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Acquisition and Disposition of Property, Plant, and Equipment
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics 1. Valuation and classification of land, buildings, and equipment. 2. Self-constructed assets, capitalization of overhead. 3. Capitalization of interest. 4. Exchanges of assets Questions 1, 2, 3, 4, 6, 7, 12, 13, 21 5, 8, 20, 21 8, 9, 10, 11, 2, 3, 4 13, 21 12, 16, 17 8, 9, 10, 11, 12 5, 6, 7 Brief Exercises 1 Exercises 1, 2, 3, 4, 5, 13 4, 6, 12, 16 4, 5, 7, 8, 9, 10, 16 3, 11, 16, 17, 18, 19, 20 1, 5, 6, 7 4, 8, 9, 10, 11 Problems 1, 2, 3, 5 Concepts for Analysis 1, 6, 7
2 3, 4 5
5. Lump-sum purchases, issuance of stock, deferredpayment contracts. 6. Costs subsequent to acquisition. 7. Alternative valuations. 8. Disposition of assets.
12, 14, 15
3, 6, 11, 12, 2, 11 13, 14, 15, 16 21, 22, 23 3 1
18, 19 22 23
Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e Instructor’s Manual (For Instructor Use Only)
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives 1. 2. 3. 4. 5. Describe property, plant, and equipment. Identify the costs to include in initial valuation of property, plant, and equipment. Describe the accounting problems associated with self-constructed assets. Describe the accounting problems associated with interest capitalization. Understand 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.
1, 2, 3, 4, 5, 11, 12, 13 4, 5, 6, 11, 12
1, 2, 3, 4, 5, 6, 11 3 5, 6, 7, 8, 9, 10, 11 3, 4
2, 3, 4 5, 6, 7, 8, 9, 10, 11, 12 13 14, 15
5, 6, 7, 8, 9, 10 11, 12, 13, 14, 15, 16, 17, 18, 19, 20 21, 22, 23 24, 25
2, 4, 11
Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e Instructor’s Manual (For Instructor Use Only)
ASSIGNMENT CHARACTERISTICS TABLE
It e m E10-1 E10-2 E10-3 E10-4 E10-5 E10-6 E10-7 E10-8 E10-9 E10-10 E10-11 E10-12 E10-13 E10-14 E10-15 E10-16 E10-17 E10-18 E10-19 E10-20 E10-21 E10-22 E10-23 E10-24 E10-25 P10-1 P10-2 P10-3 P10-4 P10-5 P10-6 P10-7 P10-8 P10-9 P10-10 P10-11 Description Level of Difficulty Time (minutes)
Acquisition costs of realty. Acquisition costs of realty. Acquisition costs of trucks. Purchase and self-constructed cost of assets. Treatment of various costs. Correction of improper cost entries. Capitalization of interest. Capitalization of interest. Capitalization of interest. Capitalization of interest. Entries for equipment acquisitions. Entries for asset acquisition, including self-construction. Entries for acquisition of assets. Purchase of equipment with zero-interest-bearing debt. Purchase of computer with zero-interest-bearing debt. Asset acquisition. Nonmonetary exchange. Nonmonetary exchange. Nonmonetary exchange. Nonmonetary exchange. Analysis of subsequent expenditures. Analysis of subsequent expenditures. Analysis of subsequent expenditures. Entries for disposition of assets. Disposition of assets. Classification of acquisition and other asset costs. Classification of acquisition costs. Classification of land and building costs. Dispositions, including condemnation, demolition, and trade-in. Classification of costs and interest capitalization. Interest during construction. Capitalization of interest. Nonmonetary exchanges. Nonmonetary exchanges. Nonmonetary exchanges. Purchases by deferred payment, lump-sum, and nonmonetary exchanges.
Moderate Simple Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate Simple Simple Simple Moderate Moderate Moderate Simple Moderate Moderate Moderate Moderate Simple Simple Moderate Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate
15–20 10–15 10–15 20–25 30–40 15–20 20–25 20–25 20–25 20–25 10–15 15–20 20–25 15–20 15–20 25–35 10–15 20–25 15–20 15–20 20–25 15–20 10–15 20–25 15–20 35–40 40–55 35–45 35–40 20–30 25–35 20–30 35–45 30–40 30–40 35–45
Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e Instructor’s Manual (For Instructor Use Only)
13/e Instructor’s Manual (For Instructor Use Only) . Inc. Intermediate Accounting.10-4 Copyright © 2010 John Wiley & Sons. Kieso.
