Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 10 Acquisition and Disposition of Property, Plant, and Equipment This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Identify property, plant, and equipment and its related costs Discuss the accounting problems associated with interest capitalization Explain the 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 Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 10 Acquisition and Disposition of Property, Plant, and Equipment Property, Plant, and Equipment • Acquisition of property, plant, and equipment • Cost of land • Cost of buildings • Cost of equipment Self-constructed assets Copyright â2019 John Wiley & Sons, Inc Preview of Chapter 10 Interest Costs During Construction • Qualifying assets • Capitalization period • Amount to capitalize • Example • Special issues • Observations Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 10 Valuation of Property, Plant, and Equipment • Cash discounts • Deferred-payment contracts • Lump-sum purchases • Issuance of stock • Exchanges of nonmonetary assets • Other valuation methods Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 10 Costs Subsequent to Acquisition • Additions • Improvements and replacements • Rearrangement and reinstallation • Repairs • Summary Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 10 Disposition of Property, Plant, and Equipment • Sale of plant assets Involuntary conversion Miscellaneous problems Copyright â2019 John Wiley & Sons, Inc Learning Objective Understand Property, Plant, and Equipment and Its Related Costs LO Copyright ©2019 John Wiley & Sons, Inc Property, Plant, and Equipment Property, plant, and equipment are assets of a durable nature Other terms commonly used are plant assets and fixed assets • Used in operations and not for resale • Long-term in nature and usually depreciated • Possess physical substance Includes land, building structures (offices, factories, warehouses), and equipment (machinery, furniture, tools) LO Copyright ©2019 John Wiley & Sons, Inc Property, Plant, and Equipment Acquisition of Property, Plant, and Equipment Historical 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 Main reasons for historical cost valuation: • Historical cost is reliable • Companies should not anticipate gains and losses but should recognize gains and losses only when asset is sold LO Copyright ©2019 John Wiley & Sons, Inc 10 Learning Objective Describe the Accounting Treatment for the Disposal of Property, Plant, and Equipment LO Copyright ©2019 John Wiley & Sons, Inc 69 Disposition of Property, Plant, and Equipment (PP&E) A company may retire plant assets voluntarily or dispose of them by • Sale, • Exchange, • Involuntary conversion, or • Abandonment Depreciation must be taken up to the date of disposition Copyright ©2019 John Wiley & Sons, Inc 70 Disposition of PP&E Sale of Plant Assets Illustration: Barret Company recorded depreciation on a machine costing $18,000 for 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: Equipment ($1,200 x ½) 600 Accumulated Depreciation 600 Copyright ©2019 John Wiley & Sons, Inc 71 Sale of Plant Assets Journal Entry Illustration: Barret Company recorded depreciation on a machine costing $18,000 for 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 7,000 Accumulated Depreciation 11,400 Machinery 18,000 Gain on Disposal of Machinery 400 Copyright ©2019 John Wiley & Sons, Inc 72 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 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 Copyright ©2019 John Wiley & Sons, Inc 73 Involuntary Conversion Illustration: 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 500,000 Accumulated Depreciation—Plant Assets 200,000 Plant Assets 400,000 Gain on Disposal of Plant Assets 300,000 Copyright ©2019 John Wiley & Sons, Inc 74 Learning Objective Describe the Accounting for Contributions LO Copyright ©2019 John Wiley & Sons, Inc 75 Appendix 10A: Accounting for Contributions Companies should use: LO • the fair value of the asset to establish its value on the books and • should recognize contributions received as revenues in the period received Copyright ©2019 John Wiley & Sons, Inc 76 Accounting for Contributions Contributions are either unconditional or conditional The criteria for evaluating whether contributions are unconditional (and thus recognized immediately in income) or conditional (for which income recognition is deferred) depend on the terms of the gift or grant agreement The focus is whether a gift or grant agreement has the following terms LO Copyright ©2019 John Wiley & Sons, Inc 77 Accounting for Contributions Terms Specifies a “barrier or hurdle” that the recipient must overcome to be entitled to the resources A barrier is the inclusion of a measurable performance requirement such as degree of completion or specific output or outcome Releases the donor from its obligation to transfer resources (or if assets are advanced, a right to demand their return) if the barrier or hurdle is not achieved by the recipient LO Copyright ©2019 John Wiley & Sons, Inc 78 Conditional Contribution Facts State Insurance Company agrees to contribute $1,000,000 to DV to provide specific career training to disabled veterans The contribution requires DV to provide training to at least 8,000 disabled veterans during the next fiscal year, with specified minimum targets that must be met each quarter State Insurance Company requires a right of release stipulation from the obligation in that it will only give DV $250,000 each quarter if DV demonstrates that those services have been provided to at least 2,000 disabled veterans during the quarter State Insurance makes the payments at the end of each quarter LO Copyright ©2019 John Wiley & Sons, Inc 79 Conditional Contribution Journal Entries Assuming the first quarter milestone is met, State Insurance Company would make the following entry Contribution Expense 250,000 Land 250,000 DV would also make an entry in the first quarter as follows Cash 250,000 Contribution Revenue LO 250,000 Copyright ©2019 John Wiley & Sons, Inc 80 Unconditional Contribution Journal Entries If the arrangement between State Insurance and DV is such that the contribution is unconditional, the entries are as follows at the time of the agreement State Insurance Company: Contribution Expense 1,000,000 Accounts Payable (DV) 1,000,000 DV: Accounts Receivable 1,000,000 Contribution Revenue LO 1,000,000 Copyright ©2019 John Wiley & Sons, Inc 81 Exchange Transactions If both the recipient and the resource provider agree on the amount of assets transferred in goods or services—which are essentially of the same value? In this case, the gift or grant is no longer considered a contribution for accounting purposes but is accounted for as an exchange The accounting for this transaction would follow the normal rules for exchanges using the revenue recognition guidelines discussed in Chapters and 18 LO Copyright ©2019 John Wiley & Sons, Inc 82 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Copyright ©2019 John Wiley & Sons, Inc 83 ... related costs Discuss the accounting problems associated with interest capitalization Explain the accounting issues related to acquiring and valuing plant assets Describe the accounting treatment... $650,000 = $100,000 $250,000 A 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 LO... depreciated LO • 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 Copyright ©2019 John Wiley