Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
► Introduction:
Property, plant, and equipment
is defined as tangible assets that are held for use in production or supply of goods
and services, for rentals to others, or for administrative purposes; they are
expected to be used during more than one period.
Nature of Property, plant, and equipment :
► Used in operations, and not for resale.
► Long-term in nature and usually depreciated, except land.
► Possess physical substance.
Property, plant, and equipment Includes:
 Land,
 Land Improvements
 Building structures (offices, factories, warehouses), and
 Equipment (machinery, furniture, tools).
► The Value of Property, plant, and equipment :
A) Value of Property plant and equipment at Acquisition date:
Determined using (Historical Cost Principle):
the cash or cash equivalent price of obtaining the asset and bringing it to the
location and condition necessary for its intended use.
B) Value of Property plant and equipment in subsequent periods:
Determined using either the:
1- Cost Method (Historical Cost)
2- Fair value (revaluation) method.
Acquisition Cost Property Plant and Equipment (PP&E):
1- Land
Includes all costs to acquire land and Making it ready for use. Costs typically
include:
(1) purchase price;
(2) Real estate Broker’s Commission
(3) Closing costs, such as title, attorney’s fees, and recording fees;
(4) assumption of any liens, mortgages, or encumbrances on the property;
(5) additional land improvements that have an indefinite life.
(Clearing, Cleaning, Filling, Grading)
(6) Accrued (Delinquent) Property taxes.
Intermediate Accounting 2:IFRS
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Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
2- Land Improvement (Must depreciated)
Includes all land improvements with limited lives (definite life)
(1) Private driveways,
(2) Walks,
(3) Fences, and
(4) Parking lots
(5) Landscaping
(6) Underground sprinklers
Notes
► Land acquired and held for speculation is classified as an investment.
► Land held by a real estate concern for resale should be classified as
inventory.
3- Building
Purchased
Purchase price
Real estate Broker’s Commission
Closing costs
Improvements to the building
(Before the use of the building)
Constructed
Contract Price
Architects Fees
Excavation Costs
Building Permits
Materials, Labor, Overhead ( Interest)
Note:
If a real estate (Land + Building) Purchased as Plant Site it must recorded as
Land otherwise recorded as Land and Building
4- Equipment
Include all costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
(1) purchase price,
(2) freight and handling charges
(3) insurance on the equipment while in transit,
(4) cost of special foundations if required,
(5) assembling and installation costs, and
(6) costs of conducting trial runs.
Intermediate Accounting 2:IFRS
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Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
E10-1 :
The expenditures and receipts below are related to land, land improvements, and
buildings acquired for use in a business enterprise. Determine how the following
should be classified:
No.
1
2
3
4
5
6
Items
Money borrowed to pay building contractor
Payment for construction from note proceeds
Cost of land fill and clearing
Delinquent real estate taxes on property assumed
Premium on 6-month insurance policy during construction
Refund of 1-month insurance premium because construction
completed early
7
Architect’s fee on building
8
Cost of real estate purchased as a plant site (land €200,000
and building €50,000)
9
Commission fee paid to real estate agency
10 Installation of fences around property
11 Cost of razing and removing building
12 Proceeds from salvage of demolished building
13 Cost of parking lots and driveways
14 Cost of trees and shrubbery (permanent)
N/P, B, L, L, B, -B, B, L, L, LI, L, -L, LI, L
Intermediate Accounting 2:IFRS
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Classification
Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
Capitalization of Interest
Capitalization considers three items:
1. Qualifying assets. ‫تحديد األصول‬
Two types of assets are qualified for interest Capitalization:
► Assets under construction for a company’s own use.
► Assets intended for sale or lease that are constructed or produced as
discrete projects.
‫أصول سوف يتم بيعها أو تأجيرها وتعتبر مشروعات مستقلة‬
2. Capitalization period.
Begins when:
1. Expenditures for the asset have been made.
2. Activities for readying the asset are in progress .
3. Interest costs are being incurred.
Ends when:
The asset is substantially complete and ready for use
3. Amount to capitalize.
Capitalize the lesser of:
1. Actual interest costs
2. Avoidable interest
the amount of interest that could have been avoided if expenditures for the
asset had not been made.