Costs of acquisition. improvements. Nonmonetary exchanges. 13/e Instructor’s Manual (For Instructor Use Only) 10-5 . Intermediate Accounting. Accounting for self-constructed assets. Inc. Cost of land vs. Capitalization of interest. and sale of realty. building—ethics. Capitalization of interest.ASSIGNMENT CHARACTERISTICS TABLE (Continued) It e m CA10-1 CA10-2 CA10-3 CA10-4 CA10-5 CA10-6 CA10-7 Description Level of Difficulty Time (minutes) Acquisition. Moderate Moderate Simple Moderate Moderate Simple Moderate 20–25 20–25 20–25 30–40 30–40 20–25 20–25 Copyright © 2010 John Wiley & Sons. Kieso.
10-6 Copyright © 2010 John Wiley & Sons. plant. Intermediate Accounting. plant and equipment. plant. 2. Describe property.LEARNING OBJECTIVES 1. 3. Describe the accounting problems associated with self-constructed assets. and equipment. 7. Describe the accounting treatment for the disposal of property. 13/e Instructor’s Manual (For Instructor Use Only) . 4. Describe the accounting problems associated with interest capitalization. 6. 5. Inc. Understand accounting issues related to acquiring and valuing plant assets. Kieso. and equipment. Identify the costs to include in initial valuation of property. Describe the accounting treatment for costs subsequent to acquisition.
and clearing the property. 13/e Instructor’s Manual (For Instructor Use Only) 10-7 . (S. and the accounting methods used to retire or dispose of these costs. (b) closing costs such as title. 6. Also. Intermediate Accounting. (c) cost of grading. filling. They provide the major means of support for the production and/or distribution of a company’s product or service. and equipment. In the case of land. Acquisition of Property. Fixed assets are an important part of the operations of most business organizations. (b) long-term in nature and usually depreciated. charges associated with freight costs and installation are considered a part of the asset’s cost. and equipment to the periods benefited by those assets is known as depreciation. use of a method other than historical cost in valuing property. Chapter 10 presents a discussion of the basic accounting problems associated with the incurrence of costs related to property. 4. plant. Building costs include materials. when improvements that have a limited life (fences. 1) Property. also referred to as fixed assets. The assets normally classified on the balance sheet as property. and (c) gains and losses should not be anticipated but should be recognized when the asset is sold. and various kinds of machinery and equipment. cost typically includes (a) purchase price. Inc. buildings. The cost of each item includes the acquisition price plus those expenditures incurred in getting the asset ready for its intended use. and overhead costs incurred during construction. plant. 2. Kieso. (d) assumption of any liens. labor. The cost of removing an old building from land purchased for the purpose of constructing a new building is properly charged to the land account. 2) Property. and equipment represents a departure from generally accepted accounting principles.O. etc. not hypothetical transactions. or encumbrances on the property. plant. These assets. An asset must be used in the normal business operations to be classified as a fixed asset. Historical cost is measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use. Copyright © 2010 John Wiley & Sons. (S. and recording fees. (b) historical cost involves actual. These characteristics may be expressed as follows: (a) acquired for use in operations and not for resale. draining. and equipment. plant. This position is justified on the grounds that: (a) cost reflects fair value on the date of acquisition. With minor exceptions. Also.O. Plant. plant and equipment are valued in the accounts at their historical cost.CHAPTER REVIEW 1. These assets last for a number of years and their costs must be allocated to the periods which benefit from their use. are of a durable nature and include land. Thus. The process of allocating the historical cost of property. The topic of depreciation is presented in Chapter 11. any fees such as those incurred for building permits or the services of an attorney are included in acquisition cost. all costs incurred from excavation of the site to completion of the building are considered part of the building costs. and equipment include land. 5. and (e) any additional land improvements that have an indefinite life. attorney. driveways.) are made to the land they should be set up in a separate Land Improvements account so they can be depreciated over their estimated useful life. and (c) possess physical substance. plant. and equipment possess certain characteristics that distinguish them from other assets owned by a business enterprise. and Equipment 3. In general. mortgages. building structures.
