1

Chapter 9
Property,
Property, Plant,
Plant, and
and
Equipment:
Equipment:
Acquisition
Acquisition and
and
Disposal
Disposal
An
Anelectronic
electronicpresentation
presentation
by
byDouglas
DouglasCloud
Cloud
Pepperdine
PepperdineUniversity
University
 2

Objectives
Objectives
1. Identify the characteristics of property,
plant, and equipment.
2. Record the acquisition of property, plant,
and equipment.
3. Determine the cost of assets acquired by the
exchange of other assets.
4. Compute the cost of a self-constructed
asset, including interest capitalization.
Continued
Continued
 3

Objectives
Objectives
5. Record costs subsequent to acquisition.
6. Record the disposal of property, plant, and
equipment.
7. Understand the disclosures of property,
plant, and equipment.
8. Explain the accounting for oil and gas
properties (Appendix).
 4

Characteristics
Characteristics of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
To be included in the property, plant, and
equipment category, an asset must have three
characteristics:
1. The asset must be held for use and not for
investment.
2. The asset must have an expected life of more
than one year.
3. The asset must be tangible in nature.
 5

Acquisition
Acquisition of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
Determination
Determination of
of Cost
Cost

Devon
DevonCompany
Companypurchases
purchasesaamachine
machinewith
withaa
contract
contractprice
priceof
of$100,000
$100,000ononterms
termsof
of2/10,
2/10,n/30.
n/30.
The
Thecompany
company does
doesnot
What is take
not takethe
the thecash
cost ofdiscount
cash discountand
and
incurs
incurstransportation
transportationcosts
costsof
of$2,500,
$2,500,asaswell
wellasas
installation the
testingmachine?
installation and testingcosts
and costsof
of$3,000.
$3,000. Sales
Salestaxes
taxes
total
total$5,000
$5,000on
onthe
thepurchase.
purchase. During
Duringinstallation,
installation,
uninsured
uninsureddamages
damagesof of$500
$500are
areincurred.
incurred.
 6

Acquisition
Acquisition of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
Determination
Determination of
of Cost
Cost

Contract
Contract price
price $100,000
$100,000
Discount
Discount not
not taken
taken (2,000
(2,000))
Transportation
Transportation cost
cost 2,500
2,500
Installation
Installation and
and testing
testing 3,000
3,000
Sales
Sales tax
tax 5,000
5,000
Cost
Cost of
of machine
machine $108,500
$108,500
 7
The company does
The company does not not
Acquisition of Property,
include
Acquisition of Property,
include
as
the
the $500
$500 damage
damage
as part
part of
of the
the cost
cost of
of the
the
Plant,
Plant, and
and Equipment
Equipment
machinery
machinery because
becauseitit was
was
not
not aa necessary
necessary cost.
cost.

Machine 108,500
Repair Expense 500
Discounts Lost 2,000
Cash 111,000
 8

Acquisition
Acquisition of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
Cost
Cost of
of Land
Land

• Contract price • Cost of surveys

• Costs of closing the • Clearing and grading
transaction, obtaining property to get it
the title, options, legal ready for its intended
fees, title search, use
insurance, past due • Razing old buildings
taxes (net of salvage)
 9

Acquisition
Acquisition of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
Cost
Cost of
of Land
Land Improvements
Improvements

• Landscaping
• Streets
• Sidewalks
• Sewers
 10

Acquisition
Acquisition of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
Cost
Cost of
of Buildings
Buildings

 Contract price
 Remodeling and reconditioning
 Excavating for the specific
building
 Architectural and building
permit costs
 Capitalized interest
 Certain unanticipated costs
 11

