Property, Plant, and Equipment
A.
Classification--property, plant, and equipment are assets that are acquired
for use in normal business operations, are long-term in nature, and possess
physical substance
B.
Acquisition
1. Cost--cost is the cash or cash equivalent price of obtaining the asset
and bringing it to the location and condition necessary for its
intended use
a. Land--the cost of land includes all expenditures incurred to
acquire land and to make it ready for use including the following:
1) Purchase Price--the cost of land includes the purchase price of
the land and the assumption of any liens, liabilities, or
encumbrances on the property (such as back property taxes and
an outstanding mortgage)
2) Closing Costs--the cost of land includes closing costs (such as
legal fees, title costs, and recording fees)
3) Preparation Costs-–the cost of land includes costs incurred to
get the land in condition for its intended use (such as
grading, filling, draining, clearing, and demolition of old
buildings) less any proceeds obtained in getting the land in
condition for its intended use (such as salvage receipts from
the demolition of an old building and the sale of cleared
timber)
4) Special Assessments--the cost of land includes special
assessments for local improvements (such as pavements, street
lights, sewers, and drainage systems)
5) Landscaping--the cost of land includes the cost of landscaping
b.
Land Improvements--the cost of land improvements includes all
expenditures incurred to improve the land that are maintained and
replaced by the owner including the following:
1) Private Driveways
2) Sidewalks
3) Fences
4) Parking Lots
5) Lighting
c.
Buildings--the cost of buildings includes all expenditures incurred
that are directly related to their or construction including:
1) Purchase Price
2) Professional Fees--the cost of buildings includes architect’s
fees to design the building
3) Construction Costs--the cost of buildings includes construction
costs from excavation to completion
4) Building Permits
1
d.
2.
Equipment--the cost of equipment includes all expenditures incurred
in acquiring the equipment and preparing it for use including the
following:
1) Purchase Price
2) Shipping Costs--the cost of equipment includes freight and
handling charges and insurance on the equipment while in
transit
3) Installation--the cost of equipment includes the cost of
special foundation, assembly and installation
4) Set Up Costs--the cost of equipment includes the costs of
conducting trial runs
Special Considerations
a. Cash Discounts--when a plant asset is purchased subject to a cash
discount, the discount (whether taken or not) is considered a
reduction in the cost of the asset
1) Illustrations
a) A corporation purchased equipment for $50,000; a cash
discount of 2% was available if payment was made within 10
days; payment was made within the discount period
Equipment = 50,000 – 2% x 50,000 = 49,000
Loss = 0
b)
A corporation purchased equipment for $50,000; a cash
discount of 2% was available if payment was made within 10
days; payment was not made within the discount period
Equipment = 50,000 – 2% x 50,000 = 49,000
Loss = 1,000
b.
Deferred Payments--when a plant asset is acquired by issuing a
long-term liability, the cost of the plant asset is equal to the
present value of the future cash payments
1) Illustration--a corporation purchased land by issuing a
$150,000, 3-year noninterest bearing note on January 1 of
year 1 when the market rate of interest was 8%; the note is to
be repaid in 3 equal installments of $50,000 on December 31 of
year 1, year 2, and year 3
Land = 50,000 x 2.57710 = 128,855
c.
Issuance of Securities--when a plant asset is acquired by issuing
securities, the cost of the plant asset is equal to either the fair
market value of the securities issued or the fair market value of
the plant asset if the fair market value of the securities is not
determinable
1) Illustrations
2
a)
A corporation purchased a patent by issuing 1,000 shares of
common stock with a par value of $30 and a fair market
value of $50; the fair market value of the patent was
$52,000
Patent = 1,000 x 50 = 50,000
b)
A corporation purchased a patent by issuing 1,000 shares of
common stock with a par value of $30; the fair market value
of the common stock is unknown; the fair market value of
the patent was $52,000
Patent = 52,000
d.
Lump-sum Purchase--when two or more plant assets are purchased at a
lump-sum price, the purchase price is allocated to the various
assets using their relative fair market value (appraisal value,
assessed valuation for property taxes, etc.)
