10

INTERMEDIATE
ACCOUNTING
TENTH CANADIAN EDITION
Kieso Weygandt Warfield Young Wiecek McConomy
CHAPTER 10
Acquisition of
Property, Plant
and Equipment
Prepared by:
Dragan Stojanovic, CA
Rotman School of Management,
University of Toronto
CHAPTE
10:
R
Acquisition of Property, Plant, and Equipment
After studying this chapter, you should be able to:
Understand the importance of property, plant, and equipment from a

business perspective.
Identify the characteristics of property, plant, and equipment assets.
Identify the recognition criteria for property, plant, and equipment.
Identify the costs to include in the measurement of property, plant, and

equipment assets at acquisition.
Determine asset cost when the transaction has delayed payment

terms or is a lump-sum purchase, a non-monetary exchange, or a
contributed asset.
Copyright John Wiley & Sons
Canada, Ltd.
CHAPTE
10:
R
Acquisition of Property, Plant, and Equipment
After studying this chapter, you should be able to:
(continued)
Identify the costs included in specific types of property, plant, and equipment.
Understand and apply the cost model.
Understand the revaluation model and apply it using the asset adjustment
method.
Understand and apply the fair value model.
Explain and apply the accounting treatment for costs incurred after acquisition.
Identify differences in accounting between ASPE and IFRS, and what changes
are expected in the near future.

Canada, Ltd.
Acquisition of Property, Plant, and

Equipment
Definition and Cost

Elements
Property, plant,
and equipment
assets
Recognition
principle
Cost elements
Measurement of
Cost
Determining
asset cost
Costs associated
with specific
assets
Measurement After
Acquisition
Cost model
Revaluation
model
Fair value model
Costs incurred
after acquisition

Canada, Ltd.
IFRS / ASPE
Comparison
Comparison
of IFRS and
ASPE
Looking
ahead
Property, Plant, and

Equipment
Also known as tangible capital assets, plant assets,
and fixed assets
Examples: land, building, equipment, and natural
resource properties
Major characteristics include:
1. Acquired and held for use in operations and not
for resale
2. Long-term in nature and usually subject to
depreciation
3. Possess physical substance (tangible)
Canada, Ltd.
Asset Components
Both IFRS and ASPE require componentization,
although IFRS guidance is more detailed
Components of a single asset (e.g. roof of a
building) should be recognized separately if they
make up a relatively significant portion of the
assets total cost
Significant professional judgment is required in
applying componentization, and other factors to
consider include differing useful lives and differing
patterns of economic benefits
Canada, Ltd.
Cost Elements
Capitalized cost of property, plant, and equipment includes
all expenditures needed to:
acquire the asset (purchase price, net of discounts

and rebates)
bring it to its location and to state where it is ready
for use (including delivery, site preparation,
installation, assembly, professional fees, etc)
discharge obligations associated with assets
eventual disposal (e.g. site restoration)
IFRS and ASPE share the above approach, but
sometimes differ in specific application
Canada, Ltd.
Self-Constructed Assets
These are assets constructed by the business
for use in operations
The cost of self-constructed assets includes:
Direct materials,
Direct labour,
Directly attributable overhead (e.g. variable
manufacturing overhead)

Canada, Ltd.
Borrowing Costs
Under IFRS, borrowing costs that are
incurred during acquisition, construction
or production of qualifying assets must
be capitalized as part of the assets cost
ASPE allows a choice of capitalizing or
expensing such interest costs
Most common approach is explained in
Appendix 10A
Canada, Ltd.
Dismantling and Restoration Costs

Companies are often responsible for costs
associated with dismantling the asset,
removing it, and restoring the site at the end
of its useful life
These costs are often referred to as asset
retirement costs and meet the recognition
criteria for capitalization as part of PP&E
asset costs
IFRS and ASPE share the above approach,
but sometimes differ in specific application
Canada, Ltd.
10
Cash Discounts
When cash discounts are offered on the
purchase of plant assets, the Net-ofDiscount Method is the preferred method
The asset cost is reduced by the discount
amount even if discount is not taken