Acquisition
Acquisition of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
Lump-Sum
Lump-Sum Purchases
Purchases
AA company
company pays
pays $120,000
$120,000 for
for land
land and
and aa
building.
building. The
The land
land and
and building
building are
are appraised
appraised
at
at $50,000
$50,000 and
and $75,000,
$75,000, respectively.
respectively.
Appraisal Relative Fair
Value Value x Total Cost = Allocated Cost
Land $ 50,000 $50,000/$125,000 x $120,000 = $ 48,000
Building 75,000 $75,000/$125,000 x $120,000 = 72,000
Total $125,000 $120,000
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Acquisition
Acquisition of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
Deferred
DeferredPayments
Payments
A
A company
company purchases
purchases equipment
equipment by by issuing
issuing aa
$10,000
$10,000 non-interest-bearing
non-interest-bearing 5-year
5-year note.
note. A A $2,000
$2,000
payment
payment will
will be
bemade
madeatat the
theend
end ofof each
each year.
year. The
The
market
market rate
rate for
for obligations
obligations of
of this
this type
typeisis12%.
12%.
Equipment ($2,000 x 3.604776) 7,210
Discount on Notes Payable 2,790
Notes Payable 10,000
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Acquisition
Acquisition of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
Assets
Assets Acquired
Acquired by
by Donation
Donation

The
The City
City of
of Julesberg
Julesberg (a
(a governmental
governmental
unit)
unit) donates
donates land
land worth
worth $20,000
$20,000 to
to the
the
Klemme
Klemme Company.
Company.

Land 20,000
Donated Capital 20,000
 14

Assets
Assets Acquired
Acquired by
by
Exchange
Exchange ofof Other
Other Assets
Assets
The
The general
general exchange
exchange principle
principle isis that
that
the
the cost
cost of
of aa nonmonetary
nonmonetary asset asset
acquired
acquired inin exchange
exchange for for another
another
nonmonetary
nonmonetary assetasset isis the
the fair
fair value
value of of
the
the asset
asset surrendered.
surrendered.
 15

Assets
Assets Acquired
Acquired by
by
Exchange
Exchange ofof Other
Other Assets
Assets
Dissimilar
Dissimilar
Company A Company B

Cost $100,000 Cost $60,000

Accum. depr. 54,000 Accum. depr. 32,000
Fair value 40,000 Fair value 40,000
 16

Assets
Assets Acquired
Acquired by
by
Exchange
Exchange ofof Other
Other Assets
Assets
Dissimilar
Dissimilar
Company A

Equipment 40,000
Accum. depr. 54,000
Loss 6,000
Building 100,000
Cost
Cost $100,000
$40,000
Accum. depr. 54,000
No boot involved
Fair value 40,000
 17

Assets
Assets Acquired
Acquired by
by
Exchange
Exchange ofof Other
Other Assets
Assets
Dissimilar
Dissimilar
Company B

Building 40,000
Accum. Depr. 32,000
Equipment 60,000
Gain 12,000
Cost $60,000
$40,000
Accum. Depr. 32,000
Fair value 40,000
 18

Assets
Assets Acquired
Acquired by
by
Exchange
Exchange ofof Other
Other Assets
Assets
Dissimilar
Dissimilar with
with Boot
Boot
Company A Company B

Cost $100,000 Cost $60,000

Accum. depr. 54,000 Accum. depr. 32,000
Fair value 40,000 Fair value 35,000
Cash received 5,000 Cash paid 5,000
 19

Assets
Assets Acquired
Acquired by
by
Exchange
Exchange ofof Other
Other Assets
Assets
Dissimilar
Dissimilar with
with Boot
Boot
Company A

Equipment 35,000
Accum. depr. 54,000
Cash 5,000
Loss 6,000
Cost $100,000
$35,000 Building 100,000
Accum. depr. 54,000
Fair value 40,000
Cash received 5,000
 20

Assets
Assets Acquired
Acquired by
by
Exchange
Exchange ofof Other
Other Assets
Assets
Dissimilar
Dissimilar with
with Boot
Boot
Company B

Building 40,000
Accum. Depr. 32,000
Equipment 60,000
Cash 5,000
Gain 7,000 Cost $60,000
$40,000
Accum. Depr. 32,000
Fair value 35,000
Cash paid 5,000
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Nonmonetary
Nonmonetary Productive
Productive Asset
Asset Exchanges
Exchanges

Is the Boot  25% of the

Total Value of the
Yes No
Exchange?
Are Similar Yes
Productive
Assets Used in
Next
the Same Line
slide
of Business
Being
Exchange?
No Account for Assets at
Fair Value. Recognize
Gains and Losses
 22

Nonmonetary
Nonmonetary Productive
Productive Asset
Asset Exchanges
Exchanges

Is Boot
Received?

