Chapter 10

Chapter 10 - CHAPTER 10 - ACQUISITION AND DISPOSAL OF...

Info iconThis preview shows pages 1–23. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 10
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 12
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 14
Background image of page 15

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 16
Background image of page 17

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 18
Background image of page 19

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 20
Background image of page 21

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 22
Background image of page 23
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT 1 . Acquisition 2. Valuation 3.Exchanges of Nonmonetary Assets 4.Cost Subsequent to Acquisition \ ,. 2 i r c 3*. ‘ .z 4’“ J A if.“ “Tiff: S‘f’E'ifi ‘ @2535??? ifiigéfl'li’ :3 “if ta ‘~ «M: *M i s l, = 159* r ' I 1 . Acquisition l _ Property, plant and equipment (PPE) includes land buildings, and equipment (machinery, furniture, tools) Major characteristics include: 3 “Used in operations" and not for resale. Loud pea; , in“ In"? 51': —. ,. r: A7.” I? Wife)“ r g a yr” Long—term in nature and usually depreciategii 7‘." n ‘ ‘ a: g91"¢“'“£’ ~« . Possess physical substance. r g Acquisition and Valuation of PPE Valued at flstorical Cost, reasons include: 0 At acquisition, cost reflects fair value. 0 Historical cost is reliable. 0 Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold. / ._._-—- APB Opinion No. 6 states, “property, plant and equipment should not be written up to reflect appraisal, market, or current values, which are above cost. if c'.‘ ‘97"5‘M 5,; <‘z .' ,. m a, :4 : 'i a . - x H ‘ , AC.) i f: i" CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT Vim roof; :A‘VMvflrirg w ‘r‘ COST 0f LGNd " ma? giggiargmflfreci {gypsy-fr Mfg; Includes all cosTs To acquire land, and ready iT for use. V CosTs Typically include: “220 mu, {was-s53, o The purchase price: 0 closing cosTs, such as TiTle To The land, aTTorney's fees, and recording fees: / o cosTs of grading, filling, draining, and clearing; W o assumpTion of any liens, morTgages, or encumbrances on The properTy: and o AddiTional land improvemenTs ThaT have an indefiniTe life. Lard WEDVE WEE/iii” m .2: r \ l ’ "- E .. w, T l, - ‘J W 1 x .4“ 3-; 5‘ fi‘ 5". '7" \2- LL; I f W if; (I (“A M . K. Jr‘i'} 5 a! 6051' of Bunldmgs 1 Includes all cosTs relaTed direchy To acquisiTion or consTrucTion. CosT Typically include: - maTerials, labor, and overhead cosTs incurred during consTrucTion and 0 professional fees and building permiTs. o ExcavaTion cosTs. o If you purchase land wiTh an old building, The demoiiTion cosT (less salvage value) is a cosT of The l_g:i_n_c_i1 6051‘ of EquipmenT . Include all cosTs incurred in acquiring The equipmenT and preparing ii" for use. CosTs Typically include: 0 purchase price, 0 TreighT and handling chargest 0 insurance on The equipmenT‘while in TransiT, 0 COST of special foundaTions if required, CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT 0 assembling and installation costs, and 0 costs of conducting trial runs. Self Constructed Assets memamd. GM} m gig 0 Costs typically include: ‘ 0 Materials and direct labor - .Qvernhead can be handled in two ways: . ./ "“'“““""".