Final Exam Material Combined

0% (0 out of 26 correct) Responses to questions are indicated by the symbol.

1. If an exchange has commercial substance all losses should be recognized immediately and all gains should be deferred.

If an exchange has commercial substance, both gains and losses should be recognized immediately.

A. True

B. False

2. IFRS and GAAP both use a commercial substance test to determine whether gains on nonmonetary exchanges should be recognized.

GAAP changed from a “similar in nature” criterion to the commercial substance test to converge with IFRS.

A. True

B. False

3. Cash or other assets received in an exchange are referred to as “boot.”

Cash received in an exchange is referred to as “boot.”

A. True

B. False

4. When nonmonetary assets are traded in an exchange that lacks commercial substance and no cash is received, any loss is recognized immediately.

Losses that arise in an exchange of nonmonetary assets that lacks commercial substance are not deferred but recognized.

A. True

B. False

5. The receipt of an asset from a contribution should be recorded as additional paid-in capital.

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Contributions received should be recorded as revenue in the period received.

A. True

B. False

6. A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at

A. the nominal cost of taking title to it.

B. its market value.

C. one dollar (since the site cost nothing but should be included in the balance sheet).

D. the value assigned to it by the company's directors.

7. Losses on exchanges of nonmonetary assets are:

All losses on exchanges of nonmonetary assets are recognized in the period when the exchange takes place.

A. never recognized.

B. recognized only on exchanges that have commercial substance.

C. recognized only on exchanges that lack commercial substance.

D. recognized in the period of the exchange.

8. Zoum Company sold manufacturing equipment with a cost of $88,000 and accumulated depreciation of $64,000 for $19,000. The journal entry to record this transaction will include:

When book value exceeds disposal price, a loss has occurred. The journal entry to record the sale would include debits to Cash ($19,000), Accumulated Depreciation – Equipment ($64,000) and a loss account ($5,000). Equipment would be credited for $88,000.

A. a credit to the Equipment account for $24,000.

B. a credit to a gain account for $4,000.

C. a debit to a loss account for $5,000.

D. a credit to Accumulated Depreciation – Equipment for $64,000.



9. A nonmonetary asset acquired in an exchange that has commercial substance is usually recorded at the:

The cost of an asset acquired in an exchange that has commercial substance is usually recorded at the fair value of the asset given up, unless the fair value of the asset received is more clearly evident.

A. book value of the asset given up.

B. book value of the asset received.

C. fair value of the asset given up, unless fair value of the asset received is more clearly evident.

D. fair value of the asset received.

10. Plant assets purchased in exchange for a zero-interest-bearing note should be accounted for at the:

Plant assets purchased in exchange for a zero-interest-bearing note are recorded at the present value of the note.

A. face value of the note.

B. fair value of the asset received.

C. book value of the asset received.

D. present value of the note.

11. In an exchange that lacks commercial substance in which a gain exists and cash is received, the asset received is recorded at the:

When cash is received in an exchange that lacks commercial substance and a gain exists, the asset received is recorded at the fair value of the asset received less the deferred portion of the gain.

A. book value of the asset given up less cash received.

B. fair value of the asset given up less cash received.

C. book value of the asset given up less the deferred portion of the gain.

D. fair value of the asset received less the deferred portion of the gain.

12. Crompton Company purchased land and a building for a lump sum cost of $210,000. The land has a fair market value of $80,000 and the building has a fair market value of $160,000. The cost assigned to the land is



The lump sum price incurred to acquire more than one asset is allocated among them based on their relative fair market values: ($80,000/ $240,000) ($210,000) = $70,000.

A. $0.

B. $70,000.

C. $80,000.

D. $105,000.

13. In an exchange of nonmonetary assets that has commercial substance, when no cash is involved, the new asset is valued at:

In an exchange of nonmonetary assets that has commercial substance, the earnings process of the old asset is completed and any gain or loss is recognized. When no cash was exchanged, the new asset would be valued at the fair market value of either the old asset or the new asset, as they will be equal.

A. the fair value of the new asset plus the gain deferred.

B. the book value of the old asset.

C. the book value of the old asset plus the gain deferred.

D. the fair value of the new asset.

14. Property received through a contribution is to be recognized at its fair market value and offset with a credit entry to a:

FASB requires that such contributions be recognized as revenues in the period received.

A. Miscellaneous Gain account.

B. Paid-in Capital account.

C. Contribution Revenue account.

D. Additional Paid-in Capital account.

15. The gain recognized in an exchange that lacks commercial substance and in which cash is received is computed by multiplying the total gain by the formula of:

A. cash paid divided by the total of cash paid plus fair value of the asset received.

B. cash paid divided by the total of cash paid plus fair value of the asset given up.

C. cash received divided by the total of cash received plus fair value of the asset received.



The gain recognized in an exchange is computed by multiplying the total gain by the cash received divided by the total of cash received plus the fair value of the asset received.

D. cash received divided by the total of cash received plus fair value of the asset given up.

16. In an exchange of nonmonetary assets that lacks commercial substance in which a gain exists and no cash is paid or received, the asset received is recorded at:

In exchanges of nonmonetary assets that lack commercial substance not involving cash received where gains exist, the asset received is recorded at the fair value of the asset given up less the deferred gain.

A. book value of the asset received less the gain deferred.

B. fair value of the asset received up less the gain deferred.

C. book value of the asset given up plus the deferred gain.

D. fair value of the asset given up less the deferred gain.

17. Assets acquired in a lump sum purchase should be recorded at their:

Assets acquired in a lump sum purchase are recorded on the basis of their relative fair market values.

A. appraised value.

B. relative book value.

C. relative fair market values.

D. fair market value.

18. Grambling Company exchanged equipment that cost $66,000 and has accumulated depreciation of $30,000 for equipment with a fair value of $48,000 and received $12,000 cash. The exchange lacked commercial substance. The gain to be recognized from the exchange is

A. $4,800 gain.

B. $6,000 gain.

C. $18,000 gain.

D. $24,000 gain.



19. The cost of a replacement that extends the useful life of an asset should be debited to the asset account.

When an asset's useful life is extended by a replacement, the cost of such replacement should be debited to the related Accumulated Depreciation account.

A. True

B. False

20. On September 10, 2012, AMX Printing Co. incurred the following costs for one of its printing presses:

Purchase of attachment $55,000Installation of attachment 5,000Replacement parts for renovation of press 18,000Labor and overhead in connection with renovation of press 7,000

Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity. What amount of the costs should be capitalized?

A. $0.

B. $67,000.

C. $78,000.

D. $85,000.

21. Which of the following is not a capital expenditure with regard to a manufacturing facility?

A. Painting the exterior of the building

B. Expanding the building by adding a new wing

C. Replacing the heating system with a more energy efficient model

D. Replacing the air conditioning system with a similar unit

22. Expenditures that extend the useful life of a plant asset without improving its quantity or quality are accounted for:

A. as additions.

B. as improvements.

C. by debiting the asset account.

D. by debiting Accumulated Depreciation.



Expenditures that extend the useful life of a plant asset are accounted for by debiting Accumulated Depreciation.

23. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were

A. less than current market value.

B. greater than cost.

C. greater than book value.

D. less than book value.

24. Brick Company purchased machinery for $320,000 on January 1, 2008. Straight-line depreciation has been recorded based on a $20,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2012 at a gain of $6,000. How much cash did Brick receive from the sale of the machinery?

A. $46,000.

B. $54,000.

C. $66,000.

D. $86,000.

25. Burton Company sold equipment with a cost of $55,000 and accumulated depreciation of $32,000 for $27,000. The journal entry to record this transaction will include:

When plant assets are sold for an amount greater than their book value, a gain is recorded. The journal entry would include debits to Cash ($27,000) and Accumulated Depreciation ($32,000) and credits to Equipment ($55,000) and a gain account ($4,000).

