CHAPTER 9 PROPERTY, PLANT, AND EQUIPMENT: ACQUISITION ...

CHAPTER 9
PROPERTY, PLANT, AND EQUIPMENT: ACQUISITION AND DISPOSAL CONTENT ANALYSIS OF EXERCISES AND PROBLEMS
Time
Range
Number Content
(minutes) E9-1 Determination of Cost. Analysis of numerous items 5-10
to determine whether or not to include in property,
plant, and equipment. E9-2 Property, Plant, and Equipment. Analysis of various 5-10
items for potential balance sheet inclusion. E9-3Acquisition Costs. Compute total acquisition costs 5-10
of machine and prepare journal entry to record. E9-4 Acquisition Cost. Journal entry to record acquisition. 5-15
Analysis of entry if price not available. E9-5 (AICPA adapted). Acquisition Cost. Determination 5-15
of cost and journal entry to record acquisition. E9-6 (AICPA adapted). Acquisition of Land and Building. 10-15
Computation of land and new building cost. E9-7 Lump Sum Purchase. Cost assigned to land, buildings, 10-15
and equipment. E9-8 Exchange of Assets. No boot, similar productive 10-15
assets. Journal entries. E9-9 Exchange of Assets. Boot, similar productive assets, 10-15
loss. Journal entries. E9-10 Exchange of Assets. Boot, similar productive assets, 10-15
gain. Journal entries. E9-11 Exchange of Assets. No boot, dissimilar productive 10-15
assets. Journal entries. E9-12 Exchange of Assets. Boot, dissimilar productive 10-15
assets. Journal entries. E9-13 (AICPA adapted). Exchange of Assets. No boot, 5-10
similar productive assets. Determination of
amount to be shown in the accounting records.
Time
Range
Number Content
(minutes) E9-14 Self-Construction. Determination of amount to be 10-15
capitalized. Evaluation under differing outside
contractor's bids. E9-15 Donation. Journal entry to record acquisition. 10-20
Financial statement disclosure. Time differences
for passage of title. E9-16 Interest During Construction. Compilation of amount 5-15
to be capitalized. Financial statement disclosure. E9-17 Interest During Construction. Compute amount of 5-15
capitalized interest and interest revenue. E9-18 Expenditures. Capital vs. operating. Classification 5-10
of various items. E9-19 (Appendix). Oil and Gas Accounting. Successful 10-20
efforts, full-cost methods. Determination of
expense and balance sheet value. P9-1 Acquisition Costs. Reclassification of erroneously 20-30
recorded items. Journal entries. P9-2 Costs Subsequent to Acquisition. Adjusting entries 45-60
to correct the books from improperly recorded costs.
Acquisition, legal fees, insurance, additions, repairs. P9-3 Cost Classification. Journal entries to record 25-35
various transactions. Acquisition, parking lot,
sale, lease, freight, installation, taxes. P9-4 (CMA adapted). Self-Construction. Computation 30-45
according to GAAP of amount to be capitalized.
Identification of any alternative procedures. P9-5 Acquisition Cost. Acquisition, replacement, 20-30
purchase. Journal entries to record various
transactions. P9-6 (AICPA adapted). Comprehensive: Analysis of 25-35
Changes in Fixed Assets. Preparation of schedules
for changes in land, building, leasehold improvements,
and machinery and equipment. P9-7 Assets Acquired by Exchange. Various situations 40-60
dealing with similar or dissimilar productive
assets and boot. Journal entries. Time
Range
Number Content
(minutes) P9-8 Assets Acquired by Exchange. Various situations 30-45
dealing with similar or dissimilar productive assets,
boot, and changing fair value. Journal entries. P9-9 Interest During Construction. Computation of amount 20-30
to be capitalized and amount to be depreciated.