4) Capitalization of interest cost incurred in connection with financing the construction or acquisition of property. 10. and equipment generally follows the rule of capitalizing only the actual interest costs incurred during construction. a comprehensive illustration of interest capitalization is shown in the text.O. It should be noted that the cost recorded for a constructed asset can never exceed the price charged by an outside producer. 10-8 Copyright © 2010 John Wiley & Sons. 13/e Instructor’s Manual (For Instructor Use Only) . The second method called a full-costing approach appears preferable because of its consistency with the historical cost principle. 11.O. cost includes purchase price plus all expenditures related to the purchase that occur subsequent to acquisition but prior to actual use. With respect to equipment. and asset testing costs. While some modification to this general rule occurs. Assets that qualify for interest cost capitalization include assets under construction for an enterprise’s own use (such as buildings. and (c) interest cost is being incurred. assets must require a period of time to get them ready for their intended use. Inc. (b) activities that are necessary to get the asset ready for its intended use are in progress. or (b) assign a portion of all overhead to the construction process. The period during which interest must be capitalized begins when three conditions are present: (a) expenditures for the asset have been made. Also. insurance charges on the asset while in transit. special preparation of facilities. Interest Costs 9.7. its adoption is consistent with the concept that the historical cost of acquiring an asset includes all costs incurred to bring the asset to the condition and location necessary for its intended use. This illustration includes both the computations and the related journal entries that should be made in a situation when an asset is constructed and capitalizable interest is a part of the transaction. The potential amount of interest that may be capitalized during an accounting period is determined by multiplying interest rate(s) by the weighted-average amount of accumulated expenditures for qualifying assets during the period. assembly and installation. These related costs would include such items as freight charges. Self-Constructed Assets 8. Examples which demonstrate computation of the weighted-average accumulated expenditures and selecting the appropriate interest rate are included in the chapter. plant. These costs may be handled in one of two ways: (a) assign no fixed overhead to the cost of the constructed asset. and machinery) and assets intended for sale or lease that are constructed or otherwise produced as discrete projects (like ships or real estate developments). Kieso. 12. 3) When machinery and equipment to be used by an entity are constructed rather than purchased. Intermediate Accounting. The amount of interest to capitalize is limited to the lower of (a) actual interest cost incurred during the period or (b) the amount of interest cost incurred during the period that theoretically could have been avoided if the expenditure for the asset had not been made (avoidable interest). a problem exists concerning the allocation of overhead costs. (S. To qualify for interest capitalization. (S. plants.
13. Copyright © 2010 John Wiley & Sons. the assessed valuation for property taxes. Controversy exists in regard to the accounting for these assets when one nonmonetary asset is exchanged for another nonmonetary asset. When the obligation stipulates no interest rate. In addition. If determinable. This appears to be a rather straight forward approach that can be easily followed. The best way to allocate the purchase price of the assets to the individual items is the relative fair values of the assets acquired. Kieso. should a loss be recorded or should the asset be recorded at a higher purchase price? Currently. Plant. Inc. companies should generally not net or offset interest revenue against interest cost. plant. and prevailing interest rates. Factors to be considered in imputing an interest rate are the borrower’s credit rating. Acquisition and Valuation 14. Two special issues relate to interest capitalization. If a company purchases land as a site for a structure. determining fair market value is not always as easy as it might appear. the cash exchange price of the asset acquired should be used as the basis for recording the asset and measuring the interest element. However. not the land. 16. The purchase of a plant asset is often accompanied by a cash discount for prompt payment. while the “loss approach” is preferred. Nonmonetary assets such as inventory or property. However.O. 15. interest costs capitalized during the period of construction are part of the cost of the plant. it results in a reduction in the purchase price of the asset. an imputed rate of interest must be determined for use in calculating the present value. and Equipment 18. In some instances a company may purchase a group of plant assets at a single lump sum price. Some of the problems one encounters in determining proper valuation are discussed in the paragraphs that follow. the amount and maturity date of the note. To determine fair value. whichever is more clearly evident. the best measure of cost is the fair value of the stock issued. Intermediate Accounting. If the discount is taken. both methods are employed in practice. Exchanges of Property. (S. 17. 13/e Instructor’s Manual (For Instructor Use Only) 10-9 . In general. an appraisal for insurance purposes. when the discount is allowed to lapse. or simply an independent appraisal by a qualified appraiser might be used. or the rate is unreasonable. an asset should be recorded at the fair market value of what is given up to acquire it or its own fair market value. When assets are acquired for an entity’s stock. Plant assets purchased on long-term credit contracts should be accounted for at the present value of the consideration exchanged on the date of purchase. and equipment are items whose price may change over time. 5) A number of accounting problems are involved in the acquisition and valuation of fixed assets.
