Kế toán, kiểm toán - Chapter 10: Property, plant and equipment, investment property, and intangible assets: acquisition and disposition

PROPERTY, PLANT AND EQUIPMENT, INVESTMENT PROPERTY, AND INTANGIBLE ASSETS: ACQUISITION AND 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 costsModification to buildingnecessary to install equipmentTesting and trial runsCosts to be CapitalizedLand (not depreciable)Purchase priceReal estate commissionsAttorney’s feesTitle searchTitle transfer feesTitle insurance premiumsRemoving old buildingsLand ImprovementsSeparately identifiable costs ofDrivewaysParking lotsFencingLandscapingPrivate roadsBuildingsPurchase priceAttorney’s feesCommissionsReconditioning Costs to be CapitalizedInvestment Property Land costs Building costsSame as costs for property, plant and equipmentThe 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.Intangible AssetsPatentsCopyrightsTrademarksFranchisesGoodwillCosts to be CapitalizedAsset Retirement ObligationsRecognize the restoration costsas a liability and a corresponding increase in the related asset.Record at fair value, usually thepresent value of future cash outflows associated with thereclamation or restoration.Often encountered with natural resource extraction when the land must berestored to a useable condition.Intangible AssetsLack physicalsubstance.Exclusive Rights.IntangibleAssetsFuture benefits less certainthan tangible assets.An exclusive right recognized by law and granted by a sovereign state for a limited period (usually 20 years.)Holder has the right to use, manufacture, or sell the patented product or process without interference or infringement by others.Some R & D costs that lead to an internally developed patent are expensed in the period incurred, while others are capitalizedIntangible Assets ─ PatentsCopyrightsA 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 50-100 years (or a finite period for anonymous or corporate creations).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 relevant national authority and renewable indefinitely in (usually) 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 AssetsEddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed James Company’s liabilities of $200,000. James Company’s assets were appraised at a fair value of $900,000. What amount of goodwill should Eddy company record as a result of the purchase? GoodwillSeveral assets are acquired for a single price that maybe lower than the sum of the individual asset fair values.Lump-Sum PurchasesAsset 2Asset 1Asset 3Allocation of the lump-sum price is basedon relative fair values of the individual assets.On May 13, we purchase land and building for $200,000 cash. The appraised value of the building is $162,500, and the land is appraised at $87,500. How much of the $200,000 purchase price will be allocated to the building account?Lump-Sum PurchasesMay 13:Land .......................................................... 70,000Building .. 130,000 Cash..... 200,000To record lump-sum purchase of land and building.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.Deferred PaymentsNote payableMarket interestrateRecord asset atface value of noteLess than market rateor noninterest bearingRecord asset at presentvalue of future cash flows.On January 2, 2013, Midwestern Corporation purchased equipment by signing a noninterest-bearing note requiring $50,000 to be paid on December 31, 2014. The prevailing market rate of interest on notes of this nature is 10%. Prepare the required journal entries for Midwestern on January 2, 2013; December 31, 2013 (year-end), and December 31, 2014 (year-end).We do not know the cash equivalent price, so we must use the present value of the future cash payment. Deferred PaymentsDeferred PaymentsJanuary 2, 2013:Equipment ........................................................... 41,323Discount on note payable ... 8,677 Note payable .... 50,000To record equipment acquisition.December 31, 2013:Interest expense (10% of $41,323)...................... 4,132 Discount on note payable 4,132To record interest expense.December 31, 2014:Interest expense (10% of ($41,323+$4,132)) ...... 4,545 Discount on note payable .... 4,545To record interest expense.December 31, 2014Note payable ........................................................ 50,000 Cash .... 50,000 To record payment of note.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 recordsThe donated asset at fair value.Revenue equal to the fair value of the donated asset.Donated Assets: Government GrantsIAS No. 20 requires government grants to be categorized as either asset related or income relatedIncome relatedGrants with a primary condition is that the qualifying entity purchase, construct or otherwise acquire long-term assetsIncome RelatedAll other government grantsDonated Assets : Government GrantsIncome relatedAccounted for as:Deferred incomeDeduction against carrying value of related asset Income RelatedAccount for as:Income in statement of comprehensive incomeDeduction to the related expensesImpact on statement of comprehensive income is the same for either accounting method. Additional disclosures may be required.Fixed-Asset Turnover RatioThis ratio measures how effectively a company manages its fixed assets to generate revenue. Net sales Average fixed assetsFixed assetturnoverratio=Gymboree generates $0.44 more in sales dollarsfor each dollar invested in fixed assets. = 5.13$14,526($2,933 + $3,267)/2 = 4.69 $1,001($204 + $186)/2DispositionsUpdate depreciation to date of disposal.Remove original cost of asset and accumulated depreciation from the books.The difference between book value of the asset and the amount received is recorded as a gain or loss.On June 30, 2013, MeLo, Inc. sold equipment for $6,350 cash. The equipment was purchased on January 1, 2008 at a cost of $15,000. The equipment was depreciated using the straight-line method over an estimated ten-year life with zero salvage value. MeLo last recorded depreciation on the equipment on December 31, 2012, its year-end. Prepare the journal entries necessary torecord the disposition of this equipment. Update depreciation to date of sale.DispositionsJune 30, 2013:Depreciation expense ($15,000 ÷ 10 years) × ½) ....... 750 Accumulated depreciation ........ 750To update depreciation to date of sale. Remove original asset cost and accumulated depreciation. Record the gain or loss.June 30, 2013:Accumulated depreciation ............................................ 8,250Cash ....................... 6,350Loss on sale . 400 Equipment ............... 15,000To record sale of equipment.