Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment

Question 1

What is Property, Plant, and Equipment?

What are its main characteristics?

Answer 1

Durable assets.

Characteristics:

• Used in operations, not for resale
• Long term and depreciable
• Tangible assets

Question 2

How is PPE measured?

What is included in this measurement?

Answer 2

Historical cost.

The cost is the cash paid to buy the asset and the costs to bring it to the location and condition necessary for its intended use.

Question 3

Why is the historical cost of valuation used for PPE?

Answer 3

• Actual costs are more reliable
• Gains/losses only recognized when asset is sold

Question 4

What is included in the cost of land?

Answer 4

Purchase price and cost to ready the asset for its intended use.

Unique to land:

• Proceeds reduce cost of land
• Improvements with limited lives added (depreciable)
• Improvements with indefinite life included
• Demolition costs

Question 5

What are the other classification for land?

Answer 5

• Land for speculation is an investment
• Land held by real estate company for resale is inventory

Question 6

What are the 2 ways companies handle indirect costs for self-constructed assets?

Answer 6

1. Assign no fixed overhead to the asset
2. Assign a portion of all overhead

Question 7

What method does GAAP employ when considering interest capitalization?

Answer 7

Capitalize actual costs incurred during construction.

Question 8

What are the special considerations for expenditures for land?

Answer 8

• Land purchased as a site for a structure capitalize interest as a part of the plant
• Land purchased for lot sales capitalize interest as a part of the land

Question 9

How should property, plant, and equipment be recorded?

Answer 9

At fair value of what is given up or received

Question 10

When purchasing plant assets using a long-term contract how should it valued?

Answer 10

• Cash equivalent price
• PV of the note payable

Question 11

What is the value of a group of plant assets purchased as a single lump sum price?

How are the fair values calculated?

Answer 11

Allocate the total cost among the various assets based on their relative fair values.

(Fair Value of Item 1 / Total fair value of all assets)

x

Purchase Price

Question 12

What is the value of plant assets exchanged for an issuance of stock?

How are the securities recorded?

Answer 12

• FV of asset received, or
• FV of securities given up, whichever one is more clearly determined
  
  • Common stock is recorded for par value and any excess is recorded to paid-in capital

Question 13

What is the value of plant assets exchanged for nonmonetary assets?

What is recorded if fair value is not determinable?

Answer 13

The fair value of the asset given up or received, whichever is more evident

and

any gains or losses on the exchange.

If fair value is not determinable:

Book Value of Asset given up + Cash paid - Cash Received

Question 14

What is commercial substance?

Answer 14

Two parties’ economic positions change.

Question 15

What are the three types of exchanges?

What is the accounting guidance on these exchanges?

Answer 15

• Commercial substance - recognize gains/losses
• Lacks commercial substance (no cash received) - defer gain; recognize losses
• Lacks commercial substance (cash received) - recognize partial gain; recognize losses

Question 16

How do you calculate the recognized gain in an exchange that lacks commercial substance and cash received is 25% or more of the fair value of the asset received?

Answer 16

Cash Received (Boot)

divided by

Cash Received + Fair Value of Other Assets Received

=

Ratio of monetary assets to total payment received x Total Gain

Question 17

What is a nonreciprocal transfers?

How are they valued?

How are they recognized?

Answer 17

Contributions that transfer assets in one direction.

At fair value of the asset.

Recognized as revenues for those who receive and expenses for those who give.

Question 18

How are costs subsequent to acquisition treated?

Answer 18

Cost incurred to achieve greater future benefits should be capitalized.

Expenditures that maintain a given level of services should be expensed.

Question 19

What are the conditions needed to capitalize costs subsequent to acquisition?

Answer 19

1. Useful life must be increased
2. Quantity of units produced must be increased
3. Quality of units produced must be enhanced

Question 20

What are the major types of expenditures?

Answer 20

• Additions - increase existing assets
• Improvements and replacements - substitution of an improved asset for an existing one
• Rearrangement and reinstallation - movement of assets from one location to another
• Repairs - maintatin assets

Question 21

What is the accounting treatment for additions?

Answer 21

Capitalize cost of addition to asset account.

Question 22

What is the accounting treatment for improvements and replacements?

Answer 22

Carrying value known:

Remove cost of and accumulated depreciation on old asset, recognizing any gain or loss. Capitalize cost of improvement/replacement.

Carrying value unknown:

1. If the asset’s useful life is extended, debit accumulated depreciation for cost of improvements/replacement.
2. If the quantity or quality of the asset’s productivity is increased, capitalize cost of improvement/replacement to asset account.

Question 23

What is the accounting treatment for rearrangement and reinstallation?

Answer 23

Original cost known:

Account for cost of rearrangement/reinstallation as a replacement (carrying value known)

Original cost unknown and rearrangement/reinstallation cost is material and benefits future periods:

Capitalize as an asset

Original cost unknown and rearrangement/reinstallation cost is not material or future benefit is questionable:

Expense the cost when incurred

Question 24

What is the accounting treatment for repairs?

Answer 24

Ordinary:

Expense cost when incurred

Major:

Treat as an addition, improvement, or replacement

Question 25

What is the cost of asset received in a non-monetary exchange of assets and there is commerical substance and a gain or loss is recognized?

Answer 25

FV of asset given up + Cash Paid - Cash Received

Question 26

What is the cost of asset received in a non-monetary exchange of assets and there is no commerical substance and a loss is recognized?

Answer 26

FV of asset given up + Cash Paid - Cash Received

Question 27

What is the cost of asset received in a non-monetary exchange of assets and there is no commerical substance and there is a gain?

Answer 27

Gain is deferred if cash received is less than 25% of fair value.

Recognize partial gain if cash received is 25% or more of fair value.

Book value of asset given up + Cash paid - Cash Received

Question 28

What are the steps for recognizing gains and losses on exchanges of nonmonetary assets?

Answer 28

1. Compute total gain/loss
   
   • FV of asset given up - BV of asset given up
2. If equals a loss, recognize entire loss
3. If a gain:
   
   • and if the exchange has commercial substance, recognize entire gain
   • and if the exchange lacks commercial substance:
     
     • and no cash involved, no gain is recognized
     • some cash is given, no gain is recognized
     • some cash is received, recognize a portion of the gain if gain is less than 25% of fair value of asset received

Question 29

What is the thought process to approach non-monetary exchange problems?

Answer 29

1. Determine if monetary/nonmonetary transaction if cash is involved
2. Determine the gain/loss on exchange
3. Determine the cost of the new asset