1) Illustration--a corporation purchased a factory for $880,000;
appraisal values were $90,000 for the land, $360,000 for the
building, and $450,000 for the equipment
Appraisal
Value
Cost_
Land
90,000 90,000 / 900,000 x 880,000 = 88,000
Building
360,000 360,000 / 900,000 x 880,000 = 352,000
Equipment 450,000 450,000 / 900,000 x 880,000 = 440,000
900,000
900,000
e.
Donated Assets--when a plant asset is acquired as a donation, the
cost of the plant asset is equal to its fair market value
1) Revenue--contribution revenue should be recognized for the
excess of the fair market value of the plant asset over any
costs incurred to acquire the plant asset (legal fees, title
costs, etc.)
2) Illustration--a corporation received land with a fair market
value of $500,000 from a city with the stipulation that a
factory be built on the land; the corporation incurred legal
fees of $10,000 to obtain title to the land
Land = 500,000
Contribution Revenue = 500,000 – 10,000 = 490,000
f.
Exchange of Nonmonetary Assets
1) Dissimilar Assets--dissimilar assets are assets that are not
used in the same way by the business
a) Accounting
I) Gain/Loss Recognition--gain/loss is recognized for the
difference between the fair market value and the book
value of the plant asset given in the exchange
3
II)
b)
Carrying Value--the carrying value of the plant asset
acquired in the exchange is equal to the fair market
value of the plant asset given in the exchange
increased/decreased by any cash given/received in the
exchange
Illustrations
I) A corporation exchanged old equipment with a cost of
$100,000, accumulated depreciation of $70,000, and a
fair market value of $25,000 and $95,000 for new
equipment with a fair market value of $120,000
Loss = 25,000 – (100,000 – 70,000) = 5,000
Equipment
(25,000 + 95,000)
Accumulated Depreciation
Loss on Disposal of Equipment
Cash
Equipment
II)
70,000
5,000
95,000
100,000
A corporation exchanged old equipment with a cost of
$100,000, accumulated depreciation of $70,000, and a
fair market value of $40,000 and $95,000 for new
equipment with a fair market value of $135,000
Gain = 40,000 – (100,000 – 70,000) = 10,000
Equipment
(40,000 + 95,000)
Accumulated Depreciation
Cash
Equipment
Gain on Disposal of Equipment
III)
120,000
135,000
70,000
95,000
100,000
10,000
A corporation exchanged old equipment with a cost of
$100,000, accumulated depreciation of $70,000, and a
fair market value of $25,000 for new equipment with a
fair market value of $17,000 and $8,000
Loss = 25,000 – (100,000 – 70,000) = 5,000
Cash
Equipment
(25,000 - 12,000)
Accumulated Depreciation
Loss on Disposal of Equipment
Equipment
4
8,000
17,000
70,000
5,000
100,000
IV)
A corporation exchanged old equipment with a cost of
$100,000, accumulated depreciation of $70,000, and a
fair market value of $40,000 for new equipment with a
fair market value of $32,000 and $8,000
5
Gain = 40,000 – (100,000 – 70,000) = 10,000
Cash
Equipment
(40,000 - 12,000)
Accumulated Depreciation
Equipment
Gain on Disposal of Equipment
2)
8,000
32,000
70,000
100,000
10,000
Similar Assets--similar assets are assets that are used in the
same way by the business
a) Accounting
I) Loss--the fair market value of the plant asset given in
the exchange is less than its book value
A) Loss Recognition--loss is recognized for the
difference between the fair market value and the
book value of the plant asset given in the exchange
B) Carrying Value--the carrying value of the plant
asset acquired in the exchange is equal to the fair
market value of the plant asset given in the
exchange increased/decreased by any cash
given/received in the exchange
II) Gain--the fair market value of the plant asset given in
the exchange is greater than its book value
A) Cash Given--cash is given in the exchange
1) Gain Recognition--gain is not recognized
2) Carrying Value--the carrying value of the plant
asset acquired in the exchange is equal to the
book value of the plant asset given in the
exchange increased by any cash given in the
exchange
B) Cash Received--cash is received in the exchange
1) Gain Recognition--gain is recognized for the
difference between the fair market value and
the book value of the plant asset given in the
exchange multiplied by a fraction the numerator
of which is the cash received in the exchange
and the denominator of which is the fair market
value of the plant asset given in the exchange
(if the amount of cash received is equal to 25%
or more of the fair market value of the plant
given in the exchange, the entire amount of the
gain is recognized)
2) Carrying Value--the carrying value of the plant
asset acquired in the exchange is equal to the
book value of the plant asset given in the
exchange multiplied by a fraction the numerator
6
b)
of which is the fair market value of the plant
asset received in the exchange and the
denominator of which is the fair market value
of the plant asset given in the exchange (if
the amount of cash received in the exchange is
equal to 25% or more of the fair market value
of the plant asset given in the exchange, the
carrying value of the plant acquired in the