Cost = FV - Boot
Received
Yes Loss = FV - BV
Yes
Is FV BV?
Cost = BV + Gain -
No Boot Received
Continued
Continued Gain = Boot (FV - BV)
Boot + FV
 23

Nonmonetary
Nonmonetary Productive
Productive Asset
Asset Exchanges
Exchanges
Cost = FV
Yes Loss = FV -
BV
Is FV BV?
No
No
Is Boot Cost = BV
No Paid? Gain Not
Recognized
Yes
Is FV BV?
Cost = FV
BV
++ Boot
Is Boot Paid
Paid
Received? Yes
No Loss
Gain =Not
FV
Recognized
- BV
 24

Exchange
Exchange of
of Similar
Similar Assets
Assets
Boot
BootPaid
Paidby
byCompany
CompanyIncurring
IncurringaaGain
Gain
Company A Company B

Cost $100,000 Cost $60,000

Accum. depr. 54,000 Accum. depr. 32,000
Fair value 40,000 Fair value 35,000
Cash received 5,000 Cash paid 5,000
 25

Exchange
Exchange of
of Similar
Similar Assets
Assets
Boot
BootPaid
Paidby
byCompany
CompanyIncurring
IncurringaaGain
Gain
Company A

Equipment 35,000
Accum. Depr. 54,000
Loss 6,000
Cash 5,000
Cost $100,000 Equipment 100,000
Cost = $35,000
Accum. depr. 54,000
Fair value 40,000
Cash received 5,000
 26

Exchange
Exchange of
of Similar
Similar Assets
Assets
Boot
BootPaid
Paidby
byCompany
CompanyIncurring
IncurringaaGain
Gain
Company B

Equipment 33,000
Accum. Depr. 32,000
Equipment 60,000
Cash 5,000
$28,000 + $5,000 Cost $60,000
Costdepr.
Accum. = $33,000
32,000
Fair value 35,000
Cash paid 5,000
 27

Exchange
Exchange of
of Similar
Similar Assets
Assets
Boot
BootReceived
Receivedby
byCompany
CompanyIncurring
IncurringaaGain
Gain
Company A Company B

Cost $100,000 Cost $60,000

Accum. depr. 80,000 Accum. depr. 32,000
Fair value 30,000 Fair value 27,000
Cash received 3,000 Cash paid 3,000
 28

Exchange
Exchange of
of Similar
Similar Assets
Assets
Boot
BootReceived
Receivedby
byCompany
CompanyIncurring
IncurringaaGain
Gain
Company A

Equipment 18,000
Accum. Depr. 80,000
Cash 3,000
Equipment 100,000
Cost $100,000 Gain 1,000
Cost = $18,000
Accum. depr. 80,000 Click on button to see
Fair value 30,000 how gain was calculated.
Cash received 3,000
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Exchange
Exchange of
of Similar
Similar Assets
Assets
Boot
BootReceived
Receivedby
byCompany
CompanyIncurring
IncurringaaGain
Gain
Company B

Equipment 30,000
Accum. Depr. 32,000
Loss 1,000
Equipment 60,000
Cash 3,000 Cost $60,000
Costdepr.
Accum. = $30,000
32,000
Fair value 27,000
Cash paid 3,000
 30

