Kế toán tài chính - Acquisition and disposition of property, plant, and equipment

PREVIEW OF CHAPTER 10Intermediate Accounting16th EditionKieso ● Weygandt ● Warfield Understand property, plant, and equipment and its related costs.Describe the accounting problems associated with self-constructed assets. Describe the accounting problems associated with interest capitalization.LEARNING OBJECTIVESUnderstand 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 Equipment10LO 1“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 1LO 1Historical 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 EquipmentMain reasons for historical cost valuation: Historical cost is reliable.Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold.PROPERTY, PLANT, AND EQUIPMENTIncludes all expenditures 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 Property, Plant, and EquipmentLO 1Improvements 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 Property, Plant, and EquipmentLO 1Includes all expenditures related directly to acquisition or construction. Costs include:materials, labor, and overhead costs incurred during construction and professional fees and building permits.Cost of BuildingsAcquisition of Property, Plant, and EquipmentLO 1Cost 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 Property, Plant, and EquipmentLO 1Money 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 earlyIllustration: 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:Notes PayableBuildingLandLandBuilding(Building)Acquisition of Property, Plant, and EquipmentLO 1(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)BuildingLandLandLand ImprovementsLand(Land)Land ImprovementsLandIllustration: 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 Property, Plant, and EquipmentLO 1Understand property, plant, and equipment and its related costs.Describe the accounting problems associated with self-constructed assets. Describe the accounting problems associated with interest capitalization.LEARNING OBJECTIVESUnderstand 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 Equipment10LO 2Self-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 Property, Plant, and EquipmentLO 2Understand property, plant, and equipment and its related costs.Describe the accounting problems associated with self-constructed assets. Describe the accounting problems associated with interest capitalization.LEARNING OBJECTIVESUnderstand 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 Equipment10LO 3Three 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 fundsGAAP$ 0$ ?Increase to Cost of AssetILLUSTRATION 10-1 Capitalization of Interest CostsCapitalize actual costs incurred during constructionAcquisition of Property, Plant, and EquipmentLO 3GAAP 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 Property, Plant, and EquipmentLO 3Require 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 Costs During ConstructionLO 3Capitalization 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 Costs During ConstructionLO 3Amount to CapitalizeCapitalize the lesser of:Actual interest costs.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 3Interest Capitalization Illustration: Assume a company borrowed $200,000 at 12% interest from State Bank on Jan. 1, 2017, for specific purposes of constructing special-purpose equipment to be used in its operations. Construction on the equipment began on Jan. 1, 2017, and the following expenditures were made prior to the project’s completion on Dec. 31, 2017:Other general debt existing on Jan. 1, 2017:$500,000, 14%, 10-year bonds payable $300,000, 10%, 5-year note payable Interest Costs During ConstructionLO 3Step 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, 2017 through Dec. 31, 2017, because expenditures are being made and interest costs are being incurred during this period while construction is taking place. Interest Costs During ConstructionLO 3A 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 3Selecting 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 3Step 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 3Amount by which the weighted-average accumulated expenditures exceeds the construction loan.Journal 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 3Comprehensive Illustration: On November 1, 2016, 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 2017.Interest Costs During ConstructionLO 3Pfeifer Construction completed the building, ready for occupancy, on December 31, 2017. Shalla had the following debt outstanding at December 31, 2017.Compute weighted-average accumulated expenditures for 2017.Specific Construction Debt1. 15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2016, with interest payable annually on December 31Other Debt2. 10%, 5-year note payable, dated December 31, 2013, with interest payable annually on December 31 3. 12%, 10-year bonds issued December 31, 2012, with interest payable annually on December 31 $750,000$550,000$600,000Interest Costs During ConstructionLO 3Compute weighted-average accumulated expenditures for 2017.Interest Costs During ConstructionILLUSTRATION 10-4 Computation of Weighted-Average Accumulated ExpendituresLO 3Compute the avoidable interest.Interest Costs During ConstructionILLUSTRATION 10-5Computation of Avoidable InterestLO 3Compute the actual interest cost, which represents the maximum amount of interest that it may capitalize during 2017.