10-1

Property, Plant, and Equipment

and Intangible Assets: Acquisition
and Disposition
Chapter 10

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright2013byTheMcGrawHillCompanies,Inc.Allrightsreserved.
 10-2

Types of Assets
Long-lived,
Long-lived, Revenue-producing
Revenue-producing Assets
Assets

Expected
Expected to
to Benefit
Benefit Future
Future Periods
Periods

General Rule for Cost Capitalization

The initial cost of an asset includes the purchase
price and all expenditures necessary to bring the
asset to its desired condition and location for use.
 10-3

Costs to be Capitalized
Equipment Land (not depreciable)
Net purchase price Purchase price

Taxes Real estate commissions

Transportation costs Attorneys fees

Installation costs Title search

Title transfer fees
Testing and trial runs
Title insurance premiums
Removing old buildings
 10-4

Costs to be Capitalized
Land Improvements Buildings
Separately identifiable Purchase price
costs of Attorneys fees
Driveways
Commissions
Parking lots
Reconditioning
Fencing
Landscaping
Private roads
 10-5

Costs to be Capitalized
Natural Resources Intangible Assets
Acquisition costs Patents
Exploration costs
Copyrights
Development costs
Trademarks
Restoration costs
Franchises
Goodwill

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
 10-6

Asset Retirement Obligations

Often
Often encountered
encountered with
with natural
natural resource
resource
extraction
extraction when
when the
the land
land must
must be
be
restored
restored to
to aa useable
useable condition.
condition.

Recognize
Recognize the the restoration
restoration costs
costs
as
as aa liability
liability and
and aa corresponding
corresponding
increase
increase in in the
the related
related asset.
asset.

Record
Record at
at fair
fair value,
value, usually
usually the
the
present
present value
value ofof future
future cash
cash
outflows
outflows associated
associated with
with the
the
restoration.
restoration.
 10-7

Intangible Assets

Lack physical Exclusive

substance. Rights.

Intangible
Intangible
Assets
Assets

Future benefits less certain

than tangible assets.
 10-8

Intangible Assets Patents

An exclusive right recognized by law and
granted by the U.S. Patent Office for 20 years.
Holder has the right to use, manufacture, or sell
the patented product or process without
interference or infringement by others.
R & D costs that lead to an internally developed
patent are expensed in the period incurred.

Torch Inc. has developed a new device. Research

and development costs totaled $30,000. Patent
registration costs consisted of $2,000 in attorney
fees and $1,000 in federal registration fees. What
is Torchs patent cost?
Torchs cost for the new patent is $3,000.
The $30,000 R & D cost is expensed as

Intangible Assets
Copyrights
A form of protection
given by law to authors
of literary, musical,
artistic, and similar
works.
Copyright owners have
exclusive rights to print,
reprint, copy, sell or
distribute, perform, and
record the work.
Generally, the legal life of
a copyright is the life of
the author plus 70 years.
10-9
Trademarks
A symbol, design, or logo
associated with a
business.
If internally developed,
trademarks have no
recorded asset cost.
If purchased, a
trademark is recorded at
cost.
Registered with U.S.
Patent Office and
renewable indefinitely in
 10-
10

Intangible Assets
Franchise A
A contractual
contractual arrangement
arrangement wherewhere thethe
franchisor
franchisor grants
grants the
the franchisee
franchisee
exclusive
exclusive rights
rights to
to use
use the
the franchisors
franchisors
trademark
trademark within
within aa certain
certain area
area for
for aa
specified
specified period
period of
of time.
time.
Goodwill is
Goodwill not
amortized.
Occurs when one Only purchased
company buys goodwill is an
another company. intangible asset.

