Kế toán tài chính 2 - Chapter 10: Accounting for property, plant, and equipment

CHAPTER 10ACCOUNTING FOR PROPERTY, PLANT, AND EQUIPMENTINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Describe property, plant, and equipment and costs to include in its initial valuation.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.Explain the concept of depreciation. Identify the factors involved in the depreciation process.Compare activity, straight-line, and decreasing-charge methods of depreciation.Describe the accounting treatment for the disposal of property, plant, and equipment.Explain how to report and analyze property, plant, and equipment.Learning ObjectivesAdditions Improvements and replacementsRearrangement and reinstallation RepairsAcquisition and ValuationCosts Subsequent to AcquisitionUse of PP&E: DepreciationDispositionsPresentation and AnalysisAcquisition costs: Land, buildings, equipment Self-constructed assetsInterest costsOther valuation issuesFactors involvedMethods of depreciationSpecial issuesSale Involuntary conversionExchangesPresentationAnalysisProperty, Plant, and Equipment“Used in operations” and not for resale.Long-term in nature and usually depreciated.Possess physical substance.Property, plant, and equipment includes land, buildings, and equipment (machinery, furniture, tools). Major characteristics include:Property, Plant, and EquipmentLO 1 Describe property, plant, and equipment and costs to include in its initial valuation.At acquisition, cost reflects fair value.Historical cost is reliable.Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold.Valued at Historical Cost, reasons include:Acquisition and Valuation of PP&EAPB Opinion No. 6 states, “property, plant, and equipment should not be written up to reflect appraisal, market, or current values which are above cost.”LO 1 Describe property, plant, and equipment and costs to include in its initial valuation.Includes all costs to acquire land and ready it for use. Costs typically include:Cost of LandAcquisition and Valuation of PP&Ethe purchase 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.LO 1 Describe property, plant, and equipment and costs to include in its initial valuation.Includes all costs related directly to acquisition or construction.Costs typically include:Cost of BuildingsAcquisition and Valuation of PP&Ematerials, labor, and overhead costs incurred during construction and professional fees and building permits.LO 1 Describe property, plant, and equipment and costs to include in its initial valuation.Include all costs incurred in acquiring the equipment and preparing it for use.Costs typically include:Cost of EquipmentAcquisition and Valuation of PP&Epurchase 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.LO 1 Describe property, plant, and equipment and costs to include in its initial valuation.Exercise: (Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. Determine how the following should be classified:Acquisition and Valuation 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 insurance policy during constructionRefund of 1-month insurance premium because construction completed earlyClassificationNotes PayableBuildingLandLandBuilding(Building)LO 1 Describe property, plant, and equipment and costs to include in its initial valuation.Acquisition and Valuation of PP&E(g) Architect’s fee on building(h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000)(i) Commission fee paid to real estate agency(j) Installation of fences around property(k) Cost of razing and removing buildingProceeds from salvage of demolished buildingCost of parking lots and drivewaysCost of trees and shrubbery (permanent)Costs of:BuildingLandLandLand ImprovementsLand(Land)Land ImprovementsLandLO 1 Describe property, plant, and equipment and costs to include in its initial valuation.Exercise: (Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. Determine how the following should be classified:Self-Constructed AssetsAcquisition and Valuation of PP&ECosts typically include:Materials and direct laborOverhead can be handled in two ways:Assign no fixed overheadAssign a portion of all overhead to the construction process.Companies use the second method extensively.LO 1 Describe property, plant, and equipment and costs to include in its initial valuation.Three approaches have been suggested to account for the interest incurred in financing the construction.Interest Costs During ConstructionAcquisition and Valuation of PP&ELO 2 Describe the accounting problems associated with interest capitalization.Capitalize no interest during constructionCapitalize