Characteristics of Property,
Plant, and Equipment
•Acquired for use in operations
•Long term in nature and usually
subject
bj to depreciation
d
i i
•Possesses a physical substance from
which the asset derives its value
Acquisition of Property,
Plant, and Equipment
•Recorded at the fair value of
consideration given.
•Includes
I l d all
ll costs normall and
d necessary
to get the asset ready for its intended
use.
•These amounts constitute the
historical cost of the asset.
Land
•Purchase Price
•Closing costs
•Cost of preparing the land
•Assumptions of liens or mortgages
•Land improvements with indefinite
lives
Buildings
Equipment
•If purchased include the purchase
price plus all costs normal and
necessary to get the building ready for
its intended use
•If constructed all costs from excavation
forward are included as part of the
building
Include the purchase price plus all costs
normal and necessary to get the
building ready for its intended use
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Self Constructed Assets
Capitalization of Interest
•Direct costs are assigned to the asset
•Overhead
•Capital expenditures must be made
•Interest must be incurred
•Activities to prepare the asset for use
must be ongoing
– Direct
Di
t costt approach
h
– Full cost approach
– Incremental cost approach
•Interest costs--capitalize if conditions
met.
Capitalization of Interest
•Weighted Average Accumulated
expenditure.
•Avoidable
A id bl iinterest
– Directly attributable
– Weighted average of previous debt
Lump-Sum Purchases
•Sometime a group of assets are
purchased in a single amount.
•The
The single amount must be allocated
to each asset because accounting
treatments differ.
•The allocation is made based on a ratio
of relative fair market values.
Exchanges of Assets
Gains and Losses
Four different accounting treatments
Basis of assets received
less book value of assets given
equals the gain or loss
–
–
–
–
Dissimilar Assets
Similar assets--loss situation
Similar assets--gain situation--no boot
Similar assets--gain situation--boot
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Establishing Basis
Dissimilar Assets
Hierarchical Order
Record the new asset at its basis.
Recognize all gains and losses
– FMV of asset given--if known
– FMV of asset received--if
received if more clearly
evident
– BV of asset given--last resort
Similar Assets
Loss Situation
Similar Assets
Gain Situation--No Boot
Record the new asset at its basis.
Recognize the loss
Defer the gain by reducing the basis of
the new asset
Similar Assets
Gain Situation--Boot
Costs Subsequent to
Acquisition
Recognize only the portion of the gain
attributable to the boot received
Gain
Recognized
=
Total
Gain
Cash Received
X
FMV of All Assets Received
Defer the rest of the gain
•Costs incurred to achieve future
benefits are capitalized.
•One
One of three conditions must be
present:
– The useful life must increase.
– The quantity produced must increase.
– The quality of production must be
enhanced.
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Types of Capital Expenditures
•Additions
•Improvements and Replacements
•Rearrangement and Reinstallation
•Major Repairs
Improvements and Extensions
•An improvement substitutes a better
asset for an existing one.
•A
A replacement
l
substitutes
b i
a similar
i il
asset for an existing one.
Rearrangement and Reinstallation
•Changes to an existing production
facility.
•Rearrangements
R
and
d reinstallations
i
ll i
are
capitalized as new, separate assets.
Additions
•These are increases or extensions of
existing assets.
•Additions
Addi i
are capitalized
i li d as new,
separate assets.
Improvements and Extensions
There capitalization approaches.
– Substitution approach.
– Capitalize the new cost
– Charge accumulated depreciation
Major Repairs
•Ordinary repairs are expensed.
•Major repairs are capitalized as a new
asset.
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