10-1
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, 4,
6, 7, 12,
13, 21
1
1, 2, 3, 4,
5, 13
1, 2, 3, 5
1, 6, 7
19, 20
5.
Lump-sum purchases,
issuance of stock, deferred-
payment contracts.
12, 14, 15
5, 6, 7
3, 6, 11, 12,
13, 14,
15, 16
2, 11
acquisition.
Alternative valuations.
3
Disposition of assets.
14, 15
24, 25
4
1
capitalization of overhead.
13, 21
9, 10, 16
10-2
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Brief
Exercises
Exercises
Problems
1
1, 2, 3, 4, 5,
11, 12, 13
1, 2, 3, 4,
5, 6, 11
4, 5, 6,
11, 12
3
4. Describe the accounting problems associated
with interest capitalization.
2, 3, 4
5, 6, 7, 8,
9, 10
5, 6, 7
6. Describe the accounting treatment for costs
subsequent to acquisition.
21, 22, 23
7. Describe the accounting treatment for the
disposal of property, plant, and equipment.
14, 15
24, 25
2, 4
10-3
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
E10-10
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
Nonmonetary exchange.
Simple
10–15
E10-18
Nonmonetary exchange.
Moderate
20–25
E10-19
Nonmonetary exchange.
Moderate
15–20
E10-20
Nonmonetary exchange.
Moderate
15–20
E10-21
Analysis of subsequent expenditures.
Moderate
20–25
E10-22
Analysis of subsequent expenditures.
Simple
15–20
E10-23
Analysis of subsequent expenditures.
Simple
10–15
E10-24
Entries for disposition of assets.
Moderate
20–25
E10-25
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
trade-in.
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
Nonmonetary exchanges.
Moderate
35–45
P10-9
Nonmonetary exchanges.
Moderate
30–40
P10-10
Nonmonetary exchanges.
Moderate
30–40
P10-11
Purchases by deferred payment, lump-sum, and
nonmonetary exchanges.
Moderate
35–45
Dispositions, including condemnation, demolition, and
Moderate
35–40
E10-4
Purchase and self-constructed cost of assets.
Moderate
20–25
E10-5
Treatment of various costs.
Moderate
30–40
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
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
Nonmonetary exchanges.
Moderate
30–40
CA10-6
Costs of acquisition.
20–25
CA10-7
Cost of land vs. building—ethics.
Moderate
20–25
10-5
CE10-1
Master Glossary
(a) Capitalize is used to indicate that the cost would be recorded as the cost of an asset. That
procedure is often referred to as deferring a cost, and the resulting asset is sometimes described
as a deferred cost.
(d) A contribution is an unconditional transfer of cash or other assets to an entity or a settlement or
cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other
CE10-2
According to FASB ASC 835-20–15-8 (Capitalization of Land Expenditures), it depends:
. . . Land that is not undergoing activities necessary to get it ready for its intended use is not a qualifying
CE10-3
According to FASB ASC 360-10–25-5, (Planned Major Maintenance Activities)
. . . The use of the accrue-in–advance (accrual) method of accounting for planned major maintenance
activities is prohibited in annual and interim financial reporting periods.
10-6
CE10-4
According to FASB ASC 845-10–15-5 (Purchases and Sales of Inventory with the Same Counterparty),
the accounting for these exchanges is similar to other nonmonetary exchanges:
30–15 A nonmonetary exchange whereby an entity transfers finished goods inventory in exchange for
the receipt of raw materials or work-in-process inventory within the same line of business is not
30–16 All other nonmonetary exchanges of inventory within the same line of business shall be recog-
nized at the carrying amount of the inventory transferred. That is, a nonmonetary exchange
within the same line of business involving either of the following shall not be recognized at fair
10-7
ANSWERS TO QUESTIONS
1. The major characteristics of plant assets are (1) that they are acquired for use in operations and
not for resale, (2) that they are long-term in nature and usually subject to depreciation, and (3) that
they have physical substance.
3. (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.
4. (a) Land.
(b) Land.
(c) Land.
5. (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,
10-8
Questions Chapter 10 (Continued)
6. (a) Disagree. Organization and 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.