A. a credit to the Equipment account for $23,000.

B. a credit to a gain account for $4,000.

C. a debit to a loss account for $28,000.

D. a credit to Accumulated Depreciation – Equipment for $32,000.

26. All of the following are true regarding the revaluation model allowed under IFRS except:

A. after initial recognition, the revalued amount is fair value less subsequent depreciation and impairment losses.

B. when an asset is revalued, any increase in carrying amount is reported as miscellaneous revenue.



Retake Test

Revalued assets cannot be written up above original cost.

C. revaluations must be made regularly to ensure that the carrying value is not materially different from fair value.

D. once selected, the revaluation policy applies to an entire class of property, plant, and equipment.




1. Land held for speculative purposes is classified as Property, Plant and Equipment but is not depreciated.

Land held for speculative purposes is classified as an Investment.

A. True

B. False

2. Which of the following is not a major characteristic of a plant asset?

A. Possesses physical substance

B. Acquired for resale

C. Acquired for use

D. Yields services over a number of years

3. The only major characteristic of property, plant and equipment shown below is:

Property, plant and equipment are considered long-term assets and as such yield services over a number of years.

A. they are acquired for resale.

B. they are always subject to depreciation.

C. they are long-term in nature.

D. they lack physical substance.

4. Which one of the following is not a characteristic of property, plant, and equipment?

Land, which is part of property, plant, and equipment, is not depreciated.

A. They are acquired for use in operations.

B. They are long-term in nature and are always subject to depreciation.

C. They possess physical substance.

D. All of the options are characteristics.

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5. Plant assets may properly include

A. deposits on machinery not yet received.

B. idle equipment awaiting sale.

C. land held for possible use as a future plant site.

D. none of these.

6. A special assessment by the municipality for sidewalks and a drainage system would be included in the cost of land.

This type of one-time special assessment would be included in the cost of the Land.

A. True

B. False

7. Boutique Suites Hotel Corporation recently purchased Rodeo Resort and the land on which it is located with the plan to tear down the Rodeo Resort and build a new luxury hotel on the site. Boutique Suites Hotel Corporation salvaged fixtures and wood flooring from Rodeo Resort prior to demolishing the building. The proceeds from the sale of the salvaged materials should be

A. recognized as revenue in the period of the sale.

B. recognized as an extraordinary gain in the year the hotel is torn down.

C. recorded as a reduction of the cost of the land.

D. recorded as a reduction of the cost of the new hotel.

8. The cost of buildings should include all of the following except:

The cost of removing an old building is a cost of getting the land ready and relates to the land instead of the new building.

A. building permits.

B. excavation costs.

C. overhead costs incurred during construction.

D. costs of removing an old building on the new building site.

9. The cost of land includes all of the following except:

A. purchase price.



The cost of fencing and lighting would be recorded as Land Improvements because these expenditures have limited lives.

B. payments to clear liens.

C. cost of fencing and lighting.

D. cost of leveling and grading.

10. Special assessments for local improvements, such as pavements, street lights, sewers, and drainage systems, are usually charged to what account?

Such assessments are usually charged to Land as they are relatively permanent in nature and are maintained and replaced by the local governmental body.

A. Land.

B. Land Improvements.

C. Building Improvements.

D. Betterments.

11. The cost of property acquired by the issuance of securities is equal to:

Property acquired in non-cash transactions is recorded at the market value of the item given up or the market value of the property received, whichever is more readily determinable.

A. the original cost of the securities.

B. the market value of the securities.

C. the par value of the securities.

D. the book value of the property acquired.

12. The cost of manufacturing equipment would include all of the following except:

The cost of training the equipment operator would not be capitalized as part of the cost of

A. purchase price reduced by any discount taken.

B. freight costs.

C. installation costs.

D. cost of training the equipment operator.



the equipment.

13. Alix Company purchased equipment for $35,000. Sales tax on the purchase was $350. Other costs incurred were freight charges of $400, insurance during shipping of $ 75, repairs of $650 for damage during installation, and installation costs of $525. What is the cost of the equipment?

A. $35,000

B. $35,750

C. $36,350

D. $37,000

14. Which of the following costs are capitalized for self-constructed assets?

A. Materials and labor only

B. Labor and overhead only

C. Materials and overhead only

D. Materials, labor, and overhead

15. During self-construction of an asset by Francoise Company, the following were among the costs incurred:Fixed overhead for the year: $1,230,000Portion of $1,000,000 fixed overhead that would be allocated to asset if it were normal production: 33,000Variable overhead attributable to self-construction:29,000What amount of overhead should be included in the cost of the self-constructed asset?

A. $-0-

B. $29,000

C. $33,000

D. $62,000

16. A portion of fixed overhead incurred during self-construction of an asset must be allocated to the construction process.

A portion of fixed overhead incurred during self-construction of an asset may be allocated to the construction process. Alternatively, the company may assign no fixed overhead to

A. True

B. False



the cost of the constructed asset.

17. Overhead costs related to self-constructed assets are accounted for by:

A pro rata portion of fixed overhead should be assigned to the self-constructed asset because a better matching of costs and revenues results.

A. allocating overhead on the basis of lost production.

B. assigning a portion of all overhead to the asset.

C. assigning no fixed overhead to the asset.

D. assigning a pro rata portion of fixed overhead to the asset.

18. Avoidable interest is the lesser of actual interest cost incurred during a fiscal period or the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset.

The company can capitalize the lesser of the actual interest cost incurred during the period or avoidable interest. Avoidable interest is the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset.

A. True

B. False

19. Interest revenue earned on borrowed funds during the construction of an asset to be used by a firm can be used to reduce the cost of interest to be capitalized.

Interest revenue should not be netted or offset against interest cost.

A. True

B. False

20. The period of time during which interest must be capitalized ends whenA. the asset is substantially complete and ready for its intended use.

B. no further interest cost is being incurred.

C. the asset is abandoned, sold, or fully depreciated.

D. the activities that are necessary to get the asset ready for its intended use have begun.



21. The approach for interest costs incurred during construction recommended under GAAP is to:

Capitalizing the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made is the approach recommended under GAAP.

A. capitalize no interest charges during construction.

B. charge construction with all costs of funds employed, whether identifiable or not.

C. capitalize the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made.

D. capitalize a pro rata portion of all costs of funds employed.

22. Which of the following is one of the conditions that must be present for the capitalization period of interest to begin?

Interest costs being incurred is one of the three conditions that must met in order for the capitalization period to begin and continue.

A. Expenditures for the asset must be budgeted.

B. Activities necessary to get the asset ready for its intended use must be known.

C. Interest costs are being incurred.

D. The construction period must occur in the current accounting period.

23. Which of the following statements is true regarding capitalization of interest?

A. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account.

B. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

C. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized.

D. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.

24. The interest rate(s) used in computing avoidable interest is the:



Retake Test

The interest rates used in computing avoidable interest are the specific interest rate and the weighted average rate.

A. rate incurred on specific borrowings.

B. weighted average rate incurred on all other outstanding debt.

C. lower of the rate incurred on specific borrowings or the weighted average rate.

D. rate incurred on specific borrowings for the weighted-average expenditures equal to the specific borrowings and the weighted average rate of other borrowings for the excess expenditures.

25. The interest capitalization period ends when:

The capitalization period ends when the asset is substantially complete and ready for its intended use.