Straight-line. Effects on financial statements. P9-10 Comprehensive: Interest Capitalization. Computation 40-60
of amounts of capitalized interest, interest expense,
and interest revenue. Journal entries to record
construction costs, including interest. P9-11 Events Subsequent to Acquisition. Replacement, 20-30
repairs, demolition. Journal entries to record
various transactions. P9-12 (AICPA adapted). Comprehensive: Adjusting Entries. 40-60
Analysis of machinery and equipment account. Schedules
to show effect of additions and retirements on
account balances. Journal entries. P9-13 (AICPA adapted). Adjusting Entries. Analysis of 40-60
the building account. Journal entries to adjust
the account as necessary. Supporting computations. P9-14(Appendix). Oil and Gas Accounting. Successful 10-20
efforts, full-cost methods. Financial statement
disclosure. ANSWERS TO QUESTIONS
Q9-1For a company to include an asset in the category of property, plant,
and equipment, the asset must: (1) be held for use in the normal
course of business; (2) have an expected useful life of more than
one year; and (3) be tangible property - that is, the asset must
have physical substance. Q9-2Generally, a company capitalizes the expenditures that are necessary to
obtain the benefits to be derived from the asset and includes them
as a cost of property, plant, and equipment. The expenditures
include the costs incurred in the acquisition of an asset and in
putting the asset into operating condition. The company expenses
the costs of maintaining the benefits at the levels originally
expected. Q9-3A company classifies land held for investment on the balance sheet as
an investment. It does not include the land as property, plant,
and equipment, since it is not being used in the normal course of
business in a productive capacity. Q9-4The book value of an asset is the recorded acquisition cost less the
accumulated depreciation recorded to date. Q9-5At the date of acquisition, the acquisition cost is equal to the market
value. At the end of the life of the asset, the book value should
equal the residual value (a market value). During the life of the
asset, there is no defined relationship between the book value and
market value because depreciation is a process of cost allocation,
not of market valuation. Q9-6In a lump-sum purchase, the company allocates the total purchase price
to the individual assets on the basis of their relative fair
values. This allocation is necessary because some of the assets
may have different economic lives, may not be depreciable, or may
be depreciated by different methods. Q9-7When a company exchanges securities for an asset, the acquisition cost
of that asset is either the fair value of the securities given up
or the fair value of the asset acquired. The company makes the
choice on the basis of the market that is more reliable. If
neither of these amounts is known, it may use an appraisal of the
asset, or, as a final solution, the company's board of directors
may place a value on the transaction. Q9-8The distinction between similar and dissimilar productive assets is
that similar productive assets are of the same general type and
perform the same basic function and are used in the same line of
business. This distinction is made because, in the exchange of
similar productive assets, the earning process is not considered
completed, and thus the accounting for the transaction is different
than when dissimilar productive assets are exchanged. Q9-9When similar productive assets are exchanged, the company recognizes a
gain to the extent that it receives "boot" along with the asset.
The company recognizes a loss in accordance with the conservatism
principle of accounting. When dissimilar productive assets are exchanged, the earning process is
considered completed and the company recognizes both gains and
losses. Q9-10The term "boot" refers to monetary consideration either paid or
received. For the special rules to apply, the boot must be less
than 25% of the fair value of the transaction. Q9-11The general principle underlying accounting for dissimilar productive
assets is that the earning process has been completed and thus
gains or losses are recognized. On the other hand, in accounting
for similar productive assets the earning process has not been
completed. The company is in the same relative position, so gains
on the exchange is deferred (except to the extent that boot is
received). Losses are recognized in accordance with the
conservatism principle. Q9-12According to the provisions of FASB Statement No. 34, a company
capitalizes interest on the acquisition of an asset if the asset
requires a period of time to get it ready for its intended use - a
criterion that is met for the self-construction of an asset.
Specifically, the company does not capitalize interest for the
following types of assets: 1.Inventories that are routinely manufactured or otherwise produced
on a repetitive basis. 2.Assets that are in use or ready for their intended use.
3.Assets that are not being used in the earning activities of the
company and are not undergoing the activit