PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Property, Plant, and Equipmentand Intangible Assets: Acquisition

and Disposition

10

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

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Equipment• Net purchase price• Taxes• Transportation costs• Installation costs• Modification to building

necessary to install equipment

• Testing and trial runs

Tangible Fixed AssetsLand (not depreciable)• Purchase price• Real estate commissions• Attorney’s fees• Title search• Title transfer fees• Title insurance premiums• Removing old buildings

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Land Improvements

Separately identifiable costs of• Driveways• Parking lots• Fencing• Landscaping• Private roads

Buildings• Purchase price• Attorney’s fees• Commissions• Reconditioning

Tangible Fixed Assets

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Examples of accounting for acquisition costs

• Read these two exercises before going to the next slides:

• Exercise 10-1 (page 537)

• Exercise 10-2 (page 537)

Exercise 10-1 (page 537)

Capitalized cost of land: Purchase price $60,000 Demolition of old building $4,000 Less: Sale of materials (2,000) 2,000 Legal fees for title investigation 2,000 $64,000 Capitalized cost of building: Construction costs $500,000 Architect's fees 12,000 Interest on construction loan 5,000 Total cost of building $517,000

Note: Property taxes are expensed in the period incurred.

Exercise 10-2

Machine: $45,000 + 2,200 + 700 + 1,000 = $48,900

Machine ..................................................... 48,900 Accounts payable .................................... 47,200 Cash ......................................................... 1,700

To record prepaid insurance for the machine.

Prepaid insurance........................................ 900 Cash ......................................................... 900

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Natural Resources• Acquisition costs• Exploration costs• Development costs• Restoration costs

The initial cost of an intangible asset includes the purchase

price and all other costs necessary to bring it to

condition and location for use, such as legal and filing fees.

Intangible Assets• Patents• Copyrights• Trademarks• Franchises• Goodwill

Other Fixed Assets

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Intangible Assets

Lack physicalsubstance.

Exclusive Rights.

IntangibleIntangibleAssetsAssets

IntangibleIntangibleAssetsAssets

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Examples: Intangible Assets

• Exercise 10-5 (page 538)– Intangible Assets (in general)

• Exercise 10-7 (page 539)– Intangible Asset - Goodwill

Exercise 10-5 (page 538)

Organization Expense ($12,000 + 3,000) 15,000 Patent ($20,000 + 2,000) 22,000 Pre-opening Expense 40,000 Furniture 30,000 Cash 107,000

Exercise 10-7 (page 539)

Smith Corp. Net Assets (book value) $7,800,000 Adjustments to Fair Value: Receivables -200,000 PP&E 1,400,000 Intangibles 1,000,000 + 2,200,000 Apparent fair value received $10,000,000 Amount actually paid $11,000,000 “Extra” amount paid = Goodwill of $1,000,000

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Several assets are acquired for a single price that maySeveral assets are acquired for a single price that maybe lower than the sum of the individual asset fair values.be lower than the sum of the individual asset fair values.Several assets are acquired for a single price that maySeveral assets are acquired for a single price that may

be lower than the sum of the individual asset fair values.be lower than the sum of the individual asset fair values.

Lump-Sum Purchases

Asset 2Asset 2Asset 1 Asset 3

Allocation of the lump-sum price is basedon relative fair values of the individual assets.

Allocation of the lump-sum price is basedon relative fair values of the individual assets.

Example:Exercise 10-8 (page 539)

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Example of Lump-sum Acquisition

Exercise 10-8

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Noncash Acquisitions of Fixed Assets

Rule: Rule: • The asset acquired is recorded at The asset acquired is recorded at the fair value

of the consideration given, or

• the fair value of the asset acquired ….

• whichever is more clearly evidentwhichever is more clearly evident

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Examples of “Noncash Acquisitions”

E10-16 & 17 - do on your own

E10-19 – read page 541, then go to two next slides

Exercise 10-19 (parts 1 and 2 only)

1. purchase of equipment on account.

Equipment ($25,000 x 98%) ....................... 24,500 Accounts payable .................................... 24,500

2. acquisition of equipment in exchange for a note.

Equipment (determined below) .................. 24,545 Discount on note payable (difference) ........ 2,455 Note payable (face amount) ..................... 27,000

PV = $27,000 (.90909* ) = $24,545 * Present value of $1: n=1, i=10% (Table 2) Note: use Excel to do PV calculations

Exercise 10-19 (parts 3 & 4 only) 3. To record the exchange of old equipment for new equipment.

Equipment - new ($2,500 + 22,000) ........... 24,500 Loss ($6,000 - 2,500) .................................. 3,500 Accumulated depreciation ......................... 8,000 Cash ......................................................... 22,000 Equipment - old ....................................... 14,000

4. To record the acquisition of equipment by the issuance of stock.

Equipment .................................................. 24,000 Common stock ......................................... 24,000

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Noncash acquisition: with equity securities (stock)

• Asset acquired is recorded at:– the fair value of the asset or – the market value of the securities, whichever is more

clearly evident.

