Kế toán, kiểm toán - Chương 10: Acquisition and disposition of property, plant, and equipment

C H A P T E R 10ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENTIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield Describe 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.Understand 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.Learning ObjectivesAcquisitionAcquisition costs: land, buildings, equipmentSelf-constructed assetsInterest costsObservationsValuationCost Subsequent to AcquisitionDispositionsCash discountsDeferred contractsLump-sum purchasesStock issuanceNon-monetary exchangesGovernment grantsSaleInvoluntary conversionAdditionsImprovements and replacementsRearrangement and reorganizationRepairsSummaryAcquisition and Disposition of Property, Plant, and Equipment“Used in operations” and not for resale.Long-term in nature and usually depreciated.Possess physical substance.Property, plant, and equipment is defined as tangible assets that are held for use in production or supply of goods and services, for rentals to others, or for administrative purposes; they are expected to be used during more than one period.Property, Plant, and EquipmentLO 1 Describe property, plant, and equipment.Includes:Land, Building structures (offices, factories, warehouses), and Equipment (machinery, furniture, tools).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.Companies value property, plant, and equipment in subsequent periods using either the cost method or fair value (revaluation) method.Acquisition of PP&ELO 2 Identify the costs to include in initial valuation of property, plant, and equipment.Includes all costs to acquire land and ready it for use. Costs typically include:Cost of LandAcquisition of PP&ELO 2purchase 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.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.Acquisition of PP&ELO 2 Identify the costs to include in initial valuation of property, plant, and equipment.Cost of LandIncludes all costs related directly to acquisition or construction. Cost typically include:Cost of BuildingsLO 2 Identify the costs to include in initial valuation of property, plant, and equipment.materials, labor, and overhead costs incurred during construction and professional fees and building permits.Acquisition of PP&EInclude all costs incurred in acquiring the equipment and preparing it for use. Costs typically include:LO 2 Identify the costs to include in initial valuation of property, plant, and equipment.purchase price, freight and handling chargesinsurance 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&ECost of EquipmentE10-1 (variation): 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&EMoney borrowed to pay building contractor Payment for construction from note proceedsCost of land fill and clearingDelinquent real estate taxes on property assumedPremium on 6-month insurance policy during constructionRefund of 1-month insurance premium because construction completed earlyClassificationNotes PayableBuildingLandLandBuilding(Building)LO 2 Identify the costs to include in initial valuation of property, plant, and equipment.ClassificationAcquisition of PP&E(g) Architect’s fee on building(h) Cost of real estate purchased as a plant site (land €200,000 and building €50,000)(i) Commission fee paid to real estate agency(j) Installation of fences around property(k) Cost of razing and removing buildingProceeds from salvage of demolished buildingCost of parking lots and drivewaysCost of trees and shrubbery (permanent)BuildingLO 2LandLandLand ImprovementsLand(Land)Land ImprovementsLandE10-1 (variation): 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:Self-Constructed AssetsAcquisition of PP&ECosts typically include:Materials and direct laborOverhead can be handled in two ways:Assign no fixed overheadAssign a portion of all overhead to the construction process.Companies use the second method extensively.LO 3 Describe the accounting problems associated with self-constructed assets.Three approaches have been suggested to account for the interest incurred in financing the construction.Interest Costs During ConstructionAcquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Capitalize no interest during constructionCapitalize actual costs incurred during construction (with modification)Capitalize all costs of fundsIFRS$ 0$ ?Increase to Cost of AssetIllustration 10-1IFRS 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 4 Describe the accounting problems associated with interest capitalization.Require a substantial 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.Qualifying AssetsAcquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Capitalization PeriodAcquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Begins when:Expenditures for the asset have been made.Activities for readying the asset are in progress .Interest costs are being incurred.Ends when:The asset is substantially complete and ready for use.Amount to CapitalizeAcquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Capitalize the lesser of:Actual interest costsAvoidable interest - the amount of interest that could have been avoided if expenditures for the asset had not been made. Interest Capitalization Illustration: Blue Corporation borrowed $200,000 at 12% interest from State Bank on Jan. 1, 2011, for specific purposes of constructing special-purpose equipment to be used in its operations. Construction on the equipment began on Jan. 1, 2011, and the following expenditures were made prior to the project’s completion on Dec. 31, 2011:Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Other general debt existing on Jan. 1, 2011:$500,000, 14%, 10-year bonds payable $300,000, 10%, 5-year note payable Step 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. Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Step 2 - Determine the capitalization period.The capitalization period is from Jan. 1, 2011 through Dec. 31, 2011, because expenditures are being made and interest costs are being incurred during this period while construction is taking place. Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Step 3 - Compute weighted-average accumulated expenditures. A 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.Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Step 4 - Compute the Actual and Avoidable Interest. Selecting 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.Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Step 4 - Compute the Actual and Avoidable Interest. Avoidable InterestWeighted-average interest rate on general debtActual Interest$100,000 $800,000= 12.5% Step 5 – Capitalize the lesser of Avoidable interest or Actual interest.Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Journal entry to Capitalize Interest:Equipment 30,250 Interest expense 30,250Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Comprehensive Illustration: On November 1, 2010, 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 2011.Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Pfeifer Construction completed the building, ready for occupancy, on December 31, 2011. Shalla had the following debt outstanding at December 31, 2011.Compute weighted-average accumulated expenditures for 2011.Specific Construction Debt1. 15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2010, with interest payable annually on December 31Other Debt2. 10%, 5-year note payable, dated December 31, 2007, with interest payable annually on December 31 3. 12%, 10-year bonds issued December 31, 2006, with interest payable annually on December 31 $750,000$550,000$600,000Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Compute weighted-average accumulated expenditures for 2011.Illustration 10-4Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Compute the avoidable interest.Illustration 10-5Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Compute the actual interest cost, which represents the maximum amount of interest that it may capitalize during 2011,Illustration 10-6The interest cost that Shalla capitalizes is the lesser of $120,228 (avoidable interest) and $239,500 (actual interest), or $120,228.Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Shalla records the following journal entries during 2011:January 1 Land 100,000 Building (or CIP) 110,000 Cash 210,000March 1 Building 300,000 Cash 300,000May 1 Building 540,000 Cash 540,000December 31 Building 450,000 Cash 450,000 Building (Capitalized Interest) 120,228 Interest Expense 119,272 Cash 239,500Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.At December 31, 2011, Shalla discloses the amount of interest capitalized either as part of the income statement or in the notes accompanying the financial statements.Illustration 10-7Illustration 10-8Acquisition of PP&ELO 4 Describe the accounting problems associated with interest capitalization.Special Issues Related to Interest CapitalizationExpenditures for land.Interest costs capitalized are part of the cost of the plant, not the land.Interest revenue.Interest revenue should be offset against interest cost when determining the amount of interest to capitalized.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 PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Cash Discounts — Whether taken or not — generally considered a reduction in the cost of the asset.Deferred-Payment Contracts — Assets, purchased through long term credit, are recorded at the present value of the consideration exchanged.Lump-Sum Purchases — Allocate the total cost among the various assets on the basis of their fair market values.Issuance of Shares — The market value of the shares issued is a fair indication of the cost of the property acquired.Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Ordinarily 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 Nonmonetary AssetsCompanies should recognize immediately any gains or losses on the exchange when the transaction has commercial substance.Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Meaning 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.Illustration 10-10Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Companies 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 SituationValuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Illustration: 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.Illustration 10-11Equipment 13,000Accumulated Depreciation—Equipment 4,000Loss on Disposal of Equipment 2,000 Equipment 12,000 Cash 7,000Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Illustration: Information Processing records this transaction as follows:Illustration 10-12Loss on DisposalValuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Exchanges - Gain SituationHas Commercial Substance. Company usually records the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset at the fair value of the asset given up, and immediately recognizes a gain. Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Illustration: 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 second-hand 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 10-13Semi-truck 60,000Accumulated Depreciation—Trucks 22,000 Trucks 64,000 Gain on disposal of Used Trucks 7,000 Cash 11,000Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Illustration: Interstate records the exchange transaction as follows:Illustration 10-14Gain on DisposalValuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Exchanges - Gain SituationLacks Commercial Substance. Now assume that Interstate Transportation Company exchange lacks commercial substance. That is, the economic position of Interstate did not change significantly as a result of this exchange. In this case, Interstate defers the gain of $7,000 and reduces the basis of the semi-truck. Semi-truck 53,000Accumulated Depreciation—Trucks 22,000 Trucks 64,000 Cash 11,000Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Illustration: Interstate records the exchange transaction as follows:Illustration 10-15Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Summary of Gain and Loss Recognition on Exchanges of Non-Monetary AssetsDisclosure include:nature of the transaction(s), method of accounting for the assets exchanged, and gains or losses recognized on the exchanges.Illustration 10-16E10-19: Santana Company exchanged equipment used in its manufacturing operations plus $2,000 in cash for similar equipment used in the operations of Delaware Company. The following information pertains to the exchange.LO 5 Understand accounting issues related to acquiring and valuing plant assets.Instructions: Prepare the journal entries to record the exchange on the books of both companies. Valuation of PP&ECalculation of Gain or LossLO 5 Understand accounting issues related to acquiring and valuing plant assets.Valuation of PP&EHas Commercial SubstanceLO 5 Understand accounting issues related to acquiring and valuing plant assets.Santana:Equipment 15,500Accumulated depreciation 19,000 Cash 2,000 Equipment 28,000 Gain on exchange 4,500Delaware:Cash 2,000Equipment 13,500Accumulated depreciation 10,000Loss on exchange 2,500 Equipment 28,000Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Santana (Has Commercial Substance):Equipment 15,500Accumulated depreciation 19,000 Cash 2,000 Equipment 28,000 Gain on disposal of equipment 4,500Valuation of PP&ESantana (LACKS Commercial Substance):Equipment (15,500 – 4,500) 11,000Accumulated depreciation 19,000 Cash 2,000 Equipment 28,000LO 5 Understand accounting issues related to acquiring and valuing plant assets.Delaware (Has Commercial Substance):Valuation of PP&EDelaware (LACKS Commercial Substance):Cash 2,000Equipment 13,500Accumulated depreciation 10,000Loss on disposal of equipment 2,500 Equipment 28,000Cash 2,000Equipment 13,500Accumulated depreciation 10,000Loss on disposal of equipment 2,500 Equipment 28,000Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.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 5 Understand accounting issues related to acquiring and valuing plant assets.Example 1: Grant for Lab Equipment. AG Company received a €500,000 subsidy from the government to purchase lab equipment on January 2, 2011. 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.Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Example 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, 2011, are:Illustration 10-17Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.Example 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, 2011, are:Illustration 10-18Valuation of PP&ELO 5 Understand accounting issues related to acquiring and valuing plant assets.When a company contributes a non-monetary asset, it should record the amount of the donation as an expense at the fair value of the donated asset. Illustration: Kline Industries donates land to the City of San Paulo for a city park. The land cost $80,000 and has a fair value of $110,000. Kline Industries records this donation as follows. Contribution Expense 110,000 Land 80,000 Gain on Disposal of Land 30,000ContributionsCosts Subsequent to AcquisitionLO 6 Describe the accounting treatment for costs subsequent to acquisition.Recognize 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. Future economic benefit would include increases inuseful life, quantity of product produced, andquality of product produced.Costs Subsequent to AcquisitionLO 6Illustration 10-21Disposition of PP&ELO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.A company may retire plant assets voluntarily or dispose of them bysale, exchange, involuntary conversion, or abandonment. Depreciation must be taken up to the date of disposition. Disposition of PP&ESale of Plant AssetsBE10-15: Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2007. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2010. The machinery is sold on September 1, 2011, for $10,500. Prepare journal entries to update depreciation for 2011 and record the sale.LO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.a) Depreciation for 2011Depreciation expense ($2,400 x 8/12) 1,600 Accumulated depreciation 1,600b) Record the saleCash 10,500Accumulated depreciation 10,000 Machinery 20,000 Gain on sale 500Disposition of PP&E* $8,400 + $1,600 = $10,000*LO 7 Describe the accounting treatment for the disposal of property, plant, and equipment.Sometimes 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 7 Describe the accounting treatment for the disposal of property, plant, and equipment.Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Copyright