A. activities to get the asset ready for its intended use are in progress.

B. expenditures for the asset are being made.

C. interest cost is being incurred.

D. the asset is substantially complete and ready for its intended use.



10-1

Prepared by Coby Harmon

University of California, Santa Barbara

Intermediate Accounting

10-2


14th Edition

10Acquisition and Disposition of Property, Plant, and Equipment

Kieso, Weygandt, and Warfield

10-3

1. Describe property, plant, and equipment.

2. Identify the costs to include in initial valuation of property, plant, and equipment.

3. Describe the accounting problems associated with self-constructed assets.

4. Describe the accounting problems associated with interest capitalization.

5. Understand accounting issues related to acquiring and valuing plant assets.

6. Describe the accounting treatment for costs subsequent to acquisition.

7. Describe the accounting treatment for the disposal of property, plant, and equipment.

Learning Objectives

10-4

Acquisition

Acquisition costs: land, buildings, equipmentSelf-constructed assetsInterest costsObservations

Valuation Cost Subsequent to Acquisition Dispositions

Cash discountsDeferred contractsLump-sum purchasesStock issuanceNonmonetary exchangesContributionsOther valuation methods

SaleInvoluntary conversionMiscellaneous problems

AdditionsImprovements and replacementsRearrangement and reinstallationRepairsSummary

Acquisition and Disposition of Property, Plant, and Equipment

10-5

► “Used in operations” and not for resale.

► Long-term in nature and usually depreciated.

► Possess physical substance.

Property, plant, and equipment are assets of a durable nature. Other terms commonly used are plant assets and fixed assets.

Property, Plant, and Equipment

LO 1 Describe property, plant, and equipment.

Includes: Land, Building structures

(offices, factories, warehouses), and

Equipment (machinery, furniture, tools).

10-6

Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.

Main reasons for historical cost valuation:

Historical cost is reliable.

Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold.

Acquisition of PP&E

LO 2 Identify the costs to include in initial valuation of property, plant, and equipment.

10-7

Includes all costs to acquire land and ready it for use. Costs typically include:

Cost of Land

Acquisition of PP&E

LO 2

(1) purchase price;

(2) closing costs, such as title to the land, attorney’s fees, and recording fees;

(3) costs of grading, filling, draining, and clearing;

(4) assumption of any liens, mortgages, or encumbrances on the property; and

(5) additional land improvements that have an indefinite life.

10-8

Improvements with limited lives, such as private driveways, walks, fences, and parking lots, are recorded as Land Improvements and depreciated.

Land acquired and held for speculation is classified as an investment.

Land held by a real estate concern for resale should be classified as inventory.

Acquisition of PP&E


Cost of Land

10-9

Includes all costs related directly to acquisition or construction. Cost typically include:

materials, labor, and overhead costs incurred during construction and

professional fees and building permits.

Cost of Buildings


Acquisition of PP&E

10-10 LO 2

Acquisition of PP&E

Cost of EquipmentInclude all costs incurred in acquiring the equipment and preparing it for use. Costs typically include:

1) purchase price,

2) freight and handling charges,

3) insurance on the equipment while in transit,

4) cost of special foundations if required,

5) assembling and installation costs, and

6) costs of conducting trial runs.

10-11

Acquisition of PP&E

(a) Money borrowed to pay building contractor

(b) Payment for construction from note proceeds

(c) Cost of land fill and clearing

(d) Delinquent real estate taxes on property assumed

(e) Premium on 6-month insurance policy during construction

(f) Refund of 1-month insurance premium because construction completed early

LO 2

E10-1 (variation): The expenditures and receipts below are related to land, land improvements, and buildings acquired for use in a business enterprise. Determine how the following should be classified:

Notes Payable

Building

Land

Land

Building

(Building)

10-12

Acquisition of PP&E

(g) Architect’s fee on building

(h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000)

(i) Commission fee paid to real estate agency

(j) Installation of fences around property

(k) Cost of razing and removing building

(l) Proceeds from salvage of demolished building

(m) Cost of parking lots and driveways

(n) Cost of trees and shrubbery (permanent)

Building

LO 2

Land

Land

Land Improvements

Land

(Land)

Land Improvements

Land


10-13

Self-Constructed Assets

Acquisition of PP&E

Costs typically include:

(1) Materials and direct labor

(2) Overhead can be handled in two ways:

1. Assign no fixed overhead

2. Assign a portion of all overhead to the construction process.

Companies use the second method extensively.

LO 3 Describe the accounting problems associated with self-constructed assets.

10-14

Three approaches have been suggested to account for the interest incurred in financing the construction.

Interest Costs During Construction

Acquisition of PP&E

LO 4 Describe the accounting problems associated with interest capitalization.

Capitalize no interest during construction

Capitalize actual costs incurred during

construction

Capitalize all costs of

funds

GAAP

$ 0 $ ?Increase to Cost of AssetIllustration 10-1

10-15

GAAP requires — capitalizing actual interest (with modification).

Consistent with historical cost.

Capitalization considers three items:

1. Qualifying assets.

2. Capitalization period.

3. Amount to capitalize.


Acquisition of PP&E


10-16

Require a substantial period of time to get them ready for their intended use.

Two types of assets:

Assets under construction for a company’s own use.

Assets intended for sale or lease that are constructed or produced as discrete projects.

Qualifying Assets

Acquisition of PP&E


10-17

Capitalization Period

Acquisition of PP&E


Begins when:

1. Expenditures for the asset have been made.

2. Activities for readying the asset are in progress .

3. Interest costs are being incurred.

Ends when:The asset is substantially complete and ready for use.

10-18

Amount to Capitalize

Acquisition of PP&E


Capitalize the lesser of:

1. Actual interest costs

2. Avoidable interest - the amount of interest that could have been avoided if expenditures for the asset had not been made.

10-19

Interest Capitalization Illustration: Blue Corporation borrowed $200,000 at 12% interest from State Bank on Jan. 1, 2011, for specific purposes of constructing special-purpose equipment to be used in its operations. Construction on the equipment began on Jan. 1, 2011, and the following expenditures were made prior to the project’s completion on Dec. 31, 2011:

Acquisition of PP&E


Actual Expenditures:January 1, 2011 $100,000 April 30, 2011 150,000November 1, 2011 300,000December 31, 2011 100,000

Total expenditures $650,000

Other general debt existing on Jan. 1, 2011:

$500,000, 14%, 10-year bonds payable

$300,000, 10%, 5-year note payable

10-20

Step 1 - Determine which assets qualify for capitalization of interest.

Special purpose equipment qualifies because it requires a period of time to get ready and it will be used in the company’s operations.

Acquisition of PP&E


Step 2 - Determine the capitalization period.

The capitalization period is from Jan. 1, 2011 through Dec. 31, 2011, because expenditures are being made and interest costs are being incurred during this period while construction is taking place.

10-21

Acquisition of PP&E


WeightedAverage

Actual Capitalization Accumulated Date Expenditures Period Expenditures

Jan. 1 100,000$ 12/12 100,000$ Apr. 30 150,000 8/12 100,000 Nov. 1 300,000 2/12 50,000 Dec. 31 100,000 0/12 -

650,000$ 250,000$

A company weights the construction expenditures by the amount of time (fraction of a year or accounting period) that it can incur interest cost on the expenditure.

Step 3 - Compute weighted-average accumulated expenditures.

10-22

Acquisition of PP&E


Selecting Appropriate Interest Rate:

1. For the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings.

2. For the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period.

Step 4 - Compute the Actual and Avoidable Interest.