The amount by which the

consideration exchanged exceeds
the fair value of net assets acquired.
 10-
11

Goodwill
Eddy
Eddy Company
Company paid
paid $1,000,000
$1,000,000 to to purchase
purchase all all of
of
James
James Companys
Companys assets
assets and
and assumed
assumed James James
Companys
Companys liabilities
liabilities of
of $200,000.
$200,000. JamesJames
Companys
Companys assets
assets were
were appraised
appraised at at aa fair
fair value
value
of
of $900,000.
$900,000. What
What amount
amount of of goodwill
goodwill should
should
Eddy
Eddy company
company record
record asas aa result
result of
of the
the purchase?
purchase?
 10-
12

Lump-Sum Purchases
Several
Several assets
assets areare acquired
acquired for for aa single
single price
price
that
that may
may
be
be lower
lower than
than the
the sum
sum ofof the
the individual
individual asset
asset
fair
fair values.
values.
Allocation
Allocation of
of the
the lump-sum
lump-sum price
price is
is based
based
on
on relative
relative fair
fair values
values ofof the
the individual
individual assets.
assets.

Asset 1 Asset 2 Asset 3

On May 13, we purchase land and building for

$200,000 cash. The appraised value of the building is
$162,500, and the land is appraised at $87,500. How
much of the $200,000 purchase price will be allocated
to the building account?
 10-
13

Lump-Sum Purchases
Appraised % of Purchase Assigned
Asset Value Value Price Cost
(a) (b)* (c) (b c)
Land $ 87,500 35% $ 200,000 $ 70,000
Building 162,500 65% 200,000 130,000
Total $ 250,000 $ 200,000

* $87,500$250,000 = 35%

May 13:
Land .......................................................... 70,000
Building .. 130,000
Cash..... 200,000
To record lump-sum purchase of land and building.
 10-
14

Noncash Acquisitions
Issuance
Issuance of
of equity
equity securities
securities
Deferred
Deferred payments
payments
Donated
Donated assets
assets
Exchanges
Exchanges

The
The asset
asset acquired
acquired isis recorded
recorded at
at
the
the fair
fair value
value of
of the
the consideration
consideration
given
given
or
or
the
the fair
fair value
value of
of the
the asset
asset acquired,
acquired,
whichever
whichever is is more
more clearly
clearly evident.
evident.
 10-
15

Deferred Payments

Note
Note payable
payable

Market
Market interest
interest Less
Less than
than market
market rate
rate
rate
rate or
or noninterest
noninterest bearing
bearing

Record
Record asset
asset at
at Record
Record asset
asset at
at present
present
face
face value
value of
of note
note value
value of
of future
future cash
cash flows.
flows.
 10-
16

Deferred Payments
On January 2, 2013, Midwestern Corporation
purchased an industrial furnace by signing a
noninterest-bearing note requiring $50,000 to be
paid on December 31, 2014. The appropriate
interest rate on notes of this nature is 10%.
Prepare the required journal entries for
Midwestern on January 2, 2013; December 31,
2013 (year-end); and
We do notDecember
know the31, 2014
cash (year-end).
equivalent price, so we
must use the present value of the future cash
payment.
 10-
17

Deferred Payments
January 2, 2013:
Furnace .............................................................. 41,323
Discount on note payable ... 8,677
Note payable .... 50,000
To record furnace acquisition.

December 31, 2013:

Interest expense (10% of $41,323)...................... 4,132
Discount on note payable 4,132
To record interest expense.

December 31, 2014:

Interest expense (10% of ($41,323+$4,132)) ...... 4,545
Discount on note payable .... 4,545
To record interest expense.

