Accounting for
Property, Plant and
Equipment
and Intangible Assets
Acquisition and Disposition – Part 1
I N T ERMEDIATE ACCOU N T I NG I
CHA PT ER 1 0
TYPES OF ASSETS
For financial reporting purposes, long-lived, revenueproducing assets typically are classified in two categories:
 Property, plant, and equipment. Assets in this category
include land, buildings, equipment, machinery, autos,
and trucks. Natural resources such as oil and gas
deposits, timber tracts, and mineral deposits also are
included.
 Intangible assets. Unlike property, plant, and equipment
and natural resources, these assets lack physical
substance and the extent and timing of their future
benefits typically are highly uncertain. They include
patents, copyrights, trademarks, franchises, and goodwill.
COSTS TO BE CAPITALIZED
 To capitalize an expenditure means to
record the purchase as an asset rather
than an expense.
 Costs are capitalized, rather than expensed,
if they are expected to produce benefits
beyond the current period.
 Property, plant, and equipment and
intangible assets can be acquired through
purchase, exchange, lease, donation, selfconstruction, or a business combination.
 If purchased, the initial capitalized cost
includes the purchase price and all
expenditures necessary to bring the asset
to its desired condition and location for
use.
Asset Descriptions and Typical Acquisition Costs
Property, plant and equipment
See page 529
Intangible assets
See page 529
Brief Exercise 10–1, page 564
Capitalized cost of the machine:
Purchase price
Freight
Installation
Testing
Total cost
$35,000
1,500
3,000
2,000
$41,500
Note: Personal property taxes on the machine for
the period after acquisition are not part of
acquisition cost. They are expensed in the period
incurred.
Brief Exercise 10–2, page 565
Capitalized cost of land:
Purchase price
Broker’s commission
Title insurance
Miscellaneous closing costs
Demolition of old building
Total cost
$600,000
30,000
3,000
6,000
18,000
$657,000
All of the expenditures, including the costs to
demolish the old building, are included in the
initial cost of the land.
Exercise 10–5, page 567
Organization cost expense ($12,000 + 3,000)
Patent ($20,000 + 2,000)
Pre-opening expenses
Furniture
Cash
15,000
22,000
40,000
30,000
107,000
LUMP-SUM PURCHASES
 A group of various assets acquired for a
single sum.
 The purchase price is allocated in
proportion to the relative fair values of the
assets acquired.
LUMP-SUM PURCHASES: Example
The Smyrna Hand & Edge Tools Company purchased an existing factory for a
single sum of $2,000,000. The price included title to the land, the factory building,
and the manufacturing equipment in the building, a patent on a process the
equipment uses, and inventories of raw materials. An independent appraisal
estimated the fair values of the assets (if purchased separately) at $330,000 for the
land, $550,000 for the building, $660,000 for the equipment, $440,000 for the
patent and $220,000 for the inventories. The lump-sum purchase price of
$2,000,000 is allocated to the separate assets as follows:
Asset
Allocated
Cost
Fair values
Land
$300,000
Land
$ 330,000 15% (330,000/2,200,000)
Building
500,000
Building
550,000 25
(550,000/2,200,000)
Equipment
660,000 30
(660,000/2,200,000)
Equipment
600,000
Patent
440,000 20
(440,000/2,200,000)
Patent
400,000
Inventories
220,000 10
(220,000/2,200,000)
Total
$2,200,000 100%
Inventories
200,000
Total
$2,000,000
Calculation
($2,000,000 X .15)
($2,000,000 X .25)
($2,000,000 X .30)
($2,000,000 X .20)
($2,000,000 X .10)
Brief Exercise 10–3, page 564
Cost of land and building:
Purchase price
Broker’s commission
Title insurance
Miscellaneous closing costs
Total cost
$600,000
30,000
3,000
6,000
$639,000
The total must be allocated to the land and building based on
their relative fair values:
Asset
Land
Building
Total
Fair Value
$420,000
280,000
$700,000
Percent of Total
Fair Value
60%
40
100%
Initial
Valuation
(Percent x
$639,000)
$383,400
255,600
$639,000
Brief Exercise 10–3, additional requirement
Journalize the lump-sum purchase
Asset
Land
Building
Total
Fair Value
$420,000
280,000
$700,000
Percent of Total
Fair Value
60%
40
100%
Debit
Land
383,400
Building
255,600
Cash
Credit
639,000
Initial
Valuation
(Percent x
$639,000)
$383,400
255,600
$639,000
Each asset is
debited for its
allocated value of
the purchase price.
NONMONETARY EXCHANGES
An asset acquired in a nonmonetary exchange generally is
recorded at the fair value of the assets exchanged.

If we can't determine the fair value of either asset in the
exchange, the asset received is valued at the book value of
the asset given.

In exchanges that lack commercial substance, the asset
received is valued at the book value of the asset given.
Brief Exercise 10–11, page 565
Pickup trucks =
Fair value of machinery plus cash paid
$17,000 + 8,000 = $25,000
Loss on exchange =
Book value – Fair value
$20,000 – 17,000 = $3,000
Journal entry:
Pickup trucks (determined above)
Accumulated depreciation (account balance)
Loss (determined above)
Cash
Machinery (account balance)
25,000
45,000
3,000
8,000
65,000
Problem 10–8, page 578 (Case A only)
Requirement 1
Book value less fair value = loss on exchange
$12,000 –
9,000 = $3,000 loss
Fair value of old tractor + cash given = Initial value of new tractor
$9,000
+ 20,000 =
$29,000
Journal entry (not required):
Tractor – New ($9,000 + 20,000)
Accumulated depreciation—old asset (account balance)
Loss ($12,000 – 9,000)
Cash
Tractor – Old (account balance)
29,000
16,000
3,000
20,000
28,000
Problem 10–8, page 579
Requirement 2
Fair value less book value = gain on exchange
$14,000 – 12,000
= $2,000 gain
Fair value of old tractor + cash given = Initial value of new tractor
$14,000
+ 20,000
=
$34,000
Journal entry (not required):
Tractor - New ($14,000 + 20,000)
34,000
Accumulated depreciation—old asset (account balance) 16,000
Cash
Tractor – Old (account balance)
Gain ($14,000 – 12,000)
20,000
28,000
2,000
DISPOSITION OF ASSETS
 When assets are sold, a gain or loss is recognized for the
difference between the consideration received and the
asset's book value.
 When assets are retired, a loss is recognized for the
remaining book value of the asset.
 Depreciation, depletion, or amortization must be brought up
to date prior to recording the asset disposition or exchange.
Brief Exercise 10–10, page 565
Proceeds
Less book value:
Gain on sale of equipment
$16,000
$80,000
(71,000)
9,000
$ 7,000
Journal entry:
Cash
Accumulated depreciation (account balance)
Gain (difference)
Equipment (account balance)
16,000
71,000
7,000
80,000
Brief Exercise 10–10, alternate assumption
Assume the equipment was abandoned rather than sold.
Journal entry:
Accumulated depreciation (account balance) 71,000
Loss (book value)
9,000
Equipment (account balance)
80,000
Recall that when plant assets are discarded, a
loss will always be recognized in the amount
of the asset’s book value.
Accounting for
Property, Plant and
Equipment
and Intangible Assets
Acquisition and Disposition – Part 1
INTERMEDIATE ACCOUNTING I - CHAPTER 10
END OF PRESENTATION