.‫مقدار الفائدة التي كان يمكن تفاديها لو لم يتم اإلنفاق على األصل باستخدام القروض‬
Exercise 2:
Blue Corporation borrowed $200,000 at 12% interest from State Bank on Jan. 1,
2011, for specific purposes of constructing special-purpose equipment to be used in
its operations. Construction on the equipment began on Jan. 1, 2011, and the
following expenditures were made prior to the project’s completion on Dec. 31,
2011:
Actual Expenditures
Amount
January 1, 2011
$ 100,000
April 30, 2011
150,000
November 1, 2011
300,000
December 31, 2011
100,000
Total expenditures
$ 650,000
Other general debt existing on Jan. 1, 2011:
1. $500,000, 14%, 10-year bonds payable
2. $300,000, 10%, 5-year note payable
Instructions:
Determine the cost of Equipment , Prepare all required Journal entries.
Intermediate Accounting 2:IFRS
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Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
Step 1 - Compute weighted-average accumulated expenditures.
Weighted
Average
Actual
Capitalization
Accumulated
Expenditures
Period
Expenditures
$
100,000
12/12
$
Apr. 30
150,000
8/12
100,000
Nov. 1
300,000
2/12
50,000
Dec. 31
100,000
0/12
-
Date
Jan. 1
$
650,000
$
100,000
250,000
Step 2 - Compute the Total Interest ( Actual Interest).
Interest
Rate
12%
14%
10%
Debt
Specific Debt
General Debt
$ 200,000
500,000
300,000
Actual Interest
Actual
Interest
$ 24,000
70,000
30,000
124,000
Step 3 - Compute the weighted-average interest Rate on General Debt.
WAIR =
=
= 12.5%
Step 4 - Compute the Avoidable Interest.
Accumulated
Interest Rate
Expenditure
From Specific Debt
$ 200,000
12.0%
From General Debt
50,000
12.5%
Avoidable Interest
Avoidable
Interest
$ 24,000
6,250
30,250
Step 5 – Capitalize the lesser of Avoidable interest or Actual interest.
Avoidable interest
= $ 30,250
Actual interest
= $124,000
Intermediate Accounting 2:IFRS
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Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
Step 6 – Capitalize the lesser of Avoidable interest or Act ual interest.
Date
1
Accounts
Dr.
650,000
Building
Cash
Interest Expenses
Cash
Building
Interest expenses
2
3
Cr.
650,000
124,000
124,000
30,250
30,250
Ex. 10-158—Weighted-Average Accumulated Expenditures.
On April 1, Paine Co. began construction of a small building. Payments of $120,000
were made monthly for four months beginning on April 1. The building was
completed and ready for occupancy on August 1. For the purpose of determining
the amount of interest cost to be capitalized, calculate the weighted-average
accumulated expenditures on the building by completing the schedule below:
Date
Expenditures
Expenditures Capitalization Period
Weighted-Average
Solution 10-158
Date
Expenditures
April 1
May 1
June 1
July 1
Expenditures Capitalization Period
$120,000
120,000
120,000
120,000
4/12
3/12
2/12
1/12
Weighted-Average
$ 40,000
30,000
20,000
10,000
$100,000
Ex. 10-159—Capitalization of interest.
On March 1, Mocl Co. began construction of a small building. The following
expenditures were incurred for construction:
March 1 $ 75,000
May 1
180,000
July 1
100,000
April 1
June 1
$ 74,000
270,000
The building was completed and occupied on July 1. To help pay for construction
$50,000 was borrowed on March 1 on a 12%, three-year note payable. The only
other debt outstanding during the year was a $500,000, 10% note issued two years
ago.
Intermediate Accounting 2:IFRS
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Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
Instructions
(a) Calculate the weighted-average accumulated expenditures.
(b) Calculate avoidable interest.
