Kế toán, kiểm toán - Acquisition and disposition of property, plant, and equipment

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 10Understand accounting issues related to acquiring and valuing plant assets.Describe the accounting treatment for costs subsequent to acquisition.Describe the accounting treatment for the disposal of property, plant, and equipment.After studying this chapter, you should be able to:Acquisition and Disposition of Property, Plant, and Equipment10LEARNING OBJECTIVESDescribe property, plant, and equipment.Identify the costs to include in initial valuation of property, plant, and equipment.Describe the accounting problems associated with self-constructed assets.Describe the accounting problems associated with interest capitalization.“Used in operations” and not for resale.Long-term in nature and usually depreciated.Possess physical substance.Property, plant, and equipment are assets of a durable nature. Other terms commonly used are plant assets and fixed assets.PROPERTY, PLANT, AND EQUIPMENTIncludes:Land, Building structures (offices, factories, warehouses), and Equipment (machinery, furniture, tools).LO 1Understand accounting issues related to acquiring and valuing plant assets.Describe the accounting treatment for costs subsequent to acquisition.Describe the accounting treatment for the disposal of property, plant, and equipment.After studying this chapter, you should be able to:Acquisition and Disposition of Property, Plant, and Equipment10LEARNING OBJECTIVESDescribe property, plant, and equipment.Identify the costs to include in initial valuation of property, plant, and equipment.Describe the accounting problems associated with self-constructed assets.Describe the accounting problems associated with interest capitalization.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.ACQUISITION OF PROPERTY, PLANT, AND EQUIPMENT (PP&E)In general, costs include:Purchase price, including import duties and non-refundable purchase taxes, less trade discounts and rebates. Costs attributable to bringing the asset to the location and condition necessary for it to be used in a manner intended by the company.LO 2ACQUISITION OF PROPERTY, PLANT, AND EQUIPMENT (PP&E)Companies value property, plant, and equipment in subsequent periods using either the cost method or fair value (revaluation) method.LO 2All expenditures made to acquire land and ready it for use. Costs typically include:Cost of Landpurchase price;closing costs, such as title to the land, attorney’s fees, and recording fees; costs of grading, filling, draining, and clearing;assumption of any liens, mortgages, or encumbrances on the property; and additional land improvements that have an indefinite life.ACQUISITION OF PP&ELO 2Improvements 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.Cost of LandACQUISITION OF PP&ELO 2Includes all expenditures related directly to acquisition or construction. Costs include:materials, labor, and overhead costs incurred during construction and professional fees and building permits.Companies consider all costs incurred, from excavation to completion, as part of the building costs.Cost of BuildingsACQUISITION OF PP&ELO 2Cost of EquipmentInclude 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.ACQUISITION OF PP&ELO 2Money borrowed to pay building contractor (signed a note) Payment for construction from note proceedsCost of land fill and clearingDelinquent real estate taxes on property assumed by purchaserPremium on 6-month insurance policy during constructionIllustration: The expenditures and receipts below are related to land, land improvements, and buildings acquired for use in a business enterprise. Determine how the following should be classified:ACQUISITION OF PP&ENotes PayableBuildingsLandLandBuildingsLO 2Refund of 1-month insurance premium because construction completed earlyArchitect’s fee on buildingCost of real estate purchased as a plant site (land €200,000 and building €50,000) Commission fee paid to real estate agency Cost of razing and removing buildingInstallation of fences around propertyIllustration: Determine how the following should be classified:ACQUISITION OF PP&E(Buildings)BuildingsLandLandLandLand ImprovementsLO 2Proceeds from residual value of demolished buildingInterest paid during construction on money borrowed for construction Cost of parking lots and