Course: Financial Accounting

Session: 2

 Instructor: M Faisal
 Course: Financial Accounting
 Course: Program: BBA/BS(A&F)
 Semester: 3rd/2nd
 Topic: Ch 9: Plant & Intangible Assets (Cont’d)
Ch 9: Plant & Intangible Assets

1
Session Contents Activities
#

Ø Some Special Class activity1: Discussion / Question Answer on

learning outcomes of the pre-reading assignment.
Considerations
Ø Land
Class activity2: Concepts will be built through lecture
Ø Land improvements & discussion.

Ø Buildings
Class activity3: Handout’s End of the Chapter
Ø Equipment practice questions - Ex9.2

Ø Allocation of a lump-sum
2
purchase Home assignment:

Revise the lecture & problem solved in the class. Read

the topic due for discussion in the next class.
Ø Capital expenditures and
revenue expenditures
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
Land
Capitalized Costs typically include:

At the time of Acquisition Land purchased as a

 cash purchase price,
 insuring the title and
attorney’s fees,
 Costs of tearing down &
 real estate brokers’
commissions, and
 accrued property taxes
and other outstanding on
the land assumed by the
purchaser.
building site, has an old
building – not suitable
for the buyer’s use
removing the unusable
building should also be
capitalized in the Land
A/c along with other
capitalized costs
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations

Illustration: Assume that Hayes Manufacturing Company

acquires real estate at a cash cost of $100,000. The property
contains an old warehouse that is razed at a net cost of $6,000
($7,500 in costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and the
real estate broker’s commission, $8,000.

Required: Determine the cost of the land to be capitalized.

Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
Required: Determine the cost of the land to be capitalized.
Land
Cash price of property ($100,000) $100,000
Net removal cost of warehouse ($6,000) 6,000
Attorney's fees ($1,000) 1,000
Real estate broker’s commission ($8,000) 8,000
Cost of Land $115,000
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations

Land Improvements
Includes improvements to real estate

 Examples: driveways, parking lots, fences, landscaping,

and sprinkler systems.
 Have limited useful lives , &
 Depreciate the cost of land improvements over their
useful lives.
 Must be capitalized in a separate account entitled as
“LAND IMPROVEMENTS”
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
Buildings – Either purchased (New or Used)
or constructed
Purchased – Cost Capitalized typically includes:
Purchased - New Purchased – Used
Building with an
 Purchase price,
intention of repairing
 Closing costs (title & before placing in use
attorney’s fees) and
 Remodeling and replacing
 Real estate broker’s or repairing the roof,
commission. floors, electrical wiring
should be capitalized with
other capitalized cost
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
Buildings – Either purchased (New or Used)
or constructed
Constructed – Cost Capitalized typically includes
Construction Construction with debt
finance
 Contract price
 Interest paid during
 Payments for
construction should be
 Architects’ fees capitalized with other
 Building permits, and capitalized cost
 Excavation costs
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
Equipment

Includes assets used in operations

Such as:
 Office furniture
 Factory machinery
 Delivery trucks
 Airplanes
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
Equipment
Include all costs incurred in acquiring the equipment and
preparing it for use.
Costs typically NOT included:
Costs typically include:  Costs of
 Cash purchase price.  Motor vehicle licenses
 Accident insurance on company
 Sales taxes. trucks & cars
 Freight charges.  Such items are annual
recurring expenditures & do
 Insurance during transit paid not benefit future period

by the purchaser.  Two criteria applies in

determining the cost
 Expenditures required in  Frequency of cost – one
time or recurring
assembling, installing, and
 Benefit period – the life
testing the unit. of the asset or one year
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations

Allocation of Lump-Sum Purchase

 Separate different types of plant assets may be
purchased at one time for a lump sum
 Then the purchase price must be allocated among the
types of assets acquired
 An Appraisal may be needed for this purpose
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations

Allocation of Lump-Sum Purchase – An

Example
 Exercise-for-Health, Inc., purchases a complete
fitness center from Golden Health, Inc at bargain price of
$800,000
 Allocation of this cost on the basis of an appraisal is
illustrated
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
Appraised
Value
Land $250,000

Land Improvements 50,000

Building 300,000

Equipment 400,000

Total $1,000,000
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations

% of Total
Appraised Calculation
Appraised
Value for %age Value
Land $250,000 $250,000 25%
$1,000,000

Land Improvements 50,000 $50,000 5

$1,000,000

Building 300,000 $300,000 30

$1,000,000

400,000 $400,000 40
Equipment $1,000,000

Total $1,000,000 100%

Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
Calculation Allocation
for Cost of $800,000
Allocation Cost
25% x $800,000
Land $200,000