Solution 10-159
(a)
Date Expenditures
March 1 $ 75,000
April 1
74,000
May 1
180,000
June 1
270,000
July 1
100,000
(b)Weighted-Average
Accum. Expend.
$50,000
46,000
$96,000
Capitalization Weighted-Average
Period
Accum. Expend.
4/12
$25,000
3/12
18,500
2/12
30,000
1/12
22,500
0
0
$96,000
Rate
.12
.10
Avoidable
Interest
$ 6,000
4,600
$10,600
:‫مالحظة هامة‬
:‫ شهور مثال ا‬9‫اذا كان المشروع ينتهي خالل سنة و‬
) ‫ تحسب السنة األولى بالطريقة العادية ( السابقة‬
‫ شهور ) فيجب وضع جميع‬9 ( ‫ أما السنة الثانية‬
‫مصروفات السنة األولى باإلضافة الي الفوائد في‬
‫ أوالً قبل حساب‬21/9 ‫السنة األولى ونضرب في‬
. ‫مصروفات التسعة شهور‬
Intermediate Accounting 2:IFRS
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Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
► Valuation of Property, plant, and equipment :
Companies should record property, plant, and equipment:
► at the fair value of what they give up or
► at the fair value of the asset received,
whichever is more clearly evident.
Valuation Problems:
1. Cash Discounts —
Whether taken or not — generally considered a reduction in the cost of the
asset.
Exercise:
On January 1, 2013. ABC Purchased Equipment for $10,000, Terms 2/10, n30
and the payment was Paid on January 15, 2013.
Date
Accounts
Dr.
Cr.
Jan 1, 2013 Equipment ($10,000 x 98%)
9,800
Accounts Payable
9,800
Jan 15, 2013 Accounts Payable
9,800
Cash Discount forfeited
200
Cash
10,000
2. Deferred-Payment Contracts —
Assets, purchased through long term credit, are recorded at the present value
of the consideration exchanged.
Exercise:
Sutter company purchases a specially built robot spray painter for its
production line. The company issues a $100,000 five years, zero interest
bearing note to Wrigley Robotics Inc. for the new equipment the prevailing
market rate of interest for obligation of this nature is 10%, Sutter is to pay off
the note in five $20,000 instalments, made at the end of each year. Sutter
cannot readily determine the fair value of this specially built robot.
Date
Accounts
Dr.
Cr.
Date of
Equipment ($20,000 x 3.79079)
75,816
Purchase
Note Payable
75,816
End of First Interest Expenses (75,816 x 10%)
7,582
Year
Note Payable (Difference)
12,418
Cash
20,000
Intermediate Accounting 2:IFRS
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Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
3. Lump-Sum Purchases —
Allocate the total cost among the various assets on the basis of their fair
market values.
Exercise:
On May 13, we purchased land and building for $200,000 cash , the appraised
value of the building is $162,500 and the land is appraised at $87,500 .
Prepare the journal entry to record this transaction ?
Asset
Building
Land
Total
Date
May 13
Apprised Value
162,500
87,500
250,000
% of value Purchase price Assigned cost
65%
200,000
130,000
35%
200,000
70,000
100%
200,000
‫وبعد عملية التوزيع يتم عمل قيد االقتناء‬
Accounts
Building
Land
Cash
Dr.
130,000
70,000
Cr.
200,000
4. Issuance of Shares —
The market value of the shares issued is a fair indication of the cost of the
property acquired.
Exercise I:
On March 31, 2003 the Elcorn Company issued 10,000 shares of $10 Par
Ordinary Shares in Exchange for land , with Fair market value of $120,000.
Journal Entry:
Date
March 31
Accounts
Land
Share Capital – Ordinary
Share Premium – Ordinary
Intermediate Accounting 2:IFRS
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Dr.
120,000
Cr.
100,000
20,000
Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
5. Government Grants ‫المنح الحكومية‬
Grants are assistance received from a government in the form of transfers of
resources to a company in return for past or future compliance with certain
conditions relating to the operating activities of the company.
