CHAPTER 10
Acquisition and Disposition
of Property, Plant, and Equipment
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Valuation and classification
of land, buildings, and
equipment.
1, 2, 3,
5, 6, 11,
12, 21
1
1, 2, 3, 4,
5, 13
1, 2, 3, 5
1, 6, 7
2.
Self-constructed assets,
capitalization of overhead.
4, 7, 20, 21
4, 6, 12, 16
2
12, 21
7, 8, 9, 10,
16
assets.
11, 12
17, 18,
10, 11
19, 20
5.
Lump-sum purchases,
issuance of shares,
deferred-payment contracts.
11, 13, 14
5, 6, 7
3, 6, 11, 12,
13, 14,
15, 16
2, 3, 11
Government grants.
21, 22
7.
Costs subsequent to
acquisition.
18, 19
23, 24, 25
1
Disposition of assets.
22, 23
15, 16
26, 27
4
1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1
1, 2, 3, 4, 5, 6,
12, 13
1, 2, 3, 4,
5, 11
1, 2, 7
2, 3, 4
1, 2, 4, 5, 6, 7,
8, 9, 10, 16
1, 5, 6, 7
3, 4, 6, 7
18, 19, 20, 21,
13
23, 24, 25
1
15, 16
26, 27
2, 4, 11
1
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E10.1
Acquisition costs of realty.
Moderate
15–20
E10.2
Acquisition costs of realty.
Simple
10–15
E10.3
Acquisition costs of trucks.
Simple
10–15
E10.4
Purchase and self-constructed cost of assets.
Moderate
20–25
E10.5
Treatment of various costs.
Moderate
20–25
E10.6
Correction of improper cost entries.
Moderate
15–20
E10.7
Capitalization of interest.
Moderate
20–25
E10.8
Capitalization of interest.
Moderate
20–25
E10.9
Capitalization of interest.
Moderate
20–25
E10.10
Capitalization of interest.
Moderate
20–25
E10.11
Entries for equipment acquisitions.
Simple
10–15
E10.12
Entries for asset acquisition, including self-construction.
Simple
15–20
E10.13
Entries for acquisition of assets.
Simple
20–25
E10.14
Purchase of equipment with zero-interest-bearing debt.
Moderate
15–20
E10.15
Purchase of computer with zero-interest-bearing debt.
Moderate
15–20
E10.16
Asset acquisition.
Moderate
25–35
E10.17
Non-monetary exchange.
Simple
10–15
E10.18
Non-monetary exchange.
Moderate
20–25
E10.19
Non-monetary exchange.
Moderate
15–20
E10.20
Non-monetary exchange.
Moderate
15–20
E10.21
Government grants.
Simple
15–20
E10.22
Government grants.
Moderate
10–15
E10.23
Analysis of subsequent expenditures.
Moderate
20–25
E10.24
Analysis of subsequent expenditures.
Simple
15–20
E10.25
Analysis of subsequent expenditures.
Simple
10–15
E10.26
Entries for disposition of assets.
Moderate
20–25
E10.27
Disposition of assets.
Simple
15–20
P10.1
Classification of acquisition and other asset costs.
Moderate
35–40
P10.2
Classification of acquisition costs.
Moderate
40–55
P10.3
Classification of land and building costs.
Moderate
35–45
P10.4
Dispositions, including condemnation, demolition, and
trade-in.
Moderate
35–40
P10.5
Classification of costs and interest capitalization.
Moderate
20–30
P10.6
Interest during construction.
Moderate
25–35
P10.7
Capitalization of interest.
Moderate
20–30
P10.8
Non-monetary exchanges.
Moderate
35–45
P10.9
Non-monetary exchanges.
Moderate
30–40
P10.10
Non-monetary exchanges.
Moderate
30–40
P10.11
Purchases by deferred payment, lump-sum, and non-
monetary exchanges.
Moderate
35–45
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
CA10.1
Acquisition, improvements, and sale of realty.
Moderate
20–25
CA10.2
Accounting for self-constructed assets.
Moderate
20–25
CA10.4
Capitalization of interest.
Moderate
30–40
CA10.5
Non-monetary exchanges.
