pptchapter10 - Acquisition and Disposition of Property,...

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1 Bob Anderson, UCSB CHAPTER 10-1 10 CHAPTER Acquisition and Disposition of Property, Plant, and Equipment Bob Anderson, UCSB Chapter 10-2 4 Property, Plant, and Equipment (Fixed Asset or Plant Asset) Historical cost principle Includes any “normal” or “routine” expenditure to get an asset in place and functioning. Noncurrent Asset! Property, Plant and Equipment Bob Anderson, UCSB Chapter 10-3 FUNDAMENTALS: Whether you buy it, build it, plan to keep it and operate it or plan to sell it: Capitalize all costs necessary to make the asset ready for its intended use Anything you get back is a reduction Capitalize indirect costs if you can make the link to the asset Capitalize costs associated with owning it during the construction period= interest and property taxes Never on books for more than its recoverable value. Generally record at the fair value of what you give up. Remember that if payment occurs over time, fair value=present value! Subsequent costs only capitalized if they generate additional future benefit.- otherwise expense as repairs & maintenance. Bob Anderson, UCSB Chapter 10-4 Cost of Land: Again, usual and routine costs to get the land fit for use: Purchase price, closing, attorney’s fees. Cost to demolish existing structure, cleanup. Proceeds from salvage are an offset to the cost. Cost to grade land. Assumption of current mortgage, debts. Land improvements with an indefinite life. Land improvements with separate lives depreciated separately. Land itself is NOT depreciable Special public assessments (sidewalks, etc.) included. Land held for speculation is classified as an investment. Property, Plant and Equipment
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2 Bob Anderson, UCSB Chapter 10-5 Cost of Buildings: Outflows for cost of buildings or cost of construction. Same rule as before applies: anything to get an asset in place and functioning is part of the cost of the building. Cost of Equipment: Machinery, office equipment, furniture and fixtures. Historical cost = Purchase price + costs to put into service Property, Plant and Equipment Bob Anderson, UCSB Chapter 10-6 Property, Plant, and Equipment: Land $ xxx Land improvements xxx Building xxx Machinery xxx Equipment xxx Furniture xxx Construction in progress xxx Less: Accumulated depreciation (xxx) Total property, plant, and equipment $ xxx Balance Sheet Presentation Bob Anderson, UCSB Chapter 10-7 10 Interest and property taxes are capitalized during construction. INTEREST CAPITALIZATION DETERMINED: Capitalization Period: Begins when: Expenditures for asset are made. Activities for construction have ensued. Interest cost has been incurred. Ends when one of the three above is not present. Amount to capitalize: Limited to actual amount incurred or avoidable interest whichever is less. DOES NOT REQUIRE SPECIFIC BORROWINGS Avoidable interest = weighted average rate (or specific rate if present) times weighted average expenditures.
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pptchapter10 - Acquisition and Disposition of Property,...

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