......... However......... If the exchange has commercial substance.000 accumulated depreciation) and cash of $8......... Thus.... it recognizes part of the gain immediately..000 $44.... As stated previously....... gains are deferred (not immediately recognized) if the exchange has no commercial substance....................... the rule for immediate recognition of a gain when an exchange lacks commercial substance is treated differently.... To summarize these concepts.. $36........ Cash.... Companies immediately recognize losses they incur on all exchanges.. unless cash or some other form of monetary consideration is received............. Also... companies should recognize immediately any gains or losses on the exchange.... 13/e Instructor’s Manual (For Instructor Use Only) . If the company receives cash in such an exchange.. Gain on Machine Disposal.......000 8.. Intermediate Accounting........... 20.............................. Machine............. a gain or loss on the exchange on nonmonetary assets is computed by comparing the book value of the asset given up with the fair value of that same asset..000 10. The rationale for immediate recognition is that most transactions have commercial substance and therefore should be recognized.000...000 for a delivery truck. Accumulated Depreciation—Machine..000 28.......000 $44... Cost of truck: Fair value of machine exchanged........ Kieso............000 8........ when a transaction involves an exchange of nonmonetary assets.... Inc.......... ordinarily companies account for the exchange of nonmonetary assets on the basis of the fair value of the asset given up or the fair value of the asset received....... An exchange has commercial substance if the future cash flows change as a result of the transaction......... the company recognizes the gain immediately...........19... An exchange of trucks with different useful lives might have commercial substance while an exchange of trucks with no significant difference in useful lives would probably not.. The examples shown below are designed to demonstrate the various situations where exchanges of nonmonetary assets are included.. whichever is clearly more evident..... it defers recognition of a gain.000 less $28... The portion to be recognized is equal to the ratio of the cash received to the total consideration received times the total gain indicated... Cost of truck.... Exchange with Commercial Substance Al Company exchanged a used machine with a book value of $26........ Cash paid.. Journal entry: Truck...... However... Gains are recognized if the exchange has commercial substance.... losses are always recognized..................... The machine is estimated to have a fair market value of $36...... 21......000 10-10 Copyright © 2010 John Wiley & Sons....... in which case a partial gain is recognized.. If the company receives no cash (boot) in such an exchange.......................000 54.........000 (cost $54.. The accounting for gains depends on whether the exchange has commercial substance.
