April 3rd, 2012 
Alexander Glaser 
Property, plant and equipment
Plant assets, fixed assets, Durable
User in operations,
Long-term in nature and depreciated
Physical substance
Includes: Land, buildings, equipment
Cost of Land
-purchase price
-closing costs such as title and fees
- costs of grading, filling, clearing, removing old buildings
-Liens or encumbrances
- Additional improvements that have indefinite life
—- “Land Improvement” account has ending life span
—- tree
Permanent life is land
Cost of Buildings
-Materials, labor, overhead during construction
-professional fees and building permits
Cost of Equipment
-Purchase price
-Freight and handling charges
- transit insurance
- cost of special foundations to support equipment
- assembly and installation
- cost of trial runs
Self-Constructed Assets
Costs include:
Materials and direct labor
Overheard
n Assign no fixed overheard
n Assign a portion of overhead to construction process
Interest Costs during Construction
GAAP requires – capitalizing actual interest
-consistent with historical cost
Capitalization considers 3 items
- Qualifying assets
- Capitalization period
- Amount to capitalize
Qualifying assets
- Require a period of time to get ready for intended use
Two kinds:
- Assets under construction for a company’s use
- Intended for sale or lease that are constructed as discrete projects
- Aircrafts, ships… large inventory
Capitalization Period
Begins when:
- Expenditures for the asset have been made
- Activities for readying the asset is in progress
- Interest is being incurred
Ends when:
- Asset is complete and ready for use
Amount to capitalize
The lesser of:
- Actual interest costs
- Avoidable interest
- The amount of interest that could have been avoided if expenditures for the asset had not been made
Valuation
Company should record property, plant and equipment ay:
- Fair value of what they give up
- Buy Land at $100,000
- Debit Land, Credit Cash by $100,000
- Fair value of what they receive
- Buy land and paying with non-cash asset with NBV of $100,000
- Debit land, Credit Asset by $100,000
- If land is valued at $120,000 and asset is $100,000
- Recognize gain
- Debit Land
- Credit land and credit gain
- If land is valued at $120,000 and asset is $100,000
Cash Discounts- whether taken or not, considered a reduction in the cost of an asset
Deferred-Payment Contracts- Assets purchased through long term credit, are recorded at present value
Acquired in Lump Sum Purchase- Allocate the total cost among the various assets on the basis of their FMV
Property Plant and Equipment Acquired through Issuance of Stock – market value of the stock issued is the value of the cost of the property gained
Debit Equipment
Credit Common stock
Credit Additional Paid in Capital
Accounting for Exchange
-Journal Entries
Property (acquired) debit
Other Asset (received) debit
Accumulated Depreciation (of the PPE given up) debit
Loss on Exchange (if exists)
PPE (given up, book value) credit
Other Asset (given up) credit
Gain on exchange (if exists) credit
Accounting for Exchange
Book value of acquired P,P or E is always determined last
- It is determined by 3 factors
- 1. What is the fair value of the exchange
- 2. Gain or loss?
- 3. Commercial Substance
- Exchange of Nonmonetary Assets
- First, determine gain or loss implied
- Fair value of the assets received – cost of asset given up
- If fair value of asset received is unknown, use fair value of assets given up to judge
- Fair value of the assets received – cost of asset given up
- Second, Figure out gain or loss recognized
- If it a loss, recognize all loss
- If gain and the exchange has commercial substance
- Recognize all gains based on future cash flow
- If gain and lacks commercial substance
- Recognize all gain
- If cash received divided by fair value of all assets received is >= 25%
- If cash surrendered divided by fair value of all assets surrendered is >= 25
- Recognize a fraction
- If fraction is less than 25%
- Recognize all gain
Asset Acquired
Other asset received
Accumulated depreciation
Loss on exchange
Asset given up
Other asset given up
Gain on exchange
Only loss or gain will show, not both
Total value of received – cost of given up
Accounting for donations/contributions
Companies should use:
- Fair value of the asset to establish its value on the books
- And recognize contributions received as revenues in that period
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 expenses
To capitalize costs, one of the 3 conditions must be met
- Useful life of the asset must be increased
- Quantity of units produced from asset must be increased
- Quality of units produced must be enhanced
Major types of expenditures
- Additions
- Improvements/ replacements
- Repairs
- Rearrangements/ reinstallation
Disposition of Assets
Sale of Plant assets
Machine costs 20,000 when purchased 01-2008
3,000 depreciation p er year
Accumulated depreciation balance at dec 31, 2010 is 9,000
Machine sold on Sept 1st, 2011 for 10,500
Prepare journal entry for update for depreciation
3,000/12 = 250 per month
250 x 8 months = $2,000
Depreciation expense 2000
Accumulated depreciation 2000
Record the sale
Cash 10,500
Accumulated depreciation 11,000
Machinery 20,000
Gain on sale 1,500
Involuntary Conversion
- Assets services is terminated involuntarily
- Fire, theft, condemnation
- Companies report the difference between the amount recovered, and the asset’s book value as a gain or loss
- Treated like any other kind of disposition
Example:
Flood damaged building
Building cost is 180,000
Depreciation is 80,000
Flood damaged building
Residual value of building is 2,000
Insurance recovery is 80,000
FV of assets received – cost of assets given up
80,000+2,000 –(180,000 – 80,000)
82,000 – 100,000 = – 18,000 loss
Cash 82000
Accumulated depreciation 80,000
Loss on event 18,000
Building 180,000
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