Intermediate accounting 17e by kieso ch10
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Intermediate Accounting
Seventeenth Edition
Kieso ● Weygandt ● Warfield
Chapter 10
Acquisition and Disposition of Property, Plant, and
Equipment
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Learning Objectives
After studying this chapter, you should be able to:
1.
Identify property, plant, and equipment and its related costs.
2.
Discuss the accounting problems associated with interest capitalization.
3.
Explain the accounting issues related to acquiring and valuing plant assets.
4.
Describe the accounting treatment for costs subsequent to acquisition.
5.
Describe the accounting treatment for the disposal of property, plant, and equipment.
Copyright ©2019 John Wiley & Sons, Inc.
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Preview of Chapter 10
Acquisition and Disposition of Property, Plant, and Equipment
Property, Plant, and Equipment
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Acquisition of property, plant, and equipment
•
Cost of land
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Cost of buildings
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Cost of equipment
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Self-constructed assets
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Preview of Chapter 10
Interest Costs During Construction
•
Qualifying assets
•
Capitalization period
•
Amount to capitalize
•
Example
•
Special issues
•
Observations
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Preview of Chapter 10
Valuation of Property, Plant, and Equipment
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Cash discounts
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Deferred-payment contracts
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Lump-sum purchases
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Issuance of stock
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Exchanges of nonmonetary assets
•
Other valuation methods
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Preview of Chapter 10
Costs Subsequent to Acquisition
•
Additions
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Improvements and replacements
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Rearrangement and reinstallation
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Repairs
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Summary
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Preview of Chapter 10
Disposition of Property, Plant, and Equipment
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Sale of plant assets
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Involuntary conversion
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Miscellaneous problems
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Learning Objective 1
Understand Property, Plant, and Equipment and Its Related Costs
LO 1
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Property, Plant, and Equipment
Property, plant, and equipment are assets of a durable nature. Other terms commonly used are
plant assets and fixed assets.
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Used in operations and not for resale
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Long-term in nature and usually depreciated
•
Possess physical substance
Includes land, building structures (offices, factories, warehouses), and equipment (machinery,
furniture, tools).
LO 1
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Property, Plant, and Equipment
Acquisition of Property, Plant, and Equipment
Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it to
the location and condition necessary for its intended use.
Main reasons for historical cost valuation:
•
Historical cost is reliable
•
Companies should not anticipate gains and losses but should recognize gains and losses only
when asset is sold
LO 1
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Property, Plant, and Equipment
Cost of Land
Includes all expenditures to acquire land and ready it for use. Costs typically include:
LO 1
1)
purchase price;
2)
closing costs, such as title to the land, attorney’s fees, and recording fees;
3)
costs of grading, filling, draining, and clearing;
4)
assumption of any liens, mortgages, or encumbrances on the property; and
5)
additional land improvements having an indefinite life.
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Cost of Land
Improvements with limited lives, such as private driveways, walks, fences, and parking lots, are
recorded as Land Improvements and depreciated.
LO 1
•
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
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Property, Plant, and Equipment
Cost of Buildings
Includes all expenditures related directly to acquisition or construction. Costs include:
LO 1
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materials, labor, and overhead costs incurred during construction and
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professional fees and building permits
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Property, Plant, and Equipment
Cost of Equipment
Include all expenditures incurred in acquiring the equipment and preparing it for use. Costs
include:
LO 1
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purchase price
•
freight and handling charges
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insurance on the equipment while in transit
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cost of special foundations if required
•
assembling and installation costs
•
costs of conducting trial runs
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Property, Plant, and Equipment
Self-Constructed Assets
Costs include:
1.
Materials and direct labor
2.
Overhead can be handled in two ways:
•.
Assign no fixed overhead
•.
Assign a portion of all overhead to the construction process
Companies use the second method extensively.
LO 1
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Property, Plant, and Equipment
Illustration: The expenditures and receipts below are related to land, land improvements, and buildings acquired for
use. Determine how the following should be classified:
Notes Payable
a.
Money borrowed to pay building contractor
b.
Payment for construction from note proceeds
c.
Cost of land fill and clearing
Land
d.
Delinquent real estate taxes on property assumed
Land
e.
Premium on 6-month insurance policy during construction
f.
Refund of 1-month insurance premium because construction completed early
LO 1
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Building
Building
(Building)
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Property, Plant, and Equipment
Page 2
Illustration: The expenditures and receipts below are related to land, land improvements, and buildings acquired for
use. Determine how the following should be classified:
Building
g.
Cost of parking lots and driveways
h.
Commission fee paid to real estate agency
i.
Installation of fences around property
j.
Cost of razing and removing building
k.
Cost of real estate purchased as a plant site (land $200,000 and building $50,000)
l.
Proceeds from salvage of demolished building
LO 1
Land
Land Improvements
Land
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Building
(Land)
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Property, Plant, and Equipment
Page 3
Illustration: The expenditures and receipts below are related to land, land improvements, and buildings acquired for
use. Determine how the following should be classified:
m.
Architect’s fee on building
n.
Cost of trees and shrubbery (permanent)
LO 1
Land Improvements
Land
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Learning Objective 2
Discuss the Accounting Problems Associated with Interest
Capitalization
LO 2
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Interest Costs During Construction
Three approaches have been suggested to account for the interest incurred in financing the
construction.
LO 2
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Interest Costs During Construction
Capitalization of Interest Costs
LO 2
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GAAP requires — capitalizing actual interest (with modification)
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Consistent with historical cost
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Capitalization considers three items:
1.
Qualifying assets.
2.
Capitalization period.
3.
Amount to capitalize.
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Interest Costs During Construction
Qualifying Assets
Require a period of time to get them ready for their intended use.
Two types of assets:
LO 2
•
Assets under construction for a company’s own use
•
Assets intended for sale or lease that are constructed or produced as discrete projects
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Interest Costs During Construction
Capitalization Period
Begins when:
1.
Expenditures for the asset have been made.
2.
Activities for readying the asset are in progress.
3.
Interest costs are being incurred.
Ends when:
The asset is substantially complete and ready for use.
LO 2
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Interest Costs During Construction
Amount to Capitalize
Capitalize the lesser of:
1.
Actual interest costs.
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.
LO 2
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Interest Costs During Construction
Interest Capitalization Illustration: Assume a company borrowed $200,000 at 12% interest from State Bank on Jan.
1, 2020, for specific purposes of constructing special-purpose equipment to be used in its operations. Construction
on the equipment began on Jan. 1, 2020, and the following expenditures were made prior to the project’s
completion on Dec. 31, 2020:
Actual Expenditures during 2020:
January 1
$100,000
April 30
150,000
November 1
300,000
December 31
100,000
Total expenditures
LO 2
Other general debt existing on Jan. 1, 2020:
$650,000
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$500,000, 14%, 10-year bonds payable
$300,000, 10%, 5-year note payable
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