......Exchange with No Commercial Substance Al Company trades drill press A for drill press B from another company..........................000 32..000 38.......... and the seller has allowed a trade-in allowance of $15. Drill Press A has a book value of $11....................000.................... Loss on disposal of equipment.................000 Exchange with No Commercial Substance Al Company contracts with Peg Company to exchange delivery vans.000 on the press..................... Cost of drill press B.. of Caravans......... Loss on disposal of drill press A. Kieso...................... Equipment................000 3...........000 21...........000 less $21....000 less $27............ Inc........... Fair value of drill press A...... Computation of Gain: Fair value of Caravans.............. Less trade-in allowance......... Less gain deferred....... Al Company will trade four Dodge Caravans for four Ford Freestars owned by Peg Company.... Cost of new machine: List price of drill press B..............000 in cash in addition to the Caravans. Book value.... Cash payment due...............000 Copyright © 2010 John Wiley & Sons........... Drill press B has a list price of $38. Total gain (unrecognized)....000 with a book value of $38....000 (cost $32.... Basis of new vans to Al Company: Fair value of Freestars................. 13/e Instructor’s Manual (For Instructor Use Only) 10-11 ..........000 8..............000 23.......................000 $53......................000 $66. Journal entry: Equipment...000 $31................. The Freestars have a fair value of $66..000... Accumulated depreciation.000 13.....................................000 15...... Cash....000 $11.000 and Al Company gives $15....................000 $ 3.. $38...............000 accumulated depreciation)................................................................... Basis of Freestar vans....000 (cost $65.....000 $13............................ Fair value of drill press A...000 23.......000 31.................................... The fair value of the Caravans is $51...............000 accumulated depreciation) and a fair market value of $8........................... Loss verification: Book value of drill press A............. $51............. Intermediate Accounting.....000 8............
.OR Book value of Caravans. Intermediate Accounting...000 – $3...................000 (10..000 Exchange with No Commercial Substance-Gain Situation (Some Cash Received) From the previous example.. assume the book value of the Freestar Vans exchanged by Peg Company was $52........................000 less $23........................... contributions received should be recorded as revenue.............. 10-12 Copyright © 2010 John Wiley & Sons.182 Deferred gain: $14.........000 52........... When an asset is received through donation.. or the federal government................... $66................818 Basis of new vans to Peg Company: Fair value of Caravans...................818) $40......................000 + $51...........000/($15...000 of accumulated depreciation).... Total gain.. in general.................000 27.................. 13/e Instructor’s Manual (For Instructor Use Only) ...............182 23............ Peg Company journal entry: Cash........ Caravan vans......... In theory............000 $53........... individuals... Book value of vans exchanged....................... Accumulated depreciation...................182 15................ These transactions are known as nonreciprocal transfers...............000 15. Many companies receive assets through donations from other organizations.........000 40...000 75..... Al Company journal entry: Freestar vans.. Freestar vans..000 (cost $75.........................182 22.....000 65...... the total gain on the exchange to Peg Company is as follows: Fair value of vans exchanged...................... Less gain deferred.......................000) X $14.......... Basis of Caravans...... or (2) revenue...000 53.........000 3....... Accumulated depreciation............... Thus............. A FASB standard states that...........................000 $14...... the credit for this transaction could be made to (1) a Donated Capital account that would appear in stockholders’ equity........... Cash.............. Kieso.. Gain on disposal of vans.... the appraisal or fair market value of the asset should be used to establish its value on the books..... Basis of Freestar vans....000 $51.000 15..................... Cash paid............. Inc..... Caravan vans............................................ Recognized gain due to cash received: $15.182 = $10.. $38.........000 = $3.