Summary
Summary ofof Productive
Productive
Asset
Asset Exchanges
Exchanges
Four
Four Issues
Issues
1. Are dissimilar productive assets exchanged?
2. Does the boot equal or exceed 25% of the value
of a similar asset exchange?
3. For exchanges of similar productive assets, is
there a loss?
4. For exchange of similar productive assets
between two dealers or between two nondealers
in which there is a gain, is cash received or paid?
 31

Self-Construction
Self-Construction

The
The cost
cost of
of materials,
materials,
labor,
labor, andand overhead
overhead usedused
in
in the
the self-construction
self-construction
of
of property,
property, plant,
plant, and
and
equipment
equipment intended
intended for
for
aa firm’s
firm’s production
production
process
process areare added
added toto the
the
cost
cost of
of the
the asset.
asset.
 32

Capitalization
Capitalization of
of Interest
Interest
AA company
company isis required
required to
to
capitalize
capitalize interest
interest on
on assets
assets that
that
are
are constructed
constructed for
for its
its own
own use
use
or
or constructed
constructed asas discrete
discrete
products.
products.
 33

Capitalization
Capitalization of
of Interest
Interest
Interest cannot be capitalized for the following types of
assets:
1. Inventories that are routinely manufactured or
otherwise produced in large quantities on a
repetitive basis.
2. Assets that are in use or ready for their intended use.
3. Assets that are not being used in the earning
activities of the company and are not undergoing the
activities necessary to get them ready for use.
 34

Capitalization
Capitalization of
of Interest
Interest
Cia
During
Cia Company
During 2004,
2004, $1
Company started
$1 million
started aa building
million was
was spent
building project
spent on
on the
project on
onproject
the January
project and
January 1,
and
1,
2004
2004 and
in
in 2005,
and completed
2005, $2.9
$2.9it
completed million
it on
on December
million was
was spent.
December 31,
31, 2005.
spent. 2005.

Capitalized Interest, 2004

$500,000 x 10% = $50,000

($0 + $1,000,000) ÷ 2
 35

Capitalization
Capitalization of
of Interest
Interest
During
Amounts
During
Amounts2004,
borrowed
2004, $1
$1 million
borrowed for
and
andother
million
for outstanding:
was
was spent
other purposes:
outstanding:
spent on
on$1.5
purposes: the$4
$4project
$1.5
the million
project and
million at
and
at
10%
10% wasin
wasinborrowed
12%
2005,
2005,and
$2.9
borrowed
12% and $6
$2.9specifically
$6 million
million
millionwas
at
atfor
specifically
million was 13%
spent.
for
13%the
the project.
spent. project.

Capitalized Interest, 2005

$1,500,000 x 10% = $150,000

$1,000,000 x 12.6% = $126,000
$276,000
(12% x $4,000,000/$10,000,000) + (13% x $6,000,000/$10,000,000)
 36

Fixed
Fixed Overhead
Overhead Costs
Costs
There
There are
are three
three alternatives
alternatives for
for aa company
company to to
include
include fixed
fixed overhead
overhead costs
costs in
in the
the cost
cost of
of aa self-
self-
constructed
constructed asset.
asset.
1. Allocate a portion of total fixed overhead to the
self-constructed asset.
2. Include only incremental fixed overhead in the
cost of the self-constructed asset.
3. Include no fixed overhead in the cost of the self-
constructed asset.
 37

Costs
Costs Subsequent
Subsequent to
to Acquisition
Acquisition
The future economic benefits of a productive asset or
product can be increased by--
•• Extending
Extending the
the life
life of
of the
the asset.
asset.
•• Improving
Improving the
theproductivity.
productivity.
•• Producing
Producing the
thesame
sameproduct
product atat
lower
lower cost.
cost.
•• Increasing
Increasing the
the quality
qualityof of the
the
product.
product.
 38

Additions
Additions

The
The cost
cost of
of an an addition
addition
represents
represents aa new
new asset
asset and
and
therefore
therefore isis capitalized.
capitalized.
 39

