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, 15, 21
1
1, 2, 3, 4,
5, 13
1, 2, 3, 5
1, 5, 6
2.
Self-constructed assets,
capitalization of overhead.
5, 8, 20, 21
4, 6, 12, 16
2
3.
Capitalization of interest.
8, 9, 10, 11,
13, 21
2, 3, 4
4, 5, 7, 8,
9, 10, 16
1, 5, 6, 7
3
11, 12
17, 18,
19, 20
10, 11
6.
Costs subsequent to
acquisition.
18, 19
21, 22, 23
1
Alternative valuations.
3
Disposition of assets.
14, 15
24, 25
4
1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1
2, 3, 4, 5, 6, 21
1
1, 2, 3, 4,
5, 11, 12,
13
1, 2, 3, 4,
5, 6, 11
CA10-1
8
4, 5, 6,
11, 12
3
CA10-2
8, 9, 10, 11
2, 3, 4
5, 6, 7, 8,
9, 10
5, 6, 7
CA10-3
19, 20, 22
9, 10, 11,
14, 15, 16,
17, 18, 19,
20
10, 11
CA10-6
6, 13, 15, 18
21, 22, 23
CA10-5,
CA10-6
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
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
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
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
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
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
CA10-3
Capitalization of interest.
Moderate
30–40
CA10-4
Nonmonetary exchanges.
Moderate
30–40
CA10-5
Costs of acquisition.
20–25
CA10-6
Cost of land vs. building—ethics.
Moderate
20–25
SOLUTIONS TO CODIFICATION EXERCISES
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
than as an owner. Those characteristics distinguish contributions from exchange transactions,
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
asset. If activities are undertaken for the purpose of developing land for a particular use, the expendi-
CE10-3
According to FASB ASC 360-10–25-5, (Planned Major Maintenance Activities)
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
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.
2. The company should report the asset at its historical cost of $450,000, not its current value. The
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.
during the construction period.
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,
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.
7. Since the land for the plant site will be used in the operations of the firm, it is classified as property,
plant, and equipment. The other tract is being held for speculation. It is classified as an investment.
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.
12. (a) Assets acquired by issuance of capital stock—when property is acquired by issuance of
common stock, the cost of the property is not measured by par or stated value of such stock. If
Questions Chapter 10 (Continued)
(b) Assets acquired by gift or donation—when assets are acquired in this manner a strict cost
(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.
(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.
(e) Lump sum or basket purchase—sometimes a group of assets are acquired for a single lump
sum. When a situation such as this exists, the accountant must allocate the total cost among
the various assets on the basis of their relative fair value.
(f) Trade or exchange of assets—when one asset is exchanged for another asset, the accountant
is faced with several issues in determining the value of the new asset. The basic principle
involved is to record the new asset at the fair value of the new asset or the fair value of what is
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
14.
Fair value of land
X Cost = Cost allocated to land
Fair value of building and land
Questions Chapter 10 (Continued)
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
any gains and losses on the exchange should be recognized immediately. If the fair value of either
17. In accordance with GAAP which requires losses to be recognized immediately, the entry should be:
Trucks (new) …………………………………………………………………………… 42,000
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.
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,
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.
(b) Cash discounts on purchases of equipment. Some accountants treat all cash discounts as
financial or other revenue, regardless of whether they arise from the payment of invoices for
(d) Cost of a safety device installed on a machine. This is an addition to the machine and
should be capitalized in the machinery account if material.
(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
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
(g) Cost of plywood partitions erected in the remodeling of the office. This is a part of the
remodeling cost and may be capitalized as part of the remodeling itself is of such a nature that
it is an 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
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 retirements should be shown in the income statement along with
other items that arise from customary business activities-usually as other revenues and gains or
other expenses and losses.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10-1
BRIEF EXERCISE 10-2
Expenditures
Date
Amount
Capitalization
Period
Weighted-Average
Accumulated Expenditures
3/1
$1,800,000
10/12
$1,500,000
0
0
$6,000,000
BRIEF EXERCISE 10-3
Principal
Interest
11%, 4-year note
$585,000
BRIEF EXERCISE 10-4
Weighted-Average
X
Interest
=
Avoidable
Accumulated Expenditures
Rate
Interest
BRIEF EXERCISE 10-5
Discount on Notes Payable ……………………………………..
