Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment Flashcards
What is Property, Plant, and Equipment?
What are its main characteristics?
Durable assets.
Characteristics:
- Used in operations, not for resale
- Long term and depreciable
- Tangible assets
How is PPE measured?
What is included in this measurement?
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.
Why is the historical cost of valuation used for PPE?
- Actual costs are more reliable
- Gains/losses only recognized when asset is sold
What is included in the cost of land?
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
What are the other classification for land?
- Land for speculation is an investment
- Land held by real estate company for resale is inventory
What are the 2 ways companies handle indirect costs for self-constructed assets?
- Assign no fixed overhead to the asset
- Assign a portion of all overhead
What method does GAAP employ when considering interest capitalization?
Capitalize actual costs incurred during construction.
What are the special considerations for expenditures for land?
- 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
How should property, plant, and equipment be recorded?
At fair value of what is given up or received
When purchasing plant assets using a long-term contract how should it valued?
- Cash equivalent price
- PV of the note payable
What is the value of a group of plant assets purchased as a single lump sum price?
How are the fair values calculated?
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
What is the value of plant assets exchanged for an issuance of stock?
How are the securities recorded?
- 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
What is the value of plant assets exchanged for nonmonetary assets?
What is recorded if fair value is not determinable?
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
What is commercial substance?
Two parties’ economic positions change.
What are the three types of exchanges?
What is the accounting guidance on these exchanges?
- 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
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?
Cash Received (Boot)
divided by
Cash Received + Fair Value of Other Assets Received
=
Ratio of monetary assets to total payment received x Total Gain
What is a nonreciprocal transfers?
How are they valued?
How are they recognized?
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.
How are costs subsequent to acquisition treated?
Cost incurred to achieve greater future benefits should be capitalized.
Expenditures that maintain a given level of services should be expensed.
What are the conditions needed to capitalize costs subsequent to acquisition?
- Useful life must be increased
- Quantity of units produced must be increased
- Quality of units produced must be enhanced
What are the major types of expenditures?
- 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
What is the accounting treatment for additions?
Capitalize cost of addition to asset account.
What is the accounting treatment for improvements and replacements?
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:
- If the asset’s useful life is extended, debit accumulated depreciation for cost of improvements/replacement.
- If the quantity or quality of the asset’s productivity is increased, capitalize cost of improvement/replacement to asset account.
What is the accounting treatment for rearrangement and reinstallation?
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
What is the accounting treatment for repairs?
Ordinary:
Expense cost when incurred
Major:
Treat as an addition, improvement, or replacement
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?
FV of asset given up + Cash Paid - Cash Received
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?
FV of asset given up + Cash Paid - Cash Received
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?
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
What are the steps for recognizing gains and losses on exchanges of nonmonetary assets?
- Compute total gain/loss
- FV of asset given up - BV of asset given up
- If equals a loss, recognize entire loss
- 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
What is the thought process to approach non-monetary exchange problems?
- Determine if monetary/nonmonetary transaction if cash is involved
- Determine the gain/loss on exchange
- Determine the cost of the new asset