December 31, 2014

Note payable ........................................................ 50,000
Cash .... 50,000
To record payment of note.
 10-
18

Issuance of Equity Securities

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 are actively traded, market value
can be easily determined.
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.
Donated Assets
On occasion, companies acquire assets through
donation.
The receiving company is required to record
The donated asset at fair value.
Revenue equal to the fair value of the donated
 10-
19

U.S. GAAP vs. IFRS

Government Grants

Fair value of donated Donated assets from a

assets granted by a governmental unit are
governmental unit is accounted for at fair value, but
not recorded as revenue. Two
recorded as revenue.
alternatives:
Deduct the fair value amount
to determine the initial cost of
the asset.
Record the grant as deferred
income and recognize it as
income over the assets useful
life.
 10-
20

Fixed-Asset Turnover Ratio

This ratio measures how effectively a
company manages its fixed assets to
generate revenue.
Fixed-asset
Net sales
turnover =
Average fixed assets
ratio

$14,664 $7866
= 5.65 = 8.16
($2,563 + $2,628)/2 ($984 + $943)/2
Ross
Ross Stores
Stores generates
generates $2.51
$2.51 more
more inin sales
sales dollars
dollars than
than
GAP
GAP for
for each
each dollar
dollar invested
invested in
in fixed
fixed assets.
assets.
 10-
21

Dispositions
Update depreciation or amortization to date of disposal.
Remove original cost of asset and accumulated
depreciation or amortization from the books.
The difference between book value of the asset and the
amount received is recorded as a gain or loss.

On June 30, 2013, MeLo Inc. sold equipment for

$6,350 cash. The equipment was purchased on
January 1, 2008, at a cost of $15,000. The equipment
was depreciated using the straight-line method over
an estimated 10-year life with zero residual value.
MeLo last recorded depreciation on the equipment on
December 31, 2012, its year-end.
Prepare the journal entries necessary to
record the disposition of this equipment.
 10-
22

Dispositions
Update depreciation to date of sale.

June 30, 2013:

Depreciation expense ($15,000 10 years) ) ....... 750
Accumulated depreciation ........ 750
To update depreciation to date of sale.

Remove original asset cost and accumulated

depreciation.
Record the gain or loss.
June 30, 2013:
Accumulated depreciation ............................................ 8,250
Cash ....................... 6,350
Loss on sale . 400
Equipment ............... 15,000
To record sale of equipment.

($15,000 10 years) 5) = $8,250

 10-
23

Exchanges
General Valuation Principle: 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

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.
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 or loss is recognized.
 10-
24

Fair Value Not Determinable

Matrix Inc. exchanged used equipment for newer
equipment. Due to the nature of the assets
exchanged, Matrix could not determine the fair
value of the asset given up or received. The asset
given up originally cost $600,000, and had an
accumulated depreciation balance of $400,000 at
the time of the exchange. Matrix exchanged the
asset and paid $100,000 cash.
Lets record this unusual transaction.
 10-
25

Fair Value Not Determinable

Matrix
Matrix Inc.
Inc.
The
The journal
journal entry
entry below
below shows
shows the
the proper
proper
recording
recording of
of the
the exchange.
exchange.

Equipment ($200,000 + $100,000) ................. 300,000

Accumulated depreciation ......... 400,000
Equipment . 600,000
Cash ............. 100,000
To record equipment acquired in exchange.
 10-
26

Exchange Lacks Commercial Substance

When exchanges are recorded at fair value, any

gain or loss is recognized for the difference between
the fair value and book value of the asset(s) given
up. To preclude the possibility of companies
engaging in exchanges of appreciated assets solely
to be able to recognize gains, fair value can only be
used in legitimate exchanges that have commercial
substance.
AA nonmonetary
nonmonetary exchange
exchange is is considered
considered to to have
have
commercial
commercial substance
substance if
if the
the company
company expects
expects aa
change
change inin future
future cash
cash flows
flows asas aa result
result of
of the
the
exchange.
exchange.
 10-
27

Exchanges
Matrix Inc. exchanged new equipment and $10,000
cash for equipment owned by Float Inc.
Below is information about the asset exchanged by
Matrix. Record the transaction assuming the
exchange has commercial substance.

Gain = Fair Value Book Value

Gain = $205,000 $200,000 = $5,000
 10-
28

Exchanges
$205,000 fair value + $10,000
cash
Equipment ............................................... 215,000
Accumulated depreciation............. 300,000
Equipment 500,000
Cash . 10,000
Gain on exchange .. 5,000
To record the exchange of equipment.

