Accounting for
Property, Plant and
Equipment
and Intangible Assets
Acquisition and Disposition – Part 2
I N T ERMEDIATE ACCOU N T I NG I
CHA PT ER 1 0
SELF-CONSTRUCTED ASSETS
A company may construct an asset (such as a building) for its own use.
Two challenges exist with regard to assigning costs to selfconstructed assets:
• Determining the amount of overhead to allocate
• Deciding on the proper treatment of interest incurred during
construction
Self-constructed Asset Costs

The cost of a self-constructed asset includes identifiable
materials and labor and a portion of the company’s
manufacturing overhead costs.

The full-cost approach is the generally accepted method used to
determine the cost of a self-constructed asset.

Interest costs incurred while financing the construction project
should be capitalized as part of the asset cost
INTEREST CAPITALIZATION

Interest is capitalized during the construction period for (a) assets built for a
company’s own use as well as for (b) assets constructed as discrete projects for sale
or lease (a ship or a real estate development, for example).
 Excludes inventories routinely manufactured in large quantities on a repetitive basis
and assets already in use or ready for intended use.
 The capitalization period starts with the first expenditure (materials, labor, or
overhead) and ends either when the asset is substantially complete and ready for use
or when interest costs no longer are being incurred.
 Interest costs incurred can pertain to borrowings other than those obtained
specifically for the construction project.
 If material, the amount of interest capitalized during the period must be disclosed.
 Interest costs incurred during the productive life of the asset are expensed as
incurred.
(h)
Exercise 10–23, page 570
Average accumulated expenditures:
$6,000,000
= $3,000,000
2
Interest capitalized:
$3,000,000
– 1,500,000
1,500,000
x 10% =$150,000
x 7%* = 105,000
$255,000 = interest capitalized
* Weighted-average rate of all other debt:
$2,000,000 x
4,000,000 x
$6,000,000
$420,000
$6,000,000
9% =$180,000
6% = 240,000
$420,000
= 7%
The interest of $255,000 is added to
the cost of the building. The
remaining interest cost incurred but
not capitalized is expensed.
Exercise 10–25, page 570
Average accumulated expenditures for 2013:
January 1, 2013 $ 600,000 x 12/12 = $ 600,000
March 31, 2013
1,200,000 x 9/12 =
900,000
June 30, 2013
800,000 x 6/12 =
400,000
September 30, 2013 600,000 x 3/12 =
150,000
December 31, 2013 400,000 x 0/12 =
-0$2,050,000
Interest capitalized:
$2,050,000
– 1,500,000 x 8.0% = $120,000
550,000 x 10.5%* = 57,750
$177,750 = interest capitalized
* Weighted-average rate of all other debt:
$5,000,000 x 12% =$600,000
3,000,000 x 8% = 240,000
$8,000,000
$840,000
$840,000 = 10.5%
$8,000,000
RESEARCH AND DEVELOPMENT






All research and development costs are charged to expense
in the period incurred.
 R&D costs entail a high degree of uncertainty of
future benefits.
 It is difficult to match R&D costs with future
revenues.
Research is planned search or critical investigation aimed
at discovery of new knowledge.
Development is the translation of research findings into a
plan for a new product or process or for a significant
improvement to an existing product or process.
R&D costs include labor costs, materials, depreciation and
amortization of assets used in R&D activities, and a
reasonable allocation of indirect costs related to those
activities.
In general, R&D costs pertain to activities that occur prior
to the start of commercial production.
GAAP requires disclosure of total R&D expense incurred
during the period.
R&D PERFORMED FOR OTHERS
 The principle requiring the immediate expensing of
R&D does not apply to companies that perform R&D
for other companies under contract.
 Under these situations, the R&D costs would be
capitalized as inventory and carried forward into
future years until the project is completed.
 Income from these contracts can be recognized using
either the percentage-of-completion or completed
contract method.
Exercise 10–27, page 571
Research and development expense:
Salaries and wages for lab research $ 400,000
Materials used in R&D projects
200,000
Fees paid to outsiders for R&D projects 320,000
Depreciation on R&D equipment
120,000
Total
$1,040,000
The patent filing and legal costs are capitalized as the cost of the patent. The salaries, wages,
and supplies for R&D performed for another company are included as inventory and expensed
as cost of goods sold using either the completed contract or percentage-of-completion method.
(h)
Exercise 10–26, page 570
Correcting entry to expense R&D costs incorrectly capitalized:
Research and development expenditures:
Basic research to develop the technology
Engineering design work
Development of a prototype
Testing and modification of the prototype
Total
$2,000,000
680,000
300,000
200,000
$3,180,000
Research and development expense
Patent
3,180,000
3,180,000
Correcting entry to capitalize the cost of equipment incorrectly
capitalized as patent:
Equipment
Patent
60,000
60,000
Entry to record depreciation expense on equipment used in R&D
projects:
Research and development expense
Accumulated depreciation—equipment
10,000
10,000
No adjustment is necessary for the $40,000 legal and other fees for patent application or legal fees for successful defense of
new patent. These items were correctly capitalized as costs of the patent.
Accounting for
Property, Plant and
Equipment
and Intangible Assets
Acquisition and Disposition – Part 2
INTERMEDIATE ACCOUNTING I - CHAPTER 10
END OF PRESENTATION