Issues in Accounting

7/17/2019 Issues in Accounting

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Acquisition andAcquisition and

Disposition of Property,Disposition of Property,Plant and EquipmentPlant and Equipment

InstructorInstructor

Adnan ShoaibAdnan Shoaib

PART II: Corporate Accounting Concepts and IssuesPART II: Corporate Accounting Concepts and Issues

Lecture 12Lecture 12


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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.. Describe the accounting problems associated with interest

capitali!ation.

". #nderstand accounting issues related to acquiring and valuing plant

assets.$. Describe the accounting treatment for costs subsequent to acquisition.

%. Describe the accounting treatment for the disposal of property, plant,

and equipment.

Learning ObjectivesLearning Objectives

Learning ObjectivesLearning Objectives


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Acquisition

&cquisition

costs' land,

buildings,

equipment

(elf-constructed

assets

Interest costs

)bservations

!aluation"ost #ubsequent

to AcquisitionDispositions

*ash discounts

Deferred

contracts

+ump-sum

purchases

(toc issuanceonmonetary

echanges

*ontributions

)ther valuation

methods

(ale

Involuntary

conversion

/iscellaneous

problems

&dditions

Improvements

and

replacements

0earrangement

and reinstallation0epairs

(ummary

Acquisition and Disposition ofAcquisition and Disposition ofProperty, Plant, and EquipmentProperty, Plant, and Equipment

Acquisition and Disposition ofAcquisition and Disposition ofProperty, Plant, and EquipmentProperty, Plant, and Equipment


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%sed in operations and not forresale.

Long&termin nature and usually

depreciated.

4ossess p'ysical substance.

Property, plant, and equipmentare assets of a durablenature. )ther terms commonly used are plant assetsand

fi(ed assets.

Property, Plant, and EquipmentProperty, Plant, and Equipment

Property, Plant, and EquipmentProperty, Plant, and Equipment

LO 1 Describe property, plant, and equipment.

)ncludes*

+and,

5uilding structures

6offices, factories,

warehouses7, and

8quipment

6machinery, furniture,

tools7.


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istorical costmeasures the cash or cash equivalent priceof obtaining the asset and bringing it to the location and

condition necessary for its intended use.

/ain reasons for historical cost valuation' 9istorical cost is reliable.

*ompanies should not anticipate gains and losses but

should recogni!e gains and losses only when the assetis sold.

Acquisition of PP-EAcquisition of PP-E


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


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Includes all costs to acquire land and ready it for use. *osts

typically include'

"ost of Land



LO 2

617 purchase price:627 closing costs, such as title to the land, attorney;s fees, and

recording fees:

637 costs of grading, filling, draining, and clearing:

67 assumption of any liens, mortgages, or encumbrances on

the property: and

6"7 additional land improvements that have an indefinite life.


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)mprovements 0it' limited lives, such as private

driveways, wals, fences, and paring lots, are recorded as

Land )mprovementsand depreciated.

+and acquired and held for speculation is classified

as an investment.

+and held by a real estate concern for resale should

be classified as inventory.

Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E


"ost of Land


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Includes all costs related directly to acquisition or

construction. *ost typically include'

materials, labor, and overhead costs incurred duringconstruction and

professional fees and building permits.

"ost of uildings




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3 LO 2


"ost of EquipmentInclude all costs incurred in acquiring the equipment and

preparing it for use. *osts typically include'

17 purchase price,27 freight and handling charges,

37 insurance on the equipment while in transit,

7 cost of special foundations if required,"7 assembling and installation costs, and

$7 costs of conducting trial runs.