actual costs incurred during construction (with modification)Capitalize all costs of fundsGAAP$ 0$ ?Increase to Cost of AssetIllustration 10-1GAAP requires — capitalizing actual interest (with modification).Consistent with historical cost — all costs incurred to bring the asset to the condition for its intended use.Interest Costs During ConstructionAcquisition and Valuation of PP&ELO 2 Describe the accounting problems associated with interest capitalization.Interest Capitalization Illustration: Richard Company begins construction on a building early in 2008 and completes construction by the end of the year. Richard incurred total interest costs on borrowing during 2008 in the amount of $325,000. It determines that $165,000 of these interest costs is attributable to expenditures on the new building. Prepare a summary journal entry to show how Richards would record capitalized interest and interest expense in 2008.Acquisition and Valuation of PP&EBuilding 165,000Interest Expense 160,000 Cash 325,000(See slides at Appendix 10A for a comprehensive illustration of capitalized interest.)LO 2 Describe the accounting problems associated with interest capitalization.Special Issues Related to Interest Capitalization Two issues:Expenditures for land.Interest revenue.LO 2 Describe the accounting problems associated with interest capitalization.Acquisition and Valuation of PP&ECompanies 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.Other Valuation IssuesLO 3 Understand accounting issues related to acquiring and valuing plant assets.Acquisition and Valuation of PP&E Cash Discounts — whether taken or not — generally considered a reduction in the cost of the asset.Lump-Sum Purchases Allocate the total cost among the various assets on the basis of their fair market values.Issuance of Stock The market value of the stock issued is a fair indication of the cost of the property acquired.Acquisition and Valuation of PP&ELO 3 Understand accounting issues related to acquiring and valuing plant assets.LO 3 Understand accounting issues related to acquiring and valuing plant assets.Companies should use:the fair value of the asset to establish its value on the books and should recognize contributions received as revenues in the period received.Accounting for ContributionsAcquisition and Valuation of PP&ECosts Subsequent to AcquisitionLO 4 Describe the accounting treatment for costs subsequent to acquisition.In general, costs incurred to achieve greater future benefits should be capitalized, whereas expenditures that simply maintain a given level of services should be expensed. To capitalize costs, one of three conditions must be present:Useful life of the asset must be increased.Quantity of units produced from asset must be increased.Quality of units produced must be enhanced.Costs Subsequent to AcquisitionLO 4 Describe the accounting treatment for costs subsequent to acquisition.Additions Improvements and replacements Rearrangement and reinstallation RepairsMajor Types of ExpendituresSee Illustration 10-6, in the text, for summary of normal accounting treatment for these expenditures.Allocating costs of long-term assets:Fixed assets = Depreciation expenseIntangibles = Amortization expenseNatural resources = Depletion expenseDepreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.Use of PP&E: DepreciationLO 5 Explain the concept of depreciation.LO 6 Identify the factors involved in the depreciation process.Three basic questions:Factors Involved in the Depreciation ProcessWhat depreciable base is to be used?What is the asset’s useful life?What method of cost allocation is best?Use of PP&E: DepreciationLO 7 Compare activity, straight-line, and decreasing-charge methods of depreciation.The profession requires the method employed be “systematic and rational.” Examples include:Methods of DepreciationActivity method (units of use or production).Straight-line method. Sum-of-the-years’-digits.Declining-balance method.Decreasing charge methodsUse of PP&E: DepreciationLO 7 Compare activity, straight-line, and decreasing-charge methods of depreciation.Exercise (Depreciation Computations—Four Methods): Robert Parish Corporation purchased a new machine for its assembly process on September 30, 2007. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Year-end is December 31.Instructions: Compute the depreciation expense under the following methods. (a) Straight-line depreciation.(b) Activity method.(c) Sum-of-the-years’-digits.