Acquiring and Valuing Plant, Property and Equipment

Valuing Plant, Property and Equipment

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

  1. Qualifying assets
  2. Capitalization period
  3. Amount to capitalize

 

Qualifying assets

–          Require a period of time to get ready for intended use

Two kinds:

  1. Assets under construction for a company’s use
  2. Intended for sale or lease that are constructed as discrete projects
  • Aircrafts, ships… large inventory

 

Capitalization Period

Begins when:

  1. Expenditures for the asset have been made
  2. Activities for readying the asset is in progress
  3. Interest is being incurred

Ends when:

  1. Asset is complete and ready for use

 

Amount to capitalize

The lesser of:

  1. Actual interest costs
  2. Avoidable interest
    1. 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

 

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
  • 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%

 

 

 

 

 

 

 

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

  1. Useful life of the asset must be increased
  2. Quantity of units produced from asset must be increased
  3. 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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