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6a7 /oney borrowed to pay building contractor

6b7 4ayment for construction from note proceeds

6c7 *ost of land fill and clearing

6d7 Delinquent real estate taes on property

assumed

6e7 4remium on $-month insurance policy during

construction

6f7 0efund of 1-month insurance premium because

construction completed early

LO 2

)llustration*


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6g7 &rchitect;s fee on building

6h7 *ost of real estate purchased as a plant site

6land =2>>,>>> and building =">,>>>7

6i7 *ommission fee paid to real estate agency

6?7 Installation of fences around property

67 *ost of ra!ing and removing building

6l7 4roceedsfrom salvage of demolished building

6m7 *ost of paring lots and driveways

6n7 *ost of trees and shrubbery 6permanent7

uilding

LO 2

Land

Land

Land )mprovements

Land6Land7

Land )mprovements

Land

)llustration*


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#elf&"onstructed Assets


*osts typically include'

617 /aterials and direct labor

627 )verhead can be handled in two ways'

1. &ssign no fied overhead

2. &ssign a portion of all overhead to the construction

process.

*ompanies use the second method etensively.

LO 3 Describe the accounting problems associated ith self!constructed assets.


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8AAPrequires @ capitali!ing actual interest 6with

modification7.

*onsistent with historical cost.

*apitali!ation considers three items'

1. Aualifying assets.

2. *apitali!ation period.

3. &mount to capitali!e.

)nterest "osts During "onstruction


LO " Describe the accounting problems associated ith interest capitali#ation.


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0equire a substantial period of time to get them ready for

their intended use.


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"apitali


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Amount to "apitali


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)nterest "apitali11'

=">>,>>>, 1B,1>-year

bonds payable

=3>>,>>>, 1>B,"-year

note payable


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#tep 1 & Determine 0'ic' assets qualify for capitali


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& company weights the construction ependitures by the amount of time6fraction of a year or accounting period7 that it can incur interest cost on theependiture.

#tep & "ompute 0eig'ted&average accumulatede(penditures=


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#electing Appropriate )nterest >ate*

1. or the portion of weighted-average accumulated ependitures

that is less than or equal to any amounts borrowed specifically tofinance construction of the assets, use t'e interest rate

incurred on t'e specific borro0ings.

2. or the portion of weighted-average accumulated ependitures

that is greater than any debt incurred specifically to financeconstruction of the assets, use a 0eig'ted average of interest

rates incurred on all ot'er outstanding debt during t'e

period.

#tep $& "ompute t'e Actual and Avoidable )nterest=


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#tep $& "ompute t'e Actual and Avoidable )nterest=

Avoidable )nterest

Eeighted-averageinterest rate ongeneral debt

Actual )nterest

=1>>,>>>

=F>>,>>>? 12=+@


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ournal entry to "apitali,2">

Interest epense 3>,2">

#tep +B "apitali


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"ompre'ensive )llustration* )n ovember 1, 2>11, (halla

*ompany contracted 4feifer *onstruction *o. to construct a

building for =1,>>,>>> on land costing =1>>,>>> 6purchased

from the contractor and included in the first payment7. (halla

made the following payments to the construction company during

2>12.


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4feifer *onstruction completed the building, ready for occupancy,

on December 31, 2>12. (halla had the following debt outstanding

at December 31, 2>12.

*ompute weighted-average accumulated ependitures for 2>12.

(pecific *onstruction Debt

1. 1"B, 3-year note to finance purchase of land and

construction of the building, dated December 31, 2>11, withinterest payable annually on December 31

)ther Debt

2. 1>B, "-year note payable, dated December 31, 2>>F, withinterest payable annually on December 31

3. 12B, 1>-year bonds issued December 31, 2>>%, withinterest payable annually on December 31

=%">,>>>

="">,>>>

=$>>,>>>


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*ompute weighted-average accumulated ependitures for 2>12.

)llustration 14&$


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)llustration 14&+

*ompute the avoidable interest.


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*ompute the actual interest cost, which represents the maimum

amount of interest that it may capitali!e during 2>11.

)llustration 14&.

,22F

6avoidable interest7 and =23G,">> 6actual interest7, or =12>,22F.


