1. Intermediate Accounting, 11th ed.
Kieso, Weygandt, and Warfield
Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment 2

2. Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment
After studying this chapter, you should be able to:
Describe the major characteristics of property, plant, and equipment.
Identify the costs included in the initial valuation of land, buildings, and equipment.
Describe the accounting problems associated with self-constructed assets.
Describe the accounting problems associated with interest capitalization.

3. Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment
Understand accounting issues related to acquiring and valuing plant assets.
Describe the accounting treatment for costs subsequent to acquisition.
Describe the accounting treatment for disposal of property, plant, and equipment.

4. Property, Plant, and Equipment (PP&E)
PP&E include:
land, building, structures and equipment
machinery, furniture and tools
They are used in operations and not held for resale
They are long term and are subject to depreciation (except land)
They are tangible

5. Acquisition Cost PPE is initially valued at historical cost.
Historical cost includes:
the asset’s cash or cash equivalent price, and
the cost of readying the asset for use

6. Cost of Land Land costs include: purchase price
closing costs, attorney fees, and recording fees
costs of getting land ready for use (clearing, etc.)
special assessments for local improvements
assumption of liens or encumbrances, and
additional improvements with an indefinite life
Sale of salvaged materials reduces cost

7. Land Improvements, Building and Equipment
Improvements with limited lives are recorded as Land Improvements (and not as Land)
Building cost includes:
costs of materials and labor, and overhead
professional fees and building permits
Cost of equipment includes:
purchase price
freight and handling charges
costs of special foundation, installation, and initial testing.

8. Self-Constructed Assets
These are assets constructed by the business for use in operations.
The cost of self-constructed assets includes:
cost of direct materials,
cost of direct labor,
variable manufacturing overhead,
a pro rata portion of the fixed overhead, and
interest costs incurred during construction (with modification).

9. Interest Capitalization: Factors
Three questions must be answered:
Which assets are qualifying assets?
What is the capitalization period?
What is the amount of interest to be capitalized?

10. Interest Capitalization: Qualifying Assets
They must require a period of time to make them ready for use.
There are two types of qualifying assets:
Assets under construction for use in operations, and
Discrete assets intended for sale or lease.

11. Interest Capitalization: Capitalization Period
Capitalization period begins when:
expenditures for the asset have been made, and
activities for readying the asset are in progress, and
interest costs are being incurred
Capitalization period ends when:
The asset is substantially complete and ready for its intended use.

12. Interest Capitalization: Amount to be Capitalized
Capitalize the lesser of:
actual interest costs
avoidable interest
Avoidable interest is the amount that could have been avoided if expenditures for the asset had not been made

13. Computing Avoidable Interest: Steps
Determine
weighted-average
accumulated
expenditures 1
Appropriate
interest rate(s) 2
Multiply by
Avoidable interest
Capitalize, lesser of
avoidable and
actual interest

14. Determining Weighted-Average Accumulated Expenditures (WAAE): Example
Amber makes the following two payments in 2004:
Jan 31: $24, July 31: $18,000
Capitalization period ran from Jan 31 – Dec 31.
What is the WAAE?
Jan 31: $24,000 * (11/12) $22,000
July 31: $18,000 * (5/12) $ 7,500
WAAE $29,500

15. Determining the Appropriate Interest Rate: Example
Amber (in the previous example) had the following debt outstanding throughout 2004:
10%, 2-year note specifically for the project: $25,000
8%, 5-year note (other debt): $20,000
What is the appropriate interest rate(s) and the avoidable interest?

16. The Appropriate Interest Rate and Avoidable Interest: Example
Up to
specific loan,
$25,000 at
10% 2
$2,500
avoidable
Weighted-
average
accumulated
expenditures:
$29,500 1 +
$2,860
Excess WAAE
($29,500 less
$25,000 = $4,500) at 8% 3
$360
avoidable

17. Comparing Actual and Avoidable Interest: Example
Actual interest:
10% = $2,500
8% = $1, $4,100
Capitalize avoidable interest of $2,860 (the lesser of avoidable and actual interest).
Expense $1,240 ($4,100 less $2,860).

18. Valuation Issues
A cash discount, whether taken or not, reduces purchase price of asset.
Assets, purchased through long term credit, are recorded at the present value of the consideration exchanged.
Cost of assets, acquired in a basket purchase, is allocated to assets on the basis of their relative fair market values.
If assets are acquired in exchange for stock then the market valuation of the stock is the basis for valuation.

19. Exchange of Non-Monetary Assets
The basic rule is that the exchange must be based on:
the fair value of the asset given up, or
the fair value of the asset received whichever is clearly more evident.
The rules for gain/loss recognition depend upon whether the assets exchanged are: dissimilar assets or similar assets

20. Accounting for Exchanges
Types of Accounting Rationale
Exchange Guidance
Dissimilar Recognize gain Earnings process
assets and losses is complete
Similar Recognize loss; Earnings process
assets (cash Gain up to boot is partially
received (partial gain) complete
Similar Recognize loss; Earnings process
assets (No Defer gain is not complete
cash received)

21. Accounting for Exchanges

22. Dispositions of PP&E Plant assets may be: retired voluntarily, or
disposed of by sale, exchange, involuntary conversion
Depreciation is recorded up to the date of disposal before determining gain or loss.
Gains or losses from involuntary conversion are often reported as extraordinary items.

23. Costs Subsequent to Acquisition
If cost incurred increase future benefits, capitalize costs.
If costs maintain a given level of services, expense costs.
Costs incurred after acquisition can be classified as:
additions
improvements and replacements
rearrangements and reinstallation
repairs

24. Improvements and Replacements
Capitalize costs, if
They increase future service potential
Improvements
Replacements or
Substitution of
a better asset
for present
asset
Substitution of
a similar asset
for present
asset

25. Capitalization Approaches
Carrying value of asset is known
Carrying value of the asset is unknown
Substitution approach
Capitalize the new asset (without removing the old asset from the pool), or
Debit accumulated depreciation (when expenditures extend useful life of asset)

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