Chapter 10

1. Chapter 10 Acquisition and Disposition of Property, Plant, and Equipment

2. 1. Overview of Topic • Operational assets • fixed assets, intangibles, and natural resources • Characteristics of fixed assets • Accounting over life cycle • acquisition costs (chapter 10)———asset goes into operation ———— • depreciation (chapter 11) • costs subsequent to acquisition (chapter 10) ———asset goes out of operation ———— • disposals and exchanges (chapter 10)

3. 2. Acquisition Cost • Historical cost • Components of cost • purchase price + all reasonable and necessary costs to prepare asset for intended use • land – closing costs, title search, attorney fees, preparing land for use • building – construction cost, architect fees, contract admin fees, attorney fees • equipment – freight, installation, testing, discounts • Example

4. 2a. Acquisition Cost • Self constructed assets • raw materials, labor, overhead • can never exceed price charged by outsider • Cash discounts • Materiality • Deferred payment contract • Lump sum purchase • Donated assets • Asset retirement obligation

5. 2b. Acquisition Cost • Capitalization of interest • when done • for self constructed assets (not land) • assets constructed for you • assets (inventory) constructed as discrete project • amount capitalized • avoidable interest • amount capitalized = WAE xIR • WAE are weighted by months • interest rate used • specific interest rate • weighted average rate • amount capitalized cannot exceed actual interest • interest income • example

6. 3. Costs Subsequent to Acquisition • General concepts • any cost should be capitalized if it • extends the life of the asset, or • improves the asset • Recording expenditure • can debit • fixed asset account • accumulated depreciation • can use • substitution approach • new asset approach • reduce accumulated depreciation approach

7. 3. Costs Subsequent to Acquisition • Repairs and maintenance • Additions • Improvements and replacements • Reinstallation or rearrangement • Materiality threshold

8. 4. Disposition of Fixed Assets • Sell, retire, or abandonment • accounted for same • Accounting • Update depreciation to date of disposal • Remove original cost of asset and accumulated depreciation from the books • Difference between book value of asset and proceeds recorded as gain or loss

9. 4. Disposition of Fixed Assets • Example • On Jan 2, 2013 purchase new asset:cost: $40,000, life: 5 years, no salvage, use SL • On March 29, 2017 sell asset for $9,000 DeprExp 2,000 AccumDepr 2,000 Cash 9,000 AccumDepr 34,000 Gain on Sale 3,000 Equipment 40,000

10. 5. Exchange of Nonmonetary Assets • Terms • monetary asset • represent a fixed claim to a specific number of dollars in future (e.g., cash, A/R, securities) • nonmonetary asset • value is capable of changing in number of dollars (e.g., fixed assets, inventory) • boot • money paid or received in an exchange of assets

11. 5a. Exchange of Nonmonetary Assets • Rules • General valuation rule • Cost of new asset acquired equals • FMV of asset given up plus boot paid or minus boot received • or, use FMV of asset acquired if more clearly evident

12. 5b. Exchange of Nonmonetary Assets • If exchange lacks commercial substance or FMV not determinable • cost of new asset equals • BV given up plus boot paid or minus boot received • gain not allowed to be recognized (unless boot is received – then partial recognition of gain) • commercial substance means • company expects a change in future cash flows as result of exchange • change is significant relative to FMV of assets exchanged • Examples