Record the same transaction

assuming the exchange lacks
commercial substance.
$200,000 book value + $10,000
cash
Equipment ............................................... 210,000
Accumulated depreciation............. 300,000
Equipment 500,000
Cash .. 10,000
To record the exchange of equipment.
 10-
29

Self-Constructed Assets
When self-constructing an asset, two accounting issues
must be addressed:
Overhead allocation to the self-constructed asset.
Incremental overhead only
Full-cost approach

Proper treatment of interest incurred during

construction

Under certain conditions, interest

incurred on qualifying assets is
capitalized.
Asset constructed: Interest that could have
For a companys own been avoided if the asset
use. were not constructed and
As a discrete project the money used to retire
 10-
30

Interest Capitalization

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.
 10-
31

Interest Capitalization
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 If there is no specific
is financed through a new borrowing, and the
specific new company has other
borrowing debt
. . . use the specific . . . use the weighted
rate of the new average cost of other
borrowing as the debt as the
 10-
32

Interest Capitalization
Welling Inc. is constructing a building for its own use.
Construction activities started on May 1 and have
continued through Dec. 31. Welling made the following
qualifying expenditures: May 1, $125,000; July 31,
$160,000; Oct. 1, $200,000; and Dec. 1, $300,000.
Welling borrowed $1,000,000 on May 1, from Bubs
Bank for 10 years at 10 percent to finance the
construction. The loan is related to the construction
project and the company uses the specific interest
method to compute
Average the amount
Accumulated of interest to
Expenditures
capitalize.
 10-
33

Interest Capitalization

Since the $1,000,000 of specific borrowing is

sufficient to cover the $337,500 of average
accumulated expenditures for the year, use the
specific borrowing rate of 10 percent to determine
the amount of interest to capitalize.

Interest = AAE Specific Borrowing Rate

Time
Interest = $337,500 10% 8/12 =
$22,500
The loan, initiated on May 1, is
outstanding for 8 months of the year.
 10-
34

Interest Capitalization

IfIf Welling
Welling had
had not
not borrowed
borrowed specifically
specifically for
for this
this construction
construction
project,
project, it
it would
would have
have used
used the
the weighted-average
weighted-average interest
interest
method.
method. The The weighted-average
weighted-average interest
interest rate
rate on
on other
other debt
debt
would
would havehave been
been used
used toto compute
compute the
the amount
amount of of interest
interest to
to
capitalize.
capitalize. ForFor example,
example, ifif the
the weighted-average
weighted-average interest
interest
rate
rate on
on other
other debt
debt is
is 12
12 percent,
percent, the
the amount
amount of of interest
interest
capitalized
capitalized would
would be:
be:

Interest
Interest =
= AAE
AAE
Weighted-average
Weighted-average Rate
Rate Time
Time
Interest
Interest == $337,500
$337,500
12%
12% 8/12
8/12 =
= $27,000
$27,000
 10-
35

Interest Capitalization

IfIf specific
specific new
new borrowing
borrowing had
had been
been
insufficient
insufficient to
to cover
cover the
the average
average
accumulated
accumulated expenditures
expenditures .. .. ..

. . . Capitalize this
portion using the Other
12 percent debt
weighted- average
cost of debt. this
. . . Capitalize AAE Specific
portion using the new
10 percent specific borrowing
borrowing rate.
 10-
36

Research and Development (R&D)

