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Chapter 9 - Solution Manual

B a plant asset acquire on a deferred payment plan

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b. A plant asset acquire on a deferred-payment plan should be recorded at an equivalent cash price excluding interest. If interest is not stated in the sales contract, an imputed interest should be determined. The asset should then be recorded at its present value, which is computed by discounting the payments at the stated or imputed interest rate. The interest portion (stated or imputed) of the contract price should be charged to interest expense over the life of the contract. d. In general, plant assets should be recorded at the fair value of the consideration given or the fair value of the asset received, whichever is more clearly evident. Specifically, under the criteria contained at FASB ASC 845, when exchanging an old machine and paying cash for a new machine, the new machine should be recorded at the amount of monetary consideration (cash paid plus the undepreciated cost of the nonmonetary asset (old machine) surrendered if there is no indicated loss. No indicated gain should be recognized by the party paying monetary consideration. If cash is received, gains are not recognized; however, a loss should be recognized if the fair value of the asset exchanged is less than its book value (i.e., an impairment is evident). The resulting amount initially recorded for the acquired asset is equal to the book value of the
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176 exchanged asset (adjusted to its fair value, when there is an apparent impairment) plus or minus any cash (boot) paid or received. Case 9-8 a. Expenditures should be capitalized when they benefit future periods. The cost to acquire the land should be capitalized and classified as land, a nondepreciable asset. Since tearing down the small factory is readying the land for its intended use, its cost is part of the cost of the land and should be capitalized and classified as land. As a result, this cost will not be depreciated as it would if. it were classified with the capitalizable cost of the building. Since rock blasting and removal is required for the specific purpose of erecting the building, its cost is part of the cost of the building and should be capitalized and classified with the capitalizable cost of the building. This cost should be depreciated over the estimated useful life of the building. The road is a land improvement, and its cost should be capitalized and classified separately as a land improvement. This cost should be depreciated over its estimated useful life. The added four stories is an addition, and its cost should be capitalized and classified with the capitalizable cost of the building. This cost should be depreciated over the remaining life of the original office building because that life is shorter than the estimated life of the addition. b. The gain should be recognized on the sale of the land and building because income is realized whenever the earning process has been completed and the sale has taken place.
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