Improvements
Improvements and
and Replacements
Replacements
A A company
company decides
decides to
to replace
replace its
its oil
oil furnace
furnace with
with aa
gas
gas furnace.
furnace. The
The oil
oil furnace
furnace isis carried
carried onon the
thebooks
books
at
at aa cost
cost of
of $50,000
$50,000 with
with anan accumulated
accumulated depreciation
depreciation
of
of $30,000.
$30,000. The
The scrap
scrap value
value ofof the
the old
old furnace
furnace isis
$5,000,
$5,000, and
and the
the new
new furnace
furnace costs
costs $70,000.
$70,000.
Furnace 70,000
Substitution
Substitution Method
Method 30,000
Accumulated Depreciation: Furnace
Loss on Disposal of Furnace 15,000
Furnace 50,000
Cash 65,000
 40

Improvements
Improvements and
and Replacements
Replacements
A
A capital
capital expenditure
expenditure of of $50,000
$50,000 isis incurred
incurred in
in
replacing
replacing aa roof
roof on
on aa factory
factory building.
building.

Reduce
Reduce Accumulated
Accumulated Depreciation
Depreciation
Accumulated Depreciation 50,000
Cash 50,000
 41

Improvements
Improvements and
and Replacements
Replacements
A
A capital
capital expenditure
expenditure of of $50,000
$50,000 isis
incurred
incurred to
to enlarge
enlarge aa factory.
factory.

Increase
Increase the
the Asset
Asset Account
Account
Factory 50,000
Cash 50,000
 42

Disposal
Disposal of
of Property,
Property, Plant,
Plant,
and
and Equipment
Equipment
A
A company
company has has aa machine
machine that
that originally
originally cost
cost
$10,000,
$10,000, has
has accumulated
accumulated depreciation
depreciation of of $8,000
$8,000 at
at
the
the beginning
beginning of of the
the current
current year,
year, and
and isis being
being
depreciation
depreciation atat $1,000
$1,000 per
per year.
year. On
On December
December 30, 30,
the
the company
company sellssells the
the machine
machine forfor $600.
$600.

Depreciation 1,000
Accumulated Depreciation 1,000
To bring depreciation to point of sale.
 43

Disposal
Disposal of
of Property,
Property, Plant,
Plant,
and
and Equipment
Equipment
A
A company
company has has aa machine
machine that
that originally
originally cost
cost
$10,000,
$10,000, has
has accumulated
accumulated depreciation
depreciation of of $8,000
$8,000 at
at
the
the beginning
beginning of of the
the current
current year,
year, and
and isis being
being
depreciation
depreciation atat $1,000
$1,000 per
per year.
year. On
On December
December 30, 30,
the
the company
company sellssells the
the machine
machine forfor $600.
$600.
Cash 600
Accumulated Depreciation 9,000
Loss on Disposal 400
Machine 10,000
To record disposal of machine for $600.
 44

Disclosure
Disclosure of
of Property,
Property,
Plant,
Plant, and
and Equipment
Equipment
APB
APB Opinion
Opinion No.No. 1212
requires
requires aa company
company to to
disclose
disclose the
the balances
balances ofof its
its
major
major classes
classes ofof depreciable
depreciable
assets
assets by
by nature
natureor or function.
function.
Land
Building and
leasehold
improvements
Machinery and
equipment
 45

Oil
Oil and
and Gas
Gas Properties
Properties
Successful-
Successful-
efforts
efforts
Full-cost
Full-cost method?
method? approach?
approach?

Click here to skip Appendix material

 46

Oil
Oil and
and Gas
Gas Properties
Properties
Once
Once aa company
company selects
selects aa
method,
method, aa company
company must
must follow
follow
specific
specific SEC
SECaccounting
accounting rules.
rules.
 47

Chapter 9

The
The End
End
 48

$3,000
Gain = ($30,000 - $20,000) = $1,000
$3,000 + $27,000

Click on button to return to Slide 28

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