of Acquisition Property, Plant and Equipment
Capitalized Cost of Asset
Generally capitalize all costs necessary to acquire the asset and put in into operating condition.
Asset Basis
Recorded at historical cost. Price of the asset, plus all costs of getting it ready for use. Include A. Purchase price, or cost of construction (materials, labor and pro rata share of overhead); do not include the internal costs of intangible assets, for example Research & Development Costs B. Freight or Delivery Charges C. Costs incurred in getting asset ready for use, examples include demolishing old building so that new building may be built and installation costs for equipment. D. Training on equipment E. Fees; Attorneys Fees, Brokers Commissions, Building Permits,etc.
Asset Basis
Also include any costs incurred after acquisition, such as additions, improvements, or replacements that provide future service potential.
Property acquired through
Issuance of debt (deferred payment contracts) Issuance of stock Donation
Deferred Payment Contracts
Assets purchased on long-term contracts should be accounted for at credit
their fair value or the fair value of the liability on the date of the transaction, whichever is more reliable.
If neither is determinable, the asset should be recorded at the present value of the payments. If no interest rate is stated or if the stated rate is unreasonable, an appropriate rate should be imputed.
Property acquired through the issuance of stock.
Record the exchange at the fair value of the
asset acquired or the stock issued, whichever is more reliable.
Example
Generous Motors gives Simple Simon 300 shares of stock in exchange for an innovative new patent. The current market value of the stock is $30 per share. What journal entry should we make to record the acquisition of the patent?
Property acquired through Donation
Assets acquired through donation should be recorded at their fair values.
Example
The City of Philadelphia gives Intel a tract of land worth $20,000,000 to locate a new plant on Broad Street. What entry should Intel make to reflect this transaction?
Interest Capitalization
Assets Qualifying for Capitalization Capitalization Period Amount Capitalized
actual interest incurred avoidable interest
Assets Qualifying for Capitalization
To qualify for interest capitalization, assets must require a period of time to get them ready for their intended use. Assets that qualify for interest capitalization include
assets under construction for an enterprise's own use and assets intended for sale or lease that are constructed as discrete projects (e.g.: aircraft carrier).
Capitalization Period
Begins with first expenditure related to the asset and continues until the asset is substantially completed and ready for use.
Amount Capitalized
The amount capitalized is the lower of the
actual interest incurred or avoidable interest (interest that would have been avoided had the project not been worked on),
It does not include any amount for cost of capital on stockholders equity.
Avoidable Interest
Interest Rate * Weighted Average Amount of Accumulated Expenditures
Weighted-Average Accumulated Expenditures
1. Determine amounts and dates outlays. Any interest earned money not yet used, should ignored for our calculations. 2. Weight each outlay by fraction period "outstanding" of on be of
Interest Rate
1. Match to debt proceeds specifically incurred to finance project. 2. If Outlays > Debt specifically incurred to finance project, match with other debt outstanding. Calculate actual interest cost/total debt.
Lower of avoidable interest or actual interest incurred is capitalized. Note: Cost of asset (per books) will be affected by financing (debt vs equity).
Example
USM Corp. constructs an asset for internal use. To fund the project it borrows $400,000 at an annual rate of 12% on Jan 1, 2008. All excess funds are invested in T-Bills earning 6%. It has $5,000,000 of other outstanding at debt an average interest rate of 15%. It expenditures for construction are as follows:
Jan 1, 2008 Jan 1, 2009 250,000 250,000
Construction is completed on December 31, 2009. Prepare the journal entries to record the loan, interest income and expense, and construction of the asset during 2008 & 2009.
Exchanges of Property, Plant and Equipment
Exchanges of Property, Plant and Equipment
Transaction has commercial substance (full recognition of gains and losses) Transaction does not have commercial substance (full recognition of losses, deferral of gains) Transaction does not have commercial substance where cash (boot) is received
Cash is less than 25% of the fair value of the exchange (full recognition of losses, partial recognition of gains) Cash is greater than or equal to 25% of the fair value (full recognition of gains and losses)
Exchanges of Property, Plant and Equipment
Always recognize losses
Exchanges of Property, Plant and Equipment
Ordinarily companies account for the exchange of nonmonetary assets 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.
Commercial Substance
New asset should be recorded at the fair value of
the asset given up or the asset received, whichever is more evident.
If fair values are not determinable the new asset should be recorded at the book value of the old asset. Gains and losses on exchanges should be recognized, by comparing the book value of the asset given up with its fair value (amount received).
Example
Exchange Car + 3,000 for Boat. Book Value of car was 8,000 (cost of 12,000, less 4,000 accumulated depreciation), fair value of car was 7,000. List price of boat is 12,000. Record the exchange.
Lacks Commercial Substance
Treatment differs in that gains are not recognized. Asset received recorded at fair value less gain not recognized.
Example
Steve & Mike exchanged cars. Steve's car had a fair value of $5,000 and a book value of $3,000 (cost of 7,000, less 4,000 accumulated depreciation). Mike's car had a book value of $6,000 (cost of 8,000, less 2,000 accumulated depreciation). What entries would each make?
Lacks commercial substance but cash is received (and is less than 25% of the total value of the exchange)
Part of gain is recognized. Computed as follows:
CR/(CR+FV) * TG
Where CR=Cash Received FV=Fair Value of Assets Received TG=Total Gain
Asset received is recorded at its' fair value less gain not recognized.
Example
Steve & Mike exchanged cars. Steve's car had a fair value of $5,000 and a book value of $3,000 (cost of 7,000, less 4,000 accumulated depreciation). Mike's car had a fair value of $4,500, so he threw in cash of $500. Mike's car had a book value of $6,000 (cost of 8,000, less 2,000 accumulated depreciation). What entries would each make?
Lacks commercial substance where cash is received (and is equal to or greater than 25% of the total value of the exchange):
Recognize entire gain or loss
Example
Steve & Mike exchanged cars. Steve's car had a fair value of $5,000 and a book value of $3,000 (cost of 7,000, less 4,000 accumulated depreciation). Mike's car had a fair value of $3,000, so he thru in cash of $2,000. Mike's car had a book value of $6,000 (cost of 8,000, less 2,000 accumulated depreciation). What entries would each make?
Costs Subsequent to Acquisition
Additions Improvements and Replacements Repairs and Maintenance
Costs Subsequent to Acquisition
Costs incurred to increase the current level of service should be capitalized (additions & improvements). Costs incurred to maintain the current level of service should be expensed (repairs).
Conditions for Capitalizing Costs
1. The useful life of the asset is increased. 2. The quantity of units produced by the asset is increased. 3. The quality of units produced by the asset is increased. Only one of the three conditions must be present for costs to be capitalized.