driveways Cost of trees and shrubbery planted (permanent in nature)Excavation costs for new buildingIllustration: Determine how the following should be classified:ACQUISITION OF PP&E(Land)BuildingsLand ImprovementsLandBuildingsLO 2Understand accounting issues related to acquiring and valuing plant assets.Describe the accounting treatment for costs subsequent to acquisition.Describe the accounting treatment for the disposal of property, plant, and equipment.After studying this chapter, you should be able to:Acquisition and Disposition of Property, Plant, and Equipment10LEARNING OBJECTIVESDescribe property, plant, and equipment.Identify the costs to include in initial valuation of property, plant, and equipment.Describe the accounting problems associated with self-constructed assets.Describe the accounting problems associated with interest capitalization.Self-Constructed AssetsCosts include:Materials and direct laborOverhead 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.ACQUISITION OF PP&ELO 3Understand accounting issues related to acquiring and valuing plant assets.Describe the accounting treatment for costs subsequent to acquisition.Describe the accounting treatment for the disposal of property, plant, and equipment.After studying this chapter, you should be able to:Acquisition and Disposition of Property, Plant, and Equipment10LEARNING OBJECTIVESDescribe property, plant, and equipment.Identify the costs to include in initial valuation of property, plant, and equipment.Describe the accounting problems associated with self-constructed assets.Describe the accounting problems associated with interest capitalization.Three approaches have been suggested to account for the interest incurred in financing the construction.Interest Costs During ConstructionCapitalize no interest during constructionCapitalize all costs of fundsIFRS$ 0$ ?Increase to Cost of AssetILLUSTRATION 10-1Capitalization of Interest CostsCapitalize actual costs incurred during constructionACQUISITION OF PP&ELO 4IFRS requires — capitalizing actual interest (with modification).Consistent with historical cost.Capitalization considers three items:Qualifying assets.Capitalization period.Amount to capitalize.Interest Costs During ConstructionACQUISITION OF PP&ELO 4Require a substantial period of time to get them ready for their intended use or sale.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.Qualifying AssetsInterest Costs During ConstructionLO 4Capitalization PeriodBegins when:Expenditures for the assets are being incurred.Activities for readying the asset for use or sale are in progress .Interest costs are being incurred.Ends when:The asset is substantially complete and ready for use.Interest Costs During ConstructionLO 4Amount to CapitalizeCapitalize the lesser of: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.Interest Costs During ConstructionLO 4Illustration: 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 project’s completion on Dec. 31, 2015:Other general debt existing on Jan. 1, 2015:$500,000, 14%, 10-year bonds payable $300,000, 10%, 5-year note payable Interest Costs During ConstructionLO 4Step 1 - Determine which assets qualify for capitalization of interest.Special purpose equipment qualifies because it requires a period of time to get ready and it will be used in the company’s operations. Step 2 - Determine the capitalization period.The capitalization period is from Jan. 1, 2015 through Dec. 31, 2015, because expenditures are being made and interest costs are being incurred during this period while construction is taking place. Interest Costs During ConstructionLO 4A company weights the construction expenditures by the amount of time (fraction of a year or accounting period) that it can incur interest cost on the expenditure.Step 3 - Compute weighted-average accumulated expenditures. Interest Costs During ConstructionLO 4Selecting Appropriate Interest Rate:For the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings.For the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period.Step 4 - Compute the Actual and Avoidable Interest. Interest Costs During ConstructionLO 4Step 4 - Compute the Actual and Avoidable Interest. Avoidable InterestWeighted-average interest rate on general debtActual Interest$100,000 $800,000= 12.5% Interest Costs During ConstructionLO 4Journal entry to Capitalize