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(halla records the following ?ournal entries during 2>12'

anuary 1 +and 1>>,>>>

5uildings 6or *I47 11>,>>>

*ash 21>,>>>

Carc' 1 5uildings 3>>,>>>*ash 3>>,>>>

Cay 1 5uildings ">,>>>

*ash ">,>>>

December 1 5uildings ">,>>>

*ash ">,>>>

uildings 6"apitali


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&t December 31, 2>12, (halla discloses the amount of interest

capitali!ed either as part of the income statement or in the notes

accompanying the financial statements.

)llustration 14&/

)llustration 14&


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#pecial )ssues >elated to )nterest "apitali


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*ompanies 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.

!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E

LO $ %nderstand accounting issues related to acquiring and valuing plant assets.


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"as' Discounts@ Discount for prompt payment.

Deferred&Payment "ontracts@ &ssets, purchased through

long term credit, are recorded at the present value of the

consideration echanged.

Lumpum Purc'ases@ &llocate the total cost among the

various assets on the basis of their fair maret values.

)ssuance of #toc@


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)rdinarily 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.

E(c'anges of 5onmonetary Assets

*ompanies should recogni!e immediately any gains or losses

on the echange when the transaction has commercial

substance.


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Ceaning of "ommercial #ubstance8change has commercial substanceif the future cash flows

change as a result of the transaction.


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*ompanies recogni!e a loss immediatelywhether the echange

has commercial substance or not.

>ationale**ompanies should not value assets at more than theircash equivalent price: if the loss were deferred, assets would be

overstated.

E(c'anges & Loss #ituation


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)llustration* Information 4rocessing, Inc. trades its used machine for anew model at Cerrod 5usiness (olutions Inc. >

6original cost =12,>>> less =,>>> accumulated depreciation7 and a fair

value of =$,>>>. >>. Cerrod gives

Information 4rocessing a trade-in allowance of =G,>>> for the usedmachine. Information 4rocessing computes the cost of the new asset

as follows.

)llustration 14&11


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8quipment 13,>>>

&ccumulated Depreciation@8quipment ,>>>

+oss on Disposal of 8quipment 2,>>>

8quipment 12,>>>

*ash %,>>>



)llustration* Information 4rocessing records this transaction asfollows'

)llustration 14&12

Loss on

Disposal


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E(c'anges & 8ain #ituationas "ommercial #ubstance= *ompany usually records the

cost of a nonmonetary asset acquired in echange for

another nonmonetary asset at the fair value of t'e asset

given up, and immediately recogni!es a gain.


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)llustration* Interstate > 6cost =$,>>> less =22,>>>

accumulated depreciation7. Interstate;s purchasing agent,

eperienced in the second-hand maret, indicates that the used

trucs have a fair maret value of =G,>>>. In addition to the trucs,Interstate must pay =11,>>> cash for the semi-truc. Interstate

computes the cost of the semi-truc as follows.

)llustration 14&1


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(emi-truc $>,>>>

&ccumulated Depreciation@>>

>>

ain on disposal of #sed >>

*ash 11,>>>



)llustration* Interstate records the echange transaction as follows'

)llustration 14&1$

8ain on

Disposal


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E(c'anges & 8ain #ituationLacs "ommercial #ubstance5o "as' >eceived=ow

assume that Interstate >

and reduces the basis of the semi-truc.


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E(c'anges & 8ain #ituationLacs "ommercial #ubstance#ome "as' >eceived=

Ehen a company receives cash 6sometimes referred to as

boot7 in an echange that lacs commercial substance, it

may immediately recogni!e a portion of the gain.


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)llustration* Aueenan *orporation traded in used machinerywith a boo value of =$>,>>> 6cost =11>,>>> less accumulated

depreciation =">,>>>7 and a fair value of =1>>,>>>. It receives in

echange a machine with a fair value of =G>,>>> plus cash of

=1>,>>>.

)llustration 14&1/


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)llustration 14&1


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Aueenan would record the following entry.)llustration 14&13

*ash 1>,>>>

/achine ",>>>

&ccumulated Depreciation@/achine ">,>>>

/achine 11>,>>>

ain on disposal of machine ,>>>


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#ummary of 8ain and Loss >ecognitionon E(c'anges of 5on&Conetary Assets)llustration 14&24


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)llustration*(antana *ompany echanged equipment used in itsmanufacturing operations plus =2,>>> in cash for similar equipment

used in the operations of Delaware *ompany.


