Long Lived Assets
•
•
•
•
Types
Cost determination
Balance sheet presentation
Disposal
Types:
•
•
•
•
Land
Buildings and equipment (plant assets)
Intangible assets
Natural resources
Cost Determination:
• Acquisition or production cost plus
• Costs needed to get asset ready for its
intended use
– Transportation
– Installation
– Modification
X Co incurred the following cost: equipment
price: $10,000; 2% cash discount; Freight in
$4,000; installation & testing $2,000; repair
of part broken during installation $700. The
equipment should be recorded at a cost of
A.
B.
C.
D.
$ 16,500
$ 15,800
$ 16,700
$ 16,000
Cost of Self Constructed Assets
•
•
•
•
Material
Labor
Overhead
Interest incurred during construction (FAS
34)
Interest Capitalization
1. Determine applicable interest rate
2. Determine the weighted average
expenditures (WAE)
3. Determine avoidable interest
4. Determine actual interest incurred
5. Capitalize the lower of avoidable or
actual interest
Exercise 10-10
1. Situation 1- Determine the amount of
interest to be capitalized
2. Situation 3 Determine the amount of
interest to be capitalized
Lump Sum purchases
Allocate the price paid in relation to the Fair
Market Value of each asset.
1. E 10-13 – the land should be recorded at
what cost?
2. E 10-13 – the building should be
recorded at what cost?
Asset acquired for non interest
bearing note – MUST be
discounted!
• E 10 – 14 Determine the cost at which the
equipment should be recorded
Balance Sheet Presentation:
• Land, Goodwill at historical cost (unless
written down for impairment)
• All other assets: Book value (BV):
• Cost – accumulated depreciation (or
amortization or depletion)
Balance Sheet Presentation:
• Equipment
100,000
• Less accumulated
depreciation
(54,000)
• Equipment (net)
$46,000
• Or:
Equipment (net)
$46,000
(see note xx)
Disposal (Methods):
• Retire (junk)
-- always loss
• Sell
-- gain or loss
• Trade in (for similar) -- only loss
recognized, otherwise new asset shown at
book value of old
Trade (Exchange)
• Two part process:
• part 1 remove old asset from books
• Part 2 record new asset and any gain or
loss
• NEW RULE (SFAS 153) UP 2-8 in your
text book
Non Monetary Exchange with
Commercial Substance
• That means that there is a change in the
company’s expected future cash flows
associated with the items exchanged.
• You must be told
• Cost of New asset is determined as equal
to the FMV of asset given up (traded in)
plus any cash paid. Gain or loss is
recognized
Non Monetary Exchange without
Commercial Substance
• That means that there is NO change in the
company’s expected future cash flows
associated with the items exchanged.
• You must be told
• Cost of New asset is determined as equal
to the FMV of asset given up (traded in)
plus any cash paid. If loss, recognize.
Gains are deferred (use book value
instead of FMV)
Work UP 10-3 Case a Garrison
would record the following
A.
B.
C.
D.
New crane as $198; gain of $18
New crane as $ 190; gain of 8
New crane as $ 190; loss of 8
New crane as $ 190; loss of 18
Work UP 10-3 Case d Garrison
would record the following
A.
B.
C.
D.
New crane as $198; gain of $18
New crane as $ 190; gain of 7
New crane as $ 183; no gain/loss
New crane as $ 183; loss of 7
Disposal:
• Get cost and accumulated depreciation off
the books
• Determine gain or loss
• Gain (Loss): Cash received – Book value
(cost – accumulated depreciation)
Disposal:
• Example:
Cost:
100,000
Accumulated Depreciation
54,000
Book value
46,000
Sold for
38,000
Loss:
8,000
Disposal:
• Example (journal entry):
Dr. cash
38,000
Dr. accumulated depreciation
54,000
Dr. loss
Cr. Equipment
8,000
100,000
Answers
1. (slide 4) B
2.
3.
4.
5.
(slide 7) – 1 $80,000
(slide 7) – 2 $385,000
(slide 8) – 1 $350,000
(slide 8) – 2 $ 1,
050,000
6. (slide 9) $ 576,765
7. (slide 16) C
8. (slide 17) C