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Acquisition andAcquisition and
Disposition of Property,Disposition of Property,Plant and EquipmentPlant and Equipment
InstructorInstructor
Adnan ShoaibAdnan Shoaib
PART II: Corporate Accounting Concepts and IssuesPART II: Corporate Accounting Concepts and Issues
Lecture 12Lecture 12
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1. Describe property, plant, and equipment.
2. Identify the costs to include in initial valuation of property, plant, and
equipment.
3. Describe the accounting problems associated with self-constructed
assets.. Describe the accounting problems associated with interest
capitali!ation.
". #nderstand 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.
Learning ObjectivesLearning Objectives
Learning ObjectivesLearning Objectives
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Acquisition
&cquisition
costs' land,
buildings,
equipment
(elf-constructed
assets
Interest costs
)bservations
!aluation"ost #ubsequent
to AcquisitionDispositions
*ash discounts
Deferred
contracts
+ump-sum
purchases
(toc issuanceonmonetary
echanges
*ontributions
)ther valuation
methods
(ale
Involuntary
conversion
/iscellaneous
problems
&dditions
Improvements
and
replacements
0earrangement
and reinstallation0epairs
(ummary
Acquisition and Disposition ofAcquisition and Disposition ofProperty, Plant, and EquipmentProperty, Plant, and Equipment
Acquisition and Disposition ofAcquisition and Disposition ofProperty, Plant, and EquipmentProperty, Plant, and Equipment
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%sed in operations and not forresale.
Long&termin nature and usually
depreciated.
4ossess p'ysical substance.
Property, plant, and equipmentare assets of a durablenature. )ther terms commonly used are plant assetsand
fi(ed assets.
Property, Plant, and EquipmentProperty, Plant, and Equipment
Property, Plant, and EquipmentProperty, Plant, and Equipment
LO 1 Describe property, plant, and equipment.
)ncludes*
+and,
5uilding structures
6offices, factories,
warehouses7, and
8quipment
6machinery, furniture,
tools7.
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istorical costmeasures the cash or cash equivalent priceof obtaining the asset and bringing it to the location and
condition necessary for its intended use.
/ain reasons for historical cost valuation' 9istorical cost is reliable.
*ompanies should not anticipate gains and losses but
should recogni!e gains and losses only when the assetis sold.
Acquisition of PP-EAcquisition of PP-E
Acquisition of PP-EAcquisition of PP-E
LO 2 Identify the costs to include in initial valuation ofproperty, plant, and equipment.
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.
Includes all costs to acquire land and ready it for use. *osts
typically include'
"ost of Land
Acquisition of PP-EAcquisition of PP-E
Acquisition of PP-EAcquisition of PP-E
LO 2
617 purchase price:627 closing costs, such as title to the land, attorney;s fees, and
recording fees:
637 costs of grading, filling, draining, and clearing:
67 assumption of any liens, mortgages, or encumbrances on
the property: and
6"7 additional land improvements that have an indefinite life.
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)mprovements 0it' limited lives, such as private
driveways, wals, fences, and paring lots, are recorded as
Land )mprovementsand depreciated.
+and acquired and held for speculation is classified
as an investment.
+and held by a real estate concern for resale should
be classified as inventory.
Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO 2 Identify the costs to include in initial valuation ofproperty, plant, and equipment.
"ost of Land
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Includes all costs related directly to acquisition or
construction. *ost typically include'
materials, labor, and overhead costs incurred duringconstruction and
professional fees and building permits.
"ost of uildings
LO 2 Identify the costs to include in initial valuation ofproperty, plant, and equipment.
Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
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3 LO 2
Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
"ost of EquipmentInclude all costs incurred in acquiring the equipment and
preparing it for use. *osts typically include'
17 purchase price,27 freight and handling charges,
37 insurance on the equipment while in transit,
7 cost of special foundations if required,"7 assembling and installation costs, and
$7 costs of conducting trial runs.