10-23

Acquisition of PP&E


Accumulated Interest AvoidableExpenditures Rate Interest

200,000$ 12% 24,000$ 50,000 12.5% 6,250

250,000$ 30,250$


Avoidable Interest

Interest ActualDebt Rate Interest

Specific Debt 200,000$ 12% 24,000$

General Debt 500,000 14% 70,000 300,000 10% 30,000

1,000,000$ 124,000$

Weighted-average interest rate on

general debt

Actual Interest

$100,000 $800,000

= 12.5%

10-24

Acquisition of PP&E


Avoidable interest 30,250$ Actual interest 124,000

Journal entry to Capitalize Interest:

Equipment 30,250

Interest expense 30,250

Step 5 – Capitalize the lesser of Avoidable interest or Actual interest.

10-25

Acquisition of PP&E


Comprehensive Illustration: On November 1, 2011, Shalla Company contracted Pfeifer Construction Co. to construct a building for $1,400,000 on land costing $100,000 (purchased from the contractor and included in the first payment). Shalla made the following payments to the construction company during 2012.

10-26

Acquisition of PP&E


Pfeifer Construction completed the building, ready for occupancy, on December 31, 2012. Shalla had the following debt outstanding at December 31, 2012.

Compute weighted-average accumulated expenditures for 2012.

Specific Construction Debt1. 15%, 3-year note to finance purchase of land and

construction of the building, dated December 31, 2011, with interest payable annually on December 31

Other Debt2. 10%, 5-year note payable, dated December 31, 2008, with

interest payable annually on December 31 3. 12%, 10-year bonds issued December 31, 2007, with

interest payable annually on December 31

$750,000

$550,000

$600,000

10-27

Acquisition of PP&E



Illustration 10-4

10-28

Acquisition of PP&E


Illustration 10-5Compute the avoidable interest.

10-29

Acquisition of PP&E


Compute the actual interest cost, which represents the maximum amount of interest that it may capitalize during 2011.

Illustration 10-6

The interest cost that Shalla capitalizes is the lesser of $120,228 (avoidable interest) and $239,500 (actual interest), or $120,228.

10-30

Acquisition of PP&E


Shalla records the following journal entries during 2012:

January 1 Land 100,000Buildings (or CIP) 110,000

Cash 210,000

March 1 Buildings 300,000Cash 300,000

May 1 Buildings 540,000Cash 540,000

December 31 Buildings 450,000Cash 450,000

Buildings (Capitalized Interest) 120,228Interest Expense 119,272

Cash 239,500

10-31

Acquisition of PP&E


At December 31, 2012, Shalla discloses the amount of interest capitalized either as part of the income statement or in the notes accompanying the financial statements.

Illustration 10-7

Illustration 10-8

10-32

Acquisition of PP&E


Special Issues Related to Interest Capitalization

1. Expenditures for land.

Interest costs capitalized are part of the cost of the plant, not the land.

2. Interest revenue.

Interest revenue should be offset against interest cost when determining the amount of interest to capitalized.

10-33

Companies should record property, plant, and equipment:

at the fair value of what they give up or

at the fair value of the asset received,

whichever is more clearly evident.

Valuation of PP&E

LO 5 Understand accounting issues related to acquiring and valuing plant assets.

10-34

Cash Discounts — Discount for prompt payment.

Deferred-Payment Contracts — Assets, purchased through long term credit, are recorded at the present value of the consideration exchanged.

Lump-Sum Purchases — Allocate the total cost among the various assets on the basis of their fair market values.

Issuance of Stock — The market value of the stock issued is a fair indication of the cost of the property acquired.

Valuation of PP&E


10-35

Valuation of PP&E


Ordinarily accounted for on the basis of:

the fair value of the asset given up or

the fair value of the asset received,

whichever is clearly more evident.

Exchanges of Nonmonetary Assets

Companies should recognize immediately any gains or losses on the exchange when the transaction has commercial substance.

10-36

Valuation of PP&E


Meaning of Commercial SubstanceExchange has commercial substance if the future cash flows change as a result of the transaction. That is, if the two parties’ economic positions change, the transaction has commercial substance.

Illustration 10-10* If cash is 25% or more of the

fair value of the exchange,

recognize entire gain because

earnings process is complete.

10-37

Valuation of PP&E


Companies recognize a loss immediately whether the exchange has commercial substance or not.

Rationale: Companies should not value assets at more than their cash equivalent price; if the loss were deferred, assets would be overstated.

Exchanges - Loss Situation

10-38

Valuation of PP&E


Illustration: Information Processing, Inc. trades its used machine for a new model at Jerrod Business Solutions Inc. The exchange has commercial substance. The used machine has a book value of $8,000 (original cost $12,000 less $4,000 accumulated depreciation) and a fair value of $6,000. The new model lists for $16,000. Jerrod gives Information Processing a trade-in allowance of $9,000 for the used machine. Information Processing computes the cost of the new asset as follows.

Illustration 10-11

10-39

Equipment 13,000

Accumulated Depreciation—Equipment 4,000

Loss on Disposal of Equipment 2,000

Equipment 12,000

Cash 7,000

Valuation of PP&E


Illustration: Information Processing records this transaction as follows:

Illustration 10-12

Loss on Disposal

10-40

Valuation of PP&E


Exchanges - Gain Situation

Has Commercial Substance. Company usually records the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset at the fair value of the asset given up, and immediately recognizes a gain.

10-41

Valuation of PP&E


Illustration: Interstate Transportation Company exchanged a number of used trucks plus cash for a semi-truck. The used trucks have a combined book value of $42,000 (cost $64,000 less $22,000 accumulated depreciation). Interstate’s purchasing agent, experienced in the second-hand market, indicates that the used trucks have a fair market value of $49,000. In addition to the trucks, Interstate must pay $11,000 cash for the semi-truck. Interstate computes the cost of the semi-truck as follows.

Illustration 10-13

10-42

Semi-truck 60,000Accumulated Depreciation—Trucks 22,000

Trucks (used) 64,000Gain on disposal of Used Trucks 7,000Cash 11,000

Valuation of PP&E


Illustration: Interstate records the exchange transaction as follows:

Illustration 10-14

Gain on Disposal

10-43

Valuation of PP&E



Lacks Commercial Substance—No Cash Received. Now assume that Interstate Transportation Company exchange lacks commercial substance. That is, the economic position of Interstate did not change significantly as a result of this exchange. In this case, Interstate defers the gain of $7,000 and reduces the basis of the semi-truck.

10-44

Trucks (semi) 53,000Accumulated Depreciation—Trucks 22,000

Trucks (used) 64,000Cash 11,000

Valuation of PP&E



Illustration 10-15

10-45

Valuation of PP&E



Lacks Commercial Substance—Some Cash Received.When a company receives cash (sometimes referred to as “boot”) in an exchange that lacks commercial substance, it may immediately recognize a portion of the gain. The general formula for gain recognition when an exchange includes some cash is as follows:

Illustration 10-16

10-46

Valuation of PP&E


Illustration: Queenan Corporation traded in used machinery with a book value of $60,000 (cost $110,000 less accumulated depreciation $50,000) and a fair value of $100,000. It receives in exchange a machine with a fair value of $90,000 plus cash of $10,000.

Illustration 10-17

10-47

Valuation of PP&E


Illustration 10-18

The portion of the gain a company recognizes is the ratio of monetary assets (cash in this case) to the total consideration received.

10-48

Valuation of PP&E


Queenan would record the following entry.Illustration 10-19

Cash 10,000Machine 54,000Accumulated Depreciation—Machine 50,000

Machine 110,000Gain on disposal of machine 4,000

10-49

Valuation of PP&E


Summary of Gain and Loss Recognition on Exchanges of Non-Monetary Assets

Illustration 10-20

10-50

E10-19: Santana Company exchanged equipment used in its manufacturing operations plus $2,000 in cash for similar equipment used in the operations of Delaware Company. The following information pertains to the exchange.


