Intermetdiate accounting 4e spiceland sepe tomasssi chap010

Operational
Assets:
Acquisition and
Disposition
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10

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.


10-2

Types of Operational Assets
Actively
Actively Used
Used in
in Operations
Operations

Expected
Expected to
to Benefit
Benefit Future
Future Periods
Periods
Tangible
Tangible
Property,
Property,Plant,

Plant,
Equipment
Equipment &
&
Natural
Natural
Resources
Resources

Intangible
Intangible
No
No Physical
Physical
Substance
Substance


10-3

Learning Objectives
Identify the various costs included in the initial
cost of property, plant, and equipment, natural
resources, and intangible assets.


10-4

Costs to be Capitalized

General
General Rule
Rule
The
The initial
initial cost
cost of
of an
an operational
operational asset
asset
includes
includes the
the purchase
purchase price
price and
and all
all
expenditures
expenditures necessary
necessary to
to bring
bring the
the asset
asset to
to
its
its desired
desired condition
condition and

and location
location for
for use.
use.


Costs to be Capitalized
Equipment

 Net
Net purchase
purchase price
price
 Taxes
Taxes
 Transportation
Transportation costs
costs
 Installation
Installation costs
costs
 Modification
Modification to
to building
building
necessary
necessary to
to install
install
equipment

equipment
 Testing
Testing and
and trial
trial runs
runs

10-5


10-6

Costs to be Capitalized
Land
















Purchase
Purchase price
price
Real
Real estate
estate commissions
commissions
Attorney’s
Attorney’s fees
fees
Title
Title search
search
Title
Title transfer
transfer fees
fees
Title
Title insurance
insurance premiums
premiums
Removing
Removing old
old buildings
buildings

Land
Land is
is not
not

depreciable.
depreciable.


Costs to be Capitalized
Land Improvements

Separately
Separately identifiable
identifiable costs
costs of
of
Driveways
Driveways
Parking
Parking lots
lots
Fencing
Fencing
Landscaping
Landscaping
Private
Private roads
roads

10-7


Costs to be Capitalized
Buildings


 Purchase
Purchase price
price

 Attorney’s
Attorney’s fees
fees

 Commissions
Commissions

 Reconditioning
Reconditioning

10-8


Costs to be Capitalized
Natural Resources

Purchase
Purchase price,
price,
exploration
exploration and
and
development
development costs

costs of:
of:
 Timber
Timber
 Mineral
Mineral deposits
deposits
 Oil
Oil and
and gas
gas reserves
reserves

10-9


10-10

Asset Retirement Obligations

Often
Often encountered
encountered with
with natural
natural resource
resource
extraction
extraction when
when the
the land

land must
must be
be
restored
restored to
to aa useable
useable condition.
condition.
Recognize
Recognize as
as aa liability
liability
and
and aa corresponding
corresponding
increase
increase in
in the
the related
related asset.
asset.
Record
Record at
at fair
fair value,
value, usually
usually the
the
present
present value

value of
of future
future cash
cash
outflows
outflows associated
associated with
with the
the
reclamation
reclamation or
or restoration.
restoration.


10-11

Intangible Assets

Lack
Lackphysical
physical
substance.
substance.

Exclusive
Exclusive
Rights.
Rights.

Intangible
Intangible
Assets
Assets
Futurebenefits
benefits
Future
lesscertain
certainthan
than
less
tangibleassets.
assets.
tangible

Usually
Usuallyacquired
acquired
for
foroperational
operational
use.
use.


10-12

Costs to be Capitalized
Intangible Assets

Record at current
cash equivalent
cost, including
purchase price,
legal fees, and
filing fees.


Patents
Patents

Copyrights
Copyrights

Trademarks
Trademarks

Franchises
Franchises

Goodwill
Goodwill


10-13

Patents


 An

An exclusive
exclusive right
right recognized
recognized by
by law
law and
and

granted
granted by
by the
the US
US Patent
Patent Office
Office for
for 20
20 years.
years.

 Holder
Holder has
has the
the right
right to
to use,
use, manufacture,
manufacture, or
or
sell
sell the

the patented
patented product
product or
or process
process without
without
interference
interference or
or infringement
infringement by
by others.
others.

R
R&
&D
D costs
costs that
that lead
lead to
to an
an
internally
internally developed
developed patent
patent
are
are expensed
expensed in
in the

the period
period
incurred.
incurred.


10-14

Patents

Torch,
Torch, Inc.
Inc. has
has developed
developed aa new
new device.
device.
Research
Research and
and development
development costs
costs totaled
totaled
$30,000.
$30,000. Patent
Patent registration
registration costs
costs
consisted
consisted of

of $2,000
$2,000 in
in attorney
attorney fees
fees and
and
$1,000
$1,000 in
in federal
federal registration
registration fees.
fees.