• If the securities given are not actively traded:– the fair value of the asset received, as determined by

appraisal, – may be more clearly evident than the fair value of the

securities.

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Noncash acquisition:Donated Assets

On occasion, companies acquire assets through donation.

The receiving company is required to: record the donated asset at fair value,

and revenue equal to the fair value of the

donated asset.

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Noncash acquisition:Exchange of one asset for another

1) General Valuation Principle (GVP): Cost of asset acquired is: • fair value of asset given up (plus cash paid or minus cash

received) or• fair value of asset acquired, if it is more clearly evident

2) In the exchange of assets fair value is used except in rare situations in which the fair value cannot be

determined or the exchange lacks commercial substance.

3) When fair value cannot be determined or the exchange lacks commercial substance, the asset(s) acquired are

valued at the book value of the asset(s) given up, plus (or minus) any cash exchanged. No gain is recognized.

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Dispositions (sales of fixed assets)

Key Points to Keep in Mind:

a)Update depreciation to date of disposal.

b)Remove original cost of asset and accumulated depreciation from the books.

c)The difference between book value of the asset and the amount received is recorded as a gain or loss.

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Example: Exercise 10-13 (p.540)Exercise 10-13 (page 540)Sale of Equipment

Req #1 Cash 3,000 Acc. Depr - tractor 26,000 loss on sale xxxxx

tractor 30,000 gain on sale

BV = $4,000, cash received = $3,000

Req #2 Cash 10,000 Acc. Depr - tractor 26,000 loss on sale

tractor 30,000 gain on sale xxxxx

BV = $4,000, cash received = $10,000

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Nonmonetary ExchangeExample: Exercise 10-18 (p. 540)

Req # 1:

What is the fair value of the new land?

Answer = fair value of what we gave up:

appraised value of old land $72,000

cash given up 14,000

$86,000

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Nonmonetary ExchangeExample: Exercise 10-18 (p. 540)

• Req # 2– assuming commercial substance

• Req # 3– assuming no commercial substance

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Nonmonetary ExchangeExample: Exercise 10-18 (p. 540)

Exercise 10-18

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Self-Constructed Assets (pp. 521-526)

1) When self-constructing an asset, two accounting issues must be addressed:

a) overhead allocation to the self-constructed asset.

• incremental overhead only

• full-cost approach (generally accepted method)

b) proper treatment of interest incurred during construction

Interest that could have been avoided if the asset were not constructed and money used to retire debt.

Asset constructed: For a company’s own use.

As a discrete project for sale or lease.

2) Under certain conditions, interest incurred on qualifying assets is capitalized.

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Capitalization begins when: • construction begins• interest is incurred, and• qualifying expenses are incurred.

Capitalization ends when:• the asset is substantially complete and

ready for its intended use, or• when interest costs no longer are being

incurred.

Interest Capitalization(pages 522-526)

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Interest is capitalized based on Average Accumulated Expenditures (AAE).

Qualifying expenditures (construction labor, material, and overhead) weighted for the number of months outstanding

during the current accounting period.

If the qualifying asset is financed through a

specific new borrowing

. . . use the specific rate of the new borrowing as the capitalization rate.

If there is no specific new borrowing, and the

company has other debt

. . . use the weighted average cost of other debt as the capitalization rate.

Interest Capitalization

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Int. Cap. Example:Exercise 10-24 (page 542)

Exercise 10-24

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R&DResearch

• Planned search or critical investigation aimed at discovery of new knowledge . . .

Development• The translation of research findings or other knowledge

into a plan or design . . .

Most R&D costs are expensed as incurred. (Must be disclosed if material.)

Research• Planned search or critical investigation aimed at

discovery of new knowledge . . .

Development• The translation of research findings or other knowledge

into a plan or design . . .

Most R&D costs are expensed as incurred. (Must be disclosed if material.)

R&D costs incurred under contract for other companies are capitalized as inventory.

Costs of assets purchased for R&D purposes are expensed in the period unless they have other future uses.

R&D costs incurred under contract for other companies are capitalized as inventory.

Costs of assets purchased for R&D purposes are expensed in the period unless they have other future uses.

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R&D Example: Exercise 10-25, p. 542

R & D Example

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Start ofR&D

Activity

TechnologicalFeasibility

Date ofProductRelease

Sale of Product

CostsExpensed

as R&DCosts

CapitalizedOperating

Costs

All costs incurred to establish the technological feasibility of a computer software product are treated as R&D and expensed as incurred.

Costs incurred after technological feasibility is established and before the software is available for release to customers are capitalized (intangible asset)

All costs incurred to establish the technological feasibility of a computer software product are treated as R&D and expensed as incurred.

Costs incurred after technological feasibility is established and before the software is available for release to customers are capitalized (intangible asset)

Software Development Costs

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U.S. GAAP vs. IFRS

• Except for software development costs incurred after technological feasibility,

• … all R&D expenditures are expensed

Research and Development Costs

• Research expenditures are expensed

• Development expenditures that meet specified criteria are capitalized as an intangible asset

End of Chapter 10