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
6a7 /oney borrowed to pay building contractor
6b7 4ayment for construction from note proceeds
6c7 *ost of land fill and clearing
6d7 Delinquent real estate taes on property
assumed
6e7 4remium on $-month insurance policy during
construction
6f7 0efund of 1-month insurance premium because
construction completed early
LO 2
)llustration*
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
6g7 &rchitect;s fee on building
6h7 *ost of real estate purchased as a plant site
6land =2>>,>>> and building =">,>>>7
6i7 *ommission fee paid to real estate agency
6?7 Installation of fences around property
67 *ost of ra!ing and removing building
6l7 4roceedsfrom salvage of demolished building
6m7 *ost of paring lots and driveways
6n7 *ost of trees and shrubbery 6permanent7
uilding
LO 2
Land
Land
Land )mprovements
Land6Land7
Land )mprovements
Land
)llustration*
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#elf&"onstructed Assets
Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
*osts typically include'
617 /aterials and direct labor
627 )verhead can be handled in two ways'
1. &ssign no fied overhead
2. &ssign a portion of all overhead to the construction
process.
*ompanies use the second method etensively.
LO 3 Describe the accounting problems associated ith self!constructed assets.
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8AAPrequires @ capitali!ing actual interest 6with
modification7.
*onsistent with historical cost.
*apitali!ation considers three items'
1. Aualifying assets.
2. *apitali!ation period.
3. &mount to capitali!e.
)nterest "osts During "onstruction
Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
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0equire a substantial period of time to get them ready for
their intended use.
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1.
"apitali
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Amount to "apitali
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)nterest "apitali11'
=">>,>>>, 1B,1>-year
bonds payable
=3>>,>>>, 1>B,"-year
note payable
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#tep 1 & Determine 0'ic' assets qualify for capitali
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
& company weights the construction ependitures by the amount of time6fraction of a year or accounting period7 that it can incur interest cost on theependiture.
#tep & "ompute 0eig'ted&average accumulatede(penditures=
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
#electing Appropriate )nterest >ate*
1. or the portion of weighted-average accumulated ependitures
that is less than or equal to any amounts borrowed specifically tofinance construction of the assets, use t'e interest rate
incurred on t'e specific borro0ings.
2. or the portion of weighted-average accumulated ependitures
that is greater than any debt incurred specifically to financeconstruction of the assets, use a 0eig'ted average of interest
rates incurred on all ot'er outstanding debt during t'e
period.
#tep $& "ompute t'e Actual and Avoidable )nterest=
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
#tep $& "ompute t'e Actual and Avoidable )nterest=
Avoidable )nterest
Eeighted-averageinterest rate ongeneral debt
Actual )nterest
=1>>,>>>
=F>>,>>>? 12=+@
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
ournal entry to "apitali,2">
Interest epense 3>,2">
#tep +B "apitali
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2$
Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
"ompre'ensive )llustration* )n ovember 1, 2>11, (halla
*ompany contracted 4feifer *onstruction *o. to construct a
building for =1,>>,>>> on land costing =1>>,>>> 6purchased
from the contractor and included in the first payment7. (halla
made the following payments to the construction company during
2>12.
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2+
Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
4feifer *onstruction completed the building, ready for occupancy,
on December 31, 2>12. (halla had the following debt outstanding
at December 31, 2>12.
*ompute weighted-average accumulated ependitures for 2>12.
(pecific *onstruction Debt
1. 1"B, 3-year note to finance purchase of land and
construction of the building, dated December 31, 2>11, withinterest payable annually on December 31
)ther Debt
2. 1>B, "-year note payable, dated December 31, 2>>F, withinterest payable annually on December 31
3. 12B, 1>-year bonds issued December 31, 2>>%, withinterest payable annually on December 31
=%">,>>>
="">,>>>
=$>>,>>>
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2.
Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
*ompute weighted-average accumulated ependitures for 2>12.
)llustration 14&$
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
)llustration 14&+
*ompute the avoidable interest.
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
*ompute the actual interest cost, which represents the maimum
amount of interest that it may capitali!e during 2>11.
)llustration 14&.
,22F
6avoidable interest7 and =23G,">> 6actual interest7, or =12>,22F.
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
(halla records the following ?ournal entries during 2>12'
anuary 1 +and 1>>,>>>
5uildings 6or *I47 11>,>>>
*ash 21>,>>>
Carc' 1 5uildings 3>>,>>>*ash 3>>,>>>
Cay 1 5uildings ">,>>>
*ash ">,>>>
December 1 5uildings ">,>>>
*ash ">,>>>
uildings 6"apitali
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
&t December 31, 2>12, (halla discloses the amount of interest
capitali!ed either as part of the income statement or in the notes
accompanying the financial statements.
)llustration 14&/
)llustration 14&
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Acquisition of PP-EAcquisition of PP-EAcquisition of PP-EAcquisition of PP-E
LO " Describe the accounting problems associated ith interest capitali#ation.