IFRS allows one of two ways:
1. Credit Deferred Grant Revenue for the subsidy ‫ االعانة المالية‬and amortize
the deferred grant revenue over the useful life of purchased asset.
2. Credit the Granted assets (Reduce the cost of equipment) for the
subsidy and depreciate this amount over the five-year period.
Example 1: Grant for Lab Equipment.
AG Company received a €500,000 subsidy from the government to purchase
lab equipment on January 2, 2011. The lab equipment cost is €2,000,000, it
has a useful life of five years, and is depreciated on the straight-line basis.
Date
Jan 2
Dec 31
Deferred Revenue
Accounts
Dr.
Cash
500
Deferred Grant Rev
Equipment
2,000
Cash
Deferred Grant Rev
100
Grant Revenue
Depreciation Exp.
400
Accumulated Dep.
Cr.
Reduce Cost
Accounts
Dr.
Cr.
500
2,000
Equipment
Cash
1,500
1,500
100
Depreciation Exp.
400
Accumulated Dep.
300
300
Statement of Financial Position
Statement of Financial Position
At Dec 31, 2011
At Dec 31, 2011
Non Current Assets
Non Current Assets
Equipment
2,000
Equipment
1,500
(-) Accumulated Dep.
400
(-) Accumulated Dep.
300
1,600
1,200
Non Current Liability
Deferred Grant Rev.
Current Liability
Deferred Grant Rev.
Income Statement
Income Statement
For the year ended Dec 31, 2011
For the year ended Dec 31, 2011
Grant Revenue
100
Depreciation Exp.
(400)
Depreciation Exp.
(300)
(=) Net Income Effect
(300) (=) Net Income Effect
(300)
Intermediate Accounting 2:IFRS
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Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
6. Contributions ‫التبرع باألصول‬
When a company contributes a non-monetary asset, it should record the
amount of the donation as an expense at the fair value of the donated asset.
Illustration:
Kline Industries donates land to the City of San Paulo for a city park. The land
cost $80,000 and has a fair value of $110,000. Kline Industries records this
donation as follows.
Date
Accounts
Contribution Expense
Land
Gain on Disposal of Land
Dr.
110,000
Cr.
80,000
30,000
► Costs Subsequent to Acquisition
Recognize costs subsequent to acquisition as an asset when the costs can be
 measured reliably and
 it is probable that the company will obtain future economic benefits.
Future economic benefit would include increases in
1. useful life,
2. quantity of product produced, and
3. quality of product produced.
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Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
► Disposition of PP&E
A company may retire plant assets voluntarily or dispose of them by:
 abandonment ( Retirement , Discarded, Scraped ) ‫الترك‬
 Involuntary Conversion ‫التحويل االجباري‬
 sale,
 exchange,
Note:
Depreciation must be taken up to the date of disposition
1. Abandonment of Assets (Voluntary).
Exercise:
Matterhorn Company retires its delivery equipment, which cost $44,000 and
had accumulated depreciation of $39,000, No residual Value is received.
Date
Accounts
[1] Accumulated Depreciation
[3] Loss on Disposal
[2]
Delivery Equipment
Dr.
39,000
5,000
Cr.
44,000
2. Involuntary Conversion
o Sometimes an asset’s service is terminated through some type of
involuntary conversion such as fire, flood, theft, or condemnation.
o Companies report the difference between the amount recovered (e.g.,
from a condemnation award or insurance recovery), if any, and the asset’s
book value as a gain or loss.
o They treat these gains or losses like any other type of disposition.
Exercise:
Matterhorn Company Involuntary retire its delivery equipment due to fire
damage, the equipment cost $44,000 and had accumulated depreciation of
$39,000, Matterhorn receive $6,000 cash from insurance company.
Date
[1]
[3]
[4]
[2]
Accounts
Accumulated Depreciation
Cash
Gain on Disposal
Delivery Equipment
Intermediate Accounting 2:IFRS
Page 12 of 16
Dr.
39,000
6,000
Cr.