What
What is
is Torch’s
Torch’s patent
patent cost?
cost?
Torch’s
Torch’s cost
cost for
for the
the new
new patent
patent is
is $3,000.
$3,000.
The
The $30,000

$30,000 R
R&
&D
D cost
cost is
is expensed
expensed as
as
incurred.
incurred.


10-15

Copyrights


A
A form
form of
of protection
protection given
given by
by law
law to
to

authors
authors of
of literary,

literary, musical,
musical, artistic,
artistic, and
and
similar
similar works.
works.

 Copyright
Copyright owners
owners have
have exclusive
exclusive rights
rights
to
to print,
print, reprint,
reprint, copy,
copy, sell
sell or
or distribute,
distribute,
perform
perform and
and record
record the
the work.
work.

 Generally,

Generally, the
the legal
legal life
life of
of aa copyright
copyright
is
is the
the life
life of
of the
the author
author plus
plus 70
70 years.
years.


10-16

Trademarks

A
Asymbol,
symbol, design,
design, or
or logo
logo
associated
associated with

with aa business.
business.

 If
If internally
internally developed,
developed, trademarks
trademarks
have
have no
no recorded
recorded asset
asset cost.
cost.

 If
If purchased,
purchased, aa trademark
trademark is
is
recorded
recorded at
at cost.
cost.

 Registered
Registered with
with U.S.
U.S. Patent
Patent Office

Office
and
and renewable
renewable indefinitely
indefinitely in
in 1010year
year periods.
periods.




10-17

Franchises

Right
Right to
to sell
sell products
products or
or provide
provide services
services
purchased
purchased by
by franchisee
franchisee from
from
franchisor.

franchisor.


10-18

Goodwill

Goodwill
Occurs when one
company buys
another company.

Only purchased
goodwill is an
intangible asset.

The amount by which the
purchase price exceeds the fair
market value of net assets acquired.


10-19

Goodwill
Eddy
Eddy Company
Company paid
paid $1,000,000
$1,000,000 to
to

purchase
purchase all
all of
of James
James Company’s
Company’s
assets
assets and
and assumed
assumed James
James Company’s
Company’s
liabilities
liabilities of
of $200,000.
$200,000. James
James
Company’s
Company’s assets
assets were
were appraised
appraised at
at aa
fair
fair value
value of
of $900,000.
$900,000.

10-20

Goodwill
What
What amount
amount of
of goodwill
goodwill should
should be
be
recorded
recorded on
on Eddy
Eddy Company
Company books?
books?
a.
a.
b.
b.
c.
c.
d.
d.

$100,000
$100,000
$200,000
$200,000
$300,000

$300,000
$400,000
$400,000


10-21

Goodwill
What
What amount
amount of
of goodwill
goodwill should
should be
be
recorded
recorded on
on Eddy
Eddy Company
Company books?
books?
a.
a.
b.
b.
c.
c.
d.
d.

$100,000
$100,000
$200,000
$200,000
$300,000
$300,000
$400,000
$400,000


10-22

Learning Objectives
Determine the initial cost of individual
operational assets acquired as a group for a
lump-sum purchase price.


10-23

Lump-Sum Purchases
Several
Several assets
assets are
are acquired
acquired for
for aa single,
single,
lump-sum
lump-sum price

price that
that may
may be
be lower
lower than
than the
the
sum
sum of
of the
the individual
individual asset
asset prices.
prices.
Allocation
Allocation of
of the
the lump-sum
lump-sum
price
price is
is based
based on
on relative
relative
values
values of
of the
the individual
individual assets.

assets.

Asset 1

Asset 2

Asset 3


10-24

Lump-Sum Purchases

On
On May
May 13,
13, we
we purchase
purchase land
land and
and building
building
for
for $200,000
$200,000 cash.
cash. The
The appraised
appraised value
value of
of

the
the building
building is
is $162,500,
$162,500, and
and the
the land
land is
is
appraised
appraised at
at $87,500.
$87,500.
How
How much
much of
of the
the $200,000
$200,000 purchase
purchase price
price
will
will be
be charged
charged to
to the
the building
building account?
account?

10-25

Lump-Sum Purchases

Asset
Land
Building
Total

Appraised
Value
(a)
$ 87,500
162,500
$ 250,000

% of
Value
(b)*
35%
65%

Purchase
Price
(c)
$ 200,000
200,000

Assigned

Cost
(b × c)
$ 70,000
130,000
$ 200,000

* $87,500÷$250,000 = 35%

The
The building
building will
will be
be apportioned
apportioned $130,000
$130,000
of
of the
the total
total purchase
purchase price
price of
of $200,000.
$200,000.
Prepare
Prepare the
the journal
journal entry
entry to
to record
record the

the purchase.
purchase.