#pecial )ssues >elated to )nterest "apitali
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*ompanies should record property, plant, and equipment'
at the fair value of what they give up or
at the fair value of the asset received,
whichever is more clearly evident.
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
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"as' Discounts@ Discount for prompt payment.
Deferred&Payment "ontracts@ &ssets, purchased through
long term credit, are recorded at the present value of the
consideration echanged.
Lumpum Purc'ases@ &llocate the total cost among the
various assets on the basis of their fair maret values.
)ssuance of #toc@
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!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
)rdinarily accounted for on the basis of'
the fair value of the asset given up or
the fair value of the asset received,
whichever is clearly more evident.
E(c'anges of 5onmonetary Assets
*ompanies should recogni!e immediately any gains or losses
on the echange when the transaction has commercial
substance.
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+
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
Ceaning of "ommercial #ubstance8change has commercial substanceif the future cash flows
change as a result of the transaction.
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.
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
*ompanies recogni!e a loss immediatelywhether the echange
has commercial substance or not.
>ationale**ompanies should not value assets at more than theircash equivalent price: if the loss were deferred, assets would be
overstated.
E(c'anges & Loss #ituation
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!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
)llustration* Information 4rocessing, Inc. trades its used machine for anew model at Cerrod 5usiness (olutions Inc. >
6original cost =12,>>> less =,>>> accumulated depreciation7 and a fair
value of =$,>>>. >>. Cerrod gives
Information 4rocessing a trade-in allowance of =G,>>> for the usedmachine. Information 4rocessing computes the cost of the new asset
as follows.
)llustration 14&11
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8quipment 13,>>>
&ccumulated Depreciation@8quipment ,>>>
+oss on Disposal of 8quipment 2,>>>
8quipment 12,>>>
*ash %,>>>
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
)llustration* Information 4rocessing records this transaction asfollows'
)llustration 14&12
Loss on
Disposal
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3
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
E(c'anges & 8ain #ituationas "ommercial #ubstance= *ompany usually records the
cost of a nonmonetary asset acquired in echange for
another nonmonetary asset at the fair value of t'e asset
given up, and immediately recogni!es a gain.
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$4
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
)llustration* Interstate > 6cost =$,>>> less =22,>>>
accumulated depreciation7. Interstate;s purchasing agent,
eperienced in the second-hand maret, indicates that the used
trucs have a fair maret value of =G,>>>. In addition to the trucs,Interstate must pay =11,>>> cash for the semi-truc. Interstate
computes the cost of the semi-truc as follows.
)llustration 14&1
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$1
(emi-truc $>,>>>
&ccumulated Depreciation@>>
>>
ain on disposal of #sed >>
*ash 11,>>>
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
)llustration* Interstate records the echange transaction as follows'
)llustration 14&1$
8ain on
Disposal
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$2
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
E(c'anges & 8ain #ituationLacs "ommercial #ubstance5o "as' >eceived=ow
assume that Interstate >
and reduces the basis of the semi-truc.
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$
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$$
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
E(c'anges & 8ain #ituationLacs "ommercial #ubstance#ome "as' >eceived=
Ehen a company receives cash 6sometimes referred to as
boot7 in an echange that lacs commercial substance, it
may immediately recogni!e a portion of the gain.
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$+
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
)llustration* Aueenan *orporation traded in used machinerywith a boo value of =$>,>>> 6cost =11>,>>> less accumulated
depreciation =">,>>>7 and a fair value of =1>>,>>>. It receives in
echange a machine with a fair value of =G>,>>> plus cash of
=1>,>>>.
)llustration 14&1/
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$.
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
)llustration 14&1
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!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
Aueenan would record the following entry.)llustration 14&13
*ash 1>,>>>
/achine ",>>>
&ccumulated Depreciation@/achine ">,>>>
/achine 11>,>>>
ain on disposal of machine ,>>>
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$
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
#ummary of 8ain and Loss >ecognitionon E(c'anges of 5on&Conetary Assets)llustration 14&24
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$3
)llustration*(antana *ompany echanged equipment used in itsmanufacturing operations plus =2,>>> in cash for similar equipment
used in the operations of Delaware *ompany.