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 Actual Interest CostLO 3Shalla records the following journal entries during 2017: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 3At December 31, 2017, Shalla discloses the amount of interest capitalized either as part of the income statement or in the notes accompanying the financial statements.ILLUSTRATION 10-7Capitalized Interest Reported in the Income StatementInterest Costs During ConstructionILLUSTRATION 10-8Capitalized Interest Disclosed in a NoteLO 3Note 1: Accounting Policies. Capitalized Interest. During 2017, total interest cost was $239,500, of which $120,228 was capitalized and $119,272 was charged to expense.The requirement to capitalize interest can significantly impact financial statements. For example, when earnings of building manufacturer Jim Walter’s Corporation dropped from $1.51 to $1.17 per share, the company offset 11 cents per share of the decline by capitalizing the interest on coal mining projects and several plants under construction. How 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,WHAT ‘S I YOUR INTEREST?Anadarko Petroleum Corporation capitalized nearly 30 percent of its total interest costs in a recent year and provided the following footnote related to capitalized interest.Financial Footnotes Total interest costs incurred during the year were $82,415,000. Of this amount, the Company capitalized $24,716,000. Capitalized interest is included as part of the cost of oil and gas properties. The capitalization rates are based on the Company’s weighted-average cost of borrowings used to finance the expenditures.WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? WHAT’S IN YOUR INTEREST?LO 3Special Issues Related to Interest CapitalizationExpenditures for LandIf the company purchases land 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 net or offset interest revenue against interest cost.Interest Costs During ConstructionLO 3Understand property, plant, and equipment and its related costs.Describe the accounting problems associated with self-constructed assets. Describe the accounting problems associated with interest capitalization.LEARNING OBJECTIVESUnderstand 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 Equipment10LO 4Companies 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, AND EQUIPMENT LO 4Cash Discounts — Discount for prompt payment.Deferred-Payment Contracts — Assets purchased on long-term credit contracts 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 Stock — The market price of the stock issued is a fair indication of the cost of the property acquired.VALUATION OF PP&ELO 4Ordinarily 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 4Meaning 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.* If cash is 25% or more of the fair value of the exchange, recognize entire gain because earnings process is complete.VALUATION OF PP&EILLUSTRATION 10-10 Accounting for ExchangesLO 4Companies 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 4Illustration: 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.VALUATION OF PP&EILLUSTRATION 10-11 Computation of Cost of New MachineLO 4Equipment 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 DisposalVALUATION OF PP&EILLUSTRATION 10-12Computation of Loss on Disposal of Used MachineLO 4Exchanges—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 4Illustration: 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.VALUATION OF PP&EILLUSTRATION 10-13Computation of Semi-Truck CostLO 4Truck (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:Gain on DisposalVALUATION OF PP&EILLUSTRATION 10-14Computation of Gain on Disposal of Used TrucksLO 4Exchanges—Gain SituationLacks Commercial Substance—No Cash Received. 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. VALUATION OF PP&ELO 4Trucks (semi) 53,000Accumulated Depreciation—Trucks 22,000 Trucks (used) 64,000 Cash 11,000Illustration: Interstate records the exchange transaction as follows:VALUATION OF PP&EILLUSTRATION 10-15Basis of Semi-Truck—Fair Value vs. Book ValueLO 4Lacks Commercial Substance—Some Cash Received. When 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. The general formula for gain recognition when an exchange includes some cash is as follows:Exchanges—Gain SituationVALUATION OF PP&EILLUSTRATION 10-16Formula for Gain Recognition, Some Cash ReceivedLO 4Illustration: Queenan Corporation traded in used machinery with a book value of $60,000 (cost $110,000 less accumulated depreciation $50,000) and a fair value of $100,000. It receives in exchange a machine with a fair value of $90,000 plus cash of $10,000.VALUATION OF PP&EILLUSTRATION 10-17Computation of Total GainLO 4The portion of the gain a company recognizes is the ratio of monetary assets (cash in this case) to the total consideration received.VALUATION OF PP&EILLUSTRATION 10-18Computation of Gain Based on Ratio of Cash Received to Total Consideration ReceivedLO 4Queenan would record the following entry.Cash 10,000Machine (new) 54,000Accumulated Depreciation—Machinery 50,000 Machine 110,000 Gain on Disposal of Machinery 4,000VALUATION OF PP&EILLUSTRATION 10-19Computation of BasisLO 4Summary of Gain and Loss Recognition on Exchanges of Non-Monetary AssetsILLUSTRATION 10-20VALUATION OF PP&ELO 4Illustration: 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.Instructions: Prepare the journal entries to record the exchange on the books of both companies. VALUATION OF PP&ELO 4Calculation of Gain or LossVALUATION OF PP&ELO 4Has Commercial SubstanceSantana: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 4Santana (Has Commercial Substance):Equipment 15,500Accumulated Depreciation 19,000 Cash 2,000 Equipment 28,000 Gain on Disposal of Equipment 4,500Santana (LACKS Commercial Substance):Equipment (15,500 – 4,500) 11,000Accumulated Depreciation 19,000 Cash 2,000 Equipment 28,000VALUATION OF PP&ELO 4Delaware (Has Commercial Substance):Delaware (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 4LO 4In a press release, Roy Olofson, former vice president of finance for Global Crossing, accused company executives of improperly describing the company’s revenue to the public. He said the company had improperly recorded long-term sales immediately rather than over the term of the contract, had improperly booked as cash transactions swaps of capacity with other carriers, and had fi red him when he blew the