Interest:Equipment 30,250 Interest Expense 30,250Step 5 – Capitalize the lesser of Avoidable interest or Actual interest.Interest Costs During ConstructionLO 4Comprehensive Illustration: On November 1, 2014, Shalla Company contracted Pfeifer Construction Co. to construct a building for $1,400,000 on land costing $100,000 (purchased from the contractor and included in the first payment). Shalla made the following payments to the construction company during 2015.Interest Costs During ConstructionLO 4Pfeifer Construction completed the building, ready for occupancy, on December 31, 2015. Shalla had the following debt outstanding at December 31, 2015.Compute weighted-average accumulated expenditures for 2015.Specific Construction Debt1. 15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2014, with interest payable annually on December 31Other Debt2. 10%, 5-year note payable, dated December 31, 2011, with interest payable annually on December 31 3. 12%, 10-year bonds issued December 31, 2010, with interest payable annually on December 31 $750,000$550,000$600,000Interest Costs During ConstructionLO 4Compute weighted-average accumulated expenditures for 2015.Interest Costs During ConstructionILLUSTRATION 10-4Computation of Weighted-AverageAccumulated ExpendituresLO 4ILLUSTRATION 10-5Computation of Avoidable InterestCompute the avoidable interest.Interest Costs During ConstructionLO 4Compute the actual interest cost, which represents the maximum amount of interest that it may capitalize during 2015.The interest cost that Shalla capitalizes is the lesser of $120,228 (avoidable interest) and $239,500 (actual interest), or $120,228.Interest Costs During ConstructionILLUSTRATION 10-6Computation of ActualInterest CostLO 4Shalla records the following journal entries during 2015:January 1 Land 100,000 Buildings (or CIP) 110,000 Cash 210,000March 1 Buildings 300,000 Cash 300,000May 1 Buildings 540,000 Cash 540,000December 31 Buildings 450,000 Cash 450,000 Buildings (Capitalized Interest) 120,228 Interest Expense 119,272 Cash 239,500Interest Costs During ConstructionLO 4At December 31, 2015, Shalla discloses the amount of interest capitalized either as part of the income statement or in the notes accompanying the financial statements.Interest Costs During ConstructionILLUSTRATION 10-7Capitalized InterestReported in the IncomeStatementILLUSTRATION 10-8Capitalized InterestDisclosed in a NoteLO 4Special Issues Related to Interest CapitalizationExpenditures for LandIf land is purchased as a site for a structure, interest costs capitalized during the period of construction are part of the cost of the plant, not the land. Conversely, if the company develops land for lot sales, it includes any capitalized interest cost as part of the acquisition cost of the developed land.Interest RevenueIn general, companies should not offset interest revenue against interest cost unless earned on specific borrowings.Interest Costs During ConstructionLO 4How do statement users determine the impact of interest capitalization on a company’s bottom line? They examine the notes to the financial statements. Companies with material interest capitalization must disclose the amounts of capitalized interest relative to total interest costs. For example, Royal Dutch Shell (GBR and NLD) capitalized nearly 42 percent of its total interest costs in a recent year and provided the following footnote related to capitalized interest.WHAT’S YOUR PRINCIPLEWHAT ‘S IN YOUR INTEREST?LO 4Understand accounting issues related to acquiring and valuing plant assets.Describe the accounting treatment for costs subsequent to acquisition.Describe the accounting treatment for the disposal of property, plant, and equipment.After studying this chapter, you should be able to:Acquisition and Disposition of Property, Plant, and Equipment10LEARNING OBJECTIVESDescribe property, plant, and equipment.Identify the costs to include in initial valuation of property, plant, and equipment.Describe the accounting problems associated with self-constructed assets.Describe the accounting problems associated with interest capitalization.Companies should record property, plant, and equipment:at the fair value of what they give up or at the fair value of the asset received, whichever is more clearly evident.VALUATION OF PROPERTY, PLANT & EQUIPMENTLO 5Cash Discounts — Discounts for prompt