Professional Documents
Culture Documents
Property, plant, and equipment includes land, buildings, and equipment (machinery, furniture, tools). Major characteristics include: Used in operations and not for resale. Long-term in nature and usually depreciated. Possess physical substance.
Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold.
Cost of Land
Includes all costs to acquire land and ready it for use. Costs typically include: (1)the purchase price; (2)closing costs, such as title to the land, attorneys fees, and recording fees; (3)costs of grading, filling, draining, and clearing; (4)assumption of any liens, mortgages, or encumbrances on the property; and (5)Additional land improvements that have an indefinite life.
Cost of Buildings
Includes all costs related directly to acquisition or construction. Costs typically include:
Cost of 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.
Acquisition Costs
(a) Money borrowed to pay building contractor : Notes Payable (b) Payment for construction from note proceeds: Buildings (c) Cost of land fill and clearing: Land (d) Delinquent real estate taxes on property assumed: Land (e) Premium on insurance policy during construction: Buildings (f) Refund of 1-month insurance premium because construction completed early: (Buildings)
Acquisition Costs
(g) Architects fee on building: Buildings (h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000): Land (i) Commission fee paid to real estate agency: Land (j) Installation of fences around property: Land Improvements (k) Cost of razing and removing building: Land (l) Proceeds from salvage of demolished building: (Land) (m) Cost of parking lots and driveways: Land Improvements (n) Cost of trees and shrubbery (permanent): Land
Self-constructed Assets
Costs typically include:
(1) Materials and direct labor
(2) Overhead can be handled in two ways: 1. Assign no fixed overhead
Consistent with historical cost all costs incurred to bring the asset to the condition for its intended use.
Companies should record property, plant, and equipment: at the fair value of what they give up or
Acquiring PP&E
Lump-Sum Purchases
Allocate the total cost among the various assets on the basis of their fair market values.
Issuance of Stock
The market value of the stock issued is a fair indication of the cost of the property acquired.
Contributions of PP&E
Companies should use: the fair value of the asset to establish its value on the books and
In general, costs incurred to achieve greater future benefits should be capitalized, whereas expenditures that simply maintain a given level of services should be expensed. To capitalize costs, one of three conditions must be present: Useful life of the asset must be increased. Quantity of units produced from asset must be increased. Quality of units produced must be enhanced.
Depreciation
Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Allocating costs of long-term assets: Fixed assets = Depreciation expense Intangibles = Amortization expense Natural resources = Depletion expense
Depreciation
Factors Involved in the Depreciation Process
Depreciation Methods
The profession requires the method employed be systematic and rational. Examples include: (1)Activity method (units of use or production). (2)Straight-line method. (3)Sum-of-the-years-digits. (4)Declining-balance method.
Calculating Depreciation
Robert Parish Corporation purchased a new machine for its assembly process on September 30, 2007. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Year-end is December 31. (a) Straight-line depreciation. (b) Activity method. (c) Sum-of-the-years-digits. (d) Double-declining balance.
Straight-line Depreciation
Depreciable Base $ 105,000 105,000 105,000 105,000 105,000 105,000 / / / / / / Annual Expense = = = = = = $ 21,000 21,000 21,000 21,000 21,000 21,000 x 9/12 = x Partial Year 3/12 = Current Year Expense $ 5,250 21,000 21,000 21,000 21,000 15,750 $ 105,000 Accum. Deprec. $ 5,250 26,250 47,250 68,250 89,250 105,000
Years 5 5 5 5 5 5
Activity Method
($105,000 / 1,000 hours = $105 per hour)
Year 2007 2008 2009 2010 2011 (Given) Hours Used 200 150 250 300 100 1,000 Journal entry: 2007 Depreciation expense Accumultated depreciation 21,000 21,000 x x x x x Rate per Hours $105 105 105 105 105 = = = = = Annual Expense $ 21,000 15,750 26,250 31,500 10,500 Partial Year Current Year Expense $ 21,000 15,750 26,250 31,500 10,500 $ 105,000 Accum. Deprec. $ 21,000 36,750 63,000 94,500 105,000
Depreciation Issues
(1) How should depreciation be computed for partial periods?
Companies normally compute depreciation on the basis of the nearest full month.
Involuntary Conversion
Sometimes an assets service is terminated through some type of involuntary conversion such as fire, flood, theft, or condemnation. Companies report the difference between the amount recovered (e.g., from a condemnation award or insurance recovery), if any, and the assets book value as a gain or loss.
They treat these gains or losses like any other type of disposition.
Exchanges
Ordinarily accounted for on the basis of: the fair value of the asset given up or the fair value of the asset received,
whichever is clearly more evident. Companies should recognize immediately any gains or losses on the exchange when the transaction has commercial substance (future cash flows change as a result of the transaction).
* If cash is 25% or more of the fair value of the exchange, recognize entire gain because earnings process is complete.
Companies recognize a loss immediately whether the exchange has commercial substance or not. Rationale: Companies should not value assets at more than their cash equivalent price; if the loss were deferred, assets would be overstated.
Fair value of equipment received Cash received / paid Less: Bookvalue of equipment ($28,000-19,000) ($28,000-10,000) Gain or (Loss) on Exchange
(18,000) ($5,500)
Summary of Gain and Loss Recognition on Exchanges of Nonmonetary Assets Lacks Commercial Substance
PP&E Disclosures
Depreciating assets, use Accumulated Depreciation. Depleting assets may include use of Accumulated Depletion account, or the direct reduction of asset.
Basis of valuation (cost) Pledges, liens, and other commitments Depreciation expense for the period. Balances of major classes of depreciable assets. Accumulated depreciation. A description of the depreciation methods used.
Ratio Analysis
Return on Sales: Net Income Sales Asset Turnover: Sales Average Total Assets Return on Assets: Net income Average Total Assets