consistent application of a capital/expense policy is normally more important than attempting to provide theoretical guidelines. the accounting records should be relieved of the cost and accumulated depreciation associated with the asset. whereas expenditures that simply maintain a given level of service should be expensed. If an improvement or replacement increases the future service potential of the asset. (S. (b) the quantity of service produced from the asset must be increased. For the costs to be capitalized. Valuation of property. costs incurred to achieve greater future benefits from the asset should be capitalized.O. exchange. one of three conditions must be present: (a) the useful life of the asset must be increased. and equipment on a basis other than historical cost has been widely discussed by those concerned with the financial reporting process. it is theoretically preferable to charge a loss immediately. (c) reinstallation and rearrangement. This concept holds that if for some reason you were ignorant about a certain price and paid too much for an asset originally. whereas a replacement substitutes a similar asset. Intermediate Accounting. 13/e Instructor’s Manual (For Instructor Use Only) 10-13 . Because additions result in the creation of new assets. They are charged to an expense account in the period in which they are incurred. a considerable amount of judgment is required in deciding whether to capitalize or expense an item. Ordinary repairs are expenditures made to maintain plant assets in operating condition. 6) Costs related to plant assets that are incurred after the asset is placed in use are either added to the asset account (capitalized) or charged against operations (expensed) when incurred. (S. Improvements and replacements are substitutions of one asset for another. The major problem in accounting for improvements and replacements concerns differentiating these expenditures from normal repairs. Plant assets may be retired voluntarily or disposed of by sale. (b) improvements and replacements. (b) capitalizing the new cost without eliminating the cost of the asset replaced. or (c) the quality of the units produced must be enhanced. Costs Subsequent to Acquisition 24. Generally. expenditures related to plant assets being used in a productive capacity may be classified as: (a) additions. In many instances.Other Asset Valuation Methods 23. Inc. it should be capitalized. Rearrangement and reinstallation costs are generally carried forward as a separate asset and amortized against future income. they should be capitalized. 7) When a plant asset is disposed of.O. 25. The specific facts related to the situation will aid in determining the most appropriate method to use. However. Capitalization may be accomplished by: (a) substituting the cost of the new asset for the cost of the asset replaced. Improvements substitute a better asset for the one currently used. or (c) debiting the expenditure to accumulated depreciation. 27. Depreciation should be recorded on the asset up to the date of disposal. and any resulting gains or losses should be reported. Copyright © 2010 John Wiley & Sons. However. 26. involuntary conversion. Kieso. and (d) repairs. historical cost continues to be recognized as the accepted method for valuing these assets in the financial statements. or abandonment. In general. Dispositions of Plant Assets 28. One valuation approach that is sometimes allowed and not considered a violation of historical cost is a method referred to as prudent cost. plant.
This is the cash or cash equivalent price of obtaining the asset and getting it ready for its intended use. (L. The options are to assign a portion of all overhead. and all costs incurred beginning with excavation and ending with completion of the building. Cost of Equipment: All expenditures incurred in acquiring the equipment and preparing it for use are included. (L. Components of cost. This includes freight charges. This includes attorneys’ and architects’ fees. Long-term in nature and subject to depreciation. 1) Characteristics of Property. 2. and the cost of conducting trial runs. (L. Cost of Buildings: All expenditures related directly to acquisition or construction are capitalized. Students should be encouraged to understand the meaning of commercial substance.O. Possess physical substance. Inc. except for land. b. General principles involved in accounting for the acquisition and disposition of plant assets: Students should be familiar with these from elementary accounting courses. 2. Historical cost is the usual basis for valuation. or assign no fixed overhead. Plant. 3. 13/e Instructor’s Manual (For Instructor Use Only) . A.O. Special assessments for relatively permanent improvements such as pavements and drainage systems are included in the land account. B.O. d. insurance while in transit. The chapter. deals with three major topics: 1. 3) Self-Constructed Assets: Such assets may cause valuation problems because of the assignment of overhead. 3. 2. The first option is preferred. 2) Acquisition and Valuation of Property. Intermediate Accounting. Plant. and Equipment. assembly costs. 1. building permits. The following lecture outline is appropriate for this chapter. which can generally be covered in three class sessions. c. 10-14 Copyright © 2010 John Wiley & Sons. Improvements with limited lives are recorded separately as Land Improvements and depreciated over their estimated lives.LECTURE OUTLINE Chapter 10 presents issues related to the acquisition and disposition of plant assets. Capitalization of interest cost during construction: Students generally have difficulty with the computational procedures required. Acquired for use and not resale. Cost of Land: All expenditures made to acquire the land and prepare it for use are included in the cost of the land. and Equipment. a. Nonmonetary exchanges: This is a difficult topic for some students. 1. Kieso.
