introduction: property, plant, and equipment nature …...ch 10 : acquisition, valuation and...

Ch 10 : Acquisition, Valuation and Disposition of Property, Plant, and Equipment

Intermediate Accounting 2:IFRS of 16 Ehab Abdou 97672930

► 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.



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 Constructed

Purchase price Contract Price Real estate Broker’s Commission Architects Fees

Closing costs Excavation Costs

Improvements to the building Building Permits (Before the use of the building) 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.



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. Items Classification 1 Money borrowed to pay building contractor

2 Payment for construction from note proceeds 3 Cost of land fill and clearing

4 Delinquent real estate taxes on property assumed 5 Premium on 6-month insurance policy during construction

6 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



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.

.باستخدام القروض األصل اإلنفاق على لو لم يتم كان يمكن تفاديها التي مقدار الفائدةExercise 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.



Step 1 - Compute weighted-average accumulated expenditures. Step 2 - Compute the Total Interest ( Actual Interest).

Debt Interest

Rate Actual

Interest Specific Debt $ 200,000 12% $ 24,000 General Debt 500,000 14% 70,000 300,000 10% 30,000

Actual Interest 124,000

Step 3 - Compute the weighted-average interest Rate on General Debt.

WAIR =

=

= 12.5%

Step 4 - Compute the Avoidable Interest.

Accumulated Expenditure

Interest Rate Avoidable Interest

From Specific Debt $ 200,000 12.0% $ 24,000 From General Debt 50,000 12.5% 6,250

Avoidable Interest 30,250

Step 5 – Capitalize the lesser of Avoidable interest or Actual interest. Avoidable interest = $ 30,250 Actual interest = $124,000

Weighted

Average

Actual Capitalization Accumulated

Date Expenditures Period Expenditures

Jan. 1 100,000$ 12/12 100,000$

Apr. 30 150,000 8/12 100,000

Nov. 1 300,000 2/12 50,000

Dec. 31 100,000 0/12 -

650,000$ 250,000$



Step 6 – Capitalize the lesser of Avoidable interest or Act ual interest.

Date Accounts Dr. Cr. 1 Building 650,000 Cash 650,000

2 Interest Expenses 124,000 Cash 124,000

3 Building 30,250 Interest expenses 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 Capitalization Period Weighted-Average Expenditures Solution 10-158

Date Expenditures Capitalization Period Weighted-Average Expenditures April 1 $120,000 4/12 $ 40,000 May 1 120,000 3/12 30,000 June 1 120,000 2/12 20,000 July 1 120,000 1/12 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 April 1 $ 74,000 May 1 180,000 June 1 270,000 July 1 100,000

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.



Instructions (a) Calculate the weighted-average accumulated expenditures. (b) Calculate avoidable interest. Solution 10-159

(a) Capitalization Weighted-Average Date Expenditures Period Accum. Expend. March 1 $ 75,000 4/12 $25,000 April 1 74,000 3/12 18,500 May 1 180,000 2/12 30,000 June 1 270,000 1/12 22,500 July 1 100,000 0 0 $96,000 (b)Weighted-Average Avoidable Accum. Expend. Rate Interest $50,000 .12 $ 6,000 46,000 .10 4,600 $96,000 $10,600

:مالحظة هامة :شهور مثالا 9ينتهي خالل سنة واذا كان المشروع

(السابقة ) تحسب السنة األولى بالطريقة العادية

فيجب وضع جميع ( شهور 9) أما السنة الثانيةفي مصروفات السنة األولى باإلضافة الي الفوائد

أوالً قبل حساب 9/21السنة األولى ونضرب في . مصروفات التسعة شهور



► 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 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



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 Apprised Value % of value Purchase price Assigned cost

Building 162,500 65% 200,000 130,000

Land 87,500 35% 200,000 70,000

Total 250,000 100% 200,000 وبعد عملية التوزيع يتم عمل قيد االقتناء


May 13 Building 130,000 Land 70,000 Cash 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:


March 31 Land 120,000 Share Capital – Ordinary 100,000 Share Premium – Ordinary 20,000



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 المالية and 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 Deferred Revenue Reduce Cost

Accounts Dr. Cr. Accounts Dr. Cr.

Jan 2 Cash 500 Deferred Grant Rev 500

Equipment 2,000 Equipment 1,500 Cash 2,000 Cash 1,500

Dec 31 Deferred Grant Rev 100 Grant Revenue 100

Depreciation Exp. 400 Depreciation Exp. 300 Accumulated Dep. 400 Accumulated Dep. 300

Statement of Financial Position At Dec 31, 2011

Statement of Financial Position 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

For the year ended Dec 31, 2011 Income Statement

For the year ended Dec 31, 2011

Grant Revenue 100 Depreciation Exp. (400) Depreciation Exp. (300)

(=) Net Income Effect (300) (=) Net Income Effect (300)



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.


Contribution Expense 110,000 Land 80,000 Gain on Disposal of Land 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.



► 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 Dr. Cr. [1] Accumulated Depreciation 39,000 [3] Loss on Disposal 5,000 [2] Delivery Equipment 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 Accounts Dr. Cr. [1] Accumulated Depreciation 39,000 [3] Cash 6,000 [4] Gain on Disposal 1,000 [2] Delivery Equipment 44,000



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



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 Dr. Cr. Equipment (New) 16,000 Accumulated Depreciation 4,000 Cash 7,000 Equipment (old) 12,000 Gain on disposal of equipment 1,000



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 Dr. Cr.

Equipment (New) 12,000 Accumulated Depreciation 4,000 Cash 7,000 Equipment (old) 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. Instructions: Prepare the journal entries to record the exchange on the books of both companies. Solution: Calculation of the cost of new assets Santa Delaware

Book Value 28,000 – 19,000 = $9,000 28,000 – 10,000 = $18,00

Gain or Loss 13,500 – 9,000 = $4,500 15,500 – 18,000 = $(2,500) Cost of New 13,500 + 2,000 = 15,500 15,500 – 2,000 = $13,500

Santana Delaware

Equipment (cost) $28,000 $28,000

Accumulated Depreciation 19,000 10,000

Fair value of equipment 13,500 15,500

Cash given up 2,000



Santa

Delaware:

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