““ . Lift-i 5‘ ’i o Ass:gn no fixed overhead iiti 3‘“: Hafiz-“115s: j . . . v6 Assign a portion of all overhead to the construction process. Companies use the second method extensively. Total cosf should not exceed market value. — limits QVQM—“fi’flfi Interest Costs Qgflng Construction 0 GAAP requires: capitalizing actual interest (with modification). Oddii’i‘a tO eases aces: o Consistent with historical cost -- all costs incurred to bring the asset to the condition for its intended use. - Capitalization considers three items: qualifying assets, capitalization period, and amount to capitalize. 0”“ iT i315. pcj . LiQLi » Li "’ ‘ i CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT Acquisi'l'ion Costs - Problem The following expenditures and receipfs are rela'l'ed 'l'o proper'l'y acquired for use in a business enterprise. The receip’rs are in paren’rheses. Purchase of land b) Fees for search of Ti’rle for land d) Buildin permi’r g e Temorar uar‘lers for consl'rucflon crew ' $270,000 4,800 500 4,000 11,200 f“ D 3 Q. U) l: ‘1 3% ‘< VET” $2 Pa men’r of deEinuen’r roer‘r Taxes on urchased land 41,000 38,000 13,000 uh I... . 1c"; :- - \_ Razin of exisfin buildin on land Excava’rion cosTs for new buildin ecial assessmen’r 'l'ax for sheer Costs of construction .5 2,640,000 Proceeds from salvae of demolished buildin L, (12,500) In'l'eres'r paid during construction on money borrowed for consTrucTion & 150,000 n COST of parkin IoTs and drivewa 5 (,3 55,000 ) 6051' of Trees and shrubbery plan'l'ed (assume n01" ermanem) wry-enmiwi‘s’ wows 36,000 Insurance durin cons?ruc1‘ion eriod 18,000 De’rermine The ToTal‘ cos? of land (L), land improvemen‘rs (LI), and buildings (B). ,— Land CHAPTER 10 — ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT or aT The currenT markeT value of The noTe, whichever value _ is more clearly deTerminable o If There is no esTablished price for The properTy, goods, or services and no sTaTed inTeresT raTe on The conTracT (or The sTaTed raTe is unreasonable), you musT impuTe an inTeresT raTe. Example of an hiresT Bearing NoTe _ . On January 1, 2006, The Apple Co. buys land for fuTure developmenT, and pays for The land wiTh cash of $25,000 and a noTe payable of $125,000. The noTe payable bears inTeresT GT 8% payable semi-annually. The noTe is due in one year. F3255 «am-W V ‘ W Lewd To v "Jay-r ‘ l “"5 z“ 3.: ; Coda-gm r 1, / %O/OLo infli-fiigfi‘ {disparage 5:000 ‘ 5‘ CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT 2. ValuaTion Generally - Companies should record properTy, planT and equipmenT: - (IT The fair value of whaT They give up or - aT The fair value of The asseT received, - whichever is more clearly evidenT. Special issues: Cash DiscounTs — wheTher Taken or noT --— generally considered a reducTion in The cosT of The asseT. m??? Deferred—PaymenT ConTracTs —- AsseTs, purchase-"cl= long Term crediT, are recorded aT The W of The consideraTion exchanged. ' Lump-Sum Purchases -- AllocaTe The ToTal cosT among The various asseTs on The basis of Their fair markeT values. Issuance of STock — The markeT value of The sTock issued is a fair indicaTion of The cosT of The properTy acquired. Deferred PaymenT 'ConTracTs o PlanT asseTs are purchased frequenle on long—Term conTracTs Through The use of noTes, morTgages, bonds. (Same as our noTes receivable work performed ~ only a payable, insTead of a receivable). o If inTeresT is charged, recognized as expense when incurred o If no inTeresT is charged, The noTe, sales price, and cosT of The properTy, goods, or services exchanged for The noTe should be recorded aT The fair markeT value of The asseTs CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT , 3 mg CW1 mam} +14%, iii'i‘ij‘éiai" { Example of Nah-Interest Begging _‘No'i;__em(Ins1'allmenfs) Assume on January 1, 2010, The SuTTer Company paid $20,000 cash down paymenT and issued a $100,000, 4—year, zer'o inTeresT-bear‘ing noTe To Wrigley, Inc. for- The purchase of new gym. The prevailing markeT r'a’re of in’rer'es’r is 8%. Su’r‘rer is To pay off The noTe in four- $25,000 ins’rallmen’rs made aT The end of each year (on December 315T). I r ' a 2 216 000 A :2 @Qiggg} ‘31 “‘3 ma; \OQd (Dis I a I, ‘1.) _ a ‘ a I ‘ ‘ :7 {‘1 meme: Pig get? (7! 