c. Intermediate Accounting. 1. Determine the interest cost to be capitalized. are part of the land’s cost. Determine which assets qualify for capitalization of interest. 10-15 f. Like other acquisition costs. Interest costs incurred in the purchase of land to be used for a building site are part of the building’s cost. Compute the actual interest cost incurred. 34. Compute the weighted-average accumulated expenditures. 3. 4) Interest Costs During Construction. Determine the capitalization period. (L. Special issues related to interest capitalization. Interest costs incurred on land being developed for lot sales. They must pay attention to the dates of construction expenditures and to the date of specific construction loans and other outstanding general debt. Typically. g. c. Illustration 10-3 provides a flowchart diagram of the requirements of FASB Statement No. Interest revenue earned on funds borrowed to finance construction of assets is not netted against the interest expense incurred. e. Compute the expenditures made during the capitalization period. b. Basic principle: Interest cost incurred during construction of plant assets is part of the cost of acquiring the assets and preparing them for their intended use. d. Compute avoidable interest. TEACHING TIP Illustration 10-2 provides a numerical example of interest capitalization for self-constructed special-purpose equipment. Inc. Copyright © 2010 John Wiley & Sons. interest cost should be capitalized and depreciated over the expected useful life of the assets involved.O. a. Describe the computational steps involved in determining the amount of interest to be capitalized. this computation is difficult for students.C. Kieso. a. 2. not the land. 13/e Instructor’s Manual (For Instructor Use Only) . b. TEACHING TIP Illustration 10-1 provides a step-by-step description of interest capitalization.
Any discount not taken should be recorded as an expense. Kieso. Deferred-Payment Contracts: Assets purchased on long-term credit contracts should be accounted for at the present value of the consideration exchanged. Intermediate Accounting.) 3. 10-16 Copyright © 2010 John Wiley & Sons. Issuance of Stock: Market value of stock issued is used as an indication of the cost of the property acquired. it is important to emphasize both the basic accounting procedures and the basic accounting principles involved. Inc. 4. Insurance appraisals. it would be useful to review the procedure for computing the present value of a note. TEACHING TIP Illustration 10-4 provides a description of the accounting procedures employed for the exchange of nonmonetary assets. In presenting this topic. (L. this is frequently overlooked. 5) Means of Acquisition and Valuation. use the fair value of the property acquired. (4) Prepare the journal entry to record the exchange. or independent appraisals may be used as indicators of relative fair values. It is preferable to exclude the cash discount from the recorded cost of the asset. property tax assessments. and equipment (nonmonetary assets). Lump Sum Purchases: Total cost should be allocated on the basis of relative fair values. or if the specified rate is unreasonable. If the stock’s market value is not determinable. When no interest rate is stated. an appropriate rate should be imputed. Cash Discounts: The asset should be recorded at the current cash equivalent price at the date of acquisition. Commercial substance is the basis for immediate recognition of any gain or loss on the exchange. (2) Compute the realized gain or loss.D. (1) Compute the net book value of the old asset. 1. TEACHING TIP Illustration 10-6 provides a numerical example of an exchange that lacks commercial substance with cash paid and received. a. b.O. 13/e Instructor’s Manual (For Instructor Use Only) . Illustration 10-5 puts these accounting procedures into a flowchart. whether the discount is taken or not. (At this point. 2. plant. Basic accounting procedures. (3) Determine the amount of gain or loss to be recognized. 5. Exchanges of property. Remind students to ensure that their entry balances.
1. a. 2. The prudent cost concept states that it is theoretically preferable to charge a loss immediately if a company ignorantly paid too much for an asset originally. 13/e Instructor’s Manual (For Instructor Use Only) 10-17 . 7. 4. Improvements and Replacements. The quality of the units produced must be enhanced. Intermediate Accounting. b. The proper accounting treatment depends on whether the carrying value of the old component is known or unknown. 6) Costs Subsequent to Acquisition. The quantity of units produced from the asset must be increased. one of three conditions must be present: a. b. c.6. improvements and replacements. Inc. Students have some difficulty in distinguishing the different natures of costs subsequent to acquisition such as additions. plant. E. Acquisition and disposition of contributions (nonreciprocal transfers). and ordinary and major repairs. two types of income statement accounts may be affected. Reinstallation and Rearrangement. Kieso. Other Asset Valuation Method. Acquisition: The fair value of the asset should be used to record the asset on the company’s books. The corresponding credit which the company will record is revenue in the amount of the asset’s fair value. The useful life of the asset must be increased. (L. Additions.O. A strict application of the cost principle would not result in a reasonable valuation of the asset. (2) A gain or loss should be recorded for the difference between the fair value and the book value of the asset. reinstallation and rearrangement. 3. (1) Contribution expense should be recorded at the fair value of the asset. and equipment. TEACHING TIP Illustration 10-7 provides a comparative summary of costs subsequent to the acquisition of property. Copyright © 2010 John Wiley & Sons. Any additions should be capitalized. In order to capitalize costs. The proper accounting treatment depends on whether the carrying value of the original installation is known or unknown. Disposition: When a plant asset is contributed.