Santana DelawareEquipment (cost) $28,000 $28,000 Accumulated Depreciation 19,000 10,000Fair value of equipment 13,500 15,500Cash given up 2,000

Instructions: Prepare the journal entries to record the exchange on the books of both companies.

Valuation of PP&E

10-51

Calculation of Gain or Loss


Santana DelawareFair value of equipment received $15,500 $13,500

Cash received / paid (2,000) 2,000

Less: Book value of equipment

($28,000-19,000) (9,000)

($28,000-10,000) (18,000)

Gain or (Loss) on Exchange $4,500 ($2,500)

Valuation of PP&E

10-52

Has Commercial Substance


Santana:Equipment 15,500Accumulated depreciation 19,000

Cash 2,000Equipment 28,000Gain on exchange 4,500

Delaware:Cash 2,000Equipment 13,500Accumulated depreciation 10,000Loss on exchange 2,500

Equipment 28,000

Valuation of PP&E

10-53 LO 5 Understand accounting issues related to acquiring and valuing plant assets.

Santana (Has Commercial Substance):Equipment 15,500Accumulated depreciation 19,000

Cash 2,000Equipment 28,000Gain on disposal of equipment 4,500

Valuation of PP&E

Santana (LACKS Commercial Substance):

Equipment (15,500 – 4,500) 11,000Accumulated depreciation 19,000

Cash 2,000Equipment 28,000


Delaware (Has Commercial Substance):

Valuation of PP&E

Delaware (LACKS Commercial Substance):

Cash 2,000Equipment 13,500Accumulated depreciation 10,000Loss on disposal of equipment 2,500

Equipment 28,000


Equipment 28,000

10-55

Valuation of PP&E


Companies should use:

the fair value of the asset to establish its value on the books and

should recognize contributions received as revenues in the period received.

Accounting for Contributions

10-56

Valuation of PP&E

LO 5

When a company contributes a non-monetary asset, it should record the amount of the donation as an expense at the fair value of the donated asset.

Illustration: Kline Industries donates land to the city of Los Angeles for a city park. The land cost $80,000 and has a fair value of $110,000. Kline Industries records this donation as follows.

Contribution Expense 110,000Land 80,000Gain on Disposal of Land 30,000

Contributions

10-57

Costs Subsequent to Acquisition

LO 6 Describe the accounting treatment for costs subsequent to acquisition.

Recognize costs subsequent to acquisition as an asset when the costs can be

measured reliably and

it is probable that the company will obtain future economic benefits.

Future economic benefit would include increases in

1. useful life,

2. quantity of product produced, and

3. quality of product produced.

10-58


LO 6

10-59



Summary Illustration 10-21

10-60

Disposition of PP&E

LO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.

A company may retire plant assets voluntarily or dispose of them by

Sale.

involuntary conversion.

Depreciation must be taken up to the date of disposition.

10-61

Disposition of PP&E

BE10-14: Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2009. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2012. The machinery is sold on September 1, 2013, for $10,500.

Prepare journal entries to

a) update depreciation for 2013 and

b) record the sale.


Sale of Plant Assets

10-62

a) Depreciation for 2013

Depreciation expense ($2,400 x 8/12) 1,600

Accumulated depreciation 1,600

b) Record the sale

Cash 10,500


Machinery 20,000

Gain on sale 500

Disposition of PP&E

* $8,400 + $1,600 = $10,000

*


10-63

Sometimes an asset’s service is terminated through some type of involuntary conversion such as fire, flood, theft, or condemnation.

Companies report the difference between the amount recovered (e.g., from a condemnation award or insurance recovery), if any, and the asset’s book value as a gain or loss.

They treat these gains or losses like any other type of disposition.

Involuntary Conversion

Disposition of PP&E


10-64

Copyright © 2012 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Copyright


1. Production backlogs fall under which category of intangible assets?

Production backlogs are an example of customer-related intangible assets.

A. Technology-related.

B. Customer-related.

C. Marketing-related.

D. Artistic-related.

2. Marketing-related intangibles would include

A. a customer list.

B. a brand name.

C. copyright.

D. a franchise.

3. The difference between the price paid to acquire another company and the fair market value of that company's net assets is called

A. windfall.

B. goodwill.

C. net worth.

D. net realizable value.

4. All intangible assets have limited legal lives except:

Goodwill does not have a limited legal life.

A. copyrights.

B. franchises.

C. goodwill.

D. patents.

5. Goodwill is the excess of cost over:

Page 1 of 8Chapter 12 Intangible Assets Results


Goodwill is the difference between the purchase price and the fair value of the net tangible and identifiable intangible assets.

A. book value of the identifiable net assets acquired.

B. book value of the tangible net assets acquired.

C. fair value of the identifiable net assets acquired.

D. fair value of the tangible net assets acquired.

6. Which of the following costs of goodwill should be amortized over their estimated useful lives?Costs of goodwill from a business combination Costs of developingaccounted for as a purchase goodwill internally

A. No No

B. No Yes

C. Yes Yes

D. Yes No

7. Vermont Company's December 31, 2012 balance sheet reports assets of $26,420,000 and liabilities of $8,550,000. The book values of Vermont's assets approximate their fair values, except for land, which has a fair value $1,200,000 greater than its book value. On December 31, 2012, Goodrich Corporation paid $23,550,000 to acquire Vermont. What amount of goodwill should Goodrich record as a result of this purchase?

A. $ -0-

B. $3,280,000

C. $4,480,000

D. $5,680,000

8. On December 31, 2012, Appalachian Corporation paid $5,550,000 to acquire Grandview Company. Grandview's December 31, 2012 balance sheet reports assets of $6,020,000 and liabilities of $2,100,000. The book values of Grandview's assets approximate their fair values, except for plant assets, which have a fair value $460,000 greater than their book value and a bond payable with a market value $20,000 greater than its book value. What amount of goodwill should Appalachian record?

A. $470,000.

B. $1,170,000.

C. $1,190,000.



The fair value of the net assets is $4,360,000 ($6,020,000 + $460,000 - $2,100,000 -$20,000). Goodwill is $1,190,000 ($5,550,000 - $4,360,000).

D. $1,630,000.

9. St. Sebastian Company and A. Jamison Company were combined in a purchase transaction. St. Sebastian was able to acquire Jamison at a bargain price. The fair market value of Jamison's net assets exceeded the price paid by St. Sebastian to acquire the company. Proper accounting treatment by St. Sebastian is to report the “negative goodwill” as

A. other revenues and gains.

B. an extraordinary gain.

C. a deferred credit and amortized.

D. paid-in capital.

10. For indefinite-life intangibles other than goodwill, an impairment test should be conducted at least:

The impairment test should be performed annually.

A. quarterly.

B. monthly.

C. annually.

D. once during its useful life.

11. Belvedere Inc. acquired a patent on January 1, 2009 for $3,900,000. It was expected to have a 10 year life and no residual value. Belvedere uses straight-line amortization for its patents. On December 31, 2012, the expected future cash flows from the patent are $259,000 per year for the next six years. The present value of these cash flows, discounted at Belvedere's market interest rate, is $1,060,000. What amount, if any, of impairment loss will be reported on Belvedere's 2012 income statement?

Amortization charged to date is $3,900,000/ 10 years X 4 years = $1,560,000 so the carrying value of the patent at December 31, 2012 is $2,340,000 ($3,900,000-

A. $670,000.

B. $1,060,000.

C. $1,280,000.

D. $2,340,000.



$1,560,000). The impairment loss is the difference between the carrying value and the discounted expected future net cash flows: $2,340,000 - $1,060,000 = $1,280,000.

12. Impairment testing is performed in the same way for indefinite-life intangibles and limited-life intangibles.

For indefinite-life intangibles, a company performs only the fair-value test; there is no recoverability test related to indefinite-life intangibles.