whistle.The accounting for the swaps involves exchanges of similar network capacity. Companies have said they engage in such deals because swapping is quicker and less costly than building segments of their own networks, or because such pacts provide redundancies to make their own networks more reliable. In one expert’s view, an exchange of similar network capacity is the equivalent of trading a blue truck for a red truck-it shouldn’t boost a company’s revenue.WHAT’S YOUR PRINCIPLEBut Global Crossing and Qwest, among others, counted as revenue the money received from the other company in the swap. (In general, in transactions involving leased capacity, the companies booked the revenue over the life of the contract.) Some of these companies then treated their own purchases as capital expenditures, which were not run through the income statement. Instead, the spending led to the addition of assets on the balance sheet (and an inflated bottom line).The SEC questioned some of these capacity exchanges, because it appeared they were a device to pad revenue. This reaction was not surprising, since revenue growth was a key factor in the valuation of companies such as Global Crossing and Qwest during the craze for tech stocks in the late 1990s and 2000. Source: Adapted from Henny Sender, “Telecoms Draw Focus for Moves in Accounting,” Wall Street Journal (March 26, 2002), p. C7.WHAT ‘S I YOUR INTEREST?WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? ABOUT THOSE SWAPSCompanies 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 ContributionsVALUATION OF PP&ELO 4Illustration: Max Wayer Meat Packing, Inc. has recently accepted a donation of land with a fair value of $150,000 from the Memphis Industrial Development Corp. In return Max Wayer Meat Packing promises to build a packing plant in Memphis. Max Wayer’s entry is:Contributions Land 150,000 Contribution Revenue 150,000VALUATION OF PP&ELO 4When 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 Los Angeles for a city park. The land cost $80,000 and has a fair value of $110,000. Kline Industries records this donation as follows.Contributions Contribution Expense 110,000 Land 80,000 Gain on Disposal of Land 30,000VALUATION OF PP&ELO 4Understand property, plant, and equipment and its related costs.Describe the accounting problems associated with self-constructed assets. Describe the accounting problems associated with interest capitalization.LEARNING OBJECTIVESUnderstand 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 Equipment10LO 5COSTS SUBSEQUENT TO ACQUISITIONIn general, costs incurred to achieve greater future benefits should be capitalized, whereas expenditures that simply maintain a given level of services should be expensed.In order to capitalize costs, one of three conditions must be present:useful life must be increased,quantity of units produced must be increased, andquality of units produced must be enhanced.LO 5COSTS SUBSEQUENT TO ACQUISITIONLO 5It all started with a check of the books by an internal auditor for WorldCom Inc. The telecom giant’s newly installed chief executive had asked for a financial review, and the auditor was spot-checking records of capital expenditures. She found the company was using an unorthodox technique to account for one of its biggest expenses: charges paid to local telephone networks to complete long-distance calls.Instead of recording these charges as operating expenses, WorldCom recorded a significant portion as capital expenditures. The maneuver was worth hundreds of millions of dollars to WorldCom’s bottom line. It effectively turned a loss for all of 2001 and the first quarter of 2002 into a profit. The graph below compares WorldCom’s accounting to that under GAAP. Soon after this discovery, WorldCom filed for bankruptcy.WHAT’S YOUR PRINCIPLEWHAT ‘S I YOUR INTEREST?WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? DISCOUNNECTEDLO 5Source: Adapted from Jared Sandberg, Deborah Solomon, and Rebecca Blumenstein, “Inside WorldCom’s Unearthing of a Vast Accounting Scandal,” Wall Street Journal (June 27, 2002), p. A1.WHAT’S YOUR PRINCIPLEWHAT ‘S I YOUR INTEREST?WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? DISCOUNNECTEDLO 5SummaryCOSTS SUBSEQUENT TO ACQUISITIONILLUSTRATION 10-21Summary of Costs Subsequent to Acquisition of Property, Plant, and EquipmentLO 5Understand property, plant, and equipment and its related costs.Describe the accounting problems associated with self-constructed assets. Describe the accounting problems associated with interest capitalization.LEARNING OBJECTIVESUnderstand 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 Equipment10LO 6DISPOSITION OF PP&EA 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 6Illustration: 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 as:Sale of Plant AssetsDepreciation Expense ($1,200 x 1/2) 600 Accumulated Depreciation 600DISPOSITION OF PP&ELO 6Illustration: 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 11,400 Machinery 18,000 Gain on Disposal of Machinery 400DISPOSITION OF PP&ELO 6Sometimes 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 6Illustration: Camel Transport Corp. had to sell a plant located on company property that stood directly in the path of an interstate highway. For a number of years, the state had sought to purchase the land on which the plant stood, but the company resisted. The state ultimately exercised its right of eminent domain, which the courts upheld. In settlement, Camel received $500,000, which substantially exceeded the $200,000 book value of the plant and land (cost of $400,000 less accumulated depreciation of $200,000). Camel made the following entry.Cash 500,000Accumulated Depreciation—Plant Assets 200,000 Plant Assets 400,000 Gain on Disposal of Plant Assets 300,000DISPOSITION OF PP&ELO 6“Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. 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