Characteristics of Property,

Plant, and Equipment

•Acquired for use in operations
•Long term in nature and usually
subject
bj to depreciation
d i i
•Possesses a physical substance from
which the asset derives its value

Acquisition of Property,
Land
Plant, and Equipment
•Recorded at the fair value of •Purchase Price
consideration given. •Closing costs
•Includes
I l d all ll costs normall andd necessary •Cost of preparing the land
to get the asset ready for its intended •Assumptions of liens or mortgages
use.
•Land improvements with indefinite
•These amounts constitute the lives
historical cost of the asset.

Buildings Equipment
•If purchased include the purchase Include the purchase price plus all costs
price plus all costs normal and normal and necessary to get the
necessary to get the building ready for building ready for its intended use
its intended use
•If constructed all costs from excavation
forward are included as part of the
building

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 Self Constructed Assets Capitalization of Interest
•Direct costs are assigned to the asset •Capital expenditures must be made
•Overhead •Interest must be incurred
– Direct
Di t costt approach
h •Activities to prepare the asset for use
– Full cost approach must be ongoing
– Incremental cost approach
•Interest costs--capitalize if conditions
met.

Capitalization of Interest Lump-Sum Purchases

•Weighted Average Accumulated •Sometime a group of assets are
expenditure. purchased in a single amount.
•Avoidable
A id bl iinterest •The
The single amount must be allocated
– Directly attributable
to each asset because accounting
– Weighted average of previous debt
treatments differ.
•The allocation is made based on a ratio
of relative fair market values.

Exchanges of Assets Gains and Losses

Four different accounting treatments
– Dissimilar Assets
Basis of assets received
– Similar assets--loss situation less book value of assets given
– Similar assets--gain situation--no boot
equals the gain or loss
– Similar assets--gain situation--boot

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 Establishing Basis Dissimilar Assets

Hierarchical Order Record the new asset at its basis.

– FMV of asset given--if known Recognize all gains and losses
– FMV of asset received--if
received if more clearly
evident
– BV of asset given--last resort

Similar Assets Similar Assets

Loss Situation Gain Situation--No Boot
Record the new asset at its basis. Defer the gain by reducing the basis of
Recognize the loss the new asset

Similar Assets Costs Subsequent to

Gain Situation--Boot Acquisition
Recognize only the portion of the gain •Costs incurred to achieve future
attributable to the boot received benefits are capitalized.
Cash Received
•One
One of three conditions must be
Gain
=
Total
X present:
Recognized Gain
FMV of All Assets Received – The useful life must increase.
– The quantity produced must increase.
– The quality of production must be
Defer the rest of the gain enhanced.

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 Types of Capital Expenditures Additions
•Additions •These are increases or extensions of
•Improvements and Replacements existing assets.
•Rearrangement and Reinstallation •Additions
Addi i are capitalized
i li d as new,
•Major Repairs separate assets.

Improvements and Extensions Improvements and Extensions

•An improvement substitutes a better There capitalization approaches.

asset for an existing one. – Substitution approach.
•A
A replacement
l substitutes
b i a similar
i il – Capitalize the new cost
– Charge accumulated depreciation
asset for an existing one.

Rearrangement and Reinstallation Major Repairs

•Changes to an existing production •Ordinary repairs are expensed.
facility. •Major repairs are capitalized as a new
•Rearrangements
R andd reinstallations
i ll i are asset.
capitalized as new, separate assets.

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