Canada, Ltd.
11
Deferred Payment Terms

Deferred Payment Contracts
Assets, purchased through long-term credit,
are recorded at the present value of the
consideration exchanged
When no interest rate is stated, the cash price
of the purchased asset is used to determine
imputed interest rate
Interest expense is recognized over the term
of the deferred payment contract

Canada, Ltd.
12

Example:
Sutter Corporation, given:
Five-year, $100,000 non-interest bearing
note issued in exchange for new
equipment
Market interest rate = 10%
Payable over 5 years$20,000 per year
Record acquisition of equipment

Canada, Ltd.
13

Calculate Present Value (PV) of Note:
Annuity Payment = $20,000, n=5, i=10%
PVA (Present Value of an annuity) = $75,816
Entry at date of purchase:
Equipment
75,816
Notes Payable
75,816
Entry to record interest expense at end of year:
Interest Expense (75,816 x 10%) 7,582
Notes Payable
7,582
Canada, Ltd.
14
Lump-Sum Purchases
Lump Sum Purchase
Cost of assets, acquired at a single lump
sum price, is allocated to assets on the
basis of their relative fair market values
Example: Inventory, land, and building
purchased for lump sum of $80,000
Fair market values for these assets are:
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15
Lump Sum Purchase

Asset
Inventory
Fair Market Proportion

Value
$ 25,000
25%
Cost
Allocation
20,000
Land
25,000
25%
20,000
Building
50,000
50%
40,000
$100,000
100%
$80,000
Total

Canada, Ltd.
16
i.e. $80,000
x .25
Non-Monetary Exchanges
Share-Based Payments
When property is acquired by issuing shares, the
fair value of the asset received or the fair value of
the shares given up is used for the cost of the asset
ASPE and IFRS have slightly different application of this
general approach
If the fair value of the asset received cannot be

readily determined, and the shares given up are
actively traded, the market value of publicly traded
shares is used
Canada, Ltd.
17
Non-Monetary Exchanges
Asset Exchange
Monetary exchange of assets occurs when:
Non-monetary assets (e.g., PP&E) are acquired for cash
or other monetary assets (e.g., accounts and notes
receivable), or
Non-monetary assets are disposed of in exchange for
monetary assets
Non-monetary transaction or exchange of assets

occurs when:
Non-monetary asset is exchanged for another nonmonetary asset
Canada, Ltd.
18
Exchange of Non-monetary Assets

The basic ASPE standard is that the nonmonetary exchange is valued at:
the fair value of the asset given up, or
the fair value of the asset received whichever
is more reliably measurable, and
gain or loss on the exchange is recognized in
income
Monetary transactions are accounted for

on the same basis
Canada, Ltd.
19
Exchange of Non-monetary Assets

Exception to standard:
If one or more of the following conditions
exist:
1. transaction lacks commercial substance,
2. fair values are not determinable,
Then:
. new asset cost equals book value of assets
given up, and
. no gain is recognized (but losses are
recognized)
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20
Exchange of Assets with Commercial

Substance
Example: Information Processing Inc. (IPI)
exchanges a used machine for a new model
Fair value of used machine:
$ 6,000
Book value of used machine:
$ 8,000
(Cost=$12,000; Accum. Depreciation=$ 4,000)
Cash paid to seller:
$ 7,000
Record the purchase in IPIs books:
Equipment (new)
13,000
Accumulated Depreciation (old)
4,000
Loss on Disposal
2,000
Equipment (old)
12,000
Cash
7,000
21
Canada, Ltd.
Non-monetary Exchange with

Commercial Substance
Cathay Corp. exchanges a number of trucks for land:
Fair value of trucks:
$ 49,000
Book value of trucks:
$ 42,000
(Cost=$64,000; Accum. Depreciation=
$ 22,000)
$ 4,000
Record purchase in Cathays books:
Land
53,000
Accumulated Depreciation Trucks
22,000
Trucks
Cash
Gain on Disposal of Trucks
Canada, Ltd.
22
64,000
4,000
7,000
Non-monetary Exchange No
Commercial Substance
Westco Ltd. exchanges a commercial property in Ontario
for almost identical one in Alberta from Eastco Ltd.
(assume no commercial substance)
Fair value of Westco property
$615,000
Book value of Westco property:
$420,000
(Cost=$520,000; Accum. Depreciation=$ 100,000)
Book value of Eastco property:
$395,000
(Cost=$540,000, Accum. Depreciation=$145,000)
$ 30,000
Record transaction on Westco books:
Building (new)
450,000
Accumulated Depreciation (old)
100,000
Building (old)
520,000
23
Canada,
Ltd.
Cash
30,000
Contribution of Assets
Referred to as non-reciprocal transfers: transfer of assets where

