Intermediate accounting 17e by kieso ch10

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.
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Preview of Chapter 10
Acquisition and Disposition of Property, Plant,
and Equipment
Property, Plant, and Equipment

• Acquisition of property, plant, and equipment
• Cost of land
• Cost of buildings
• Cost of equipment
• 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
• Cash discounts
• Deferred-payment contracts

• Lump-sum purchases
• Issuance of stock
• Exchanges of nonmonetary assets
• Other valuation methods

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Preview of Chapter 10

Costs Subsequent to Acquisition
• Additions
• Improvements and replacements
• Rearrangement and reinstallation
• Repairs
• Summary

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Preview of Chapter 10

Disposition of Property, Plant, and Equipment
• Sale of plant assets
• Involuntary conversion
• 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.
• Used in operations and not for resale
• 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:
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.
LO 1

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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.
• 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

LO 1

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Property, Plant, and Equipment
Cost of Buildings

Includes all expenditures related directly to acquisition or
construction. Costs include:
• materials, labor, and overhead costs incurred during
construction and
• professional fees and building permits

LO 1

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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:
• purchase price
• freight and handling charges
• insurance on the equipment while in transit
• cost of special foundations if required
• assembling and installation costs
• costs of conducting trial runs
LO 1

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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:
a. Money borrowed to pay building contractor
b. Payment for construction from note proceeds
c. Cost of land fill and clearing
d. Delinquent real estate taxes on property assumed
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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Notes Payable
Building
Land
Land
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

Land
Land Improvements
Land

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

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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

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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

• GAAP requires — capitalizing actual interest (with
modification)
• Consistent with historical cost
• Capitalization considers three items:
1. Qualifying assets.

2. Capitalization period.
3. Amount to capitalize.
LO 2

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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:
• Assets under construction for a company’s own use
• Assets intended for sale or lease that are
constructed or produced as discrete projects

LO 2

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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
$650,000
LO 2

Other general debt
existing on Jan. 1, 2020:
$500,000, 14%, 10-year
bonds payable
$300,000, 10%, 5-year
note payable

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