1517 fig:qu PVOA x“: i U S. go 56: r“, E053 wave, A 91;: 1 Etbuip 2: Cage A» @0900 + Degas - W Iw’i-eetig—TT QmSH-flfiflun M PT? if}; \QiBI/is Lplbaur aiaiiu 335;; {3 '5; “EM 53:53»; again; 3:; VII?!“ %}§mw ’3’: {Emu "” g: v33 \ mm m I P \,%E’7i s J >%\iecw'\g Jauf'mwi mania N]? 951000 1 ‘fl‘éfl ’ 7 M'flfi gg £03 L5V“13?-PJ"-«-"’T¥ffl;“f" a}? 2 EM? bywd i CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT CHAPTER 10 — ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT AddiTional Problem Example of a Non—InTeresT Bearing NoTe (one paymenT) Assume an asseT is purchased on January 1, 2010 in exchange for a $10,000 zero—inTeresT-bearing noTe payable due 4 years from now. The markeT inTeresT raTe is 12%. Record The purchase of The equipmenT, amorTizaTion of The discounT and The maTuriTy of The noTe. SoluTion: F“: $10,000, n=4, 3:12:70 P = 10,000(Table 6—2, n=4, max.) = 10,000(0.63552) = 6,355 Jan 1/10 - Record equipmenT purchase and NoTes Payable (N/P) Dr. EquipmenT ' 6,355 Dr. DiscounT on N/P 3,645 iii-[feast ,,A,m9t?¥i‘%9téensnd " W m WWW“ W ? w a, . Des. erest exp? _ ism: 'Wwfffffwff7ffcéflHEéfii§hitib"I ,,0:Wfi '..:'::::”"::::w “W ” 7 854 . . 1,071? CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERW PLANT AND EQUIPMENT Lump Sum Purchase 0 A number of asseTs acquired for one lump sum. The ToTal purchase price is allocaTed among The individual asseTs, excepT when parT of The purchase price can be clearly idenTified wiTh a Specific asseT. 0 Because some asseTs may be depreciable or amorTizable and oTher aSSeTs may noT, iT is imporTanT To do The besT job possible in allocaTing The Example Jimbo CorporaTion acquired land, building and invenTory wiTh a ToTal appraised value of $400,000 for $§0m9,000. The only addiTional cosT of The purchase was The appraisalfee, which was $20,000. The deTail of The appraised value is: MMWMUIWZM. Qgégc, Land l Tfifid _- 1.,- Building 24o,ooo - issfiaInvenTory 48 000 ToTal 400 000 HQQOO thgoaaoer" : “121's $2135;- 3» "33-30; 10 CHAPTER 10 — ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT AcquisiTion by Issuing Securi‘l‘ies _ A company may acquire cerTain properTy by issuing iTs own bonds or sTocks. When a markeT value for The securiTies can be deTermined, ThaT value is assigned To The asseT; in The absence of o markeT value for The securiTies, The fair markeT value of The asseT acquired'would be used. 0 Assume a company issues 2,000 shares of $1 parnyalufle WWW common sTock in acquiring land, and The sToWEk has a currenT Price of $50 Per shares-WP“?! Priiiia ‘i-Pv’iiig WWW... Com mo l”: STg: iv: QOGQ \ ’ z _ f if? . “ A,- ,-~ - “T/‘Px‘, ‘M‘ ' ...' .. rum .»- :ss? -‘..~‘.,‘”";‘ 3 0 WhoT if The value of The sTock is 1101' known, buT The land has a FMV of $90,000? Lama {Llfifififi 1' AH W xv. ..x-. A,“ {EMTVIfiifiJ «(d 3;; LIL“ 1,231? 3;“); a y, u m, {x 2- " é ‘ ‘K'I\.,.=‘ _.g§g‘;>:| gm: 33‘; V. -, 11 CHAPTER 10 - ACQUISITION AND DISPOSAL OF 7 PROPERTY PLANT AND EQUIPMENT 3.Exchanges of NonmoneTary AsseTs Exchanges are ordinarily accounTed for on The basis of: o The fair value of The asseT given up or o The fair value of The asseT received, whichever is clearly more evidenT. 1“!“va i J \ A ‘1 ell—55(5).