exchange is equal to its fair market value)
Illustrations
I) A corporation exchanged old equipment with a cost of
$100,000, accumulated depreciation of $70,000, and a
fair market value of $25,000 and $95,000 for new
equipment with a fair market value of $120,000
Loss = 25,000 – (100,000 – 70,000) = 5,000
Equipment
(25,000 + 95,000)
Accumulated Depreciation
Loss on Disposal of Equipment
Cash
Equipment
II)
70,000
5,000
95,000
100,000
A corporation exchanged old equipment with a cost of
$100,000, accumulated depreciation of $70,000, and a
fair market value of $40,000 and $95,000 for new
equipment with a fair market value of $135,000
Gain = 40,000 – (100,000 – 70,000) = 10,000
Equipment
(30,000 + 95,000)
Accumulated Depreciation
Cash
Equipment
III)
120,000
125,000
70,000
95,000
100,000
A corporation exchanged old equipment with a cost of
$100,000, accumulated depreciation of $70,000, and a
fair market value of $25,000 for new equipment with a
fair market value of $17,000 and $8,000
Loss = 25,000 – (100,000 – 70,000) = 5,000
Cash
Equipment
(25,000 - 12,000)
Accumulated Depreciation
Loss on Disposal of Equipment
Equipment
7
8,000
17,000
70,000
5,000
100,000
IV)
A corporation exchanged old equipment with a cost of
$100,000, accumulated depreciation of $70,000, and a
fair market value of $40,000 for new equipment with a
fair market value of $32,000 and $8,000
Gain = 40,000 – (100,000 – 70,000) = 10,000
Cash
Equipment
(30,000 x 32,000 / 40,000)
Accumulated Depreciation
Equipment
Gain on Disposal of Equipment
(10,000 x 8,000 / 40,000)
g.
8,000
24,000
70,000
100,000
2,000
Constructed Assets
1) Self-constructed Assets--the cost of a self-constructed asset
includes all costs incurred in constructing the asset
a) Direct Materials--the cost of construction includes the
cost of direct materials used in the construction
Direct Labor--the cost of construction includes the cost of
direct materials used in the construction
Overhead--the cost of construction includes the cost of
overhead allocated in the same way as to other production
2) Interest Costs During Construction--since the asset under
construction is not generating revenues during construction,
interest costs during construction should be capitalized and
matched against future revenues as the asset is depreciated
a) Qualifying Assets--assets that qualify for the
capitalization of interest incurred during construction
include both assets constructed for an organization’s own
use and assets constructed as discrete projects for sale or
less (such as airplanes, ships, and real estate
developments)
b) Capitalization Period--the period of time during interest
should be capitalized begins when expenditures for the
construction of the asset are first made and ends when the
asset is substantially completed and ready for its intended
use
I) Abandonment--the capitalization of interest ceases when
construction on the asset halts before completion of
construction
c) Amount to Capitalize--the amount of interest to be
capitalized is equal to the lesser of the actual interest
cost incurred during the capitalization period or the
amount of interest during the construction period that
could have been avoided if the weighted-average accumulated
expenditures for the asset had not been made
8
I)
Weighted-average Accumulated Expenditures--the
weighted-average accumulated expenditures is computed
by multiplying the construction expenditures by the
fraction of the year from the incurrence of the
expenditure until the end of the accounting period
A) Illustration-a corporation incurred the following
costs in the construction of a building: land
acquisition of $250,000, architect’s fees of
$50,000, and construction costs of $1,200,000; the
land acquisition cost and the architect’s fees were
assumed to have been incurred on January 1; the
construction costs were assumed to be incurred
uniformly throughout the year
Weighted-average Costs = 12 / 12 x (250,000 +
50,000) + 6 / 12 x
1,200,000 = 900,000
II)
Interest Rates--in computing the avoidable interest the
weighted-average accumulated expenditures are first
applied to any specific borrowings to finance the
construction and then applied to all other outstanding
debt during the period using a weighted-average
interest rate
A) Illustration--a corporation had the following
outstanding debt: a $150,000 loan borrowed at 7%
and a $300,000 loan borrowed at 10%
Weighted-average Rate = (150,000 x 7% = 300,000
x 10%) / (150,000 +
300,000) = 9%
III)
Illustrations
A) A corporation had weighted-average accumulated
expenditures for construction of $400,000; the
corporation had a specific borrowing of $500,000 at
8% to finance the construction and other
outstanding debt of $1,000,000 with a weightedaverage interest rate of 9%
Capitalizable Interest = 8% x 400,000 = 32,000
B)
A corporation had weighted-average accumulated
expenditures for construction of $800,000; the
corporation had a specific borrowing of $500,000 at
8% to finance the construction and other
outstanding debt of $1,000,000 with a weightedaverage interest rate of 9%
9
Capitalizable Interest = 8% x 500,000 + 9% x
(800,000 – 500,000) =
67,000
C)
h.