nothing is given up in exchange (e.g., donations, gift, government
grants)
Assets fair market value used as cost of asset
Two approaches:
1. Capital Approach: credit Donated Capital; used for shareholder
contributions only; otherwise not GAAP
2. Income Approach: credit represents income; used for non-owner
contributions;
Cost Reduction Method: credit the respective asset account
(benefit recognized through reduced depreciation expense)
Deferral Method: credit Deferred Revenue (benefit amortized
into income)
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24
Specific Assets: Land

Land costs include:
1.Purchase price
2.Closing costs (title, legal, and recording fees)
3.Costs of getting land ready for use (such as removal
of old building, clearing, grading, filling and draining)
4.Assumption of liens or encumbrances
5.Additional improvements with an indefinite life
Sale of salvaged materials reduces cost of land
Special assessments for local improvements (e.g.,
pavement) are part of land cost
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25
Land Improvements
Permanent improvements to the land such as
landscaping are added to the Land account
Improvements with limited lives (such as
driveways, walkways, fences, and parking
lots) are recorded in a separate Land
Improvements account
These costs are separated from Land as they
are depreciated over their estimated useful
lives
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26
Specific Assets: Buildings

Building costs include all costs directly
related to buying or constructing the
building
The removal of an old building previously
owned and used increases loss on the
disposal of the old building
If land is purchased with an old building on
it, any demolition costs less salvage value
is charged to Land
Canada, Ltd.
27
Specific Assets: Leasehold

Improvements
In long-term lease contracts, the lessee may
pay for improvements on the leased property
Examples: construction of building on leased
land, improvements to leased building
These costs are recorded in a separate
account called Leasehold Improvements
Leasehold improvements are depreciated
over the lesser of the remaining lease life
and the useful life
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28
Specific Assets: Equipment

Includes delivery equipment, office equipment, factory
equipment, machinery, and furniture
Cost of equipment includes all necessary and reasonable
costs incurred to get asset ready for its intended use
Includes:
Purchase price
Freight and handling charges
Insurance while in transit
Costs of special foundation, assembly and installation
Cost of trial runs
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29
Specific Assets: Investment Property

Property that is held to generate rental
revenue and/or appreciate in value, rather
than
sell as part of ordinary business or
use in production, administration, or supplying
of goods and services
IFRS allows for special accounting

subsequent to acquisition
Canada, Ltd.
30
Specific Assets: Natural Resource

Properties
Also known as wasting assets

Examples: oil and gas resources, and mineral deposits
Main characteristics:
1. Asset is completely removed or consumed
2. Asset does not retain original characteristics
Costs to be capitalized relate to four activities:
1. Acquisition of properties
2. Exploration
3. Development
4. Restoration
Capitalized costs make up the depletion base, and are
depreciated through depletion charge into inventory
Canada, Ltd.
31
Specific Assets: Biological Assets
Examples: fruit trees, grapevines, livestock
Special standard under IFRS
Measure at fair value less costs to sell, with

changes in values going through income
statement

Canada, Ltd.
32
Measurement after Acquisition
There are three main measurement methods to

account for property, plant, and equipment
subsequent to acquisition:
1.
2.
3.
Cost Model (CM)