payment.Deferred-Payment Contracts — Assets purchased on long-term credit contracts are valued at the present value of the consideration exchanged.Lump-Sum Purchases — Allocate the total cost among the various assets on the basis of their relative fair market values.Issuance of Shares — The market price of the shares issued is a fair indication of the cost of the property acquired.VALUATION OF PP&ELO 5Ordinarily accounted for on the basis of: the fair value of the asset given up or the fair value of the asset received,whichever is clearly more evident. Exchanges of Non-Monetary AssetsCompanies should recognize immediately any gains or losses on the exchange when the transaction has commercial substance.VALUATION OF PP&ELO 5Meaning of Commercial SubstanceExchange has commercial substance if the future cash flows change as a result of the transaction. That is, if the two parties’ economic positions change, the transaction has commercial substance.Exchanges of Non-Monetary AssetsILLUSTRATION 10-10Accounting for ExchangesLO 5Companies 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.Exchanges—Loss SituationExchanges of Non-Monetary AssetsLO 5Illustration: Information Processing, Inc. trades its used machine for a new model at Jerrod Business Solutions Inc. The exchange has commercial substance. The used machine has a book value of €8,000 (original cost €12,000 less €4,000 accumulated depreciation) and a fair value of €6,000. The new model lists for €16,000. Jerrod gives Information Processing a trade-in allowance of €9,000 for the used machine. Information Processing computes the cost of the new asset as follows.Exchanges of Non-Monetary AssetsILLUSTRATION 10-11Computation of Cost ofNew MachineLO 5Equipment 13,000Accumulated Depreciation—Equipment 4,000Loss on Disposal of Equipment 2,000 Equipment 12,000 Cash 7,000Illustration: Information Processing records this transaction as follows:Loss on DisposalExchanges of Non-Monetary AssetsILLUSTRATION 10-12Computation of Losson Disposal of UsedMachineLO 5Exchanges—Gain SituationHas 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. Exchanges of Non-Monetary AssetsLO 5Illustration: Interstate Transportation Company exchanged a number of used trucks plus cash for a semi-truck. The used trucks have a combined book value of $42,000 (cost $64,000 less $22,000 accumulated depreciation). Interstate’s purchasing agent, experienced in the secondhand market, indicates that the used trucks have a fair market value of $49,000. In addition to the trucks, Interstate must pay $11,000 cash for the semi-truck. Interstate computes the cost of the semi-truck as follows.Illustration 10-13Computation of Semi-Truck CostExchanges of Non-Monetary AssetsLO 5Truck (semi) 60,000Accumulated Depreciation—Trucks 22,000 Trucks (used) 64,000 Gain on Disposal of Trucks 7,000 Cash 11,000Illustration: Interstate records the exchange transaction as follows:ILLUSTRATION 10-14Computation of Gain on Disposal of Used TrucksGain on DisposalExchanges of Non-Monetary AssetsLO 5Exchanges—Gain SituationLacks Commercial Substance. Now assume that Interstate Transportation Company exchange lacks commercial substance. Interstate defers the gain of $7,000 and reduces the basis of the semi-truck. Exchanges of Non-Monetary AssetsLO 5Trucks (semi) 53,000Accumulated Depreciation—Trucks 22,000 Trucks (used) 64,000 Cash 11,000Illustration: Interstate records the exchange transaction as follows:Exchanges of Non-Monetary AssetsILLUSTRATION 10-15Basis of Semi-Truck—Fair Value vs. Book ValueLO 5Summary of Gain and Loss Recognition on Exchanges of Non-Monetary AssetsILLUSTRATION 10-16Exchanges of Non-Monetary AssetsDisclosure includenature of the transaction(s), method of accounting for the assets exchanged, and gains or losses recognized on the exchanges.LO 5Government 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.IFRS requires grants to be recognized in income (income approach) on a systematic basis that matches them with the related costs that they are intended to compensate.Government GrantsVALUATION OF PP&ELO 5Example 1: Grant for Lab Equipment. AG Company received a €500,000 subsidy from the government to purchase lab equipment on January 2, 2015. The lab equipment cost is €2,000,000, has a useful life of five years, and is depreciated on the straight-line basis.IFRS allows AG to record this grant in