C.
A corporation had weighted-average accumulated
expenditures for construction of $1,800,000; the
corporation had a specific borrowing of $500,000 at
8% to finance the construction and other
outstanding debt of $1,000,000 with a weightedaverage interest rate of 9%
Capitalizable Interest = 8% x 500,000 + 9% x
1,000,000 = 130,000
Costs Subsequent to Acquisition--costs incurred after a plant asset
is ready for its intended use are capitalized if they increase the
useful life of the plant asset, if they increase the quantity of
units produced from the plant asset, or if they enhance the quality
of the units produced from the plant asset
1) Additions--increases or extensions of an existing plant assets
are capitalized because a new plant asset has been created
2) Improvements and Replacements--substitutions of a plant asset
for an existing plant asset are capitalized if they increase
the future service potential of the plant asset
3) Rearrangement and Relocation--movements of plant assets from
one location to another are capitalized if they increase the
future efficiency of the plant assets
4) Repairs
a) Ordinary Repairs--expenditures incurred to keep a plant
asset in operating condition are expensed when incurred
b) Major Repairs--expenditures incurred to extend the useful
life of a plant asset are capitalized
Depreciation--depreciation is the allocation of the cost of plant assets to
expense in a systematic and rational manner to those periods expected to
benefit from the use of plant assets
1. Methods
a. Straight-line Depreciation--the straight-line depreciation method
provides for a constant depreciation over the useful life of the
plant asset
1) Computation--under the straight-line depreciation method
depreciation expense is equal to the cost less the estimated
salvage value of the plant asset divided by the estimated
useful life of the plant asset
2) Illustration--a corporation purchased equipment on January 1 of
year 1 for $16,000; the equipment had an estimated salvage
value of $1,000 and an estimated useful life of 5 years
10
Year
1
2
3
4
5
b.
(16,000 – 1,000) / 5 =
15,000 / 5
=
15,000 / 5
=
15,000 / 5
=
15,000 / 5
=
Depreciation
3,000
3,000
3,000
3,000
_3,000
15,000
Accelerated Depreciation--accelerated depreciation methods provide
for higher depreciation in the earlier years of the useful life of
the plant asset and lower depreciation in the later years of the
useful life of the plant asset
1) Sum-of-the-years’-digits Depreciation
a) Computation--under the sum-of-the-years’-digits
depreciation method depreciation expense is equal to the
cost less the estimated salvage value of the plant asset
multiplied by a fraction the denominator of which is the
sum of the digits from 1 to the estimated useful life of
the plant asset and the numerator of which is the digits in
inverse order
b) Illustration--a corporation purchased equipment on
January 1 of year 1 for $16,000; the equipment had an
estimated salvage value of $1,000 and an estimated useful
life of 5 years
Year
Depreciation
1
(16,000 – 1,000) x 5 / 15 =
5,000
2
15,000 x 4 / 15
=
4,000
3
15,000 x 3 / 15
=
3,000
4
15,000 x 2 / 15
=
2,000
5
15,000 x 1 / 15
=
_1,000
15,000
2)
Double-declining-balance Depreciation
a) Computation--under the double-declining-balance
depreciation method depreciation expense is equal to the
cost less the accumulated depreciation of the plant asset
multiplied by a fraction the numerator of which is 2 and
the denominator of which is the estimated useful life of
the plant asset
I) Salvage Value--since estimated salvage value of the
plant asset is not included in the double-decliningbalance depreciation formula, depreciation expense for
the last year or years of the estimated useful life of
the plant asset needs to be adjusted to insure the
plant asset is depreciated down to its estimated
salvage value
11
b)
c.
2.
Illustration--a corporation purchased equipment on
January 1 of year 1 for $16,000; the equipment had an
estimated salvage value of $1,000 and an estimated useful
life of 5 years
Year
Depreciation
1
(16,000 – 0) x 2 / 5
=
6,400
2
(16,000 – 6,400) x 2 / 5 =
3,840
3
(16,000 – 10,240) x 2 / 5 =
2,304
4
(16,000 – 12,544) x 2 / 5 =
1,382
5
(16,000 – 13,926) x 2 / 5
or (16,000 – 13,926 –
1,000)
=
_1,074
15,000
Units of Activity Depreciation--the units of activity depreciation
method provides for a constant depreciation per unit of activity
over the useful life of the plant asset
1) Computation--under the units of activity depreciation method
depreciation expense is equal to the cost less the estimated
salvage value of the plant asset divided by the estimated
useful life of the plant asset in units of activity multiplied
by the actual units of activity for each year
2) Illustration--a corporation purchased equipment on January 1 of
year 1 for $16,000; the equipment had an estimated salvage
value of $1,000 and an estimated useful life of 6,000 hours;
actual usage of the equipment was 1,300 hours in year 1, 1,700
hours in year 2, 1,100 hours in year 3, 1,000 hours in year 4,
and 900 hours in year 5
Year
Depreciation
1
(16,000 – 1,000) / 6,000 x 1,300 =
3,250
2
2.50 x 1,700
=
4,250
3
2.50 x 1,100
=
2,750
4
2.50 x 1,000
=
2,500
5
2.50 x 900
=
_2,250
15,000
Special Considerations
a. Mid-year Acquisition--the depreciation expense for each year of the
life of the plant asset is allocated to the accounting periods
affected on a proportionate basis
1) Straight-line Depreciation--depreciation expense needs to be
allocated to the accounting periods affected for the first year
and last year only
a) Illustration--a corporation purchased equipment on April 1
of year 1 for $16,000; the equipment had an estimated
salvage value of $1,000 and an estimated useful life of 5
years
12
Year
1
2
3
4
5
6
(16,000 – 1,000) / 5 x 9 / 12 =
15,000 / 5
=
15,000 / 5
=
15,000 / 5
=
15,000 / 5
=
15,000 / 5 x 3 / 12
=
Depreciation
2,250
3,000
3,000
3,000
3,000
_ 750
15,000
2)
Sum-of-the-years’-digits Depreciation--the depreciation expense
needs to be allocated to the accounting periods affected for
each year
a) Illustration--a corporation purchased equipment on April 1
of year 1 for $16,000; the equipment had an estimated
salvage value of $1,000 and an estimated useful life of 5
years
Year
Depreciation
1
(16,000 – 1,000) x 5 / 15 x
9 / 12
=
4,250
2
5,000 x 3 / 12 + 15,000 x
4 / 15 x 9 / 12
=
3,250
3
4,000 x 3 / 12 + 15,000 x
3 / 15 x 9 / 12
=
2,250
4
3,000 x 3 / 12 + 15,000 x
=
2 / 15 x 9 / 12
=
1,250
5
2,000 x 9 / 12 + 15,000 x
1 / 15 x 9 / 12
=
1,250
6
1,000 x 3 / 12
=
_ 250
15,000
3)
Double-declining-balance Depreciation--depreciation expense
needs to be allocated to the accounting periods affected for
the first year only
a) Illustration--a corporation purchased equipment on April 1
of year 1 for $16,000; the equipment had an estimated
salvage value of $1,000 and an estimated useful life of 5
years
Year
Depreciation
1
(16,000 – 0) x 2 / 5 x 9 / 12 =
4,800
2
(16,000 – 4,800) x 2 / 5
=
4,480
3
(16,000 – 9,280) x 2 / 5
=
2,688
4
(16,000 – 11,968) x 2 / 5
=
1,613
5
(16,000 – 13,581) x 2 / 5
=
968
6
(16,000 – 14,549) x 2 / 5 or
(16,000 – 1,000 – 14,549)
=
_ 451
15,000
13
4)
b.
