ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT

CHAPTER10ACQUISITIONANDDISPOSITIONOFPROPERTY,PLANT,ANDEQUIPMENTIntermediateAccountingIFRSEditionKieso,Weygandt,andWarfieldDescribeproperty,plant,andequipment.Identifythecoststoincludeininitialvaluationofproperty,plant,andequipment.Describetheaccountingproblemsassociatedwithself-constructedassets.Describetheaccountingproblemsassociatedwithinterestcapitalization.Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Describetheaccountingtreatmentforcostssubsequenttoacquisition.Describetheaccountingtreatmentforthedisposalofproperty,plant,andequipment.LearningObjectivesAcquisitionAcquisitioncosts:land,buildings,equipmentSelf-constructedassetsInterestcostsObservationsValuationCostSubsequenttoAcquisitionDispositionsCashdiscountsDeferredcontractsLump-sumpurchasesStockissuanceNon-monetaryexchangesGovernmentgrantsSaleInvoluntaryconversionAdditionsImprovementsandreplacementsRearrangementandreorganizationRepairsSummaryAcquisitionandDispositionofProperty,Plant,andEquipment“Usedinoperations”andnotforresale.Long-terminnatureandusuallydepreciated.Possessphysicalsubstance.Property,plant,andequipmentisdefinedastangibleassetsthatareheldforuseinproductionorsupplyofgoodsandservices,forrentalstoothers,orforadministrativepurposes;theyareexpectedtobeusedduringmorethanoneperiod.Property,Plant,andEquipmentLO1Describeproperty,plant,andequipment.Includes:Land,Buildingstructures(offices,factories,warehouses),andEquipment(machinery,furniture,tools).Historicalcostmeasuresthecashorcashequivalentpriceofobtainingtheassetandbringingittothelocationandconditionnecessaryforitsintendeduse.Companiesvalueproperty,plant,andequipmentinsubsequentperiodsusingeitherthecostmethodorfairvalue(revaluation)method.AcquisitionofPP&ELO2Identifythecoststoincludeininitialvaluationofproperty,plant,andequipment.Includesallcoststoacquirelandandreadyitforuse.Coststypicallyinclude:CostofLandAcquisitionofPP&ELO2purchaseprice;closingcosts,suchastitletotheland,attorney’sfees,andrecordingfees;costsofgrading,filling,draining,andclearing;assumptionofanyliens,mortgages,orencumbrancesontheproperty;andadditionallandimprovementsthathaveanindefinitelife.Improvementswithlimitedlives,suchasprivatedriveways,walks,fences,andparkinglots,arerecordedasLandImprovementsanddepreciated.Landacquiredandheldforspeculationisclassifiedasaninvestment.Landheldbyarealestateconcernforresaleshouldbeclassifiedasinventory.AcquisitionofPP&ELO2Identifythecoststoincludeininitialvaluationofproperty,plant,andequipment.CostofLandIncludesallcostsrelateddirectlytoacquisitionorconstruction.Costtypicallyinclude:CostofBuildingsLO2Identifythecoststoincludeininitialvaluationofproperty,plant,andequipment.materials,labor,andoverheadcostsincurredduringconstructionandprofessionalfeesandbuildingpermits.AcquisitionofPP&EIncludeallcostsincurredinacquiringtheequipmentandpreparingitforuse.Coststypicallyinclude:LO2Identifythecoststoincludeininitialvaluationofproperty,plant,andequipment.purchaseprice,freightandhandlingchargesinsuranceontheequipmentwhileintransit,costofspecialfoundationsifrequired,assemblingandinstallationcosts,andcostsofconductingtrialruns.AcquisitionofPP&ECostofEquipmentE10-1(variation):Theexpendituresandreceiptsbelowarerelatedtoland,landimprovements,andbuildingsacquiredforuseinabusinessenterprise.Determinehowthefollowingshouldbeclassified:AcquisitionofPP&EMoneyborrowedtopaybuildingcontractor(signedanote)PaymentforconstructionfromnoteproceedsCostoflandfillandclearingDelinquentrealestatetaxesonpropertyassumedPremiumon6-monthinsurancepolicyduringconstructionRefundof1-monthinsurancepremiumbecauseconstructioncompletedearlyClassificationNotesPayableBuildingLandLandBuilding(Building)LO2Identifythecoststoincludeininitialvaluationofproperty,plant,andequipment.ClassificationAcquisitionofPP&E(g)Architect’sfeeonbuilding(h)Costofrealestatepurchasedasaplantsite(land€200,000andbuilding€50,000)(i)Commissionfeepaidtorealestateagency(j)Installationoffencesaroundproperty(k)CostofrazingandremovingbuildingProceedsfromsalvageofdemolishedbuildingCostofparkinglotsanddrivewaysCostoftreesandshrubbery(permanent)BuildingLO2LandLandLandImprovementsLand(Land)LandImprovementsLandE10-1(variation):Theexpendituresandreceiptsbelowarerelatedtoland,landimprovements,andbuildingsacquiredforuseinabusinessenterprise.Determinehowthefollowingshouldbeclassified:Self-ConstructedAssetsAcquisitionofPP&ECoststypicallyinclude:MaterialsanddirectlaborOverheadcanbehandledintwoways:AssignnofixedoverheadAssignaportionofalloverheadtotheconstructionprocess.Companiesusethesecondmethodextensively.LO3Describetheaccountingproblemsassociatedwithself-constructedassets.Threeapproacheshavebeensuggestedtoaccountfortheinterestincurredinfinancingtheconstruction.InterestCostsDuringConstructionAcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.CapitalizenointerestduringconstructionCapitalizeactualcostsincurredduringconstruction(withmodification)CapitalizeallcostsoffundsIFRS$0$?IncreasetoCostofAssetIllustration10-1IFRSrequires—capitalizingactualinterest(withmodification).Consistentwithhistoricalcost.Capitalizationconsidersthreeitems:Qualifyingassets.Capitalizationperiod.Amounttocapitalize.InterestCostsDuringConstructionAcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Requireasubstantialperiodoftimetogetthemreadyfortheirintendeduse.Twotypesofassets:Assetsunderconstructionforacompany’sownuse.Assetsintendedforsaleorleasethatareconstructedorproducedasdiscreteprojects.QualifyingAssetsAcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.CapitalizationPeriodAcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Beginswhen:Expendituresfortheassethavebeenmade.Activitiesforreadyingtheassetareinprogress.Interestcostsarebeingincurred.Endswhen:Theassetissubstantiallycompleteandreadyforuse.AmounttoCapitalizeAcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Capitalizethelesserof:ActualinterestcostsAvoidableinterest-theamountofinterestthatcouldhavebeenavoidedifexpendituresfortheassethadnotbeenmade.InterestCapitalizationIllustration:BlueCorporationborrowed$200,000at12%interestfromStateBankonJan.1,2011,forspecificpurposesofconstructingspecial-purposeequipmenttobeusedinitsoperations.ConstructionontheequipmentbeganonJan.1,2011,andthefollowingexpendituresweremadepriortotheproject’scompletiononDec.31,2011:AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.OthergeneraldebtexistingonJan.1,2011:$500,000,14%,10-yearbondspayable$300,000,10%,5-yearnotepayableStep1-Determinewhichassetsqualifyforcapitalizationofinterest.Specialpurposeequipmentqualifiesbecauseitrequiresaperiodoftimetogetreadyanditwillbeusedinthecompany’soperations.AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Step2-Determinethecapitalizationperiod.ThecapitalizationperiodisfromJan.1,2011throughDec.31,2011,becauseexpendituresarebeingmadeandinterestcostsarebeingincurredduringthisperiodwhileconstructionistakingplace.AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Step3-Computeweighted-averageaccumulatedexpenditures.Acompanyweightstheconstructionexpendituresbytheamountoftime(fractionofayearoraccountingperiod)thatitcanincurinterestcostontheexpenditure.AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Step4-ComputetheActualandAvoidableInterest.SelectingAppropriateInterestRate:Fortheportionofweighted-averageaccumulatedexpendituresthatislessthanorequaltoanyamountsborrowedspecificallytofinanceconstructionoftheassets,usetheinterestrateincurredonthespecificborrowings.Fortheportionofweighted-averageaccumulatedexpendituresthatisgreaterthananydebtincurredspecificallytofinanceconstructionoftheassets,useaweightedaverageofinterestratesincurredonallotheroutstandingdebtduringtheperiod.AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Step4-ComputetheActualandAvoidableInterest.AvoidableInterestWeighted-averageinterestrateongeneraldebtActualInterest$100,000$800,000=12.5%Step5–CapitalizethelesserofAvoidableinterestorActualinterest.AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.JournalentrytoCapitalizeInterest:Equipment30,250Interestexpense30,250AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.ComprehensiveIllustration:OnNovember1,2010,ShallaCompanycontractedPfeiferConstructionCo.toconstructabuildingfor$1,400,000onlandcosting$100,000(purchasedfromthecontractorandincludedinthefirstpayment).Shallamadethefollowingpaymentstotheconstructioncompanyduring2011.AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.PfeiferConstructioncompletedthebuilding,readyforoccupancy,onDecember31,2011.ShallahadthefollowingdebtoutstandingatDecember31,2011.Computeweighted-averageaccumulatedexpendituresfor2011.SpecificConstructionDebt1.15%,3-yearnotetofinancepurchaseoflandandconstructionofthebuilding,datedDecember31,2010,withinterestpayableannuallyonDecember31OtherDebt2.10%,5-yearnotepayable,datedDecember31,2007,withinterestpayableannuallyonDecember313.12%,10-yearbondsissuedDecember31,2006,withinterestpayableannuallyonDecember31$750,000$550,000$600,000AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Computeweighted-averageaccumulatedexpendituresfor2011.Illustration10-4AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Computetheavoidableinterest.Illustration10-5AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Computetheactualinterestcost,whichrepresentsthemaximumamountofinterestthatitmaycapitalizeduring2011,Illustration10-6TheinterestcostthatShallacapitalizesisthelesserof$120,228(avoidableinterest)and$239,500(actualinterest),or$120,228.AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.Shallarecordsthefollowingjournalentriesduring2011:January1Land100,000Building(orConstructioninProcess)110,000Cash210,000March1Building300,000Cash300,000May1Building540,000Cash540,000December31Building450,000Cash450,000Building(CapitalizedInterest)120,228InterestExpense119,272Cash239,500AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.AtDecember31,2011,Shalladisclosestheamountofinterestcapitalizedeitheraspartoftheincomestatementorinthenotesaccompanyingthefinancialstatements.Illustration10-7Illustration10-8AcquisitionofPP&ELO4Describetheaccountingproblemsassociatedwithinterestcapitalization.SpecialIssuesRelatedtoInterestCapitalizationExpendituresforland.Interestcostscapitalizedarepartofthecostoftheplant,nottheland.Interestrevenue.Interestrevenueshouldbeoffsetagainstinterestcostwhendeterminingtheamountofinteresttocapitalized.IFRSrequiresthatinterestrevenueearnedonspecificborrowingshouldoffsetinterestcostscapitalized.Companiesshouldrecordproperty,plant,andequipment:atthefairvalueofwhattheygiveuporatthefairvalueoftheassetreceived,whicheverismoreclearlyevident.ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.CashDiscounts—Whethertakenornot—generallyconsideredareductioninthecostoftheasset.Deferred-PaymentContracts—Assets,purchasedthroughlongtermcredit,arerecordedatthepresentvalueoftheconsiderationexchanged.Lump-SumPurchases—Allocatethetotalcostamongthevariousassetsonthebasisoftheirfairmarketvalues.IssuanceofShares—Themarketvalueofthesharesissuedisafairindicationofthecostofthepropertyacquired.ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Ordinarilyaccountedforonthebasisof:thefairvalueoftheassetgivenuporthefairvalueoftheassetreceived,whicheverisclearlymoreevident.ExchangesofNon-monetaryAssetsCompaniesshouldrecognizeimmediatelyanygainsorlossesontheexchangewhenthetransactionhascommercialsubstance.ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.MeaningofCommercialSubstanceExchangehascommercialsubstanceifthefuturecashflowschangeasaresultofthetransaction.Thatis,ifthetwoparties’economicpositionschange,thetransactionhascommercialsubstance.P524footnote7Illustration10-10ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Companiesrecognizealossimmediatelywhethertheexchangehascommercialsubstanceornot.Rationale:Companiesshouldnotvalueassetsatmorethantheircashequivalentprice;ifthelossweredeferred,assetswouldbeoverstated.Exchanges-LossSituationValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Illustration:InformationProcessing,Inc.tradesitsusedmachineforanewmodelatJerrodBusinessSolutionsInc.Theexchangehascommercialsubstance.Theusedmachinehasabookvalueof$8,000(originalcost$12,000less$4,000accumulateddepreciation)andafairvalueof$6,000.Thenewmodellistsfor$16,000.JerrodgivesInformationProcessingatrade-inallowanceof$9,000fortheusedmachine.InformationProcessingcomputesthecostofthenewassetasfollows.Illustration10-11Equipment13,000AccumulatedDepreciation—Equipment4,000LossonDisposalofEquipment2,000Equipment12,000Cash7,000ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Illustration:InformationProcessingrecordsthistransactionasfollows:Illustration10-12LossonDisposalValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Exchanges-GainSituationHasCommercialSubstance.Companyusuallyrecordsthecostofanonmonetaryassetacquiredinexchangeforanothernonmonetaryassetatthefairvalueoftheassetgivenup,andimmediatelyrecognizesagain.ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Illustration:InterstateTransportationCompanyexchangedanumberofusedtruckspluscashforasemi-truck.Theusedtruckshaveacombinedbookvalueof$42,000(cost$64,000less$22,000accumulateddepreciation).Interstate’spurchasingagent,experiencedinthesecond-handmarket,indicatesthattheusedtruckshaveafairmarketvalueof$49,000.Inadditiontothetrucks,Interstatemustpay$11,000cashforthesemi-truck.Interstatecomputesthecostofthesemi-truckasfollows.Illustration10-13Semi-truck60,000AccumulatedDepreciation—Trucks22,000Trucks64,000GainondisposalofUsedTrucks7,000Cash11,000ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Illustration:Interstaterecordstheexchangetransactionasfollows:Illustration10-14GainonDisposalValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Exchanges-GainSituationLacksCommercialSubstance.NowassumethatInterstateTransportationCompanyexchangelackscommercialsubstance.Thatis,theeconomicpositionofInterstatedidnotchangesignificantlyasaresultofthisexchange.Inthiscase,Interstatedefersthegainof$7,000andreducesthebasisofthesemi-truck.Semi-truck53,000AccumulatedDepreciation—Trucks22,000Trucks64,000Cash11,000ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Illustration:Interstaterecordstheexchangetransactionasfollows:Illustration10-15ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.SummaryofGainandLossRecognitiononExchangesofNon-MonetaryAssetsDisclosureinclude:natureofthetransaction(s),methodofaccountingfortheassetsexchanged,andgainsorlossesrecognizedontheexchanges.Illustration10-16E10-19:SantanaCompanyexchangedequipmentusedinitsmanufacturingoperationsplus$2,000incashforsimilarequipmentusedintheoperationsofDelawareCompany.Thefollowinginformationpertainstotheexchange.LO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Instructions:Preparethejournalentriestorecordtheexchangeonthebooksofbothcompanies.ValuationofPP&ECalculationofGainorLossLO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.ValuationofPP&EHasCommercialSubstanceLO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Santana:Equipment15,500Accumulateddepreciation19,000Cash2,000Equipment28,000Gainonexchange4,500Delaware