1,000
44,000
Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
3. Sale of Plant Assets
BE10-15:
Ottawa Corporation owns machinery that cost $20,000 when purchased on
July 1, 2007. Depreciation has been recorded at a rate of $2,400 per year,
resulting in a balance in accumulated depreciation of $8,400 at December 31,
2010. The machinery is sold on September 1, 2011, for $10,500.
Prepare journal entries to
a) update depreciation for 2011 and
b) record the sale.
4. Exchange of Non-Monetary assets
We have two situations
1- The transaction has commercial substance (when)
a- If the company expect a change in future cash flows as a result
of the exchange
b- If the two parties’ economic positions change, the transaction
has commercial substance.
2- The transaction has No commercial substance.
The transaction has commercial substance:
(any Gain or loss should be recognized)
1- book value (old)
= Cost – Accumulated Depreciation
2- Gain or loss
= FMV (old) – BV (old)
3- Cost of new
= FMV (old) + Cash paid (Or) – Cash Received
(List Price – Trade in allowance)
3- Journal Entry
FMV = Fair Market Value
Intermediate Accounting 2:IFRS
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Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
The transaction has No commercial substance:
(only loss should be recognized)
1- Book value (old)
= Cost – Acc/Dep
2- Gain or loss
= FMV (old) – BV(old)
3- Cost of new
= FMV (old) + Cash paid (Or) – Cash Received - Gain
(List Price – Trade in allowance)
3- Journal Entry
Exercise:
Information Processing, Inc. trades its used machine for a new model at
Jerrod Business Solutions Inc. The exchange has commercial substance. The
used machine has a book value of $8,000 (original cost $12,000 less $4,000
accumulated depreciation) and a fair value of $9,000. The new model lists for
$16,000. Jerrod gives Information Processing a trade-in allowance of $9,000
for the used machine.
Instructions:
1. By How much will Information Processing computes the cost of the new
asset.
2. Prepare the required journal entry.
3. Repeat requirements (1) and (2) assuming the transaction has no
commercial substance.
Solution:
1. The cost of new assets computed as follows:
1- book value (old) = $12,000 - $4,000
= $ 8,000
2- Gain or loss
= $ 9,000 - $8,000
= $ 1,000 Gain
3- Cost of new
= $ 9,000 + ($16,000 - $9,000) = $16,000
2. Journal Entry
Date
Description
Equipment (New)
Accumulated Depreciation
Cash
Equipment (old)
Gain on disposal of equipment
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Dr.
16,000
4,000
Cr.
7,000
12,000
1,000
Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
3. Assuming No Commercial Substance.
The cost of new assets computed as follows:
1- book value (old) = $12,000 - $4,000
= $ 8,000
2- Gain or loss
= $ 9,000 - $8,000
= $ 1,000
3- Cost of new
= $ 9,000 + ($16,000 - $9,000) - $1,000 = $15,000
The Journal entry is as follows:
Date
Description
Equipment (New)
Accumulated Depreciation
Cash
Equipment (old)
Dr.
12,000
4,000
Cr.
7,000
12,000
E10-19:
Santana Company exchanged equipment used in its manufacturing operations
plus $2,000 in cash for similar equipment used in the operations of Delaware
Company. The following information pertains to the exchange.
Santana
$28,000
Delaware
$28,000
Accumulated Depreciation
19,000
10,000
Fair value of equipment
13,500
15,500
Equipment (cost)
Cash given up
2,000
Instructions:
Prepare the journal entries to record the exchange on the books of both
companies.
Solution:
Calculation of the cost of new assets
Book Value
Gain or Loss
Cost of New
Santa
28,000 – 19,000 = $9,000
13,500 – 9,000 = $4,500
13,500 + 2,000 = 15,500
Intermediate Accounting 2:IFRS
Page 15 of 16
Delaware
28,000 – 10,000 = $18,00
15,500 – 18,000 = $(2,500)
15,500 – 2,000 = $13,500
Ehab Abdou 97672930
Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment
Santa
Delaware:
Intermediate Accounting 2:IFRS
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