one of two ways: Credit Deferred Grant Revenue for the subsidy and amortize the deferred grant revenue over the five-year period. Credit the lab equipment for the subsidy and depreciate this amount over the five-year period.Government GrantsLO 5Example 1: Grant for Lab Equipment. If AG chooses to record deferred revenue of €500,000, it amortizes this amount over the five-year period to income (€100,000 per year). The effects on the financial statements at December 31, 2015, are:Government GrantsILLUSTRATION 10-17Government GrantRecorded as DeferredRevenueLO 5Example 1: Grant for Lab Equipment. If AG chooses to reduce the cost of the lab equipment, AG reports the equipment at €1,500,000 (€2,000,000 - €500,000) and depreciates this amount over the five-year period. The effects on the financial statements at December 31, 2015, are:Government GrantsILLUSTRATION 10-18Government Grant Adjusted to AssetLO 5Understand accounting issues related to acquiring and valuing plant assets.Describe the accounting treatment for costs subsequent to acquisition.Describe the accounting treatment for the disposal of property, plant, and equipment.After studying this chapter, you should be able to:Acquisition and Disposition of Property, Plant, and Equipment10LEARNING OBJECTIVESDescribe property, plant, and equipment.Identify the costs to include in initial valuation of property, plant, and equipment.Describe the accounting problems associated with self-constructed assets.Describe the accounting problems associated with interest capitalization.COSTS SUBSEQUENT TO ACQUISITIONRecognize costs subsequent to acquisition as an asset when the costs can be measured reliably and it is probable that the company will obtain future economic benefits. Evidence of future economic benefit would include increases in useful life, quantity of product produced, andquality of product produced.LO 6COSTS SUBSEQUENT TO ACQUISITIONILLUSTRATION 10-21 Summary of Costs Subsequent to AcquisitionLO 6Understand accounting issues related to acquiring and valuing plant assets.Describe the accounting treatment for costs subsequent to acquisition.Describe the accounting treatment for the disposal of property, plant, and equipment.After studying this chapter, you should be able to:Acquisition and Disposition of Property, Plant, and Equipment10LEARNING OBJECTIVESDescribe property, plant, and equipment.Identify the costs to include in initial valuation of property, plant, and equipment.Describe the accounting problems associated with self-constructed assets.Describe the accounting problems associated with interest capitalization.DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENTA company may retire plant assets voluntarily or dispose of them bySale,Exchange,Involuntary conversion, orAbandonment.Depreciation must be taken up to the date of disposition. LO 7Illustration: Barret Company recorded depreciation on a machine costing €18,000 for nine years at the rate of €1,200 per year. If it sells the machine in the middle of the tenth year for €7,000, Barret records depreciation to the date of sale as:Sale of Plant AssetsDISPOSITION OF PP&EDepreciation Expense (€1,200 x ½) 600 Accumulated Depreciation—Machinery 600LO 7Illustration: Barret Company recorded depreciation on a machine costing $18,000 for 9 years at the rate of $1,200 per year. If it sells the machine in the middle of the tenth year for $7,000, Barret records depreciation to the date of sale. Record the entry to record the sale of the asset:Cash 7,000Accumulated Depreciation—Machinery 11,400 Machinery 18,000 Gain on Disposal of Machinery 400DISPOSITION OF PP&ELO 7Sometimes an asset’s service is terminated through some type of involuntary conversion such as fire, flood, theft, or condemnation. Companies report the difference between the amount recovered (e.g., from a condemnation award or insurance recovery), if any, and the asset’s book value as a gain or loss. They treat these gains or losses like any other type of disposition. Involuntary ConversionDISPOSITION OF PP&ELO 7Illustration: 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 500,000Accumulated Depreciation—Buildings 200,000 Buildings 300,000 Land 150,000 Gain on Disposal of Plant Assets 250,000DISPOSITION OF PP&ELO 7Copyright © 2014 John Wiley & Sons, Inc. All rights reserved. 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