(d) Disagree. Interest revenue is not considered part of the acquisition cost of the building.
8. A common accounting justification is that all costs associated with the construction of an asset,
9. Assets that do not qualify for interest capitalization are (1) assets that are in use or ready for their
intended use, and (2) assets that are not being used in the earnings activities of the firm.
10. 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
11. The total interest cost incurred during the period should be disclosed, indicating the portion
capitalized and the portion charged to expense.
Interest revenue from temporarily invested excess funds should not be offset against interest cost
when determining the amount of interest to be capitalized. The interest revenue would be reported
in the same manner customarily used to report any other interest revenue.
12. (a) Assets acquired by issuance of capital stock—when property is acquired by issuance of
securities such as common stock, the cost of the property is not measured by par or stated
10-9
Questions Chapter 10 (Continued)
(c) Cash discount—when assets are purchased subject to a cash discount, the question of how
the discount should be handled occurs. If the discount is taken, it should be considered a
reduction in the asset cost. Different viewpoints exist, however, if the discount is not taken.
One approach is that the discount must be considered a reduction in the cost of the asset. The
rationale for this approach is that the terms of these discounts are so attractive that failure to
take the discount must be considered a loss because management is inefficient. The other
view is that failure to take the discount should not be considered a loss, because the terms
may be unfavorable or the company might not be prudent to take the discount. Presently both
methods are employed in practice. The former approach is conceptually correct.
(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.
13. 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
10–10
Questions Chapter 10 (Continued)
15. $10,000 + $4,208 = $14,208
16. Ordinarily accounting for the exchange of nonmonetary 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
17. In accordance with GAAP which requires losses to be recognized immediately, the entry should be:
Trucks (new) …………………………………………………………………………… 42,000
Accumulated Depreciation ………………………………………………………… 9,800*
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.
The first class of expenditures represents the day-to-day service and in general is chargeable to
operations as incurred. These expenditures should not be charged to the asset accounts.
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.
10–11
Questions Chapter 10 (Continued)
(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 handled as an addition,
improvement or replacement depending on the type of major repair made.
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.
The extra wages should be charged off immediately as an expense; the wages could be shown as
a separate item in the income statement for disclosure purposes.
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.
10–12
Questions Chapter 10 (Continued)
(f) Cost of moving machinery to a new location. Normally, only the cost of one installation should
be capitalized for any piece of equipment. Thus the original installation and any accumulated
depreciation relating thereto should be removed from the accounts and the new installation
costs (i.e., cost of moving) should be capitalized. In cases where this is not possible and the
cost of moving is substantial, it is capitalized and depreciated appropriately over the period
during which it makes a contribution to operations.
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.
Either the company should keep these assets on the balance sheet or they should be recorded at
salvage value and the resulting gain recognized. In either case, there should be a clear indication
that these assets are fully depreciated, but are still being used in the business.
10–13
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10-1
$27,000 + $1,400 + $10,200 = $38,600
BRIEF EXERCISE 10-3
Principal
Interest
10%, 5-year note
$2,000,000
$200,000
11%, 4-year note
3,500,000
385,000
$5,500,000
$585,000
$1,800,000
$6,000,000
10–14
BRIEF EXERCISE 10-5
Trucks ($80,000 X .68301) ………………………………………..
54,641
Discount on Notes Payable ……………………………………..
25,359
Notes Payable …………………………………………………
80,000
BRIEF EXERCISE 10-7
Land (2,000 X $40) …………………………..………………………
80,000
Common Stock (2,000 X $10) …………………………..
20,000
Paid-in Capital in Excess of Par—
Common Stock …………………………………………..
60,000
Equipment ……………………………………………………….
Accumulated Depreciation—Trucks …………………………
18,000
Trucks ……………………………………………………….
20,000
Cash ……………………………………………………….
Gain on Disposal of Trucks …………………………..
BRIEF EXERCISE 10-9
Equipment ($3,300 – $800) …………………………..…………..
Accumulated Depreciation—Trucks …………………………
18,000
Trucks ……………………………………………………….
20,000
Cash ……………………………………………………….
Land
Building
Equipment
10–15
BRIEF EXERCISE 10-10
Equipment……………………………………………………….
