Kế toán, kiểm toán - Chapter 10: Property, plant, and equipment and intangible assets: acquisitionand disposition

Property, Plant, and Equipmentand Intangible Assets: Acquisitionand DispositionChapter 10Long-lived, Revenue-producing AssetsTypes of AssetsExpected to Benefit Future PeriodsGeneral Rule for Cost CapitalizationThe initial cost of an asset includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.EquipmentNet purchase priceTaxesTransportation costsInstallation costsTesting and trial runsCosts to be CapitalizedLand (not depreciable)Purchase priceReal estate commissionsAttorney’s feesTitle searchTitle transfer feesTitle insurance premiumsRemoving old buildingsCosts to be CapitalizedLand ImprovementsSeparately identifiable costs ofDrivewaysParking lotsFencingLandscapingPrivate roadsBuildingsPurchase priceAttorney’s feesCommissionsReconditioning Natural Resources Acquisition costs Exploration costs Development costs Restoration costsThe initial cost of an intangible asset includes the purchase price and all other costs necessary to bring it to condition and location for use, such as legal and filing fees.Costs to be CapitalizedIntangible AssetsPatentsCopyrightsTrademarksFranchisesGoodwillAn exclusive right recognized by law and granted by the U.S. Patent Office for 20 years.Holder has the right to use, manufacture, or sell the patented product or process without interference or infringement by others.R & D costs that lead to an internally developed patent are expensed in the period incurred.Intangible Assets ─ PatentsTorch Inc. has developed a new device. Research and development costs totaled $30,000. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees. What is Torch’s patent cost?Torch’s cost for the new patent is $3,000. The $30,000 R & D cost is expensed as incurred. CopyrightsA form of protection given by law to authors of literary, musical, artistic, and similar works.Copyright owners have exclusive rights to print, reprint, copy, sell or distribute, perform, and record the work.Generally, the legal life of a copyright is the life of the author plus 70 years.TrademarksA symbol, design, or logo associated with a business.If internally developed, trademarks have no recorded asset cost.If purchased, a trademark is recorded at cost.Registered with U.S. Patent Office and renewable indefinitely in 10-year periods.Intangible AssetsOccurs when onecompany buysanother company.The amount by which theconsideration exchanged exceedsthe fair value of net assets acquired.Only purchased goodwill is an intangible asset.A contractual arrangement where the franchisor grants the franchisee exclusive rights to use the franchisor’s trademark within a certain area for a specified period of time. GoodwillFranchiseIntangible AssetsGoodwill is not amortized.Noncash AcquisitionsIssuance of equity securitiesDeferred paymentsDonated assetsExchangesThe asset acquired is recorded atthe fair value of the consideration givenor the fair value of the asset acquired,whichever is more clearly evident.Issuance of Equity SecuritiesAsset acquired is recorded at the fair value of the asset or the market value of the securities, whichever is more clearly evident.If the securities are actively traded, market value can be easily determined.If the securities given are not actively traded, the fair value of the asset received, as determined by appraisal, may be more clearly evident than the fair value of the securities.Donated AssetsOn occasion, companies acquire assets through donation.The receiving company is required to record The donated asset at fair value.Revenue equal to the fair value of the donated asset.ExchangesGeneral Valuation Principle: Cost of asset acquired is: fair value of asset given up plus cash paid or minus cash received orfair value of asset acquired, if it is more clearly evident In the exchange of assets fair value is used except in rare situations in which the fair value cannot be determined or the exchange lacks commercial substance.When fair value cannot be determined or the exchange lacks commercial substance, the asset(s) acquired are valued at the book value of the asset(s) given up, plus (or minus) any cash exchanged. No gain or loss is recognized.Exchange Lacks Commercial SubstanceWhen exchanges are recorded at fair value, any gain or loss is recognized for the difference between the fair value and book value of the asset(s) given up. To preclude the possibility of companies engaging in exchanges of appreciated assets solely to be able to recognize gains, fair value can only be used in legitimate exchanges that have commercial substance.A nonmonetary exchange is considered to have commercial substance if the company expects a change in future cash flows as a result of the exchange.Self-Constructed Assets When self-constructing an asset, two accounting issues must be addressed: Overhead allocation to the self-constructed asset.Incremental overhead onlyFull-cost approach Proper treatment of interest incurred during constructionInterest that could have been avoided if the asset were not constructed and the money used to retire debt.Asset constructed: For a company’s own use. As a discrete project for sale or lease.Under certain conditions, interest incurred on qualifying assets is capitalized.Capitalization begins whenconstruction beginsinterest is incurred, andqualifying expenses are incurred.Capitalization ends whenthe asset is substantially complete and ready for its intended use, orwhen interest costs no longer are being incurred.Interest CapitalizationInterest is capitalized based on Average Accumulated Expenditures (AAE).Qualifying expenditures (construction labor, material, and overhead) weighted for the number of months outstanding during the current accounting period.If the qualifying asset is financed through a specific new borrowing . . . use the specific rate of the new borrowing as the capitalization rate.If there is no specific new borrowing, and the company has other debt . . . use the weighted average cost of other debt as the capitalization rate.Interest CapitalizationIf specific new borrowing had been insufficient to cover the average accumulated expenditures . . .SpecificnewborrowingAAE. . . Capitalize this portion using the 10 percent specific borrowing rate.Otherdebt. . . Capitalize this portion using the 12 percent weighted- average cost of debt.Interest CapitalizationResearch and Development (R&D)ResearchPlanned search or critical investigation aimed at discovery of new knowledge . . .DevelopmentThe translation of research findings or other knowledge into a plan or design . . .Most R&D costs are expensed as incurred. (Must be disclosed if material.)R&D costs incurred under contract for other companies are capitalized as inventory and carried forward into future years.Costs of assets purchased for R&D purposes are expensed in the period unless they have alternative future uses.Start ofR&DActivityTechnologicalFeasibilityDate ofProductReleaseSale of ProductCostsExpensedas R&DCostsCapitalizedOperating CostsAll costs incurred to establish the technological feasibility of a computer software product are treated as R&D and expensed as incurred.Costs incurred after technological feasibility is established and before the software is available for release to customers are capitalized as an intangible asset.Software Development CostsSoftware Development CostsAmortization of capitalized computer software costs starts when the product begins to be marketed.Two methods, the percentage-of-revenue method and the straight-line method, are compared and the method producing the largest amount of amortization is used.End of Chapter 10