“ x'n , ‘A ' - a": J A“; :‘ . ,g/ axe-m .0 if: no" nxzesiis'iizasgwif i.- 5T’i it???” i “M V in” Lmi» "-‘..rj"‘-’ “Var 3;, “4: w , a 5 “ ,5 ' A. K V T" KM V“: m EM.ng , : i “:3 Commercial subsTance means fuTure cash flows change as a“ resulT of The TransacTion. No commercial subsTance means ThaT fuTure cash flows do noT change (e.g. Trade a red Truck for a blue Truck). subsTance immediaTel Exchange lgglg commercial subsTance - no cash received recognize losses immediaTel Exchange [g_c_k_s commercial Recognize parTiol gain: subsTance - cash received recognize losses immediaTely < 25% of TransacTion* Exchange lggjgg commercial subsTance - cash paid < 25% of TransacTion* Exchange lgglg commercial subsTance - cash received or cash paid 2 25% of TransacTion* Defer (do noT recognize) gain: recognize losses immediaTely Recognize gains and losses immediaTely *TransacTion = FMV of all asseTs received (including cash) / 2"} 3r figgé"? W3 ‘ o? ML: sir am ' if s ‘ 12 M A um»- l CA3 ., 7 CHAPTER 10 — ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT Exchanges — Loss 5iTuaTions Companies WEE immediaTely wheTher The exchange R has commercial subsTance or noT. 3 53¢”, P, "- RaTionale: Companies should noT valuemawsseTs aT more Than Their cash equivalenT price: if The loss were deferred, asseTs would be oversTaTed. General NoTes on Exchanges and dcbrl‘ (steal gap, 0 Always Take The old asseT and all relaTed accumulaTed depreciaTion off The books 0 Any cash received in The exchange is referred To as “booT” . LlS'l' price is NOT FMZM O IllusTraTion 10—20 onwpage 505 is a good summary of The exchange rules (regarding recogniTion of gain or loss) - know These rules 0 A general rule of Thumb for deTermining The book value of The new asseT is: 6 Fair Value of Old AsseT + [ Cash Paid OR - Cash Rec'd] - Deferred Gain 0 ToTal Gain or Loss : Fair Value of Old AsseT less Book Value of Old AsseT 13 CHAPTER 10 — ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT Exchanges with Commercial Substance 0 Record all gains 0 GAAP considers the earnings process is complete if the assets are dissimilar 0 Record new asset at 8 Fair Market Value (FMV) of new asset, or 0 FMV of old asset O Whichever is more clearly determinable (or for class problems, whichever is given). 0 If cash is paid, record new asset at FMV of old asset plus cash paid. Cash is only paid to equalize the fair values of the assets exchanged. Therefore, if you give up an asset and cash, the fair value of the old asset plus the cash wili always equal the fair value of the new asset. This holds true for exchanges with no commercial substance as well. Example: Commercial Substance - No Cash Involved KLCO swaps a computer for a copier at TA Inc. The facts of the case are: TA $8,000 3,500 5,000 A/D 4,000 4,500 Gain <Loss> 4,000) 1500 C; any fix} /[\ Wili ' ; fiev' Lid. * en‘s 1:1,:- W Requnred vlL ig3§2_riwegs.;g,g f r a; Record this swap for both companies. 14 CHAPTER 10 — ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT Le“ fl ‘ . . MK..me Peat. Dan LLOGQ ‘ a” "a w“ (“Ex-31 9"} ' “fl Q? 2 2:? Val”; 3i a v» rm COO-fir ggbuipwkamfi ang . . a ‘3? q } I” r E‘f‘fij‘im a» % W ‘ a ; ~ J “a - a v w— I v.4»: .5? “f 5” £55.33; 5., A 1 5 -- “in; f M; em a» my 1-»: #2 xx ‘~ 3,9115) Compmaw q 5 00 R5: Cap'aflw ig‘jasigfiééifité“ 8; OO .59“, . fl : ' {f . I 1' § n h 7‘». ‘ . 1r" .="n _r , w V" r’ a, a -E § F3 E Efiflré‘f 2 s ti “3% w ¥ "' " ‘ ’ V 15 CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT Exchange with No Commercial Substance #fifggwflwg fliiewfimim: i O No cash (boot) - No gain recognized M 0 If a gain — Record new asset at book value (BV) of old asset. 