Lecture14 - Lecture 14 Property Plant and Equipment 1 Types...

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1 Lecture 14 Property, Plant and Equipment
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2 Types of Transactions That Affect the Net Book Value of PPE Transactions that increase PPE Acquisitions of PPE by purchase Acquisitions of PPE by self-construction Acquisitions of PPE by long-term (capital) lease agreements Expenditures for improvements and betterments Foreign Currency Translation Adjustments Transactions that decrease PPE Depreciation Disposal of PPE by sale or abandonment Permanent impairment of value Foreign Currency Translation Adjustments
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3 Acquisitions of PPE by purchase PP&E XXX Cash (Liabilities) 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 to prepare it for “normal” intended use.
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4 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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5 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 a manufactured product (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 (but not for manufactured inventory) 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. PP&E Cash Materials Inventory Wages Payable Accumulated Depreciation Interest Payable PPE CCC RMI WWW DDD III
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6 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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7 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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8 Another Example for the capitalization of interest expense How much interest should the firm capitalize in 2005 related to the construction of the
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Lecture14 - Lecture 14 Property Plant and Equipment 1 Types...

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