:Cash2,000Equipment13,500Accumulateddepreciation10,000Lossonexchange2,500Equipment28,000ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Santana(HasCommercialSubstance):Equipment15,500Accumulateddepreciation19,000Cash2,000Equipment28,000Gainondisposalofequipment4,500ValuationofPP&ESantana(LACKSCommercialSubstance):Equipment(15,500–4,500)11,000Accumulateddepreciation19,000Cash2,000Equipment28,000LO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Delaware(HasCommercialSubstance):ValuationofPP&EDelaware(LACKSCommercialSubstance):Cash2,000Equipment13,500Accumulateddepreciation10,000Lossondisposalofequipment2,500Equipment28,000Cash2,000Equipment13,500Accumulateddepreciation10,000Lossondisposalofequipment2,500Equipment28,000ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Grantsareassistancereceivedfromagovernmentintheformoftransfersofresourcestoacompanyinreturnforpastorfuturecompliancewithcertainconditionsrelatingtotheoperatingactivitiesofthecompany.IFRSrequiresgrantstoberecognizedinincome(incomeapproach)onasystematicbasisthatmatchesthemwiththerelatedcoststhattheyareintendedtocompensate.GovernmentGrantsValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Example1:GrantforLabEquipment.AGCompanyreceiveda€500,000subsidyfromthegovernmenttopurchaselabequipmentonJanuary2,2011.Thelabequipmentcostis€2,000,000,hasausefullifeoffiveyears,andisdepreciatedonthestraight-linebasis.IFRSallowsAGtorecordthisgrantinoneoftwoways:CreditDeferredGrantRevenueforthesubsidyandamortizethedeferredgrantrevenueoverthefive-yearperiod.Creditthelabequipmentforthesubsidyanddepreciatethisamountoverthefive-yearperiod.ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Example1:GrantforLabEquipment.IfAGchoosestorecorddeferredrevenueof$500,000,itamortizesthisamountoverthefive-yearperiodtoincome($100,000peryear).TheeffectsonthefinancialstatementsatDecember31,2011,are:Illustration10-17ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Example1:GrantforLabEquipment.IfAGchoosestoreducethecostofthelabequipment,AGreportstheequipmentat€1,500,000(€2,000,000-€500,000)anddepreciatesthisamountoverthefive-yearperiod.TheeffectsonthefinancialstatementsatDecember31,2011,are:Illustration10-18ValuationofPP&ELO5Understandaccountingissuesrelatedtoacquiringandvaluingplantassets.Whenacompanycontributesanon-monetaryasset,itshouldrecordtheamountofthedonationasanexpenseatthefairvalueofthedonatedasset.Illustration:KlineIndustriesdonateslandtotheCityofSanPauloforacitypark.Thelandcost$80,000andhasafairvalueof$110,000.KlineIndustriesrecordsthisdonationasfollows.ContributionExpense110,000Land80,000GainonDisposalofLand30,000ContributionsCostsSubsequenttoAcquisitionLO6Describetheaccountingtreatmentforcostssubsequenttoacquisition.Recognizecostssubsequenttoacquisitionasanassetwhenthecostscanbemeasuredreliablyanditisprobablethatthecompanywillobtainfutureeconomicbenefits.Futureeconomicbenefitwouldincludeincreasesinusefullife,quantityofproductproduced,andqualityofproductproduced.CostsSubsequenttoAcquisitionLO6Illustration10-21DispositionofPP&ELO7Describetheaccountingtreatmentforthedisposalofproperty,plant,andequipment.Acompanymayretireplantassetsvoluntarilyordisposeofthembysale,exchange,involuntaryconversion,orabandonment.Depreciationmustbetakenuptothedateofdisposition.DispositionofPP&ESaleofPlantAssetsBE10-15:OttawaCorporationownsmachinerythatcost$20,000whenpurchasedonJuly1,2007.Depreciationhasbeenrecordedatarateof$2,400peryear,resultinginabalanceinaccumulateddepreciationof$8,400atDecember31,2010.ThemachineryissoldonSeptember1,2011,for$10,500.Preparejournalentriestoupdatedepreciationfor2011andrecordthesale.LO7Describetheaccountingtreatmentforthedisposalofproperty,plant,andequipment.a)Depreciationfor2011Depreciationexpense($2,400x8/12)1,600Accumulateddepr