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Coby Harmon
University of California, Santa Barbara
Westmont College
10-1
Acquisition and CHAPTER 10
Disposition of Property,
Plant, and Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify property, plant, and 4. Describe the accounting
equipment and its related costs. treatment for costs subsequent
to acquisition.
2. Discuss the accounting
problems associated with 5. Describe the accounting
interest capitalization. treatment for the disposal of
property, plant, and equipment.
3. Explain accounting issues
related to acquiring and valuing
plant assets.
10-2
PREVIEW OF CHAPTER 10
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
10-3
Property, Plant, and LEARNING OBJECTIVE 1
Identify property, plant, and
Equipment equipment and its related costs.
10-4 LO 1
Acquisition of Property, Plant, and
Equipment (PP&E)
10-5 LO 1
Acquisition of Property, Plant, and
Equipment (PP&E)
10-6 LO 1
Acquisition of PP&E
Cost of Land
All expenditures made to acquire land and ready it for use.
Costs typically include:
(1) purchase price;
(2) closing costs, such as title to the land, attorney’s fees, and
recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) assumption of any liens, mortgages, or encumbrances on
the property; and
(5) additional land improvements that have an indefinite life.
10-7 LO 1
Acquisition of PP&E
Cost of Land
Improvements with limited lives, such as private
driveways, walks, fences, and parking lots, are recorded
as Land Improvements and depreciated.
10-8 LO 1
Acquisition of PP&E
Cost of Buildings
Includes all expenditures related directly to acquisition or
construction. Costs include:
10-9 LO 1
Acquisition of PP&E
Cost of Equipment
Include all expenditures incurred in acquiring the equipment
and preparing it for use. Costs include:
purchase price,
10-10 LO 1
Interest Costs LEARNING OBJECTIVE 2
Discuss the accounting problems
During Construction associated with interest
capitalization.
$0
Increase to Cost of Asset $?
Capitalize no Capitalize
interest during Capitalize actual all costs of
construction costs incurred during funds
construction
ILLUSTRATION 10.1
Capitalization of Interest Costs
IFRS
10-15 LO 2
Interest Costs During Construction
1. Qualifying assets.
2. Capitalization period.
3. Amount to capitalize.
10-16 LO 2
Interest Costs During Construction
Qualifying Assets
Require a substantial period of time to get them ready for
their intended use or sale.
Two types of assets:
Assets under construction for a company’s own use.
10-17 LO 2
Interest Costs During Construction
Capitalization Period
Begins when:
1. Expenditures for the assets are being incurred.
Ends when:
The asset is substantially complete and ready for use.
10-18 LO 2
Interest Costs During Construction
Amount to Capitalize
Capitalize the lesser of:
1. Actual interest cost incurred.
10-19 LO 2
Amount to Capitalize
10-20 LO 2
Weighted-Average Accumulated Expenditures
10-21 LO 2
Amount to Capitalize
Interest Rates
Selecting Appropriate Interest Rate:
1. 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.
10-22 LO 2
Amount to Capitalize
Interest Rates
Shown is the computation of a capitalization rate (weighted-
average interest rate) for debt greater than the amount incurred
specifically to finance construction of the assets.
ILLUSTRATION 10.3
10-23 LO 2
Comprehensive Example
10-24 LO 2
Comprehensive Example
10-25 LO 2
Comprehensive Example
ILLUSTRATION 10.4
Computation of Weighted-Average Accumulated Expenditures
10-26 LO 2
Comprehensive Example
ILLUSTRATION 10.5
Compute the avoidable interest. Computation of
Avoidable Interest
10-27 LO 2
Comprehensive Example
ILLUSTRATION 10.6
Computation of Actual
Interest Cost
The interest cost that Shalla capitalizes is the
lesser of $120,228 (avoidable interest) and
$239,500 (actual interest), or $120,228.
10-28 LO 2
Comprehensive Example
10-29 LO 2
Comprehensive Example
ILLUSTRATION 10.7
Capitalized Interest
Reported in the Income
Statement
ILLUSTRATION 10.8
Capitalized Interest
Disclosed in a Note
10-30 LO 2
Interest Costs During Construction
2. Interest Revenue
In general, companies should not offset interest revenue
against interest cost unless earned on specific borrowings.