A. True

B. False

13. There are no significant differences between U.S. GAAP and IFRS with respect to accounting treatments for intangibles.

There are several significant differences between U.S. GAAP and IFRS treatment of intangible assets, including the fact that IFRS permits more recognition of intangibles compared to U.S. GAAP.

A. True

B. False

14. The impairment rule for goodwill involves how many steps?

There are two steps: first, compare the fair value of the company to its carrying value including goodwill; and second, compare the fair value of the goodwill to its carrying value.

A. 1

B. 2

C. 3

D. 4

15. Halter Inc. purchased Bay View Marine on June 1, 2012 for $12,500,000 and recorded goodwill of $1,550,000 in connection with the purchase. At December 31, 2015, the Bay View Marine Division had a fair value of $12,700,000. The net identifiable assets of Bay View (excluding goodwill) had a fair value of $11,450,000 at that time. What amount of loss on impairment of goodwill should Halter record in 2015?

A. $0.



The fair value of Bay View is greater than its carrying amount so no impairment has occurred.

B. $200,000.

C. $300,000.

D. $1,250,000.

16. Madhoff Company acquired a patent on a manufacturing process on January 1, 2010 for $10,200,000. It was expected to have a 12 year life and no residual value. Madhoff uses straight-line amortization for patents. On December 31, 2011, the expected future cash flows from the patent are $755,000 per year for the next ten years. The present value of these cash flows, discounted at Madhoff's market interest rate, is $6,100,000. At what amount should the patent be carried on the December 31, 2011 balance sheet?

A. $10,200,000

B. $8,500,000

C. $7,550,000

D. $6,100,000

17. Berber Corporation acquired EOW Products on January 1, 2012 for $22,000,000, and recorded goodwill of $3,750,000 as a result of that purchase. At December 31, 2014, the EOW Products Division had a fair value of $19,700,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $17,450,000 at that time. What amount of loss on impairment of goodwill should Berber record in 2014?

A. $ -0-

B. $1,500,000

C. $2,250,000

D. $2,300,000

18. Which of the following principles best describes the current method of accounting for research and development costs?

A. Associating cause and effect

B. Systematic and rational allocation

C. Income tax minimization

D. Immediate recognition as an expense



19. Research and development costs:

Research and development costs must be expensed as incurred.

A. are intangible assets.

B. include periodic alternatives to existing products.

C. should be charged to expense when incurred.

D. usually are small in dollar amount.

20. How should research and development costs be accounted for according to GAAP?

A. Must be capitalized when incurred and then amortized over their estimated useful lives.

B. Must be expensed in the period incurred.

C. May be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved.

D. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will have alternative future uses or unless contractually reimbursable.

21. Which of the following research and development costs may be capitalized?

R & D equipment to be used on current and future projects is to be capitalized and depreciated over its useful life.

A. Contract services.

B. Personnel.

C. Indirect costs.

D. Research and development equipment to be used on current and future projects.

22. Martin Inc. incurred the following costs during the year ended December 31, 2012: Laboratory research aimed at discovery of new knowledge $ 9,850,000 Costs of testing prototype and design modifications 1,425,000 Quality control during commercial production, including routine testing of products 970,000 Purchase of research facilities having an estimated usefullife of 20 years but no alternative future use 14,720,000The total amount to be classified and expensed as research and development in 2012 is

A. $12,011,000.

B. $12,981,000.



C. $25,995,000.

D. $26,965,000.

23. Which of the following costs should be excluded from research and development expense?

A. Modification of the design of a product

B. Acquisition of R & D equipment for use on a current project only

C. Cost of marketing research for a new product

D. Engineering activity required to advance the design of a product to the manufacturing stage

24. All of the following expenditures should be expensed as R & D except:

All of the options should be expensed as R & D except marketing research costs which are a selling expense.

A. acquisition of R & D equipment for use on current project only.

B. salaries of research staff designing a new product.

C. engineering costs incurred to advance a new product to full production stage.

D. costs of marketing research to promote a new product.

25. All of the following are similar to R & D costs except:

All of the options are similar in some respect to R & D costs.

A. advertising costs.

B. start-up costs.

C. initial operating losses.

D. All of the options are similar.

26. Which intangible asset should be disclosed separately on the balance sheet?

A. Patents.

B. Customer lists.

C. Goodwill.

D. Copyrights.



Retake Test

27. The presentation of intangible assets in the financial statements

A. Includes R & D costs.

B. Involves the use of a contra-asset account.

C. Is the same as the presentation of property, plant, and equipment.

D. Should include disclosure of the amortization expense for the next 5 years.

28. The presentation of intangible assets in the financial statements:

The financial statements should disclose the amortization expense for intangible assets for the next 5 years.

A. includes R & D costs.

B. involves the use of a contra-asset account.

C. is the same as the presentation of property, plant, and equipment.

D. should include disclosure of the amortization expense for the next 5 years.

29. All of the following statements regarding IFRS accounting treatments for intangibles are true except:

Under IFRS, costs in the development phase are capitalized once technological feasibility is achieved.

A. IFRS permits some capitalization of internally generated intangible assets.

B. under IFRS the costs associated with research and development are segregated into two components.

C. IFRS allows reversal of impairment losses when there has been a change in economic conditions.

D. under IFRS, costs in the development phase of R & D costs are expensed once technological feasibility is achieved.




1. Intangible assets are normally classified as long-term assets.

In most cases, intangible assets provide services over a period of years.

A. True

B. False

2. Which of the following is not a characteristic of intangible assets?

A. They lack physical existence.

B. They are not financial instruments.

C. They are long-term in nature

D. They are all subject to amortization.

3. Which of the following is not a characteristic of intangible assets?

All of the options are characteristics of intangibles.

A. They are classified as long-term assets.

B. They lack physical existence.

C. They are not financial instruments.

D. All of these are correct.

4. Which of the following is not a factor to be considered in determining a limited-life intangible asset's useful life?

All of the options are factors affecting useful life.

A. Any legal provisions that may limit the useful life.

B. The expected useful life of any related asset.

C. The effects of obsolescence.

D. All of these are correct.

5. Which of the following statements is correct concerning intangible assets?



A. Has physical characteristics, are not financial instruments, and are only created internally.

B. Has physical characteristics, is reported on financial reports, and are only created internally.

C. Has no physical characteristics, is reported on financial reports, and can be created internally or externally.

D. Has physical characteristics, are financial instruments, and can be created internally or externally.

6. Annual payments made under a franchise agreement should be capitalized.

Annual payments are expensed.

A. True

B. False

7. If a company acquires intangibles for stock or in exchange for other assets, the cost of the intangible is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.

The accounting treatment for purchased intangibles closely parallels that for purchased tangible assets.

A. True

B. False

8. A company charges legal fees and other costs incurred in successfully defending a trademark to Legal Expense.

Successful defense of a patent is capitalized to the Trademark account because the suit establishes the owner's legal right to the trademark.

A. True

B. False

9. Which of the following costs would not be included in the cost of a patent?

A. Filing fees.

B. Research and development costs related to product development.



R & D costs are expensed as incurred.

C. Legal fees to file for patent protection.

D. Purchase price.

10. Unrecovered legal fees and other costs incurred in successfully defending a copyright are debited to:

Such costs are considered a part of a copyright's cost and debited to the Copyright account.

A. Accumulated Amortization – Copyright.

B. Legal Expense.

C. a loss account.

D. Copyright.

11. Costs incurred internally to create intangibles are

A. capitalized.

B. capitalized if they have an indefinite life.

C. expensed as incurred.

D. expensed only if they have a limited life.

12. Dyer Corporation acquired a patent on October 31, 2012. The patent had an appraised value of $1,225,000. Dyer paid cash of $1,205,000 to the seller to acquire the patent as well as legal fees of $3,500 related to the acquisition. What amount should be capitalized for the patent?