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+4
"alculation of 8ain or Loss
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
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+1
as "ommercial #ubstance
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
#antana*
8quipment 1",">>
&ccumulated depreciation 1G,>>>
*ash 2,>>>
8quipment 2F,>>>ain on echange ,">>
Dela0are*
*ash 2,>>>
8quipment 13,">>&ccumulated depreciation 1>,>>>
+oss on echange 2,">>
8quipment 2F,>>>
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
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+2 LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
#antana 6as "ommercial #ubstance7*8quipment 1",">>
&ccumulated depreciation 1G,>>>
*ash 2,>>>
8quipment 2F,>>>
ain on disposal of equipment ,">>
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
#antana 6LA"F#"ommercial #ubstance7*
8quipment 61",">> J ,">>7 11,>>>&ccumulated depreciation 1G,>>>
*ash 2,>>>
8quipment 2F,>>>
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+ LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
Dela0are 6as "ommercial #ubstance7*
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
Dela0are 6LA"F#"ommercial #ubstance7*
*ash 2,>>>
8quipment 13,">>
&ccumulated depreciation 1>,>>>
+oss on disposal of equipment 2,">>
8quipment 2F,>>>
*ash 2,>>>
8quipment 13,">>
&ccumulated depreciation 1>,>>>
+oss on disposal of equipment 2,">>
8quipment 2F,>>>
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+$
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $ %nderstand accounting issues related to acquiring and valuing plant assets.
*ompanies should use'
the fair value of the asset to establish its value on the
boos and
should recogni!e contributions received as revenues
in the period received.
Accounting for "ontributions
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++
!aluation of PP-E!aluation of PP-E!aluation of PP-E!aluation of PP-E
LO $
Ehen a company contributes a non&monetary asset, it should
record the amount of the donation as an epense at the fair
value of the donated asset.
)llustration* Kline Industries donates land to the city of +os
&ngeles for a city par. ,>>> and has a fair
value of =11>,>>>. Kline Industries records this donation as
follows.
*ontribution 8pense 11>,>>>
+and F>,>>>
ain on Disposal of +and 3>,>>>
"ontributions
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+.
"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition
LO & Describe the accounting treatment for costs subsequent to acquisition.
0ecogni!e costs subsequent to acquisitionas an assetwhen the costs can be
measured reliablyand
it is probable that the company will obtain future
economic benefits.
Guture economic benefitwould include increases in
1. useful life,
2. quantity of product produced, and
3. quality of product produced.
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+/
"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition
LO &
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+
"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition"osts #ubsequent to Acquisition
LO & Describe the accounting treatment for costs subsequent to acquisition.
#ummary)llustration 14&21
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+3
Disposition of PP-EDisposition of PP-EDisposition of PP-EDisposition of PP-E
LO ' Describe the accounting treatment for thedisposal of property, plant, and equipment.
& company may retire plant assets voluntarily or dispose ofthem by
(ale.
involuntary conversion.
Depreciation must be taen up to the date of disposition.
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.4
Disposition of PP-EDisposition of PP-EDisposition of PP-EDisposition of PP-E
)llustration*)ttawa *orporation owns machinery that cost
=2>,>>> when purchased on Culy 1, 2>>G. Depreciation has been
recorded at a rate of =2,>> per year, resulting in a balance in
accumulated depreciation of =F,>> at December 31, 2>12. 13, for =1>,">>.
4repare ?ournal entries to
a7 update depreciation for 2>13 and
b7 record the sale.
LO ' Describe the accounting treatment for thedisposal of property, plant, and equipment.
#ale of Plant Assets
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.1
a7 Depreciation for 241
Depreciation epense 6=2,>> FL127 1,$>>
&ccumulated depreciation 1,$>>
b7 >ecord t'e sale
*ash 1>,">>
&ccumulated depreciation 1>,>>>
/achinery 2>,>>>
ain on sale ">>
Disposition of PP-EDisposition of PP-EDisposition of PP-EDisposition of PP-E
HH=F,>> M =1,$>> N =1>,>>>=F,>> M =1,$>> N =1>,>>>
HH
LO ' Describe the accounting treatment for thedisposal of property, plant, and equipment.
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.2
(ometimes an asset;s service is terminated through some type
of involuntary conversionsuch as fire, flood, theft, or
condemnation.
*ompanies report the difference between the amount
recovered 6e.g., from a condemnation award or insurance
recovery7, if any, and the asset;s boo value as a gain or loss.
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End of Lecture 12End of Lecture 12End of Lecture 12End of Lecture 12