Land Improvements 5% x $800,000 40,000

Building 30% x $800,000 240,000

Equipment 40% x $800,000 320,000

Total $800,000
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations
% of Total Allocation of
Appraised $800,000
Appraised
Value Value Cost
Land $250,000 25% $200,000

Land Improvements 50,000 5 40,000

Building 300,000 30 240,000

Equipment 400,000 40 320,000

Total $1,000,000 100% $800,000

Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations

Journal Entry

Land 200,000

Land Improvements 40,000

Building 240,000

Equipment 320,000

Cash 800,000
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets ––
Some
Some Special
Special Considerations
Considerations

Logan Industries purchased the following assets during the

current year.

Assets 1 & 2
These assets were purchased as a lump sum for $104,000
cash. The following information was gathered.
Depreciation Book
Initial Cost Value on
to Date on Appraised
Description on Seller’s Seller’s
Seller’s Value
Books Book
Book
Machinery $100,000 $50,000 $50,000 $90,000
Office Equipment 60,000 10,000 50,000 30,000

Instructions: Record the acquisition of each of these assets.

 Capital
Capital Expenditures
Expenditures &
&
Revenue
Revenue Expenditures
Expenditures

Capital Expenditures
• Any material expenditure that will benefit several
accounting periods

• Recorded by debiting an asset account

• Also said as Capitalizing the expenditure

 Capital
Capital Expenditures
Expenditures &
&
Revenue
Revenue Expenditures
Expenditures

Revenue Expenditures
• Any expenditure that will benefit only the current
accounting period or that is not material in amount.

• Such expenditures includes ordinary repairs,

maintenance, fuel, & other items necessary to the
ownership & use of the plant asset

• Recorded by debiting an expense account

• Also said as Expensing the expenditure

Key Points
 The definition for plant assets for both IFRS and GAAP is
essentially the same.
 Both international standards, IFRS and GAAP follow the cost
principle when accounting for property, plant, and equipment at
date of acquisition.
 Under both IFRS and GAAP, interest costs incurred during
construction are capitalized.
 The accounting for subsequent expenditures, such as ordinary
repairs and additions, are essentially the same under IFRS and
GAAP.
Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Class Activity:

1.Ex 9.2 pg 400

Discussion
Discussion Questions
Questions
Class Activity:
1.The following expenditures were incurred in
connection with a new machine acquired by a metals
manufacturing company. Identify those that should be
included in the cost of the asset. (a) Freight
charges, (b) sales tax on the machine, (c) payment to a
passing motorist whose car was damaged by the
equipment used in unloading the machine, (d) wages of
employees for time spent in installing and testing the
machine before it was placed in service, (e) wages of
employees assigned to lubricate and make minor
adjustments to the machine one year after it was
placed in service.
Discussion
Discussion Questions
Questions
Class Activity:

2.Shoppers’ Market purchased for $245,000 a site

on which it planned to build a new store. The site
consisted of three acres of land and included an
old house and two barns. County property tax
records showed the following appraised values for
this property: land, $160,000; buildings, $40,000.
Indicate what Shoppers’ should do with this
$245,000 cost in its financial statements, and
explain your reasoning.
Discussion
Discussion Questions
Questions

Class Activity:

3.What is the distinction between a capital

expenditure and a revenue expenditure?

4.If a capital expenditure is erroneously treated as

a revenue expenditure, will the net income of the
current year be overstated or understated? Will
this error have any effect on the net income
reported in future years? Explain.
Acquisition
Acquisition of
of Plant
Plant Assets
Assets –– Home
Home Work
Work
Logan Industries purchased the following assets & constructed a building as well. All this was done
during the current year.
Assets 1 & 2
These assets were purchased as a lump sum for $104,000 cash. The following information was gathered.
Depreciation Book
Initial Cost Value on
to Date on Appraised
Description on Seller’s Seller’s
Seller’s Value
Books Book
Book
Machinery $100,000 $50,000 $50,000 $90,000
Office Equipment 60,000 10,000 50,000 30,000

Construction of Building
A building was constructed on land purchased last year at a cost of $180,000. Construction began on
February 1 and was completed on November 1. The payments to the contractor were as follows:

To finance construction of the building, a $600,000, 12%

Date Payment
2/1 $ 120,000 construction loan was taken out on February 1. The loan was repaid
6/1 360,000 on November 1. The firm had $200,000 of other outstanding debt
9/1 480,000
during the year at a borrowing rate of 8%.
11/1 100,000
Instructions: Record the acquisition of each of these assets.
Questions & Answers