Depreciation up to the date of disposition must be recorded. 2. The cost and accumulated depreciation of the asset must be removed from the books. 10-18 Copyright © 2010 John Wiley & Sons.5. 1. Intermediate Accounting. F. b. 3. Major repairs should be treated as an addition.O. a. Ordinary repairs should be expensed in the period incurred. Repairs. improvement. Gains or losses are the same in any other type of disposition regardless of whether any resulting cash proceeds are going to be reinvested in replacement assets. Inc. Involuntary Conversion. 7) Dispositions of Plant Assets. Sale of Plant Assets. (L. capitalization of interest on borrowing costs incurred during construction of assets can be either expensed or capitalized. plant. Abandonment. Under iGAAP. Key difference between iGAAP and GAAP relating to property. any cash received must be recorded. 13/e Instructor’s Manual (For Instructor Use Only) . and a gain or loss is recognized. and equipment is: I. or replacement. Kieso.
Intermediate Accounting. Kieso. 13/e Instructor’s Manual (For Instructor Use Only) 10-19 .ILLUSTRATION 10-1 CAPITALIZATION OF INTEREST COST Copyright © 2010 John Wiley & Sons. Inc.
Intermediate Accounting. Kieso.ILLUSTRATION 10-1 (continued) 10-20 Copyright © 2010 John Wiley & Sons. Inc. 13/e Instructor’s Manual (For Instructor Use Only) .
Intermediate Accounting. Inc. Kieso.ILLUSTRATION 10-2 CAPITALIZATION OF INTEREST EXAMPLE Copyright © 2010 John Wiley & Sons. 13/e Instructor’s Manual (For Instructor Use Only) 10-21 .
Kieso.ILLUSTRATION 10-2 (continued) 10-22 Copyright © 2010 John Wiley & Sons. Intermediate Accounting. 13/e Instructor’s Manual (For Instructor Use Only) . Inc.
Inc. Intermediate Accounting. Kieso.ILLUSTRATION 10-3 FLOWCHART FOR DETERMINING CAPITALIZATION OF INTEREST COST Copyright © 2010 John Wiley & Sons. 13/e Instructor’s Manual (For Instructor Use Only) 10-23 .
ILLUSTRATION 10-4 ACCOUNTING FOR NONMONETARY EXCHANGES 10-24 Copyright © 2010 John Wiley & Sons. Inc. Kieso. 13/e Instructor’s Manual (For Instructor Use Only) . Intermediate Accounting.
13/e Instructor’s Manual (For Instructor Use Only) 10-25 .ILLUSTRATION 10-5 NONMONETARY EXCHANGE FLOWCHART Copyright © 2010 John Wiley & Sons. Intermediate Accounting. Inc. Kieso.
Intermediate Accounting. 13/e Instructor’s Manual (For Instructor Use Only) . Kieso.ILLUSTRATION 10-6 EXCHANGE OF NONMONETARY ASSETS (WITH AND WITHOUT BOOT) 10-26 Copyright © 2010 John Wiley & Sons. Inc.
Kieso. 13/e Instructor’s Manual (For Instructor Use Only) 10-27 .ILLUSTRATION 10-6 (continued) Copyright © 2010 John Wiley & Sons. Intermediate Accounting. Inc.
ILLUSTRATION 10-7 SUMMARY OF COSTS SUBSEQUENT TO ACQUISITION OF PROPERTY. 13/e Instructor’s Manual (For Instructor Use Only) . PLANT. AND EQUIPMENT 10-28 Copyright © 2010 John Wiley & Sons. Kieso. Intermediate Accounting. Inc.
13/e Instructor’s Manual (For Instructor Use Only) 10-29 . Kieso. Inc. Intermediate Accounting.Copyright © 2010 John Wiley & Sons.
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