Chapter 10 notes Property, plant, and equipment Includes land, buildings, and equipment Major characteristics include: Used in operations and not for resale Long term in nature and usually depreciated Possess physical substance (tangible) Acquisition and valuation of PPE Valued at historical cost, reasons include At acquisition, cost reflects fair value Historical cost is reliable Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold APB Opinion 6 states PPE should not be written up to reflect appraisal, market, or current values which are above cost Cost of land Includes all costs to acquire land and ready it for use, including: The purchase price Cash paid Notes payable Closing costs Title to the land Attorney?s fees Recording fees Costs of draining, filling, and grading If building demolished, capitalize to land Assumption of any liens, mortgages, or encumbrances on the property Additional land improvements that have an indefinite life Landscaping Definite life items, like parking lots, are amortized in land improvements Cost of buildings Includes all costs related to acquisition or construction, including: Materials, labor, and overhead costs incurred during construction Professional fees and building permits Indirectly paid ? include in cost of building Directly paid ? contractors Cost of equipment Includes all costs incurred in acquiring the equipment and preparing it for use, including: Purchase price Cash Notes payable Freight and handling charges Insurance on the equipment while in transit Cost of special foundations if required Assembling and installation costs Costs of conducting trial runs, only initial testing Valuation of PPE Generally Companies should record PPE: At the fair value of what they give up, or At the fair value of the asset received, whichever is more clearly evident Cash discounts ? whether taken or not, generally considered a reduction in the cost of the asset (forfeited discount = EXPENSE) Deferred payment contracts ? assets, purchased through long term credit, are recorded at the present value of the consideration exchanged (same as paid in cash on the day bought) Lump-sum purchases ? allocate the total cost among the various assets on the basis of their fair market values (find % and allocate) Issuance of stock ? the market value of the stock issued is a fair indication of the cost of the property acquired Accounting for contributions Companies should use the fair value of the asset to establish its value on the books and Should recognize contributions received as revenues in the period received Debit asset, credit gain Costs subsequent to acquisition In general, costs incurred to achieve greater future benefits should be capitalized Expenditures that only maintain and not improve services should be expensed To capitalize costs, must meet on of three conditions Useful life of the asset increases Quantity of units produced from assets increases Quality of units produced is enhanced Major types of expenditures Additions capitalize Improvements and replacements capitalize if life extended Rearrangement and reinstallation capitalize if life extended Repairs expense minor, capitalize major Sale of plant assets Update depreciation for the year Depreciation expense xxx Accumulated Depreciation xxx Record sale Accumulated Depreciation xxx Cash xxx Asset xxx (Loss) Gain (xxx) xxx Disposition of plant assets Involuntary conversion Sometimes an asset?s service is terminated through involuntary conversion Theft Fire Flood Condemnation Companies report the difference between the amount recovered, if any, and the asset?s book value as a gain or loss They treat these gains or losses like any other type of disposition Entry like sale of assets entry Miscellaneous problems If a company scraps or abandons an asset without any cash recovery, it recognizes a loss equal to the asset?s book value Loss xxx Accumulated Dep xxx Asset xxx If scrap value exists, the gain/loss that occurs is the difference between the scrap value and the book value Loss (gain) xxx (xxx) Accumulated Dep xxx Cash xxx Asset xxx If an asset is fully depreciated and can still be used, keep on books at historical cost less accumulated depreciation (NO ENTRY)
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