Units of Activity--depreciation expense does not need to be
allocated to the accounting periods affected since the units of
activity depreciation method is not based on time
Change in Estimate--the effect of a change in estimate should
effect the depreciation calculation for the current year and future
years only
1) Straight-line Depreciation--for the year of the change in
estimate and for future years, depreciation expense is equal to
the cost less the accumulated depreciation less the estimated
salvage value of the plant asset divided by the estimated
remaining useful life of the plant asset
a) Illustration--a corporation purchased equipment on
January 1 of year 1 for $16,000; the equipment had an
estimated salvage value of $1,000 and an estimated useful
life of 5 years; during year 4 it was estimated that the
equipment would have a remaining useful life of 3 years and
a salvage value of $700
Year
Depreciation
1
(16,000 – 1,000) / 5
=
3,000
2
15,000 / 5
=
3,000
3
15,000 / 5
=
3,000
4
(16,000 – 700 – 9,000) / 3
=
2,100
5
6,300 / 3
=
2,100
6
6,300 / 3
=
_2,100
15,300
2)
Sum-of-the-years’-digits Depreciation--for the year of the
change in estimate and for future years, depreciation expense
is equal to the cost less accumulated depreciation less the
estimated salvage value of the plant asset multiplied by a
fraction the denominator of which is the sum of the digits from
1 to the estimated remaining useful life of the plant asset and
the numerator of which is the digits in inverse order
a) Illustration--a corporation purchased equipment on
January 1 of year 1 for $16,000; the equipment had an
estimated salvage value of $1,000 and an estimated useful
life of 5 years; during year 4 it was estimated that the
equipment would have a remaining useful life of 3 years and
a salvage value of $700
14
Year
1
2
3
4
5
6
(16,000 – 1,000) x 5 / 15
15,000 x 4 / 15
15,000 x 3 / 15
(16,000 – 700 – 12,000) x
3 / 6
3,300 x 2 / 6
3,300 x 1 / 6
=
=
=
=
=
=
Depreciation
5,000
4,000
3,000
1,650
1,100
_ 550
15,300
3)
Double-declining-balance Depreciation--for the year of the
change in estimate and for future years, depreciation expense
is equal to the cost less accumulated depreciation of the plant
asset multiplied by a fraction the numerator of which is 2 and
the denominator of which is the estimated remaining useful life
of the plant asset
a) Illustration--a corporation purchased equipment on
January 1 of year 1 for $16,000; the equipment had an
estimated salvage value of $1,000 and an estimated useful
life of 5 years; during year 4 it was estimated that the
equipment would have a remaining useful life of 3 years and
a salvage value of $700
Year
Depreciation
1
(16,000 – 0) x 2 / 5
=
6,400
2
(16,000 – 6,400) x 2 / 5 =
3,840
3
(16,000 – 10,240) x 2 / 5 =
2,304
4
(16,000 – 12,544) x 2 / 3 =
2,304
5
(16,000 – 14,848) x 2 / 3
or (16,000 – 14,848 –
=
452
700)
6
=
_
0
15,300
4)
Units of Activity Depreciation--for the year of the change in
estimate and for future years, depreciation expense is equal to
the cost less accumulated depreciation less the estimated
salvage value of the plant asset divided by the estimated
remaining useful life of the plant asset in units of activity
multiplied by the actual units of activity for each year
a) Illustration--a corporation purchased equipment on
January 1 of year 1 for $16,000; the equipment had an
estimated salvage value of $1,000 and an estimated useful
life of 6,000 hours; actual usage of the equipment was
1,400 hours in year 1, 1,500 hours in year 2, and 1,100
hours in year 3; during year 4 it was estimated that the
equipment would have a salvage value of $700; actual usage
of the equipment was 1,000 hours in year 4, 600 hours in
15
year 5, and
Year
1
2
3
4
5
6
D.
