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Intermediate Accounting Ch. 10 - Acquisition and Disposition of PPE
Terms in this set (32)
1) Acquired for use in operations and not for resale
2) Long-term in nature and usually depreciated
3) Possess physical substance
At what value is PPE recorded?
What is included in Historical Cost
1) Price of the asset
2) Bringing the asset to location and condition necessary for intended use
*Freight and installation charges included
Why should companies not write up PPE?
1) Historical cost involves actual (not hypothetical) transactions -- most reliable
2) Companies should only recognize gains or losses when asset sold
Costs included in LAND
1) Purchase price
2) Closing costs (title, attorney, recording fees)
3) Costs of clearing land (including old building)
4) Assumption of any liens, mortgages, or encumbrances
5) Additional land improvements that have an indefinite life
Limited Life Costs LAND
Ex. fences and driveways
Put in a separate LAND IMPROVEMENTS account and depreciated over their estimated useful life
Costs included in BUILDING COSTS
1) Construction costs (materials, labor, overhead)
2) Fees for building permits or services of an attorney
3) All costs incurred from excavation to site to completion of building
Costs included in EQUIPMENT
1) Purchase Price
2) Plus all expenditures related to the purchase that occur subsequent to acquisition but prior to actual use
Ex. Freight charges, insurance charges on asset while in transit, assembly and installation, special preparation of facilities, and asset testing costs
Two methods of assigning overhead costs
1) Assign NO FIXED OVERHEAD
2) Assign a PORTION OF ALL OVERHEAD to the construction process (Full-costing approach)
Assign a PORTION OF ALL OVERHEAD to the construction process.
Preferred, consistent with the historical cost principle
Capitalization of interest cost rule
capitalizing only the actual interest costs incurred during construction.
Three conditions necessary to capitalize interest cost
1) Expenditures for the asset have been made
2) Activities necessary to get asset ready for intended use are in progress
3) Interest cost is being incurred
ASSET ALREADY PAID FOR AND IN DEVELOPMENT STAGE
What interest amount gets capitalized?
1) Actual interest cost incurred during the period
2) The amount of interest cost incurred during the period that theoretically could have been avoided IF ASSET EXPENDITURES HAD NOT BEEN MADE (avoidable interest)
Equation to find potential amount of interest that may be capitalized:
Interest Rates * weighted-average amount of accumulated expenditures
Interest Capitalization with land as a site for a structure
Interest costs capitalized during the period of construction are PART OF PLANT, NOT LAND
Cash Discount problem for purchase of plant
If discount taken, reduction in purchase price.
When discount allowed to lapse, EITHER 1) loss recorded or 2) Asset recorded at higher purchase price
LOSS APPROACH PREFERRED
Plant assets purchased on long-term credit contracts problem
Should be accounted for at PV of the consideration exchanged on date of purchase
-if no interest rate given you may need to input your own
Purchase a group of assets at a single LUMP SUM PRICE problem
Allocate purchase price to each individual asset according to relative fair values
Exchanging one nonmonetary asset for another
1) company should immediately recognize any gains or losses on the exchange (b/c most transactions have commercial substance)
Future cash flows change as a result of the transaction.
Ex. exchange of trucks with DIFFERENT useful life DOES HAVE COMMERCIAL SUBSTANCE
exchange of trucks with the SAME useful life DOESN'T HAVE COMMERCIAL SUBSTANCE
Recording of losses (nonmonetary assets)
Recognize losses on ALL EXCHANGES
Recording of Gains - Commercial (nonmonetary assets)
Recognize gain IMMEDIATELY
Use Fair Value of Asset Given Up
Recording of Gains - Noncommercial (nonmonetary assets)
If company RECEIVES NO CASH (boot) in such an exchange, it DEFERS RECOGNITION of gain.
If company RECEIVES CASH - record part of gain immediately. (Reduce Basis for the amount of the rest of the gain)
Portion of gain = [cash received/(Cash Received+FV of other assets received])*total gain indicated
How to determine if a gain/loss is present on exchange of nonmonetary assets
Compare Book Value of asset given up to Fair Value of the same asset.
FV old machine - BV old machine =Gain/loss
Alternative for Historical Cost.
If you were ignorant about a certain price and paid too much for the asset originally, it is preferable to charge a loss immediately.
Costs related to plant assets incurred AFTER asset is placed
1) Added to the asset account (capitalized) when incurred
2) Charged against operations (expensed) when incurred
Which subsequent acquisition costs get capitalized?
Costs incurred to achieve greater future benefits from the asset
Which subsequent acquisition costs get expensed?
Expenditures that maintain a given level of service.
Conditions for capitalized costs:
Must meet one of three:
1) The useful life of the asset must be increased
2) The quantity of service produced from the asset must be increased
3) The quality of units produced must be enhanced
--deciding capitalize or expense takes a lot of judgement
Capitalizing costs for improvements and replacements
If improvement/replacement increases future service potential - capitalize.
Capitalization accomplished by:
1) Substituting the cost of the new asset for the cost of the asset replaced
2) Capitalizing the new cost without eliminating the cost of the asset
3) Debiting expenditure to accumulate depreciation
Rearrangement and reinstallation costs
carry forward as a separate asset and amortize against future income
Options for getting rid of plant assets
Or disposed of by sale, exchange, involuntary conversion, or abandonment
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