9 and 10

• Property, plant, and equipment (PP&E)


  Tangible long-term assets acquired for use and not resale, subject to depreciation (except land)
• Historical cost


  Cash or cash equivalent price at time of purchase plus all expenditures to get asset ready for intended use
• Cost allocation concept


  As long-term assets are used up, their historical cost is converted into an expense
• Long-term asset categories


  • Tangible assets (PP&E) - depreciation
  • Natural resources - depletion
  • Intangible assets - amortization
• Characteristics of PP&E


  • Acquired for use and not resale
  • Long-term in nature and subject to depreciation, except for land
  • Possess physical substance
• Acquisition of PP&E


  • Historical cost is the usual basis for valuation
  • Additions, improvements, or replacements should be added to the asset's historical cost if they provide future service potential
  • Expensed immediately if they do not provide future service potential
• Components of historical cost for different tangible assets


  • Land
  • Land improvements
  • Equipment
  • Buildings
• Costs included in land historical cost


  • Purchase price
  • Closing costs
  • Grading, filling, draining, and clearing
  • Assumption of encumbrances
  • Costs of razing old buildings
• Costs included in equipment historical cost


  • Purchase price
  • Freight charges
  • Insurance while in transit
  • Assembly costs
  • Installation
  • Special preparation of facilities
  • Cost of conducting trial runs
• Costs included in building historical cost


  • If purchased: contract price, closing costs, unpaid property taxes, renovation costs
  • If constructed: contract price, closing costs, unpaid property taxes, attorneys' and architects' fees, building permits, excavation costs, capitalized interest
• Self-constructed assets


  • The cost recorded can never exceed the price charged by an outside contractor
  • Difficulties in assigning costs: determining amount of indirect manufacturing costs to allocate, deciding proper treatment of interest incurred during construction
• Interest costs during construction period


  1. Qualifying assets: assets under construction for own use, assets intended for sale/lease

  2. Capitalization period: start when expenditures and construction begin, stop when asset is substantially complete

  3. Amount to capitalize: lower of actual interest expense or avoidable interest
• Interest costs incurred on land being developed for lot sales are part of the land's cost and included in inventory
• Intangible assets


  Assets acquired for use in firm, not for resale, do not possess physical form, subject to amortization (except indefinite life)
• Calculating historical cost of intangible assets


  • If purchased: capitalize fair value of consideration given
  • If internally created: capitalize only direct costs to establish legal rights, never R&D
• Internally created vs purchased intangible assets


  • Cannot capitalize costs to create internal customer list, but can capitalize purchased customer list
• Goodwill


  Condition that contributes to earning power of firm, can only be recorded when business is purchased, based on going concern concept
• Calculating goodwill in business acquisition


  Purchase price > Fair value of net assets = Goodwill
• Internally generated goodwill is expensed when incurred
• Research and development (R&D)


  • Research: discover new knowledge, Development: translate knowledge into new design/product/process
  • Most R&D costs are expensed as incurred due to uncertainty about future benefits
• At the time of the purchase, the book value of X's assets and liabilities which are presented above were the same as their fair value, except for the building which had a fair value of $250,000
• Calculate the amount of Goodwill Eastman will record from this acquisition
• Research


  To discover new knowledge for significantly improved product/process
• Development


  Translation of knowledge into new Design/product/process
• Treatment of R&D costs


  • Expense most R&D costs as incurred
  • Follows: Measurement principle - to be considered an asset, it must generate a future benefit (revenue)
  • Follows: Matching principle – immediate match since no association to revenues or time periods
  • Follows Faithful Representation
• Costs to expense as R&D


  • Material, Equip, Facilities - IF no alternative future use, expense in period incurred
  • Material, Equip, Facilities - If alternative future use exists, depreciate over useful life but expense as R&D Expense
  • R&D Personnel (salaries & wages) – expense as incurred
  • Intangibles purchased from others- expense unless they have alternative future uses
  • Contract services – if others are hired to perform R&D, expense as incurred
  • Indirect costs – must be clearly related to the R&D
  • Purchased R&D –capitalize cost
• In future periods, accounting for Purchased R&D depends on if the research/development was successful or not
• Cash Discounts


  Use the net method because that represents the cash purchase price
• Deferred Payment Contracts


  Account for assets purchased on long-term credit contracts at the present value all future payments of the consideration exchanged
• When no interest rate is stated, or if the specified rate is unreasonable, impute an appropriate rate
• When imputing an interest rate consider the borrower's credit rating, the amount and maturity date of the note, and prevailing interest rates
• If determinable, use the cash exchange price of the asset acquired as the basis for recording the asset and measuring the interest element
• Relative Market Values Approach or Basket purchase


  The buyer pays a lump sum for several components. Allocate the total cost on the basis of relative fair market values
• Relative Market Values Approach or Basket purchase


  • Land
  • Building
  • Fixtures
• Acquiring fixed assets by issuing stock


  1. If stock is actively trading, then the market value of stock issued is an indication of the cost of the property acquired

  2. If the stock's market value is not determinable, use the fair market value of the property acquired as a basis for recording the land and issuance of stock
• Nonreciprocal transfers


  Transfers of assets in one direction. The firm is either receiving or giving a gift (i.e. asset or forgiveness of debt)
• Contributions received by the company


  Record "Contribution" at the fair market value of the asset received
• Nonmonetary donations or dispositions by the company


  Record the "Contribution" at the fair market value of the donated asset, remove donated assets and any associated Accumulated Depreciation, record Losses or Gains as difference between Fair Market Value and net book value of the asset
• When to Record contributions


  If the promise is "unconditional" record in the period received, if the promise is "conditional" record when asset is received
• Nonreciprocal transfers


  • Sanderson Farms received a parcel of land with a FMV of $250,000 from the Lubbock's Economic Development Corp. (EDC) in return for a promise to build a new processing plant