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"alculation of 8ain or Loss




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as "ommercial #ubstance


#antana*

8quipment 1",">>

&ccumulated depreciation 1G,>>>

*ash 2,>>>

8quipment 2F,>>>ain on echange ,">>

Dela0are*

*ash 2,>>>

8quipment 13,">>&ccumulated depreciation 1>,>>>

+oss on echange 2,">>

8quipment 2F,>>>



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+2 LO $ %nderstand accounting issues related to acquiring and valuing plant assets.

#antana 6as "ommercial #ubstance7*8quipment 1",">>

&ccumulated depreciation 1G,>>>

*ash 2,>>>

8quipment 2F,>>>

ain on disposal of equipment ,">>


#antana 6LA"F#"ommercial #ubstance7*

8quipment 61",">> J ,">>7 11,>>>&ccumulated depreciation 1G,>>>

*ash 2,>>>

8quipment 2F,>>>


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+ LO $ %nderstand accounting issues related to acquiring and valuing plant assets.

Dela0are 6as "ommercial #ubstance7*


Dela0are 6LA"F#"ommercial #ubstance7*

*ash 2,>>>

8quipment 13,">>

&ccumulated depreciation 1>,>>>

+oss on disposal of equipment 2,">>

8quipment 2F,>>>

*ash 2,>>>

8quipment 13,">>


+oss on disposal of equipment 2,">>

8quipment 2F,>>>


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*ompanies should use'

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

boos and

should recogni!e contributions received as revenues

in the period received.

Accounting for "ontributions


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LO $

Ehen a company contributes a non&monetary asset, it should

record the amount of the donation as an epense at the fair

value of the donated asset.

)llustration* Kline Industries donates land to the city of +os

&ngeles for a city par. ,>>> and has a fair

value of =11>,>>>. Kline Industries records this donation as

follows.

*ontribution 8pense 11>,>>>

+and F>,>>>

ain on Disposal of +and 3>,>>>

"ontributions


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"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition

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

0ecogni!e costs subsequent to acquisitionas an assetwhen the costs can be

measured reliablyand

it is probable that the company will obtain future

economic benefits.

Guture economic benefitwould include increases in

1. useful life,

2. quantity of product produced, and

3. quality of product produced.


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LO &


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

#ummary)llustration 14&21


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Disposition of PP-EDisposition of PP-EDisposition of PP-EDisposition of PP-E

LO ' Describe the accounting treatment for thedisposal of property, plant, and equipment.

& company may retire plant assets voluntarily or dispose ofthem by

(ale.

involuntary conversion.

Depreciation must be taen up to the date of disposition.


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)llustration*)ttawa *orporation owns machinery that cost

=2>,>>> when purchased on Culy 1, 2>>G. Depreciation has been

recorded at a rate of =2,>> per year, resulting in a balance in

accumulated depreciation of =F,>> at December 31, 2>12. 13, for =1>,">>.

4repare ?ournal entries to

a7 update depreciation for 2>13 and

b7 record the sale.


#ale of Plant Assets


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a7 Depreciation for 241

Depreciation epense 6=2,>> FL127 1,$>>

&ccumulated depreciation 1,$>>

b7 >ecord t'e sale

*ash 1>,">>


/achinery 2>,>>>

ain on sale ">>


HH=F,>> M =1,$>> N =1>,>>>=F,>> M =1,$>> N =1>,>>>

HH



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(ometimes an asset;s service is terminated through some type

of involuntary conversionsuch as fire, flood, theft, or

condemnation.

*ompanies report the difference between the amount

recovered 6e.g., from a condemnation award or insurance

recovery7, if any, and the asset;s boo value as a gain or loss.


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End of Lecture 12End of Lecture 12End of Lecture 12End of Lecture 12

Issues in Accounting

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