The company does not include the $500 damage because it was not a necessary cost.

8 Contract price Costs of closing the transaction, obtaining the title, options, legal fees, title search, insurance, past due taxes Acquisition of Property, Plant, and Equipment Cost of Land Cost of surveys Clearing and grading property to get it ready for its intended use Razing old buildings (net of salvage)

9 Landscaping Streets Sidewalks Sewers Acquisition of Property, Plant, and Equipment Cost of Land Improvements

10 Contract price Remodeling and reconditioning Excavating for the specific building Architectural and building permit costs Capitalized interest Certain unanticipated costs Acquisition of Property, Plant, and Equipment Cost of Buildings

11 Acquisition of Property, Plant, and Equipment Lump-Sum Purchases A company pays $120,000 for land and a building. The land and building are appraised at $50,000 and $75,000, respectively. Appraisal Relative Fair Value Value x Total Cost = Allocated Cost Land$ 50,000$50,000/$125,000x $120,000 = $ 48,000 Building 75,000$75,000/$125,000x $120,000 = 72,000 Total$125,000$120,000

12 Acquisition of Property, Plant, and Equipment Deferred Payments A company purchases equipment by issuing a $10,000 non-interest-bearing 5-year note. A $2,000 payment will be made at the end of each year. The market rate for obligations of this type is 12%. Equipment7,210 Discount on Notes Payable2,790 Notes Payable10,000 ($2,000 x )

13 Acquisition of Property, Plant, and Equipment Assets Acquired by Donation The City of Julesberg (a governmental unit) donates land worth $20,000 to the Klemme Company. Land20,000 Donated Capital20,000

14 Assets Acquired by Exchange of Other Assets Dissimilar Company ACompany B Cost $100,000 Accum. depr.54,000 Fair value40,000 Cost $60,000 Accum. depr.32,000 Fair value40,000

15 Assets Acquired by Exchange of Other Assets Dissimilar Company A Cost $100,000 Accum. depr.54,000 Fair value40,000 Equipment40,000 Accum. depr.54,000 Loss6,000 Building100,000 Cost $40,000

16 Assets Acquired by Exchange of Other Assets Dissimilar Company B Cost $60,000 Accum. Depr.32,000 Fair value40,000 Building40,000 Accum. Depr.32,000 Equipment60,000 Gain12,000 Cost $40,000

17 Assets Acquired by Exchange of Other Assets Dissimilar with Boot Company ACompany B Cost $100,000 Accum. depr.54,000 Fair value40,000 Cash received5,000 Cost $60,000 Accum. depr.32,000 Fair value35,000 Cash paid5,000

18 Assets Acquired by Exchange of Other Assets Dissimilar with Boot Company A Cost $100,000 Accum. depr.54,000 Fair value40,000 Cash received5,000 Equipment35,000 Accum. depr.54,000 Cash5,000 Loss6,000 Building100,000 Cost $35,000

19 Assets Acquired by Exchange of Other Assets Dissimilar with Boot Company B Cost $60,000 Accum. Depr.32,000 Fair value35,000 Cash paid5,000 Building40,000 Accum. Depr.32,000 Equipment60,000 Cash5,000 Gain7,000 Cost $40,000

20 Nonmonetary Productive Asset Exchanges Are Similar Productive Assets Used in the Same Line of Business Being Exchange? Yes No Account for Assets at Fair Value. Recognize Gains and Losses Is the Boot  25% of the Total Value of the Exchange? Yes No Next slide

21 Nonmonetary Productive Asset Exchanges Is Boot Received? Yes Is FV  BV? Yes Cost = FV - Boot Received Loss = FV - BV No Cost = BV + Gain - Boot Received Gain = Boot Boot + FV (FV - BV) ContinuedContinued

22 Nonmonetary Productive Asset Exchanges Is Boot Received? No Is FV  BV? Is Boot Paid? No Yes Cost = FV Loss = FV - BV No Cost = BV Gain Not Recognized Yes Is FV  BV? Cost = FV + Boot Paid Loss = FV - BV Yes Cost = BV + Boot Paid Gain Not Recognized No

23 Exchange of Similar Assets Company ACompany B Cost $100,000 Accum. depr.54,000 Fair value40,000 Cash received5,000 Cost $60,000 Accum. depr.32,000 Fair value35,000 Cash paid5,000 Boot Paid by Company Incurring a Gain