Moderate
30–40
CA10.6
Costs of acquisition.
20–25
CA10.7
Cost of land vs. building—ethics.
Moderate
20–25
ANSWERS TO QUESTIONS
1. The major characteristics of plant assets are (1) that they are acquired for use in operations and
2. (a) The acquisition costs of land may include the purchase or contract price, the broker’s commis-
sion, title search and recording fees, assumed taxes or other liabilities, and surveying, demolition
(less salvage), and landscaping costs.
(b) Machinery and equipment costs may properly include freight and handling, taxes on purchase,
3. (a) Land.
(b) Land.
(c) Land.
4. (a) The position that no fixed overhead should be capitalized assumes that the construction of
plant (fixed) assets will be timed so as not to interfere with normal operations. If this were not
the case, the savings anticipated by constructing instead of purchasing plant assets would be
nullified by reduced profits on the product that could have been manufactured and sold. Thus,
Questions Chapter 10 (Continued)
5. (a) Disagree. Promotion expenses should be expensed.
(b) Agree. Architect’s fees for plans actually used in construction of the building should be charged
to the building account as part of the cost.
(c) Agree. IFRS requires that avoidable interest or actual interest cost, whichever is lower, be
6. Since the land for the plant site will be used in the operations of the firm, it is classified as property,
7. A common accounting justification is that all costs associated with the construction of an asset,
8. Assets that do not qualify for interest capitalization are (1) assets that are in use or ready for their
9. The avoidable interest is determined by multiplying (an) interest rate(s) by the weighted-average
amount of accumulated expenditures on qualifying assets. For the portion of weighted-average
accumulated expenditures which is less than or equal to any amounts borrowed specifically to
10. The total interest cost incurred during the period should be disclosed, indicating the portion
capitalized and the portion charged to expense.
Questions Chapter 10 (Continued)
11. (a) Assets acquired by issuance of ordinary shares—when property is acquired by issuance of
securities such as ordinary shares, the cost of the property is not measured by par or stated
value of such shares. If the shares are actively traded on the market, then the fair value of the
shares is a fair indication of the cost of the property because the fair value of the shares is a
good measure of the current cash equivalent price. If the fair value of the ordinary shares is
not determinable, then the fair value of the property should be established and used as the
basis for recording the asset and issuance of ordinary shares.
(d) Deferred payments—assets should be recorded at the present value of the consideration
exchanged between contracting parties at the date of the transaction. In a deferred payment
situation, there is an implicit (or explicit) interest cost involved, and the accountant should be
careful not to include this amount in the cost of the asset.
are significantly different.
12. The cost of such assets includes the purchase price, freight and handling charges incurred,
insurance on the equipment while in transit, cost of special foundations if required, assembly and
installation costs, and costs of conducting trial runs. Costs thus include all expenditures incurred in
acquiring the equipment and preparing it for use. When plant assets are purchased subject to cash
discounts for prompt payment, the question of how the discount should be handled arises. The
Questions Chapter 10 (Continued)
13.
Fair value of land
X Cost = Cost allocated to land
Fair value of building and land
15. Ordinarily accounting for the exchange of non-monetary assets should be based on the fair value
of the asset given up or the fair value of the asset received, whichever is more clearly evident.
Thus any gains and losses on the exchange should be recognized immediately. If the fair value of
16. In accordance with IFRS which requires gains and losses to be recognized when an exchange has
commercial substance the entry should be:
Equipment ……………………………………………………………………………… 42,000
Accumulated Depreciation—Equipment ……………………………………… 9,800*
17. IFRS requires that a grant be recognized in income on a systematic basis that matches it with the
related costs that they are intended to compensate. This can be accomplished by either
(1) recording the grant as deferred grant revenue, which is recognized as income over the useful
18. Ordinarily such expenditures include (1) the recurring costs of servicing necessary to keep property
in good operating condition, (2) cost of renewing structural parts of major plant units, and (3) costs
of major overhauling operations which may or may not extend the life beyond original expectation.
Questions Chapter 10 (Continued)
The third class of expenditures, major overhauls, is usually entered through the asset accounts
because replacement of important structural elements is usually involved. Other than maintenance
19. (a) Additions. Additions represent entirely new units or extensions and enlargements of old units.
