Lecture14 - Lecture 14 Property, Plant and Equipment (PP&E)...

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1 Lecture 14 Property, Plant and Equipment (PP&E)
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Admin Stuff • Wed. & Thur. lectures – Inventory • No office hours for me on Wednesday 2
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Review • Common-Sized Income Statement (and Balance Sheet) • Margin analysis (gross, operating, net) • Effective Tax Rate • Earnings Per Share (EPS) 3
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4 Goals of Today’s Class • Acquisition of PP&E – Purchase – Construction • Foreign Currency Translation • Depreciation • Impairment of PP&E
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5 Types of Transactions That Affect the Net Book Value of PPE • Transactions that increase (net) PPE – Acquisitions of PPE by purchase – Acquisitions of PPE by self-construction – Foreign Currency Translation Adjustments • Transactions that decrease (net) PPE – Depreciation – Disposal of PPE by sale or abandonment – Permanent impairment of value – Foreign Currency Translation Adjustments
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6 Acquisitions of PPE by purchase PP&E (+A) XXX Cash (+A) XXX The amount debited to the PP&E account includes the costs both of purchasing the item and of transporting the equipment to the firm’s facilities, installation, set-up and testing prior to normal use – i.e. the cost of the PP&E includes all costs incurred to acquire the asset and to prepare it for “normal” intended use.
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7 GENERAL JOURNAL Page 9 Date Description Debit Credit June 14 Flight equipment 60,000,000 Cash 1,000,000 Note payable 59,000,000 Acquisitions of PPE by purchase - Example On June 14, Delta Air Lines purchased aircraft for $1,000,000 cash and a $59,000,000 note payable.
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Acquisitions of PPE by self-construction With one exception, the cost of PP&E (buildings and/or equipment) acquired by self-construction is determined in exactly the same way as a cost of goods sold (i.e. it includes the cost of materials, labor and overhead used to produce the item). The exception is that for self-constructed PP&E, the cost will also include interest costs on debt outstanding during the period of construction. The amount of interest is related to the amount of the firm’s investment in the self-constructed asset. Journal Entry • PPE (asset) XXX Cash (asset) XXX Materials inventory (asset) XXX Wages payable (liability) XXX Accumulated depreciation (contra asset) XXX Interest payable (liability) XXX 8
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9 Acquisitions of PPE by self-construction - Example Instead of purchasing the aircraft, let’s assume that Delta incurred the following expenses to build an aircraft. – Used materials, cost = $40 million – Incurred wages (not paid), $10 million – Used equipment, relevant depreciation was $7 million – $1 million of utilities used in building the aircraft – Incurred $2 million in interest on a loan acquired for financing the project What should the journal entry be?
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10 Acquisitions of PPE by self-construction - Example PP&E 60 Materials inventory 40 Wages payable 10 Accumulated Depreciation 7 Utilities payable 1 Interest Payable 2
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This note was uploaded on 06/28/2009 for the course ACCT 101 taught by Professor Armstrong during the Summer '09 term at UPenn.

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Lecture14 - Lecture 14 Property, Plant and Equipment (PP&E)...

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