(d) Double-declining balance.Use of PP&E: DepreciationLO 7 Compare activity, straight-line, and decreasing-charge methods of depreciation.Exercise (Straight-line Method)Use of PP&E: DepreciationLO 7 Compare activity, straight-line, and decreasing-charge methods of depreciation.Exercise (Activity Method)Use of PP&E: DepreciationLO 7 Compare activity, straight-line, and decreasing-charge methods of depreciation.Exercise (Sum-of-the-years’-digits Method)Use of PP&E: DepreciationLO 7 Compare activity, straight-line, and decreasing-charge methods of depreciation.Exercise (Double-Declining Balance Method)Use of PP&E: DepreciationSpecial Depreciation IssuesHow should depreciation be computed for partial periods?Companies normally compute depreciation on the basis of the nearest full month.How are revisions in depreciation rates handled?Use of PP&E: DepreciationLO 7 Compare activity, straight-line, and decreasing-charge methods of depreciation.Changes in Depreciation RateAccounted for in the period of change and future periods (Change in Estimate)Not handled retrospectivelyNot considered errors or extraordinary itemsUse of PP&E: DepreciationLO 7 Compare activity, straight-line, and decreasing-charge methods of depreciation.Disposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Sale of Plant AssetsExercise: Sim City Corporation owns machinery that cost $20,000 when purchased on January 1, 2005. Depreciation has been recorded at a rate of $3,000 per year, resulting in a balance in accumulated depreciation of $9,000 at December 31, 2007. The machinery is sold on September 1, 2008, for $10,500. Prepare journal entries to (a) update depreciation for 2008 and (b) record the sale.(a) Update depreciation for 2008Depreciation Expense ($3,000 x 8/12) 2,000 Accumulated Depreciation 2,000LO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.(b) Record the saleCash 10,500Accumulated Depreciation 11,000 Machinery 20,000 Gain on Sale 1,500Disposition of Plant AssetsSometimes 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 ConversionLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Disposition of Plant AssetsOrdinarily 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. ExchangesCompanies should recognize immediately any gains or losses on the exchange when the transaction has commercial substance (future cash flows change as a result of the transaction).Disposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Accounting for Exchanges* If cash is 25% or more of the fair value of the exchange, recognize entire gain because earnings process is complete.Illustration 10-17Disposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.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 SituationDisposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Exchange – Gain Situation Illustration: Carlos Arruza Company exchanged equipment used in its manufacturing operations plus $3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.Instructions: Prepare the journal entries to record the exchange on the books of both companies.Disposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Calculation of Gain or LossWhen a company receives cash (sometimes referred to as “boot”) in an exchange that lacks commercial substance, it may immediately recognize a portion of the gain.Disposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.LO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Has Commercial SubstanceArruza:Equipment 12,500Cash 3,000Accumulated Depreciation 19,000 Equipment 28,000 Gain on Exchange 6,500LoBianco:Disposition of Plant AssetsEquipment 15,500Accumulated Depreciation 10,000 Equipment 28,000 Cash 3,000Loss on Exchange 5,500Lacks Commercial SubstanceArruza:Equipment (12,500 – 5,242) 7,258Cash 3,000Accumulated Depreciation 19,000 Equipment 28,000 Gain on Exchange 1,258Cash ReceivedCash Received + FMV of Assets ReceivedxTotal Gain=Recognized Gain$3,000$3,000 + $12,500x$6,500=$1,258Disposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Deferred gain = $6,500 – 1,258 = $5,242Lacks Commercial SubstanceLoBianco (no change):Equipment 15,500Accumulated Depreciation 10,000 Equipment 28,000 Cash 3,000Loss on Exchange 5,500Companies recognize a loss immediately whether the exchange has commercial substance or not.Disposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Summary of Gain and Loss Recognition on Exchanges of Nonmonetary Assets Lacks Commercial SubstanceIllustration 10-27Disposition of Plant AssetsLO 8 Describe the accounting treatment for the disposal of property, plant, and equipment.Presentation of Property, Plant, EquipmentPresentation and AnalysisBasis of valuation (cost)Pledges, liens, and other commitmentsDepreciation expense for the