Expenditures for additions are capitalized by charging either old or new asset accounts
depending on the nature of the addition.
(b) Major Repairs. Expenditures to replace parts or otherwise to restore assets to their previously
efficient operating condition are regarded as repairs. To be considered a major repair, several
periods must benefit from the expenditure. The cost should be recorded as an asset, with the
20. The cost of installing the machinery should be capitalized, but the extra month’s wages paid to the
dismissed employees should not, as this payment did not add any value to the machinery.
21. (a) Overhead of a business that builds its own equipment. Some accountants have maintained
that the equipment account should be charged only with the additional overhead caused by
such construction. However, a more realistic figure for cost of equipment results if the plant
asset account is charged for overhead applied on the same basis and at the same rate as
used for production (see Question 4).
Questions Chapter 10 (Continued)
(d) Profit on self-construction. This is not a proper cost of property, plant and equipment.
(e) Freight on equipment returned before installation, for replacement by other equipment of
greater capacity. If ordering the first equipment was an error, whether due to judgment or
addition to the building and not merely a replacement or repair.
(h) Replastering of a section of the building. This seems more in the nature of a repair than
anything else and as such should be treated as an expense.
22. This approach is not correct since at the very minimum the investor should be aware that certain
assets are used in the business which are not reflected in the main body of the financial statements.
23. Gains or losses on plant asset disposals should be shown in the income statement in the other
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10.1
BRIEF EXERCISE 10.2
Expenditures
Date
Amount
Capitalization
Period
Weighted-Average
Accumulated Expenditures
3/1
HK$1,800,000
10/12
HK$1,500,000
6/1
3,000,000
HK$6,000,000
BRIEF EXERCISE 10.3
Principal
Interest
10%, 5-year note
HK$2,000,000
HK$200,000
11%, 4-year note
HK$585,000
BRIEF EXERCISE 10.4
Weighted-Average
Interest
Avoidable
BRIEF EXERCISE 10.5
Truck (£80,000 X .68301) ………………………………………….
54,641
Notes Payable …………………………………………………
BRIEF EXERCISE 10.6
Fair Value
% of Total
Cost
Recorded
Amount
Land
$ 60,000
60/360
X
$315,000
$ 52,500
Building
Equipment
BRIEF EXERCISE 10.7
Land (2,000 X $40) …………………………..………………………
80,000
Share Capital—Ordinary (2,000 X $10) ………………
Share Premium—Ordinary …………………………..
BRIEF EXERCISE 10.8
Equipment ……………………………………………………….
3,300
Accumulated Depreciation—Trucks …………………………
18,000
Trucks ……………………………………………………….
Cash ……………………………………………………….
Gain on Disposal of Trucks …………………………..
BRIEF EXERCISE 10.9
Computer (£3,300 – £800) ………………………………………..
2,500
Accumulated Depreciation ………………………………………
18,000
Truck ……………………………………………………….
Cash ……………………………………………………….
BRIEF EXERCISE 10.10
Equipment……………………………………………………….
5,000
Accumulated Depreciation—Equipment …………………..
Loss on Disposal of Equipment …………………………..
Equipment ……………………………………………………..
Cash ……………………………………………………….
BRIEF EXERCISE 10.11
Trucks ……………………………………………………………………
39,000
Accumulated Depreciation—Trucks …………………………
27,000
Trucks ……………………………………………………….
Cash ……………………………………………………….
BRIEF EXERCISE 10.12
Trucks ……………………………………………………………………
35,000
Accumulated Depreciation—Trucks …………………………
17,000
Loss on Disposal of Truck ……………………………………….
1,000
Trucks ……………………………………………………….
Cash ……………………………………………………….
BRIEF EXERCISE 10.13
BRIEF EXERCISE 10.14
1.
Deferred revenue approach:
Cash ………………………………………………………………………
Deferred Grant Revenue …………………………..
2.
Reduction of asset approach:
Cash ………………………………………………………………………
Equipment ……………………………………………………..