24 Exchange of Similar Assets Boot Paid by Company Incurring a Gain Company A Cost $100,000 Accum. depr.54,000 Fair value40,000 Cash received5,000 Equipment35,000 Accum. Depr.54,000 Loss6,000 Cash5,000 Equipment100,000 Cost = $35,000

25 Exchange of Similar Assets Company B Cost $60,000 Accum. depr.32,000 Fair value35,000 Cash paid5,000 Boot Paid by Company Incurring a Gain Equipment33,000 Accum. Depr.32,000 Equipment60,000 Cash5,000 $28,000 + $5,000 Cost = $33,000

26 Exchange of Similar Assets Boot Received by Company Incurring a Gain Company ACompany B Cost $100,000 Accum. depr.80,000 Fair value30,000 Cash received3,000 Cost $60,000 Accum. depr.32,000 Fair value27,000 Cash paid3,000

27 Exchange of Similar Assets Equipment18,000 Accum. Depr.80,000 Cash3,000 Equipment100,000 Gain1,000 Company A Cost $100,000 Accum. depr.80,000 Fair value30,000 Cash received3,000 Click on button to see how gain was calculated. Cost = $18,000 Boot Received by Company Incurring a Gain

28 Boot Received by Company Incurring a Gain Company B Cost $60,000 Accum. depr.32,000 Fair value27,000 Cash paid3,000 Exchange of Similar Assets Equipment30,000 Accum. Depr.32,000 Loss1,000 Equipment60,000 Cash3,000 Cost = $30,000

29 Summary of Productive Asset Exchanges  Are dissimilar productive assets exchanged?  Does the boot equal or exceed 25% of the value of a similar asset exchange?  For exchanges of similar productive assets, is there a loss?  For exchange of similar productive assets between two dealers or between two nondealers in which there is a gain, is cash received or paid? Four Issues

30 Capitalization of Interest A company is required to capitalize interest on assets that are constructed for its own use or constructed as discrete products.

31 Capitalization of Interest Cia Company started a building project on January 1, 2000 and completed it on December 31, ($0 + $1,000,000) ÷ 2 Capitalized Interest, 2000 $500,000 x 10% = $50,000

32 Capitalization of Interest Cia Company started a building project on January 1, 2000 and completed it on December 31, Capitalized Interest, 2001 $1,500,000 x 10%= $150,000 $1,000,000 x 12.6% = $126,000 $276,000 (12% x $4,000,000/$10,000,000) + (13% x $6,000,000/$10,000,000)

33 Costs Subsequent to Acquisition Extending the life of the asset. Improving the productivity. Producing the same product at lower cost. Increasing the quality of the product. Extending the life of the asset. Improving the productivity. Producing the same product at lower cost. Increasing the quality of the product. The future economic benefits of a productive asset or product can be increased by--

34 Improvements and Replacements A company decides to replace its oil furnace with a gas furnace. The oil furnace is carried on the books at a cost of $50,000 with an accumulated depreciation of $30,000. The scrap value of the old furnace is $5,000, and the new furnace costs $70,000. Furnace70,000 Accumulated Depreciation: Furnace30,000 Loss on Disposal of Furnace15,000 Furnace50,000 Cash65,000 Substitution Method

35 Improvements and Replacements A capital expenditure of $50,000 is incurred in replacing a roof on a factory building. Accumulated Depreciation50,000 Cash50,000 Reduce Accumulated Depreciation

36 Improvements and Replacements A capital expenditure of $50,000 is incurred to enlarge a factory. Factory50,000 Cash50,000 Increase the Asset Account

37 Disposal of Property, Plant, and Equipment A company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being depreciation at $1,000 per year. On December 30, the company sells the machine for $600. Depreciation1,000 Accumulated Depreciation1,000 To bring depreciation to point of sale.

38 Disposal of Property, Plant, and Equipment A company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being depreciation at $1,000 per year. On December 30, the company sells the machine for $600. Cash600 Accumulated Depreciation9,000 Loss on Disposal400 Machine10,000 To record disposal of machine for $600.

39 Disclosure of Property, Plant, and Equipment APB Opinion No. 12 requires a company to disclose the balances of its major classes of depreciable assets by nature or function.

40 Oil and Gas Properties Successful- efforts approach? Full-cost method?

41 Oil and Gas Properties Once a company selects a method, a company must follow specific SEC accounting rules.

42 C hapter 9

43 Click on button to return to Slide 27 Gain = ($30,000 - $20,000) = $1,000 $3,000 $3,000 + $27,000