accounting for property, plant and equipment and intangible assets acquisition and disposition –...
TRANSCRIPT
![Page 1: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/1.jpg)
Accounting for Property, Plant and Equipment and Intangible AssetsAcquisition and Disposition – Part 1INTERMEDIATE ACCOUNTING I
CHAPTER 10
![Page 2: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/2.jpg)
TYPES OF ASSETSFor 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.
![Page 3: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/3.jpg)
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.
![Page 4: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/4.jpg)
Property, plant and equipmentSee page 531
Intangible assetsSee page 531
Asset Descriptions and Typical Acquisition Costs
![Page 5: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/5.jpg)
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 $35,000Freight 1,500Installation 3,000Testing 2,000
Total cost $41,500
![Page 6: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/6.jpg)
Brief Exercise 10–2, page 566
Capitalized cost of land:
Purchase price $600,000Broker’s commission 30,000Title insurance 3,000Miscellaneous closing costs 6,000Demolition 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.
![Page 7: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/7.jpg)
Exercise 10–5, page 569
Organization cost expense ($12,000 + 3,000) 15,000Patent ($20,000 + 2,000) 22,000Pre-opening expenses 40,000Furniture 30,000
Cash 107,000
![Page 8: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/8.jpg)
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.
![Page 9: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/9.jpg)
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:
Asset Allocated 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 valuesLand $ 330,000 15% (330,000/2,200,000)Building 550,000 25 (550,000/2,200,000)Equipment 660,000 30 (660,000/2,200,000)Patent 440,000 20 (440,000/2,200,000)Inventories 220,000 10 (220,000/2,200,000)Total $2,200,000100%
LUMP-SUM PURCHASES: Example
![Page 10: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/10.jpg)
Brief Exercise 10–3, page 566
Cost of land and building:
Purchase price $600,000Broker’s commission 30,000Title insurance 3,000Miscellaneous closing costs 6,000
Total cost $639,000
Asset
Fair Value
Percent of Total Fair Value
InitialValuation(Percent x $639,000)
Land $420,000 60% $383,400Building 280,000 40 255,600Total $700,000 100% $639,000
The total must be allocated to the land and building based on their relative fair values:
![Page 11: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/11.jpg)
Brief Exercise 10–3, additional requirement
Journalize the lump-sum purchase
Asset
Fair Value
Percent of Total Fair Value
InitialValuation(Percent x $639,000)
Land $420,000 60% $383,400Building 280,000 40 255,600Total $700,000 100% $639,000
Debit Credit
Land 383,400
Building 255,600
Cash 639,000
Each asset is debited for its allocated value of the purchase price.
![Page 12: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/12.jpg)
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.
![Page 13: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/13.jpg)
Brief Exercise 10–11, page 567
Pickup trucks = Fair value of machinery plus cash paid$17,000 + 8,000 = $25,000
Loss on exchange = Book value – Fair value$20,000 – 17,000 = $3,000
Journal entry:
Pickup trucks (determined above) 25,000Accumulated depreciation (account balance) 45,000Loss (determined above) 3,000
Cash 8,000Machinery (account balance)65,000
![Page 14: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/14.jpg)
Problem 10–8, page 579 (Case A only)
Requirement 1Book 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 + 20,000 = $29,000
Journal entry (not required):
New tractor ($9,000 + 20,000) 29,000Accumulated depreciation—old asset (account balance) 16,000Loss ($12,000 – 9,000) 3,000
Cash 20,000Old tractor (account balance) 28,000
![Page 15: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/15.jpg)
Problem 10–8, page 579
Requirement 2Fair 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 + 20,000 = $34,000
Journal entry (not required):
New tractor ($14,000 + 20,000) 34,000Accumulated depreciation—old asset (account balance) 16,000
Cash 20,000Old tractor (account balance) 28,000Gain ($14,000 – 12,000) 2,000
![Page 16: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/16.jpg)
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.
![Page 17: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/17.jpg)
Brief Exercise 10–10, page 567
Proceeds $16,000Less book value: $80,000
(71,000) 9,000Gain on sale of equipment $ 7,000
Journal entry:
Cash 16,000Accumulated depreciation (account balance) 71,000Gain (difference)7,000Equipment (account balance)80,000
![Page 18: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/18.jpg)
Brief Exercise 10–10, alternate assumption
Journal entry:
Accumulated depreciation (account balance) 71,000Loss (book value) 9,000Equipment (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.
![Page 19: Accounting for Property, Plant and Equipment and Intangible Assets Acquisition and Disposition – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 10](https://reader036.vdocuments.net/reader036/viewer/2022072005/56649cca5503460f94992042/html5/thumbnails/19.jpg)
Accounting for Property, Plant and Equipment and Intangible AssetsAcquisition and Disposition – Part 1INTERMEDIATE ACCOUNTING I - CHAPTER 8
END OF PRESENTATION