Revaluation Model (RM)
Fair Value Model (FVM)
Under ASPE, CM must be used

Under IFRS, companies have the following
choices:
. For investment property assets: CM or FVM
. For other PP&E assets: CM or RM
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33
Revaluation Model
PP&E assets carried at
fair value at the date of revaluation, less

any subsequent accumulated depreciation and
impairment losses
Available only for PP&E assets whose fair

value can be measured reliably
Revaluation must be frequent enough so that
carrying value is not materially different from
assets fair value (not necessarily every year)
Canada, Ltd.
34
Revaluation Model
When carrying value of asset increases (debit)
When carrying value of asset decreases (credit)
Credit Revaluation Surplus (equity, OCI), unless increase

reverses previous declines recognized in income (in this
case, recognize increase in income to extent of prior
declines)
Debit Revaluation Surplus (equity, OCI) to the extent the
account has credit balance for the asset. Otherwise, debit
is recognized as decrease in income.
There can be no net increase in net income from

revaluing the asset over its life
Revaluation Surplus is transferred directly to Retained
Earnings (either each period, or only at time of disposal)
Canada, Ltd.
35
Revaluation Model: Example Convo

Corp
Convo Corp (CC) purchased $100,000 building on
January 2013 (fiscal year end December 31)
Revaluation: every 3 years
Depreciation: straight-line
Useful life: estimated 25 years at purchase (no residual)
Fair value at December 31, 2015: $90,000
Fair value at December 31, 2018: $75,000
Required: Prepare all journal entries needed at
revaluation dates noted above.
Canada, Ltd.
36

Corp
Revaluation entries at December 31, 2015
Depreciation for 2013-2015
(100,0000)/25yrs =Before
After
4,000/yr
Revaluation Adjustment Revaluation
X 3 years = 12,000
Building
100,000
(12,000)
90,000
2,000
Accumulated depreciation
Carrying amount
(12,000)
88,000
Accumulated Depreciation
Building
Building (90,000 88,000)
Revaluation Surplus (OCI)
12,000
2,000
nil
90,000
12,000
12,000
2,000

Canada, Ltd.
2,000
37

Corp
Revaluation entries at December 31, 2018
Depreciation for 2016-2018
(90,000 0) / 22yrs =
Before
After
4,091/yr
Revaluation Adjustment Revaluation
X 3 years = 12,273
Building
90,000
(12,273)
75,000
(2,727)
Accumulated depreciation
Carrying amount
(12,273)
77,727
Accumulated Depreciation
Building
12,273
(2,727)
nil
75,000
12,273
12,273
Revaluation Surplus (OCI)

2,000
Revaluation Loss (to income)
727
Copyright John Wiley
& Sons
Building
2,727
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38
Fair Value Model
Available as measurement option for investment

properties (under IFRS only)
Investment property measured at fair value
subsequent to acquisition
Changes in value reported in net income during
period of change
No depreciation is recognized over assets life
Note that fair value must be disclosed in financial
statements, even if cost model is chosen instead
of fair value model
Canada, Ltd.
39
Fair Value Model: Example

Erican Corp (EC) purchases shopping mall on February 2, 2011
Purchase price:
1,000,000
Property transfer fee:
40,000
Legal fees:
3,000
Empty store painting (before rent):
2,000
Mortgage financing assumed (rest in cash): 730,000
Tenant damage deposits acquired:
37,000
Fair values:
December 31, 2014:

December 31, 2015:
December 31, 2016:
1,040,000
1,028,000
1,100,000
REQUIRED: Prepare all necessary journal entries to December 31, 2016

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40

February 2, 2014 (acquisition)
Investment Property Mall 1,043,000
Maintenance Expense
2,000
Mortgage Payable 730,000
Tenant Deposits Liability 37,000
Cash 278,000

Canada, Ltd.
41

December 31, 2014
Loss in Value of Inv. Property
3,000
Investment Property Mall
(1,043,000 1,040,000)
3,000
December 31, 2015

Loss in Value of Inv. Property
12,000
12,000
(1,040,000 1,028,000)
December 31, 2016
72,000
Gain in Value of Inv. Property
72,000
(1,100,000 1,028,000)
Canada, Ltd.
42
Costs Subsequent to Acquisition
If costs incurred achieve greater future benefits, capitalize costs

(Capital expenditure)
If costs maintain a specific level of service, expense costs (Revenue
expenditure)
Major types of expenditures are:
Additions: Increase or extension of existing assets
Replacements, major overhauls, and inspections: Substitution
of a new part/component for an existing asset, and
overhauls/inspections whether or not physical parts are replaced
Rearrangement and reinstallation: Moving an asset from one
location to another
Repairs: Costs that maintain assets in good operating condition
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43
Replacements, Major Overhauls, and