A. $3,500

B. $1,228,500

C. $1,205,000

D. $1,208,500

13. A patent should be amortized over the greater of its useful life or their legal life.

A. True

B. False



Amortization should be over the lesser of the patent's useful or legal life.

14. The total cost of a trademark or trade name may be expensed rather than capitalized.

If the cost is immaterial it may be expensed.

A. True

B. False

15. The residual value of an intangible asset should be assumed to be zero unless its useful life is less than its economic life.

If economic life is greater than useful life, the asset may have value to someone else.

A. True

B. False

16. Bryson Corporation purchased a limited-life intangible asset for $2,325,000 on May 1, 2010. It has a remaining useful life of 15 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?

A. $133,333

B. $258,333

C. $310,000

D. $413,333

17. Which of the following is an example of a limited life intangible asset?

Patents, which have a legal life of 20 years, are considered limited life intangibles.

A. Goodwill.

B. Trademark.

C. Trade name.

D. Patent.

18. Tangipahoa Corporation acquired a patent on January 1, 2012. Tangipahoa paid cash of



$21,225,000 to the seller to acquire the patent. The remaining legal life of the patent is 15 years. Tangipahoa expects that the patent will be obsolete in 10 years. What amount of amortization expense will Tangipahoa record for 2012?

Patents should be amortized over the shorter of their legal life or useful life: $21,225,000/ 10 years = $2,212,500 annual amortization expense.

A. $707,500

B. $1,061,250

C. $1,415,000

D. $2,212,500

19. Factors considered in determining an intangible asset's useful life include all of the following except

A. the expected use of the asset.

B. any legal or contractual provisions that may limit the useful life.

C. any provisions for renewal or extension of the asset's legal life

D. the amortization method used.

20. On July 2, 2012, Shelby Company bought a trademark from Randolph, Inc. for $5,500,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Royce's books was $3,200,000. In Shelby's 2012 income statement, what amount should be reported as amortization expense?

A. $160,000.

B. $275,000.

C. $320,000.

D. $550,000.

21. Tiburon Corporation purchased a patent for $925,000 on November 30, 2010. It has a remaining legal life of 11 years. Tiburon estimates that the remaining useful life of the patent is useful life of 15 years. What balance will be reported on the December 31, 2012 balance sheet for the patent?

A. $925,000

B. $791,389.

C. $796,528.

D. $742,803.



Total amortization expense charged between November 30, 2010 and December 31, 2012: $925,000/ 180 months X 25 months = $128, 472. The balance in the Patent account would be: $925,000-$128,472 = $796,528.

22. Customer lists and production backlogs are examples of contract-related intangible assets.

Customer lists and production backlogs are examples of customer-related intangible assets.

A. True

B. False

23. Copyrights are renewable.

Copyrights are only valid for the life of the creator plus 70 years.

A. True

B. False

24. Which of the following is not an example of a limited-life intangible asset?

Goodwill is an unlimited-life intangible asset.

A. Patent.

B. Franchise.

C. Goodwill.

D. Copyright.

25. Which of the following is not one of the major categories of intangibles?

A. Contract-related.

B. Financing-related.

C. Artistic-related.

D. Marketing-related.



Retake Test

There is no category of financing-related intangibles.

26. All of the following represent federally granted rights except:

Goodwill represents the difference between the cost of acquiring another company's net assets and their fair market value.

A. copyrights.

B. goodwill.

C. patents.

D. trademarks.

27. Which of the following would be amortized?

Customer lists are considered limited life intangibles and subject to amortization.

A. Goodwill.

B. Trademark.

C. Trade name.

D. Customer List.



10-1




10-2


14th Edition

10Acquisition and Disposition of Property, Plant, and Equipment


10-3

1. Describe property, plant, and equipment.

2. Identify the costs to include in initial valuation of property, plant, and equipment.

3. Describe the accounting problems associated with self-constructed assets.

4. Describe the accounting problems associated with interest capitalization.

5. Understand accounting issues related to acquiring and valuing plant assets.

6. Describe the accounting treatment for costs subsequent to acquisition.

7. Describe the accounting treatment for the disposal of property, plant, and equipment.

Learning Objectives

10-4

Acquisition

Acquisition costs: land, buildings, equipmentSelf-constructed assetsInterest costsObservations

Valuation Cost Subsequent to Acquisition Dispositions

Cash discountsDeferred contractsLump-sum purchasesStock issuanceNonmonetary exchangesContributionsOther valuation methods

SaleInvoluntary conversionMiscellaneous problems

AdditionsImprovements and replacementsRearrangement and reinstallationRepairsSummary

Acquisition and Disposition of Property, Plant, and Equipment

10-5

► “Used in operations” and not for resale.

► Long-term in nature and usually depreciated.

► Possess physical substance.

Property, plant, and equipment are assets of a durable nature. Other terms commonly used are plant assets and fixed assets.

Property, Plant, and Equipment

LO 1 Describe property, plant, and equipment.

Includes: Land, Building structures

(offices, factories, warehouses), and

Equipment (machinery, furniture, tools).

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Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.

Main reasons for historical cost valuation:

Historical cost is reliable.

Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold.

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10-7

Includes all costs to acquire land and ready it for use. Costs typically include:

Cost of Land

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LO 2

(1) purchase price;

(2) closing costs, such as title to the land, attorney’s fees, and recording fees;

(3) costs of grading, filling, draining, and clearing;

(4) assumption of any liens, mortgages, or encumbrances on the property; and

(5) additional land improvements that have an indefinite life.

10-8

Improvements with limited lives, such as private driveways, walks, fences, and parking lots, are recorded as Land Improvements and depreciated.

Land acquired and held for speculation is classified as an investment.

Land held by a real estate concern for resale should be classified as inventory.

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Cost of Land

10-9

Includes all costs related directly to acquisition or construction. Cost typically include:

materials, labor, and overhead costs incurred during construction and

professional fees and building permits.

Cost of Buildings


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10-10 LO 2

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Cost of EquipmentInclude all costs incurred in acquiring the equipment and preparing it for use. Costs typically include:

1) purchase price,

2) freight and handling charges,

3) insurance on the equipment while in transit,

4) cost of special foundations if required,

5) assembling and installation costs, and

6) costs of conducting trial runs.

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(a) Money borrowed to pay building contractor

(b) Payment for construction from note proceeds

(c) Cost of land fill and clearing

(d) Delinquent real estate taxes on property assumed

(e) Premium on 6-month insurance policy during construction

(f) Refund of 1-month insurance premium because construction completed early

LO 2


Notes Payable

Building

Land

Land

Building

(Building)

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(g) Architect’s fee on building

(h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000)

(i) Commission fee paid to real estate agency

(j) Installation of fences around property

(k) Cost of razing and removing building

(l) Proceeds from salvage of demolished building

(m) Cost of parking lots and driveways

(n) Cost of trees and shrubbery (permanent)

Building

LO 2

Land

Land

Land Improvements

Land

(Land)

Land Improvements

Land


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Self-Constructed Assets

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Costs typically include:

(1) Materials and direct labor

(2) Overhead can be handled in two ways:

1. Assign no fixed overhead

2. Assign a portion of all overhead to the construction process.

Companies use the second method extensively.

LO 3 Describe the accounting problems associated with self-constructed assets.

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Three approaches have been suggested to account for the interest incurred in financing the construction.


