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PREVIEW OF CHAPTER 10
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
10-2
Acquisition and Disposition
10 of Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
2. Identify the costs to include in initial 6. Describe the accounting treatment for
valuation of property, plant, and costs subsequent to acquisition.
equipment. 7. Describe the accounting treatment for
3. Describe the accounting problems the disposal of property, plant, and
associated with self-constructed assets. equipment.
10-3
PROPERTY, PLANT, AND EQUIPMENT
10-4 LO 1
Acquisition and Disposition
10 of Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and 5. Understand accounting issues related
equipment. to acquiring and valuing plant assets.
10-6 LO 2
ACQUISITION OF PROPERTY, PLANT,
AND EQUIPMENT (PP&E)
10-7 LO 2
ACQUISITION OF PP&E
Cost of Land
All expenditures made to acquire land and ready it for use.
Costs typically include:
10-8 LO 2
ACQUISITION OF PP&E
Cost of Land
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.
10-9 LO 2
ACQUISITION OF PP&E
Cost of Buildings
Includes all expenditures related directly to acquisition or
construction. Costs include:
materials, labor, and overhead costs incurred during
construction and
10-10 LO 2
ACQUISITION OF PP&E
Cost of Equipment
Include all expenditures incurred in acquiring the equipment
and preparing it for use. Costs include:
purchase price,
freight and handling charges,
insurance on the equipment while in transit,
cost of special foundations if required,
assembling and installation costs, and
costs of conducting trial runs.
10-11 LO 2
ACQUISITION OF PP&E
10-12 LO 2
ACQUISITION OF PP&E
10-13 LO 2
ACQUISITION OF PP&E
10-14 LO 2
Acquisition and Disposition
10 of Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and 5. Understand accounting issues related
equipment. to acquiring and valuing plant assets.
2. Identify the costs to include in initial 6. Describe the accounting treatment for
valuation of property, plant, and costs subsequent to acquisition.
equipment. 7. Describe the accounting treatment for
3. Describe the accounting the disposal of property, plant, and
problems associated with self- equipment.
constructed assets.
4. Describe the accounting problems
associated with interest capitalization.
10-15
ACQUISITION OF PP&E
Self-Constructed Assets
Costs include:
Materials and direct labor
Overhead can be handled in two ways:
1. Assign no fixed overhead.
10-16 LO 3
Acquisition and Disposition
10 of Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and 5. Understand accounting issues related
equipment. to acquiring and valuing plant assets.
2. Identify the costs to include in initial 6. Describe the accounting treatment for
valuation of property, plant, and costs subsequent to acquisition.
equipment. 7. Describe the accounting treatment for
3. Describe the accounting problems the disposal of property, plant, and
associated with self-constructed assets. equipment.
$0
Increase to Cost of Asset $?
Capitalize no Capitalize
interest during Capitalize actual
Capitalize actual all costs of
construction costs incurred
costs incurred during
during funds
construction
construction
ILLUSTRATION 10-1
Capitalization of Interest
Costs IFRS
10-18 LO 4
ACQUISITION OF PP&E
1. Qualifying assets.
2. Capitalization period.
3. Amount to capitalize.
10-19 LO 4
Interest Costs During Construction
Qualifying Assets
Require a substantial period of time to get them ready for
their intended use or sale.
Two types of assets:
Assets under construction for a companys own use.
Assets intended for sale or lease that are constructed or
produced as discrete projects.
10-20 LO 4
Interest Costs During Construction
Capitalization Period
Begins when:
1. Expenditures for the assets are being incurred.
Ends when:
The asset is substantially complete and ready for use.
10-21 LO 4
Interest Costs During Construction
Amount to Capitalize
Capitalize the lesser of:
1. Actual interest cost incurred.
2. Avoidable interest - the amount of interest cost during
the period that a company could theoretically avoid if it
had not made expenditures for the asset.
10-22 LO 4
Interest Costs During Construction
Illustration: Assume a company borrowed $200,000 at 12% interest
from State Bank on Jan. 1, 2015, for specific purposes of constructing
special-purpose equipment to be used in its operations. Construction on
the equipment began on Jan. 1, 2015, and the following expenditures
were made prior to the projects completion on Dec. 31, 2015:
10-23 LO 4
Interest Costs During Construction
10-24 LO 4
Interest Costs During Construction
10-26 LO 4
Interest Costs During Construction
Step 4 - Compute the Actual and Avoidable Interest.
Actual Interest
Weighted-average
interest rate on
general debt
$100,000
= 12.5%
$800,000
Avoidable Interest
10-27 LO 4
Interest Costs During Construction
Equipment 30,250
Interest Expense 30,250
10-28 LO 4
Interest Costs During Construction
10-29 LO 4
Interest Costs During Construction
10-30 LO 4
Interest Costs During Construction
ILLUSTRATION 10-4
Computation of Weighted-Average
Accumulated Expenditures
10-31 LO 4
Interest Costs During Construction
ILLUSTRATION 10-5
Compute the avoidable interest. Computation of
Avoidable Interest
10-32 LO 4
Interest Costs During Construction
ILLUSTRATION 10-6
Computation of Actual The interest cost that Shalla capitalizes is the
Interest Cost
lesser of $120,228 (avoidable interest) and
$239,500 (actual interest), or $120,228.
10-33 LO 4
Interest Costs During Construction
10-34 LO 4
Interest Costs During Construction
ILLUSTRATION 10-7
Capitalized Interest
Reported in the Income
Statement
ILLUSTRATION 10-8
Capitalized Interest
Disclosed in a Note
10-35 LO 4
Interest Costs During Construction
2. Interest Revenue
In general, companies should not offset interest revenue
against interest cost unless earned on specific borrowings.