period.Balances of major classes of depreciable assets.Accumulated depreciation.A description of the depreciation methods used.Depreciating assets, use Accumulated Depreciation.Depleting assets may include use of Accumulated Depletion account, or the direct reduction of asset.DisclosuresLO 9 Explain how to report and analyze property, plant, equipment.Rate of Return on Assets measures a firm’s success in using assets to generate earnings.Net Income Average Total Assets ROA = $56,200 ($1,030,400 + 682,400) / 2 6.56% = Presentation and AnalysisLO 9 Explain how to report and analyze property, plant, equipment.The analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows:Net Income Average Total Assets Rate of Return on Assets = Net Income Sales Profit Margin on Sales = SalesAsset Turnover x x Average Total Assets Presentation and AnalysisLO 9 Explain how to report and analyze property, plant, equipment.The analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows:$56,200 ($1,030,400 + 682,400) / 2Rate of Return on Assets = $56,200 $300,000 Profit Margin on Sales = $300,000Asset Turnover x x Presentation and Analysis6.56% 18.73% = x .3503 ($1,030,400 + 682,400) / 2LO 9 Explain how to report and analyze property, plant, equipment.The profit margin on sales is a measure of the ability of a firm to generate operating income from a particular level of sales.Rate of Return on Assets = Profit Margin on Sales Asset Turnover x Presentation and Analysis= x .3503 Net Income Average Total Assets Net Income Sales = Salesx Average Total Assets 6.56% 18.73% LO 9 Explain how to report and analyze property, plant, equipment.The profit margin on sales is a measure of the ability of a firm to generate operating income from a particular level of sales.Rate of Return on Assets = Profit Margin on Sales Asset Turnover x Presentation and AnalysisNet Income Average Total Assets Net Income Sales = Salesx Average Total Assets Differences in the profit margin on sales (from year to year) can be studied by analyzing individual revenues and expenses.LO 9 Explain how to report and analyze property, plant, equipment.The assets turnover is a measure of a firm’s ability to generate sales from a particular investment in assets. Rate of Return on Assets = Profit Margin on Sales Asset Turnover x Presentation and Analysis= x .3503 Net Income Average Total Assets Net Income Sales = Salesx Average Total Assets 6.56% 18.73% LO 9 Explain how to report and analyze property, plant, equipment.APPENDIX 10AInterest Capitalization IllustrationGAAP requires — capitalizing actual interest (with modification).Consistent with historical cost — all costs incurred to bring the asset to the condition for its intended use.Capitalization considers three items:Qualifying assets.Capitalization period.Amount to capitalize.Interest Costs During ConstructionInterest Capitalization IllustrationRequire 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.Qualifying AssetsInterest Capitalization IllustrationCapitalization PeriodBegins 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.Interest Capitalization IllustrationAmount to CapitalizeCapitalize 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 IllustrationInterest Capitalization Illustration: Delmar Corporation borrowed $200,000 at 12% interest from State Bank on Jan. 1, 2005, for specific purposes of constructing special-purpose equipment to be used in its operations. Construction on the equipment began on Jan. 1, 2005, and the following expenditures were made prior to the project’s completion on Dec. 31, 2005:Other general debt existing on Jan. 1, 2005:$500,000, 14%, 10-year bonds payable $300,000, 10%, 5-year note payable Interest Capitalization IllustrationStep 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, 2005 through Dec. 31, 2005, because expenditures are being made and interest costs are being incurred during this period while construction is taking place. Interest Capitalization IllustrationStep 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.Interest Capitalization IllustrationStep 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.Interest Capitalization IllustrationStep 4 - Compute the Actual and Avoidable Interest. Avoidable InterestWeighted-average interest rate on general debtActual Interest$100,000 $800,000= 12.5% Interest Capitalization IllustrationStep 5 – Capitalize the lesser of Avoidable interest or Actual interest.Journal entry to Capitalize Interest:Equipment 30,250 Interest Expense 30,250Interest Capitalization IllustrationCopyright © 2008 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