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Capitalize no interest during construction

Capitalize actual costs incurred during

construction

Capitalize all costs of

funds

GAAP

$ 0 $ ?Increase to Cost of AssetIllustration 10-1

10-15

GAAP requires — capitalizing actual interest (with modification).

Consistent with historical cost.

Capitalization considers three items:

1. Qualifying assets.

2. Capitalization period.

3. Amount to capitalize.


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Require a substantial period of time to get them ready for their intended use.

Two types of assets:

Assets under construction for a company’s own use.

Assets intended for sale or lease that are constructed or produced as discrete projects.

Qualifying Assets

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Capitalization Period

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Begins when:

1. Expenditures for the asset have been made.

2. Activities for readying the asset are in progress .

3. Interest costs are being incurred.

Ends when:The asset is substantially complete and ready for use.

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Amount to Capitalize

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Capitalize the lesser of:

1. Actual interest costs

2. Avoidable interest - the amount of interest that could have been avoided if expenditures for the asset had not been made.

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Interest Capitalization Illustration: Blue Corporation borrowed $200,000 at 12% interest from State Bank on Jan. 1, 2011, for specific purposes of constructing special-purpose equipment to be used in its operations. Construction on the equipment began on Jan. 1, 2011, and the following expenditures were made prior to the project’s completion on Dec. 31, 2011:

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Actual Expenditures:January 1, 2011 $100,000 April 30, 2011 150,000November 1, 2011 300,000December 31, 2011 100,000

Total expenditures $650,000

Other general debt existing on Jan. 1, 2011:

$500,000, 14%, 10-year bonds payable

$300,000, 10%, 5-year note payable

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Step 1 - Determine which assets qualify for capitalization of interest.

Special purpose equipment qualifies because it requires a period of time to get ready and it will be used in the company’s operations.

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Step 2 - Determine the capitalization period.

The capitalization period is from Jan. 1, 2011 through Dec. 31, 2011, because expenditures are being made and interest costs are being incurred during this period while construction is taking place.

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WeightedAverage

Actual Capitalization Accumulated Date Expenditures Period Expenditures

Jan. 1 100,000$ 12/12 100,000$ Apr. 30 150,000 8/12 100,000 Nov. 1 300,000 2/12 50,000 Dec. 31 100,000 0/12 -

650,000$ 250,000$

A company weights the construction expenditures by the amount of time (fraction of a year or accounting period) that it can incur interest cost on the expenditure.

Step 3 - Compute weighted-average accumulated expenditures.

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Selecting Appropriate Interest Rate:

1. For the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings.

2. For the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period.


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Accumulated Interest AvoidableExpenditures Rate Interest

200,000$ 12% 24,000$ 50,000 12.5% 6,250

250,000$ 30,250$


Avoidable Interest

Interest ActualDebt Rate Interest

Specific Debt 200,000$ 12% 24,000$

General Debt 500,000 14% 70,000 300,000 10% 30,000

1,000,000$ 124,000$

Weighted-average interest rate on

general debt

Actual Interest

$100,000 $800,000

= 12.5%

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Avoidable interest 30,250$ Actual interest 124,000

Journal entry to Capitalize Interest:

Equipment 30,250


Step 5 – Capitalize the lesser of Avoidable interest or Actual interest.

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Comprehensive Illustration: On November 1, 2011, Shalla Company contracted Pfeifer Construction Co. to construct a building for $1,400,000 on land costing $100,000 (purchased from the contractor and included in the first payment). Shalla made the following payments to the construction company during 2012.

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Pfeifer Construction completed the building, ready for occupancy, on December 31, 2012. Shalla had the following debt outstanding at December 31, 2012.


Specific Construction Debt1. 15%, 3-year note to finance purchase of land and

construction of the building, dated December 31, 2011, with interest payable annually on December 31

Other Debt2. 10%, 5-year note payable, dated December 31, 2008, with

interest payable annually on December 31 3. 12%, 10-year bonds issued December 31, 2007, with

interest payable annually on December 31

$750,000

$550,000

$600,000

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Illustration 10-4

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Illustration 10-5Compute the avoidable interest.

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Compute the actual interest cost, which represents the maximum amount of interest that it may capitalize during 2011.

Illustration 10-6

The interest cost that Shalla capitalizes is the lesser of $120,228 (avoidable interest) and $239,500 (actual interest), or $120,228.

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Shalla records the following journal entries during 2012:

January 1 Land 100,000Buildings (or CIP) 110,000

Cash 210,000

March 1 Buildings 300,000Cash 300,000

May 1 Buildings 540,000Cash 540,000

December 31 Buildings 450,000Cash 450,000

Buildings (Capitalized Interest) 120,228Interest Expense 119,272

Cash 239,500

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At December 31, 2012, Shalla discloses the amount of interest capitalized either as part of the income statement or in the notes accompanying the financial statements.

Illustration 10-7

Illustration 10-8

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Special Issues Related to Interest Capitalization

1. Expenditures for land.

Interest costs capitalized are part of the cost of the plant, not the land.

2. Interest revenue.

Interest revenue should be offset against interest cost when determining the amount of interest to capitalized.

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Companies should record property, plant, and equipment:

at the fair value of what they give up or

at the fair value of the asset received,

whichever is more clearly evident.

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Cash Discounts — Discount for prompt payment.

Deferred-Payment Contracts — Assets, purchased through long term credit, are recorded at the present value of the consideration exchanged.

Lump-Sum Purchases — Allocate the total cost among the various assets on the basis of their fair market values.

Issuance of Stock — The market value of the stock issued is a fair indication of the cost of the property acquired.

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Ordinarily accounted for on the basis of:

the fair value of the asset given up or

the fair value of the asset received,

whichever is clearly more evident.

Exchanges of Nonmonetary Assets

Companies should recognize immediately any gains or losses on the exchange when the transaction has commercial substance.

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Meaning of Commercial SubstanceExchange has commercial substance if the future cash flows change as a result of the transaction. That is, if the two parties’ economic positions change, the transaction has commercial substance.

Illustration 10-10* If cash is 25% or more of the

fair value of the exchange,

recognize entire gain because

earnings process is complete.

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Companies recognize a loss immediately whether the exchange has commercial substance or not.

Rationale: Companies should not value assets at more than their cash equivalent price; if the loss were deferred, assets would be overstated.

Exchanges - Loss Situation

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Illustration: Information Processing, Inc. trades its used machine for a new model at Jerrod Business Solutions Inc. The exchange has commercial substance. The used machine has a book value of $8,000 (original cost $12,000 less $4,000 accumulated depreciation) and a fair value of $6,000. The new model lists for $16,000. Jerrod gives Information Processing a trade-in allowance of $9,000 for the used machine. Information Processing computes the cost of the new asset as follows.

Illustration 10-11

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Equipment 13,000

Accumulated Depreciation—Equipment 4,000

Loss on Disposal of Equipment 2,000

Equipment 12,000

Cash 7,000

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Illustration: Information Processing records this transaction as follows:

Illustration 10-12

Loss on Disposal

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Has Commercial Substance. Company usually records the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset at the fair value of the asset given up, and immediately recognizes a gain.

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Illustration: Interstate Transportation Company exchanged a number of used trucks plus cash for a semi-truck. The used trucks have a combined book value of $42,000 (cost $64,000 less $22,000 accumulated depreciation). Interstate’s purchasing agent, experienced in the second-hand market, indicates that the used trucks have a fair market value of $49,000. In addition to the trucks, Interstate must pay $11,000 cash for the semi-truck. Interstate computes the cost of the semi-truck as follows.

Illustration 10-13

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Semi-truck 60,000Accumulated Depreciation—Trucks 22,000

Trucks (used) 64,000Gain on disposal of Used Trucks 7,000Cash 11,000

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Illustration 10-14

Gain on Disposal