10-36 LO 4
WHATS YOUR
WHAT S IN YOUR PRINCIPLE
INTEREST?
10-37 LO 4
Acquisition and Disposition
10 of Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and 5. Understand accounting issues
equipment. related to acquiring and valuing
2. Identify the costs to include in initial plant assets.
valuation of property, plant, and
6. Describe the accounting treatment for
equipment. costs subsequent to acquisition.
3. Describe the accounting problems 7. Describe the accounting treatment for
associated with self-constructed assets.
the disposal of property, plant, and
4. Describe the accounting problems equipment.
associated with interest capitalization.
10-38
VALUATION OF PROPERTY, PLANT &
EQUIPMENT
10-39 LO 5
VALUATION OF PP&E
10-40 LO 5
VALUATION OF PP&E
10-41 LO 5
Exchanges of Non-Monetary Assets
ILLUSTRATION 10-10
Accounting for Exchanges
10-42 LO 5
Exchanges of Non-Monetary Assets
ExchangesLoss Situation
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.
10-43 LO 5
Exchanges of Non-Monetary Assets
ILLUSTRATION 10-11
Computation of Cost of
New Machine
10-44 LO 5
Exchanges of Non-Monetary Assets
Equipment 13,000
Accumulated DepreciationEquipment 4,000
Loss on Disposal of Equipment 2,000
Equipment 12,000
Cash 7,000
ILLUSTRATION 10-12
Loss on Computation of Loss
on Disposal of Used
Disposal Machine
10-45 LO 5
Exchanges of Non-Monetary Assets
ExchangesGain Situation
Has Commercial Substance. Company usually records the
cost of a non-monetary asset acquired in exchange for
another non-monetary asset at the fair value of the asset
given up, and immediately recognizes a gain.
10-46 LO 5
Exchanges of Non-Monetary Assets
Illustration 10-13
Computation of
Semi-Truck Cost
10-47 LO 5
Exchanges of Non-Monetary Assets
ILLUSTRATION 10-14
Computation of Gain
Gain on on Disposal of Used
Trucks
Disposal
10-48 LO 5
Exchanges of Non-Monetary Assets
ExchangesGain Situation
Lacks Commercial Substance. Now assume that
Interstate Transportation Company exchange lacks
commercial substance.
10-49 LO 5
Exchanges of Non-Monetary Assets
ILLUSTRATION 10-15
Basis of Semi-Truck
Fair Value vs. Book Value
10-50 LO 5
Exchanges of Non-Monetary Assets
Disclosure include
nature of the transaction(s),
method of accounting for the assets exchanged, and
gains or losses recognized on the exchanges.
10-51 LO 5
VALUATION OF PP&E
Government Grants
Government Grants are assistance received from a
government in the form of transfers of resources to a
company in return for past or future compliance with certain
conditions relating to the operating activities of the
company.
10-52 LO 5
Government Grants
2. Credit the lab equipment for the subsidy and depreciate this
amount over the five-year period.
10-53 LO 5
Government Grants
ILLUSTRATION 10-17
Government Grant
Recorded as Deferred
Revenue
10-54 LO 5
Government Grants
10-55 LO 5
Acquisition and Disposition
10 of Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and 5. Understand accounting issues related
equipment. to acquiring and valuing plant assets.
2. Identify the costs to include in initial 6. Describe the accounting treatment
valuation of property, plant, and for costs subsequent to acquisition.
equipment.
7. Describe the accounting treatment for
3. Describe the accounting problems the disposal of property, plant, and
associated with self-constructed assets. equipment.
4. Describe the accounting problems
associated with interest capitalization.
10-56
COSTS SUBSEQUENT TO ACQUISITION
10-57 LO 6
COSTS SUBSEQUENT TO ACQUISITION
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and 5. Understand accounting issues related
equipment. to acquiring and valuing plant assets.
2. Identify the costs to include in initial 6. Describe the accounting treatment for
valuation of property, plant, and costs subsequent to acquisition.
equipment.
7. Describe the accounting treatment
3. Describe the accounting problems for the disposal of property, plant,
associated with self-constructed assets. and equipment.
4. Describe the accounting problems
associated with interest capitalization.
10-59
DISPOSITION OF PROPERTY, PLANT,
AND EQUIPMENT
10-60 LO 7
DISPOSITION OF PP&E
10-61 LO 7
DISPOSITION OF PP&E
Cash 7,000
Accumulated DepreciationMachinery 11,400
Machinery 18,000
Gain on Disposal of Machinery 400
10-62 LO 7
DISPOSITION OF PP&E
Involuntary Conversion
Sometimes an assets service is terminated through some type of
involuntary conversion such as fire, flood, theft, or
condemnation.
They treat these gains or losses like any other type of disposition.
10-63 LO 7
DISPOSITION OF PP&E
Illustration: Camel Transport Corp. had to sell a plant located on
company property that stood directly in the path of an interstate
highway. Camel received $500,000, which substantially exceeded the
book value of the land of $150,000 and the book value of the building
of $100,000 (cost of $300,000 less accumulated depreciation of
$200,000). Camel made the following entry.
Cash 500,000
Accumulated DepreciationBuildings 200,000
Buildings 300,000
Land 150,000
Gain on Disposal of Plant Assets 250,000
10-64 LO 7
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10-65