Intermediate Accounting I
Lecture 6: Acquisition & Disposition of
Property, Plant & Equipment
by Rebecca Bloch
In this lecture, the professor discusses the acquisition and disposition of property, plant and equipment. The professor uses exercises and examples to reinforce the lecture topics.
Land is real property used in operations (not held for speculation or future use), Cost includes expenditures to get it ready for its intended purpose, such as purchase price, attorney’s fees, title, recording fees, commissions, back taxes, mortgages, liens, clearing, filing, draining, and the removal of old buildings. Proceeds (such as salvage receipts from materials) reduce the price of the land. Permanent improvements to the land and special assessments should be charged TO the land (such as landscape, sewers, draining required by local government, etc). Land improvements (which have limited lives) include parking lots, driveways, private roads, fences, and sprinkler systems. Unlike permanent improvements, normal land improvements are depreciated over an estimated useful life separately from the land itself (which is not depreciated).
Buildings include any structures, such as warehouses, plants, and office buildings. Equipment are productive assets whose value comes from their long-term use in operations (not from their resale value). The acquisition cost includes all expenditures necessary to get the asset ready for use. Expenditures can include taxes, transportation, installation, testing, trial runs, and reconditioning. Any discounts taken should be deducted from the equipment.
For noncash acquisitions (like trading one asset for another), the asset being traded should be valued at the fair value of the assets given OR the fair value of the assets received, whichever is more clearly determinable. Examples include issuing stock in exchange for assets when a company is forming, or exchanging some inventory for a car. Equity securities can also be exchanged for operational assets (usually occur when small companies incorporate).
To identify the cost of a self-constructed asset, the amount of indirect manufacturing costs (overhead) that is allocated to construction must be determined. The method in which interest is treated (actual or implicit) during construction should also be determined. Construction costs should include all materials and direct labor. The company must also decide how to allocate overhead between normal production and the construction of the project in question.
Overhead allocation can be done in two ways. One way is adding only the incremental variable overhead costs incurred because of the construction project (excluding all fixed overhead that would be incurred regardless of whether or not the construction project was pursued). Another way is the full cost approach (GAAP) which allocates to production and to self-constructed assets based upon the relative amount of a cost driver (like direct labor).
Regarding interest capitalization, the main idea here is that the total cost reflects the company’s total investment in the asset and to charge that cost to the future periods benefiting. Interest can be capitalized only on assets that are constructed as discrete projects. Only interest during the construction period can be capitalized. This satisfies the matching principle (which says that expenses should be matched with related revenues and “depreciate” later when the asset starts providing benefits to the company).
There are 3 steps to determine the amount of interest to capitalize (under the specific interest method): (1) Determine the average accumulated expenditures. (2) Calculate the amount of interest to be capitalized. (3) Compare calculated interest with the actual interest incurred.
***NOTE: Lecture seems to be cut short. Seems incomplete.
Property, Plant, and Equipment: 0:06
Land Improvements: 7:15
Example – E10-2: 9:33
“Sometimes we purchase assets
for items other than cash…”: 15:43
Non-cash acquisition: 16:56
Issuance of Equity Securities in
Exchange for Operational Assets: 18:01
Example – E10-3: 19:14
Self-Constructed Assets: 24:36
Construction Costs: 29:14
Overhead Allocation: 30:02
and Full Cost Approach)
Interest Capitalization (conceptual): 32:46
Capitalization Period: 37:38
Interest Capitalized: 37:49
Weighted-Average Accumulated Expenditures: 38:37
Example of Weighted-Average
Accumulated Expenditures: 39:39
3 Step Process to Determine the
Amount of Interest to Capitalize: 41:56
—Step 1 – Determine the Average
Accumulated Expenditures: 42:57
—Step 2 – Calculate the amount of
interest to capitalize: 43:37
—Step 3 – Compare calculated interest
with the actual interest incurred: 44:18
Specific Interest vs. Weighted Average Method: 44:19
Weighted-average Interest: 45:25