Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment Flashcards
Lump sum purchases
Group of assets purchased in single amount
How are lump sum purchases allocated?
Single amount allocated to each asset, allocation made based on ratio of relative fair market values
Basis of land formula
(FV of land/FV of real estate) x Purchases price
4 Accounting Treatments for Exchanges of Assets
Dissimilar assets, similar assets - loss situation, similar assets - gain situation - no boot, similar assets - gain situation - boot
Calculation of Gains and Losses
Basis of assets received - Book value of assets given
Hierarchical Order of Establishing Basis
FMV of asset given (if known), FMV of asset received (if more clearly evident), BV of asset given (last resort)
Recording of Dissimilar Assets
Record new asset at basis, recognize all gains and losses
Recording of Similar Assets - Loss Situation
Record new asset at basis, recognize loss
Recording of Similar Assets - Gain Situation - No Boot
Defer gain by reducing basis of new asset, recognize at sale, depreciation
Recording of Similar Assets - Gain Situation - Boot
Recognize only portion of gain attributable to boot received, defer rest of gain
Recognized Gain Calculation with Boot
Total Gain x (Cash Received/FMV of all Assets Received)
3 Characteristics of PPE
Used in operations, LT in nature and subject to depreciation, and physical substance from which assets value can be derived
Recording of Acquisition of PPE
Record at FV of consideration given, includes all costs normal and necessary to get assets ready for use (historical cost)
Recording of Acquisition of Land
Purchase Price + Closing Costs + Cost of Preparing Land + Mortgages/Liens Assumed + Land Improvements with Indefinite Life
Recording of Buildings Purchased
Purchase Price + All costs necessary to set building ready for intended use
Recording of Buildings Constructed
All costs from excavation forward considered cost of building
Recording of Equipment
Purchase Price + All costs normal and necessary for intended use
Recording of Self-Constructed Assets
Direct Cost Assigned to asset + Overhead + Capitalized Interest Cost
3 Ways to Allocate Overhead
Direct Cost Approach (no overhead), Full cost approach (overhead allocated similar to inventory), incremental cost (only assigned if increases overhead)
3 Conditions Necessary to Capitalize Interest Cost
Expenditure Must be made, Interest must be incurred, ongoing activities for asset preparation
Calculation of Capitalized Interest
Weighted Average Accumulated Expenditure Method
Avoidable interest
Interest that could have been avoided had we not built asset
Calculate avoidable interest
Directly attributable rate first, weighted average of previous debt second
