Chapter 10 Acquisition and Disposition of Property, Plant, and Equipment ACCT-30301

1. Overview of Topic Operational assets ◦ fixed assets, intangibles, and natural resources Characteristics of fixed assets Accounting over life cycle ◦ acquisition costs (chapter 10) ———asset goes into operation ———— ◦ depreciation (chapter 11) ◦ costs subsequent to acquisition (chapter 10) ———asset goes out of operation ———— ◦ disposals and exchanges (chapter 10) ACCT-30302

2. Acquisition Cost Historical cost Components of cost ◦ purchase price + all reasonable and necessary costs to prepare asset for intended use ◦ land – closing costs, title search, attorney fees, preparing land for use ◦ building – construction cost, architect fees, contract admin fees, attorney fees ◦ equipment – freight, installation, testing, discounts Example ACCT-30303

2a. Acquisition Cost Self constructed assets ◦ raw materials, labor, overhead ◦ can never exceed price charged by outsider Cash discounts Materiality Deferred payment contract Lump sum purchase Donated assets Asset retirement obligation ACCT-30304

2b. Acquisition Cost Capitalization of interest ◦ when done  for self constructed assets (not land)  assets constructed for you  assets (inventory) constructed as discrete project ◦ amount capitalized  avoidable interest ◦ amount capitalized = WAE x IR  WAE are weighted by months ◦ interest rate used  specific interest rate  weighted average rate ◦ amount capitalized cannot exceed actual interest ◦ interest income ◦ example ACCT-30305

3. Costs Subsequent to Acquisition General concepts ◦ any cost should be capitalized if it  extends the life of the asset, or  improves the asset Recording expenditure ◦ can debit  fixed asset account  accumulated depreciation ◦ can use  substitution approach  new asset approach  reduce accumulated depreciation approach ACCT-30306

3. Costs Subsequent to Acquisition Repairs and maintenance Additions Improvements and replacements Reinstallation or rearrangement Materiality threshold ACCT-30307

4. Disposition of Fixed Assets Sell, retire, or abandonment ◦ accounted for same Accounting 1. Update depreciation to date of disposal 2. Remove original cost of asset and accumulated depreciation from the books 3. Difference between book value of asset and proceeds recorded as gain or loss ACCT-30308

4. Disposition of Fixed Assets Example ◦ On Jan 2, 2013 purchase new asset: cost: $40,000, life: 5 years, no salvage, use SL ◦ On March 29, 2017 sell asset for $9,000 Depr Exp 2,000 Accum Depr2,000 Cash 9,000 Accum Depr 34,000 Gain on Sale 3,000 Equipment40,000 ACCT-30309

5. Exchange of Nonmonetary Assets Terms ◦ monetary asset  represent a fixed claim to a specific number of dollars in future (e.g., cash, A/R, securities) ◦ nonmonetary asset  value is capable of changing in number of dollars (e.g., fixed assets, inventory) ◦ boot  money paid or received in an exchange of assets ACCT

5a. Exchange of Nonmonetary Assets Rules General valuation rule ◦ Cost of new asset acquired equals  FMV of asset given up plus boot paid or minus boot received  or, use FMV of asset acquired if more clearly evident ACCT

5b. Exchange of Nonmonetary Assets If exchange lacks commercial substance or FMV not determinable ◦ cost of new asset equals  BV given up plus boot paid or minus boot received ◦ gain not allowed to be recognized (unless boot is received – then partial recognition of gain) commercial substance means ◦ company expects a change in future cash flows as result of exchange ◦ change is significant relative to FMV of assets exchanged Examples ACCT