0 Cash received (boot) less than 25% of the value of them ‘zwwurmwwymma EMA; manure-:2: - transaction. Mo mush «- m {jam O Gain partially recognized it cash is RECEIVED. (Qiyfih 5W” O No gain recognized if cash is PAID. 0 Cash received (boot) 25% or more of the value of the Fig" 7 i Transom“. a» me i O Recognize all gains and losses (both parties). ‘ JUST LIKE EXCHANGES OF ASSETS WITH COMMERCIAL SUBSTANCE! Nu grim Example - No Commercial Substance, Nod/Cash involved 0 The Heavy Equipment Co. exchanged equipment costing $400,000 with related accumulated depreciation of $200,000 for equipment owned by Jacobs Corp. The Jacobs' equipment cost $420,000 with accumulated depreciation of $250,000. The fair value of both pieces of equipment was $300,000. 0 Provide the necessary entries to record the transactions for both companies' books assuming the assets exchanged are similar. 3'3 _ ,_,,,+:l'_? x...~.:\ 1 gt»; 1 mg}; 50%? Lifljaf) 4,3433 ail-“l ,fiQ‘Q a, my i .. I Qadidw a «A, w £200;ch aflofiggj 500,000 8-00 F W" 16 030; m fi may, “JCS *1??ij ii: ’3'“) 1 31"“l'3 CC" K30 1’“? 3 CC? filifiéj“ 93’; {2;} agifl. ué‘f icosiawile‘vv CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT A , " 15:05 De p QLX) 3% Ech :9 mam? iii-flaw} g < Eggs 5;)?“AQMW LTOOg GOG WW” arracé mm 17 CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT abme/ gain j / NC: @figm Example - No Commercial SubsTance, Cash involved < 25% FosTer Co. exchanges equipmenT wiTh Griffin, Inc. The equipmenT is similar and will be used by each company in The same line of business as The old equipmenT. The amounTs involved in The case are: '- 3; l (is: "T — 96013101 i zed Q33“ : t 51000 Cash 000 _ 5,000 _ $0000 “W “I. 1 I” IF H ‘- , ,, .0 x :3 » ng Book Value 15,000 18,000 was» a 500:0: E]: a.) u {j 0+ Am: a} ‘1 ToTaI Gain <Loss> 10,000 Psi-330- Recognized Gain 2,000 0'. M M’} ‘1'?“ "E52,? - w ' as.qu o‘xfii‘uu". _.«- Required: Record This swap foF'boTh canpanies. 2,000 Tim; is 0 2 “raw-.s‘mr . 5 \,~\ C000 5mm 1 31:11 5,1,: g) a“ Park?“ ’ _ E3523} aim 0%" J36!” 3’ immuju <5:- FV e Ci“? T1600 - deTavwegj (3mm 3mm «5 o :0 I _' ,0 ..‘ _,, ,0. 3i“ :’ p ‘k “ 2 Ljifiw“ LTD 300 has Dis, ECbUWe-Mmm) 523,000: Mme: some Pg AVE; 5 5’3. 0%)“; war: f if?” $2 {ix-2‘4?" 9’ Cash _,_ r if” g 18 CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT 19 CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT Summary of Gain and Loss RecogniTion on Exchanges of NonmoneTary AsseTs 1. CompuTe The ToTal gain or loss on The TransacTion. This amounT is equal To The difference beTween The fair value of The asseT given up and The book value of The asseT given up. 2. If a loss is compuTed in sTep 1, always recognize The enTire loss. 3. If a gain is compuTed in sTep 1, a. and The exchange has commercial subsTance, recognize The enTire gain, b. and The exchange lacks commercial subsTance, i. and no cash is involved, no gain is recognized ii. and some cash is paid 825% of TransacTion), no gain is recognized _ iii. and some cash is received, The following porTion of The gain is recognized (<25°/o of TransacTion): = "/0 of TransacTion X ToTal Gain :- Cash Received (BooT) X (ToTal cash Received (BooT) + FMV of OTher AsseTs Gain) Received iv. and some cash is paid or received (2 25% of TransacTion), recognize The enTire gain. AccounTing for ConTribuTions Companies should use: 1) The fair value of The asseT To - esTablish iTs value on The books and 2) should recognize conTribuTions received as revenues in The period received. 