Research
Research
Planned search or critical investigation aimed at
Planned search or critical investigation aimed at
discovery
discovery of
of new
new knowledge
knowledge .. .. ..
Development
Development
The translation of research findings or other
The translation of research findings or other
knowledge
knowledge into
into aa plan
plan or
or design
design .. .. ..
Most
Most R&D
R&D costs
costs areare expensed
expensed as as incurred.
incurred. (Must
(Must
be
be disclosed
disclosed if if material.)
material.)
R&D costs incurred under contract for other
R&D costs incurred under contract for other
companies
companies are
are capitalized
capitalized as
as inventory
inventory and
and carried
carried
forward
forward into
into future
future years.
years.
Costs of assets purchased for R&D purposes are
Costs of assets purchased for R&D purposes are
expensed
expensed inin the
the period
period unless
unless they
they have
have alternative
alternative
 10-
37

Software Development Costs

All costs incurred to establish the technological
All costs incurred to establish the technological
feasibility
feasibility of
of aa computer
computer software
software product
product are
are
treated
treated as
as R&D
R&D andand expensed
expensed asas incurred.
incurred.
Costs
Costs incurred
incurred after
after technological
technological feasibility
feasibility is
is
established
established andand before
before the
the software
software isis available
available for
for
release
release to
to customers
customers are are capitalized
capitalized asas an
an
intangible
intangible asset.
asset.
Costs
Expensed Costs Operating
as R&D Capitalized Costs

Start of Technological Date of Sale of

R&D Feasibility Product Product
Activity Release
 10-
38

Software Development Costs

Amortization of capitalized computer software
Amortization of capitalized computer software
costs
costs starts
starts when
when thethe product
product begins
begins to
to be
be
marketed.
marketed.
Two
Two methods,
methods, the
the percentage-of-revenue
percentage-of-revenue
method
method and
and the
the straight-line
straight-line method,
method, are
are
compared
compared andand the
the method
method producing
producing the
the largest
largest
amount
amount ofof amortization
amortization isis used.
used.

U.S. GAAP vs. IFRS
Research and Development Expenditures
Except for software
development costs incurred
after technological
feasibility, all research and
development expenditures
are expensed in the period
incurred.
Direct costs to secure a
patent are capitalized.
10-
39
Research expenditures are
expensed in the period
incurred. Development
expenditures that meet
specified criteria are
capitalized as an intangible
asset.
Direct costs to secure a
patent are capitalized.
 10-
40

U.S. GAAP vs. IFRS

Software Development Costs

The percentage used to The same approach is

amortize software allowed, but not required.
development costs is the
greater of (1) the ratio of
current revenues to current
and anticipated revenues
or (2) the straight-line
percentage over the useful
life of the software.
 10-
41

Appendix 10 Oil and Gas Accounting

Two
Two acceptable
acceptable accounting
accounting alternatives
alternatives

Successful
Successful efforts
efforts Full-cost
Full-cost
method
method method
method

Exploration
Exploration costs
costs resulting
resulting Exploration
Exploration costs
costs resulting
resulting
in
in unsuccessful
unsuccessful wells
wells in
in unsuccessful
unsuccessful wells
wells
(dry
(dry holes)
holes) are
are expensed.
expensed. may
may be
be capitalized.
capitalized.

Political
Political pressure
pressure prevented
prevented the
the FASB
FASB from
from requiring
requiring
all
all companies
companies to
to use
use the
the successful
successful efforts
efforts method.
method.
 10-
42

Oil and Gas Accounting

The
The Shannon
Shannon Oil
Oil Company
Company incurred
incurred $2,000,000
$2,000,000 in in
exploration
exploration costs
costs for
for each
each of
of 10
10 oil
oil wells
wells in
in 2013.
2013. Eight
Eight
of
of the
the 10
10 wells
wells were
were dry
dry holes.
holes. Prepare
Prepare the
the journal
journal
entries
entries to
to record
record the
the exploration
exploration costs
costs under
under both
both of
of the
the
acceptable
acceptable methods.
methods.
Successful Efforts:
Oil deposit ..................................... 4,000,000
Exploration expense 16,000,000
Cash . 20,000,000

Full Cost:
Oil deposit ..................................... 20,000,000
Cash . 20,000,000
 10-
43

End of Chapter 10