BRIEF EXERCISE 10.15
(a)
Depreciation Expense ($2,400 X 8/12) ………………………
1,600
Accumulated Depreciation—Machinery ……………
1,600
(b)
Cash ………………………………………………………………………
($8,400 + $1,600)—Machinery …………………………..
Machinery ………………………………………………………
Gain on Disposal of Machinery ………………………..
BRIEF EXERCISE 10.16
(a)
Depreciation Expense ($2,400 X 8/12) ………………………
1,600
Accumulated Depreciation—Machinery ……………
1,600
(b)
Cash ………………………………………………………………………
5,200
Loss on Disposal of Machinery …………………………..
4,800
($8,400 + $1,600)—Machinery …………………………..
Machinery ………………………………………………………
SOLUTIONS TO EXERCISES
EXERCISE 10.1 (15–20 minutes)
Item
Land
Land
Improvements
Buildings
Other Accounts
(a)
(€275,000) Notes Payable
(b)
€275,000
(c)
€ 10,000
(d)
7,000
6,000
(g)
25,000
(h)
11,000
(5,000)
13,000
(n)
(p)
3,000
EXERCISE 10.2 (10–15 minutes)
The allocation of costs would be as follows:
Land
Buildings
Land……………………………………………………………………….
$450,000
Razing costs …………………………..…………………………..
42,000
Residual value ……………………………………………………….
(6,300)
Legal fees …………………………..…………………………..
Survey ……………………………………………………….
Plans ………………………………………………………………………
Title insurance ……………………………………………………….
Liability insurance …………………………………………………..
Construction ……………………………………………………….
Interest ……………………………………………………….
EXERCISE 10.3 (10–15 minutes)
1.
Trucks ……………………………………………………………………
13,900
Cash ……………………………………………………….
13,900
2.
Trucks ……………………………………………………………………
Cash ……………………………………………………….
Notes Payable ………………………………………………..
16,364
*PV of $18,000 @ 10% for 1 year =
$18,000 X .90909 = $16,364
$16,364 + $2,000 = $18,364
3.
Trucks ……………………………………………………………………
15,200
Cost of Goods Sold ………………………………………………..
12,000
Inventory ……………………………………………………….
12,000
Sales ……………………………………………………….
15,200
4.
Trucks ……………………………………………………………………
13,000
Share Capital—Ordinary…………………………..
10,000
Share Premium—Ordinary
$13,000 less $10,000 par value) ……………………
EXERCISE 10.4 (20–25 minutes)
Purchase
Cash paid for equipment, including sales tax of €5,000 ……
€105,000
Freight and insurance while in transit …………………………….
2,000
Cost of moving equipment into place at factory ………………
3,100
Wage cost for technicians to test equipment …………………..
6,000
Special plumbing fixtures required for new equipment …….
8,000
Construction
Material and purchased parts (€200,000 X .99) …………………
€198,000
Labor costs …………………………………………………………………..
190,000
Overhead costs ……………………………………………………………..
50,000
Cost of installing equipment …………………………………………..
4,400
Total cost ……………………………………………………………………..
€442,400
EXERCISE 10.5 (20–25 minutes)
Land
Buildings
Equipment
Other
Abstract fees
£ 520
Architect’s fees
£ 3,170
Cash paid for land
and old building
92,000
Removal of old building
($20,000 – $5,500)
14,500
Interest on loans during
construction
7,400
Machinery purchased
£1,300
(Discount Lost)
Freight on machinery
Storage charges caused by
noncompletion of building
New building
Assessment by city
1,600
Hauling charges—machinery
(Loss)
5,400
£114,020
EXERCISE 10.6 (15–20 minutes)
Land ……………………………………………………………………………………
127,500
Buildings ………………………………………………………………………………
297,500
Cash ……………………………………………………………………………
2.
Equipment ……………………………………………………….
25,000
Cash ……………………………………………………….
2,000
Note Payable ………………………………………………….
23,000
Equipment ……………………………………………………….
Accounts Payable ($20,000 X .98) …………………….
19,600
Buildings ……………………………………………………….
Deferred Grant Revenue …………………………..
Buildings ……………………………………………………….
Cash ……………………………………………………….