20 CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT 4.Costs Subsequent to Acquisition In general, costs incurred to achieve greater future benefits should be capitalized, whereas expenditures that simply maintain a given level of services should be eXpensed. .fl;__. e; . _‘ - .5, s x” eii’ia’friqpian. i ? “i963 Eff-1.535.551} To capitalize costs, one of three conditions must be present: 0 Useful life of the asset must be increased. 0 Quantity of units produced from asset must be increased. 0 Quality of units produced must be enhanced. Chow-th843 Qgggt w: capitcrehee. i-‘i'tazisltfitifiviPMFig gage; {13+ my fix Major Types of Expenditures and Accounting Treatment 0 Additions - Capitalize cost of addition to an aSSet account. Ex; new mime} gr», iaaiidéflfi J - Improvements and Replacements add ME? +6) madm MM (a) Carrying value known: remove cost of and accumulated wzmmwammmu “’“M depreciation on old asset, recogniZing any 90in 0*" '055- I???" w 53w aim mine Capitalize cost of improvement/ replacement. \ (b) Carrying value unknown: \t ' wz‘mf‘*w=-=» _ 1 Am: xx 1. If the assets life Is extended, debit accumulated t X X depreciation for cost of improvement/ replacement Agew xx .432. If the quantity or quality of the asset's productivity 3 X it; is increased, capitalize cost of improvement/ replacement to asset account. o Rearrangement and Reinstallation (a) if original installation cost is known, account for cost of rearrangement/reinstallation as a replacement (carrying value-known) (b) if original installation cost is unknown and rearrangement/reinstallation cost is material in e :4?! ;/ 9‘"; 1'1?! L- ..i -. 21 CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT amount and it benefits future periods, capitalize as an asset. (c) it original installation cost is unknown and rearrangement/reinstallation is not material or future benefit is questionable, expense the cost when incurred. 0 Repairs: (a) Ordinary: Expense cost of repairs when incurred. (b) Major: As appropriate, treat as an addition, improvement, or replacement. Involuntary Conversion Sometimes an asset's service is terminated through some type of involuntary conversion such as fire, flood, theft, or condemnation. Companies report the difference between the amount recovered (e.g., tram a condemnation award or insurance recovery), if any, and the asset's book value as a gain or loss. They treat these gains or losses like any other type of disposmon. Umug um “i: -i??7€i’”€1fb£)€ia+ -_ means. O’Tl’E—gk’kfl 6:13, « cams“ " Miscellaneous Problems If a company scraps or abandons an asset without any cash recovery, it recognizes a loss equal to the asset's book value. 22 CHAPTER 10 - ACQUISITION AND DISPOSAL OF PROPERTY PLANT AND EQUIPMENT If scrap value exisTs, The gain or loss ThaT occurs is The difference beTween The asseT's scrap value and HS book value. If an asseT sTill can be used even ThOUgh ET is fully depreciaTed, iT may be kepT on The books aT hisTorical cosT less depreciaTion. Remember To: 1. Read The Tebeook acTively before each class or oTherwise read afTer each lecTure. Make a lisT of quesTions To ask in class- 2. AfTer class, do These problems: a. in-class problems from These noTes, b. The Wiley Plus recommended assignments, and c. The exTra exercises posTed on Moodle. 3. Prepare for The nexT quiz - To be announced in class. 4. Keep up wiTh These assignmenTs each week, and Try noT To fall behind. 23 ...
View Full Document

Page1 / 23

Chapter 10 - CHAPTER 10 - ACQUISITION AND DISPOSAL OF...

This preview shows document pages 1 - 23. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online