400 hours in year 6
Depreciation
(16,000 – 1,000) / 6,000 x 1,400 =
3,500
2.50 x 1,500
=
3,750
2.50 x 1,100
=
2,750
(16,000 –10,000 – 700) /
(6,000 – 4,000) x 1,000
=
2,650
2.65 x 600
=
1,590
2.65 x 400
=
_1,060
15,300
Disposition--a disposition of a plant asset is the sale, exchange,
retirement, involuntary conversion, or abandonment of the plant asset
1. Accounting--a gain or loss on the disposition of a plant asset is
recognized for the difference between the cost less the accumulated
depreciation of the plant asset and the proceeds, if any, from the
disposition of the plant asset
a. Depreciation--depreciation expense should be recorded from the
beginning of the accounting period to date of disposition of the
plant asset before recording the disposition of the plant asset
2. Illustration--a corporation purchased equipment on January 1 of year
for $16,000; the equipment had an estimated salvage value of $1,000 and
an estimated useful life of 5 years; the corporation sold the equipment
on May 1 of year 4 for $6,400
Depreciation Expense
1,000
((16,000 – 1,000) / 5 x 4 / 12)
Accumulated Depreciation
1,000
Cash
Accumulated Depreciation
(3 x 3,000 + 1,000)
Equipment
Gain on Disposal of Equipment
E.
6,400
10,000
16,000
400
Natural Resources
1. Classification--natural resources are assets that are consumed
physically over the period of use and are created only by an act of
nature
2. Cost--cost is the cash or cash equivalent price paid to find natural
resources and bring them to the point where they are ready to be
extracted and includes the following items:
a. Acquisition Cost
1) Exploration--the price paid to obtain the property right to
search for and find an undiscovered natural resource is
deferred until it is determined whether the natural resource
exists or not--at which time the cost is capitalized if the
natural resource is found or is expensed if the natural
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resource is not found
Existing Natural Resource--the price paid for an already
discovered natural resource is capitalized
Exploration Costs--the costs incurred to find natural resources are
deferred until it is determined whether the natural resource exists
or not--at which time the costs are capitalized if the natural
resource is found or are expensed if the natural resource is not
found
1) Illustrations
a) A corporation acquired the right to explore for a natural
resource on land in Texas for $100,000 and incurred
exploration costs of $200,000 in successfully finding the
natural resource; the corporation incurred development
costs of $400,000 in getting the property ready for
extraction
Deferred Acquisition and Exploration
Costs
100,000
Cash
100,000
2)
b.
Deferred Acquisition and Exploration
Costs
Cash
b)
200,000
200,000
Natural Resources
Deferred Acquisition and
Exploration Costs
300,000
Natural Resources
Cash
400,000
300,000
400,000
A corporation acquired the right to explore for a natural
resource on land in Texas for $100,000 and incurred
exploration costs of $200,000 in unsuccessfully finding the
natural resource
Deferred Acquisition and Exploration
Costs
100,000
Cash
100,000
Deferred Acquisition and Exploration
Costs
Cash
Acquisition and Exploration Expense
Deferred Acquisition and
Exploration Costs
17
200,000
200,000
300,000
300,000
2)
Oil and Gas Industry--acquisition and exploration costs in the
oil and gas industry may be handled in either of two ways
a) Full Costing--under the full costing method the cost of
unsuccessful exploration ventures are capitalized as a
necessary cost of successful exploration ventures
I) Illustrations--a corporation acquired the right to
explore for oil on land in Texas for $100,000 and on
land in Oklahoma for $100,000; the corporation incurred
exploration costs of $200,000 in successfully finding
oil on the land in Texas and of $200,000 in
unsuccessfully finding oil on the land in Oklahoma; the
corporation incurred development costs of $400,000 in
getting the property in Texas ready for extraction
Deferred Acquisition and
Exploration Costs
200,000
(100,000 + 100,000)
Cash
200,000
Deferred Acquisition and
Exploration Costs
(200,000 + 200,000)
Cash
b)
400,000
400,000
Natural Resources
Deferred Acquisition and
Exploration Costs
600,000
Natural Resources
Cash
400,000
600,000
400,000
Successful Efforts--under the successful efforts method
only the cost of successful exploration ventures are
capitalized
I) Illustrations--a corporation acquired the right to
explore for oil on land in Texas for $100,000 and on
land in Oklahoma for $100,000; the corporation incurred
exploration costs of $200,000 in successfully finding
oil on the land in Texas and of $200,000 in
unsuccessfully finding oil on the land in Oklahoma; the
corporation incurred development costs of $400,000 in
getting the property in Texas ready for extraction
Deferred Acquisition and
Exploration Costs
200,000
(100,000 + 100,000)
Cash
200,000
18
Deferred Acquisition and
Exploration Costs
(200,000 + 200,000)
Cash
Acquisition and Exploration
Expense
Natural Resources
Deferred Acquisition and
Exploration Costs
Natural Resources
Cash
400,000
400,000
300,000
300,000
600,000
400,000
400,000
c.