($15,000 ÷ 10 years) × 5½) = $8,250ExchangesGeneral Valuation Principle (GVP): 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 net book value of the asset(s) given up, plus (or minus) any cash exchanged. No gain is recognized.Fair Value Not DeterminableMatrix, Inc. exchanged used equipment for newer equipment. Due to the nature of the assets exchanged, Matrix could not determine the fair value of the asset given up or received. The asset given up originally cost $600,000, and had an accumulated depreciation balance of $400,000 at the time of the exchange. Matrix exchanged the asset and paid $100,000 cash.Let’s record this unusual transaction.Matrix, Inc.The journal entry below shows the proper recording of the exchange.Fair Value Not DeterminableEquipment ($200,000 + $100,000) ................. 300,000Accumulated depreciation ......... 400,000 Equipment . 600,000 Cash ............. 100,000To record equipment acquired in exchange.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, and that expected change is significant relative to the fair  value of the assets exchanged.ExchangesMatrix, Inc. exchanged new equipment and $10,000 cash for equipment owned by Float, Inc.Below is information about the asset exchanged by Matrix. Record the transaction assuming the exchange has commercial substance.Gain = Fair Value – Book ValueGain = $205,000 – $200,000 = $5,000ExchangesRecord the same transaction assuming the exchange lacks commercial substance.Equipment ............................................... 215,000Accumulated depreciation............. 300,000 Equipment 500,000 Cash . 10,000 Gain on exchange .. 5,000To record the exchange of equipment.$205,000 fair value + $10,000 cashEquipment ............................................... 210,000Accumulated depreciation............. 300,000 Equipment 500,000 Cash .. 10,000To record the exchange of equipment.$200,000 book value + $10,000 cashSelf-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 and other costs that are incurred in connection with the borrowing of funds that are directly attributable to the acquisition, construction or production of the qualifying assetAsset that necessarily takes a substantial period of time to get ready for its intended use.Under certain conditions, borrowing costs incurred on qualifying assets is capitalized.Capitalization begins when: construction beginsBorrowing cost is incurred, andqualifying expenses are incurred.Capitalization ends when:the asset is substantially complete and ready for its intended use, orwhen borrowing costs no longer are being incurred.Borrowing Cost CapitalizationBorrowing Cost 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 CapitalizationWelling, Inc. is constructing a building for its own use. Construction activities started on May 1 and have continued through Dec. 31. Welling made the following qualifying expenditures: May 1, $125,000; July 31, $160,000, Oct. 1, $200,000; and Dec. 1, $300,000. Welling borrowed $1,000,000 on May 1, from Bub’s Bank for 10 years at 10 percent to finance the construction. The loan is related to the construction project and the company uses the specific interest method to compute the amount of interest to capitalize.Average Accumulated ExpendituresInterest CapitalizationSince the $1,000,000 of specific borrowing is sufficient to cover the $337,500 of average accumulated expenditures for the year, use the specific borrowing rate of 10 percent to determine the amount of interest to capitalize. Interest = AAE × Specific Borrowing Rate × Time Interest = $337,500 × 10% × 8/12 = $22,500The loan, initiated on May 1, is outstanding for 8 months of the year.Interest CapitalizationIf Welling had not borrowed specifically for this constructionproject, it would have used the weighted-average interestmethod. The weighted average interest rate on other debtwould have been used to compute the amount of interest tocapitalize. For example, if the weighted-average interestrate on other debt is 12 percent, the amount of interestcapitalized would be: Interest = AAE × Weighted-average Rate × Time  Interest = $337,500 × 12% × 8/12 = $27,000 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)ResearchResearch is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. . .DevelopmentDevelopment is the application of research findings or other knowledge into a plan or design for the production of new or substantially improved materials, devices, products, process, systems or services before the start of commercial production or use . . .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&DActivityCapitalizationCriterion(Enter Development Phase)R&D Completed SuccessfullySale of ProductCostsExpensedas R&DCostsCapitalizedOperating Costs and AmortizationAll expenditure in the research phase are to be expensed when incurred.Expenditure incurred in the development phase, but before the R&D is successfully completed, are to be capitalizedR&D CostsStart-up Costs and Software Development CostsBalance SheetThe unamortized portion of capitalized computer software cost is an asset.Income StatementAmortization expense associated with computer software cost.R&D expense associated with computer software development cost.Start-up costs, including pre-operating costs and establishment costs, are expensed in the period incurred.IFRS applies the same accounting treatment for R&D expenditure to software development costs.DisclosureU.S. GAAP vs. IFRSExcept for software development costs incurred after technological feasibility, all research and development expenditures are expensed in the period incurred.Direct costs to secure a patent are capitalized.Research and Development CostsResearch expenditures are expensed in the period incurred. Development expenditures that meet specified criteria are capitalized as an intangible asset.Direct costs to secure a patent are capitalized.U.S. GAAP vs. IFRSThe percentage used to amortize software development costs is the greater of (1) the ratio of current revenues to current and anticipated revenues or (2) the straight-line percentage over the useful life of the software. Software Development CostsThe same approach is allowed, but not required.Appendix 10 ─ Oil and Gas AccountingTwo acceptable accounting alternativesSuccessful effortsmethodFull-costmethodExploration costs resultingin unsuccessful wells(dry holes) are expensed.Exploration costs resultingin unsuccessful wellsmay be capitalized.Political pressure prevented the FASB from requiringall companies to use the successful efforts method.The Shannon Oil Company incurred $2,000,000 in exploration costs for each of 10 oil wells in 2013. Eight of the 10 wells were dry holes. Prepare the journal entries to record the exploration costs under both of the acceptable methods.Oil and Gas AccountingSuccessful Efforts:Oil deposit ..................................... 4,000,000Exploration expense 16,000,000 Cash . 20,000,000Full Cost:Oil deposit ..................................... 20,000,000 Cash . 20,000,000End of Chapter 10