5,000
Accumulated Depreciation—Machinery ……………………
3,000
Loss on Disposal of Machinery …………………………..
4,000
Machinery ………………………………………………………
9,000
Cash ……………………………………………………….
3,000
BRIEF EXERCISE 10-12
Trucks (new) ……………………………………………………….
35,000
Accumulated Depreciation—Trucks …………………………
17,000
Loss on Disposal of Trucks ……………………………………..
1,000
Trucks (used)………………………………………………….
20,000
Cash ……………………………………………………….
33,000
Trucks (new) ……………………………………………………….
37,000
Accumulated Depreciation—Trucks …………………………
27,000
Loss on Disposal of Trucks ……………………………………..
2,000
Trucks (used)………………………………………………….
Cash ……………………………………………………….
10–16
BRIEF EXERCISE 10-14
(a)
Depreciation Expense ($2,400 X 8/12) ………………………
1,600
Accumulated Depreciation—Machinery ……………
1,600
BRIEF EXERCISE 10-15
(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
Machinery ………………………………………………………
(b)
Cash ………………………………………………………………………
Machinery ………………………………………………………
Gain on Disposal of Machinery ………………………..
SOLUTIONS TO EXERCISES
EXERCISE 10-1 (15–20 minutes)
Item
Land
Land
Improvements
Building
Other Accounts
(a)
($275,000) Notes Payable
(b)
$275,000
(c)
$ 10,000
(d)
7,000
6,000
(g)
25,000
(h)
9,000
11,000
(5,000)
13,000
(n)
(o)
14,000
(p)
3,000
EXERCISE 10-2 (10–15 minutes)
The allocation of costs would be as follows:
Land
Building
Land …………………………..………………………………………….
$450,000
Razing costs ……………………………………………………….
42,000
Salvage ……………………………………………………….
(6,300)
Legal fees ……………………………………………………….
Survey ……………………………………………………….
Plans ……………………………………………………………………..
Title insurance ……………………………………………………….
Liability insurance …………………………………………………..
Construction ……………………………………………………….
10–18
EXERCISE 10-3 (10–15 minutes)
1.
Trucks ……………………………………………………………………
13,900
Cash ……………………………………………………….
13,900
2.
Trucks ……………………………………………………………………
18,364*
Discount on Notes Payable …………………………..
1,636
3.
Trucks ……………………………………………………………………
15,200
Cost of Goods Sold …………………………………………………
12,000
Inventory ……………………………………………………….
12,000
Sales Revenue …………………………..……………………
15,200
4.
Trucks ……………………………………………………………………
13,000
Common Stock ……………………………………………….
10,000
Cash ……………………………………………………….
Notes Payable ………………………………………………..
18,000
*PV of $18,000 @ 10% for 1 year =
$18,000 X .90909 = $16,364
$16,364 + $2,000 = $18,364
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 ………………
Wage cost for technicians to test equipment …………………..
Special plumbing fixtures required for new equipment ……
The insurance premium paid during the first year of operation on this equip-
ment should be reported as insurance expense, and not be capitalized.
Repair cost incurred in the first year of operations related to this equipment
should be reported as repair and maintenance expense, and not be capitalized.
Both these costs relate to periods subsequent to purchase.
Material and purchased parts ($200,000 X .99) …………………
Labor costs …………………………………………………………………..
Overhead costs …………………………………………………………….
Cost of installing equipment ………………………………………….
Total cost ……………………………………………………………………..
$442,400
EXERCISE 10-5 (30–40 minutes)
Land
Buildings
M & E
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
Excavation before construction
19,000
Machinery purchased
$63,700
—Misc. expense
(Discount Lost)
Freight on machinery
1,340
Storage charges caused by
noncompletion of building
2,180
—Misc. expense
(Loss)
New building
Assessment by city
1,600
Hauling charges—machinery
—Misc. expense
2,000
(Loss)
5,400
EXERCISE 10-6 (15–20 minutes)
1.
Land ………………………………………………………………………
127,500
Buildings ……………………………………………………….
297,500
Equipment ……………………………………………………….
255,000
Cash ……………………………………………………….
680,000