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
Common Stock (2,000 X $10) …………………………..
BRIEF EXERCISE 10-8
Equipment ……………………………………………………….
3,300
Accumulated Depreciation—Trucks …………………………
Trucks ……………………………………………………….
Cash ……………………………………………………….
Gain on Disposal of Trucks …………………………..
BRIEF EXERCISE 10-9
Equipment ($3,300 – $800) ……………………………………….
2,500
Accumulated Depreciation—Trucks …………………………
Trucks ……………………………………………………….
Cash ……………………………………………………….
BRIEF EXERCISE 10-10
Equipment……………………………………………………….
5,000
Accumulated Depreciation—Machinery ……………………
Machinery ………………………………………………………
Cash ……………………………………………………….
BRIEF EXERCISE 10-11
Trucks (new) ……………………………………………………….
37,000
Accumulated Depreciation—Trucks …………………………
27,000
Trucks (used)………………………………………………….
Cash ……………………………………………………….
BRIEF EXERCISE 10-12
Trucks (new) ……………………………………………………….
35,000
Accumulated Depreciation—Trucks …………………………
17,000
Cash ……………………………………………………….
BRIEF EXERCISE 10-13
Only cost (c) is expensed when incurred.
BRIEF EXERCISE 10-14
(a)
Depreciation Expense ($2,400 X 8/12) ………………………
1,600
Accumulated Depreciation—Machinery ……………
1,600
(b)
Cash ………………………………………………………………………
Machinery ………………………………………………………
Gain on Disposal of Machinery ………………………..
BRIEF EXERCISE 10-15
(a)
Depreciation Expense ($2,400 X 8/12) ………………………
1,600
Accumulated Depreciation—Machinery ……………
1,600
(b)
5,200
Loss on Disposal of Machinery …………………………..
4,800
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)
$ 8,000
(d)
7,000
(e)
6,000
(g)
22,000
(h)
9,000
(k)
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
$400,000
Razing costs
42,000
Salvage
(6,300)
Legal fees
Survey
Plans
Title insurance
Liability insurance
Construction
Interest
$439,050
$2,981,100
EXERCISE 10-3 (10–15 minutes)
1.
Trucks ……………………………………………………………………
13,900.00
Cash ……………………………………………………….
13,900.00
2.
Trucks ……………………………………………………………………
14,727.26*
Discount on Notes Payable …………………………..
1,272.74
Cash ……………………………………………………….
Notes Payable ………………………………………………..
14,000.00
*PV of $14,000 @ 10% for 1 year =
$14,000 X .90909 = $12,727.26
$12,727.26 + $2,000.00 = $14,727.26
3.
Trucks ……………………………………………………………………
15,200.00
Cost of Goods Sold …………………………………………………
12,000.00
Inventory ……………………………………………………….
12,000.00
Sales Revenue ………………………………………………..
15,200.00
[Note to instructor: The selling (retail) price of the computer system
4.
Trucks ……………………………………………………………………
13,000.00
Common Stock ……………………………………………….
10,000.00
(1,000 shares X $13 = $13,000)
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
4,000
Special plumbing fixtures required for new equipment
Construction
Material and purchased parts ($200,000 X .98)
$196,000
Labor costs
190,000
Overhead costs
50,000
Cost of installing equipment
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
Removal of old building
($20,000 – $5,500)
14,500
Interest on loans during
construction
7,400
Excavation before
construction
19,000
Machinery purchased
$53,900
$1,100
—Misc. expense
Freight on machinery
1,340
(Discount Lost)
Storage charges caused by
noncompletion of building
—Misc. expense
(Loss)
New building
Assessment by city
1,600
Hauling charges—machinery
2,000
(Loss)
5,400
EXERCISE 10-6 (15–25 minutes)
1.
Land ………………………………………………………………………
131,250
Buildings ……………………………………………………….
306,250
Equipment ……………………………………………………….
262,500
Cash ……………………………………………………….
700,000