10-31 LO 2
Valuation of Property, LEARNING OBJECTIVE 3
Explain accounting issues related
Plant, and Equipment to acquiring and valuing plant
assets.
10-32 LO 3
Valuation of PP&E
10-33 LO 3
Valuation of PP&E
10-34 LO 3
Exchanges of Non-Monetary Assets
ILLUSTRATION 10.10
Accounting for Exchanges
10-35 LO 3
Exchanges of Non-Monetary Assets
10-36 LO 3
Loss Situation (Has Commercial Substance)
ILLUSTRATION 10.11
Computation of Cost of
New Machine
10-37 LO 3
Loss Situation (Has Commercial Substance)
Equipment 13,000
Accumulated Depreciation—Equipment 4,000
Loss on Disposal of Equipment 2,000
Equipment 12,000
Cash 7,000
ILLUSTRATION 10.12
Loss on Computation of Loss
on Disposal of Used
Disposal Machine
10-38 LO 3
Exchanges of Non-Monetary Assets
10-39 LO 3
Gain Situation (Has Commercial Substance)
ILLUSTRATION 10.13
Computation of Semi-
Truck Cost
10-40 LO 3
Gain Situation (Has Commercial Substance)
ILLUSTRATION 10.14
Computation of Gain
Gain on on Disposal of Used
Trucks
Disposal
10-41 LO 3
Exchanges of Non-Monetary Assets
10-42 LO 3
Exchanges of Non-Monetary Assets
ILLUSTRATION 10.15
Basis of Semi-Truck—Fair Value vs. Book Value
10-43 LO 3
Exchanges of Non-Monetary Assets
Compute the total gain or loss on the transaction. This amount is equal to the
difference between the fair value of the asset given up and the book value of
the asset given up.
(a) If the exchange has commercial substance, recognize the entire gain or
loss.
(b) If the exchange lacks commercial substance, no gain or loss is
recognized.
Disclosure include
nature of the transaction(s),
method of accounting for the assets exchanged, and
gains or losses recognized on the exchanges.
10-44 LO 3
Valuation of PP&E
Government Grants
Government Grants are assistance received from a
government in the form of transfers of resources to a company
in return for past or future compliance with certain conditions
relating to the operating activities of the company.
10-45 LO 3
Government Grants
2. Credit the lab equipment for the subsidy and depreciate this
amount over the five-year period.
10-46 LO 3
Government Grants
10-47 LO 3
Government Grants
ILLUSTRATION 10.18
Government Grant Adjusted to Asset
10-48 LO 3
Government Grants
Cash 1,000,000
Grant Revenue 1,000,000
Cash 6,499,300
Notes Payable 6,499,300
10-50 LO 3
Government Grants
Cash 3,500,700
Deferred Grant Revenue 3,500,700
10-51 LO 3
Costs Subsequent LEARNING OBJECTIVE 4
Describe the accounting
to Acquisition treatment for costs subsequent to
acquisition.
10-52 LO 4
Costs Subsequent to Acquisition
10-53 LO 4
Costs Subsequent to Acquisition
ILLUSTRATION 10.21
Summary of Costs Subsequent to Acquisition of Property, Plant, and Equipment
Exchange,
Involuntary conversion, or
Abandonment.
10-55 LO 5
Disposition of PP&E
10-56 LO 5
Disposition of PP&E
Cash 7,000
Accumulated Depreciation—Machinery 11,400
Machinery 18,000
Gain on Disposal of Machinery 400
10-57 LO 5
Disposition of PP&E
Involuntary Conversion
Sometimes an asset’s service is terminated through some type of
involuntary conversion such as fire, flood, theft, or condemnation.
They treat these gains or losses like any other type of disposition.
10-58 LO 5
Disposition of PP&E
Cash 500,000
Accumulated Depreciation—Buildings 200,000
Buildings 300,000
Land 150,000
Gain on Disposal of Plant Assets 250,000
10-59 LO 5
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10-60