1. Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
ACCT-3030

2. 1. Overview of Topic Operational assets
fixed assets, intangibles, and natural resources
Characteristics of fixed assets
Accounting over life cycle
acquisition costs ———asset goes into operation ————
depreciation
costs subsequent to acquisition ———asset goes out of operation ————
disposals and exchanges
ACCT-3030

3. 2. Acquisition Cost Historical cost Components of cost Example
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-3030

4. 2a. Acquisition Cost Self constructed assets Cash discounts
raw materials, labor, overhead
can never exceed price charged by outsider
Cash discounts
Materiality
Deferred payment contract
Lump sum purchase
Donated assets
Assets acquired through issuance of own stock
Asset retirement obligation
ACCT-3030

5. 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-3030

6. 3. Intangible Assets Characteristics Cost Amortization
lack physical substance
Cost
purchased
internally developed
Amortization
over life if finite life
not amortized if indefinite life
ACCT-3030

7. 3a. Intangible Assets Identifiable intangibles patents – finite life
copyrights – finite life
trademarks & tradenames – indefinite life
franchise – finite life
ACCT-3030

8. 3b. Intangible Assets Unidentifiable intangibles - goodwill
only recorded when
entire business is acquired
goodwill is purchased
measurement
excess of cost over FMV of assets acquired
life - indefinite
ACCT-3030

9. 4. Disposition of Fixed Assets
Sell, retire, or abandonment
accounted for same
Accounting
Update depreciation to date of disposal
Remove original cost of asset and accumulated depreciation from the books
Difference between book value of asset and proceeds recorded as gain or loss
ACCT-3030

10. 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 ,000
Accum Depr 2,000
Cash ,000
Accum Depr ,000
Gain on Sale 3,000
Equipment 40,000
ACCT-3030

11. 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-3030

12. 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-3030

13. 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-3030