3.
Development Costs--the costs incurred to get the natural resource
ready for extraction (such as drilling costs, tunnels, shafts, and
wells) are capitalized
d. Restoration Costs--the costs incurred to restore the property to
its natural state after extraction has occurred are capitalized
Depletion--depletion is the allocation of the cost of natural resources
in a systematic and rational manner to the cost of producing the
natural resource to be sold (as the direct materials cost
a. Method--the units of activity method is used to allocate the cost
less the estimated salvage value of the natural resource to the
cost of production
b. Illustration--a corporation purchased a coal mine at a cost of
$1,150,000 on January 1 of year 1; the mine had an estimated
restoration cost of $150,000, an estimated salvage value of
$300,000, and an estimated useful life of 100,000 tons of coal;
during year 1 35,000 tons of coal were mined at a direct labor and
overhead cost of $525,000, and 30,000 tons of coal were sold for
$1,050,000
Natural Resources
1,150,000
Cash
1,050,000
Inventory
Accumulated Depletion
((1,150,000 + 150,000 – 300,000) /
100,000 x 35,000)
350,000
Inventory
Cash
525,000
350,000
525,000
Cash
Sales
1,050,000
1,050,000
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Cost of Goods Sold
Inventory
((350,000 + 525,000) / 35,000 x 30,000)
F.
750,000
750,000
Impairment--impairment occurs when the carrying amount of an asset is not
recoverable due to events or changes in circumstances (such as a projection
of continuing losses associated with an asset, an accumulation of costs
significantly in excess of the amount originally expected to acquire or
construct an asset, a significant adverse change in legal factors or in the
business climate that affects the value of an asset, a significant decrease
in the fair market value of an asset, and a significant change in the
extent or manner in which an asset is used)
1. Recoverability Test--an impairment has occurred if the undiscounted
future net cash flows expected from the use of the asset and its
eventual disposition is less than the carrying amount of the asset
2. Amount of Loss--the impairment loss is the excess of the carrying
amount of the asset over its fair market value, if an active market for
it exists, or the present value of the future net cash flows expected
from the use of the asset and its eventual disposition, if an active
market for it does not exist
a. Held for Use--the reduced carrying value of the asset held for use
in operations becomes its new cost basis
1) Illustrations
a) A corporation had an asset with a carrying amount of
$500,000, undiscounted expected future net cash flows of
$520,000, and a fair market value of $420,000
525,000 > 500,000
No Entry
b)
A corporation had an asset with a carrying amount of
$500,000, undiscounted expected future net cash flows of
$470,000, and a fair market value of $420,000
470,000 < 500,000
Loss on Impairment
(500,000 – 420,000)
Accumulated Depreciation
b.
G.
80,000
80,000
Held for Disposal--an asset held for disposal should be reported at
the lower of cost or net realizable value
Disclosure
1. Valuation--the basis of valuation for property, plant, equipment, and
natural resources should be disclosed
2. Liens--pledges, liens, and other commitments related to property,
plant, equipment, and natural resources should be disclosed
20
3.
4.
5.
Depreciation--the following disclosures should be made
a. Depreciation expense for the year.
b. Balances of major classes of depreciable assets, by nature and
function.
c. Accumulated depreciation, either by major classes of depreciable
assets or in total.
d. A general description of the method or methods used in computing
depreciation with respect to major classes of depreciable assets.
Oil and Gas Industry--oil and gas companies should disclose the method
of accounting for costs incurred in oil and gas producing activities
(e.g., full costing versus successful efforts) and the manner of
disposing of costs relating to oil and gas producing activities (e.g.,
expensing immediately versus depreciation and depletion)
Impairments--the asset impaired, the events leading to the impairment,
the amount of the loss, and how fair market value was determined should
be disclosed
21