Inspections
Generally meet definition for capitalization, and costs added
to carrying amount
However, replaced assets or previous overhauls and/or
inspections already have a depreciated carrying value on
books
Therefore, original assets carrying value should be removed
If original cost and accumulated depreciation are not known,
they must be estimated
ASPE is less strict than IFRS and allows for new cost to be
debited to Accumulated Depreciation or simply added to
assets carrying value
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44
Rearrangement and Reinstallation

Accounting treatment for rearrangement
and reinstallation costs:
1. If the original installation cost is known,
record as a replacement
2. If the original installation cost is not known,
cost is expensed
3. If the original installation cost is not known
and amount is material, capitalize cost
(ASPE)
Canada, Ltd.
45
Repairs
Ordinary repairs are costs that keep asset
in good operating condition
Ordinary repairs are treated as an
expense
Examples: replacement of minor parts,
repainting, lubricating equipment

Canada, Ltd.
46
Looking Ahead
There are two significant projects under
way by IASB
Development of new and comprehensive
accounting standards for extractive industries
(e.g. mining, oil, gas)
Updating standards relating to government
grants and assistance

Canada, Ltd.
47
COPYRIGHT
Copyright 2013 John Wiley & Sons Canada, Ltd. All
rights reserved. Reproduction or translation of this
work beyond that permitted by Access Copyright (The
Canadian Copyright Licensing Agency) is unlawful.
Requests for further information should be addressed
to the Permissions Department, John Wiley & Sons
Canada, Ltd. The purchaser may make back-up copies
for his or her own use only and not for distribution or
resale. The author and the publisher assume no
responsibility for errors, omissions, or damages
caused by the use of these programs or from the use
of the information contained herein.

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INTERMEDIATE

Understand the importance of property, plant, and equipment from a

Identify the characteristics of property, plant, and equipment assets.

Identify the recognition criteria for property, plant, and equipment.

Identify the costs to include in the measurement of property, plant, and

Determine asset cost when the transaction has delayed payment

Understand and apply the cost model.

Understand and apply the fair value model.

Copyright John Wiley & Sons

Acquisition of Property, Plant, and

Definition and Cost

Copyright John Wiley & Sons

Property, Plant, and

acquire the asset (purchase price, net of discounts

Copyright John Wiley & Sons

Dismantling and Restoration Costs

Copyright John Wiley & Sons

Deferred Payment Terms

Copyright John Wiley & Sons

Deferred Payment Contracts

Copyright John Wiley & Sons

Deferred Payment Contracts

Lump Sum Purchase

Fair Market Proportion

Copyright John Wiley & Sons

If the fair value of the asset received cannot be

Non-monetary transaction or exchange of assets

Exchange of Non-monetary Assets

Monetary transactions are accounted for

Exchange of Non-monetary Assets

Exchange of Assets with Commercial

Non-monetary Exchange with

Referred to as non-reciprocal transfers: transfer of assets where

Assets fair market value used as cost of asset

Specific Assets: Land

Specific Assets: Buildings

Specific Assets: Leasehold

Specific Assets: Equipment

Specific Assets: Investment Property

IFRS allows for special accounting

Specific Assets: Natural Resource

Also known as wasting assets

Specific Assets: Biological Assets

Examples: fruit trees, grapevines, livestock

Special standard under IFRS

Measure at fair value less costs to sell, with

Copyright John Wiley & Sons

Measurement after Acquisition

There are three main measurement methods to

Cost Model (CM)

Under ASPE, CM must be used

PP&E assets carried at

fair value at the date of revaluation, less

Available only for PP&E assets whose fair

When carrying value of asset increases (debit)

When carrying value of asset decreases (credit)

Credit Revaluation Surplus (equity, OCI), unless increase

There can be no net increase in net income from

Revaluation Model: Example Convo

Revaluation Model: Example Convo

Copyright John Wiley & Sons

Revaluation Model: Example Convo