Property, Plant, and Equipment, Investment Property and Intangible Assets: Acquisition and Disposition

Chapter 6
Property, Plant, and

Equipment, Investment
Property and Intangible
Assets:
Acquisition and Disposition
Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Spiceland et al., Intermediate Accounting, Global Edition 2
6-1
LO6-1
Types of Assets
Long-lived, revenue-producing assets
Property, plant, and Intangible assets:

equipment: • Patents
Land, buildings, equipment, • Copyrights
machinery, furniture, autos, • Trademarks
and trucks • Franchises
Investment property: • Goodwill
Land and buildings held for
rental income and capital
appreciation
6-2
LO6-1
Costs to be Capitalized
Property, plant, and equipment and intangible assets
Can be acquired by:
Purchase Donation Exchange

Self-construction Business Lease
combination
Initial cost = Purchase price + All expenditures
necessary to bring the asset
to its desired condition and
location for use

6-3
LO6-1
Cost of Equipment
Includes:
• Purchase price
• Any sales tax
• Transportation costs
• Expenditures for installation and testing
• Legal fees to establish title
• Any other costs to bring the asset to its
condition and location for use

6-4
LO6-1
Cost of Land
Costs should include:
• Purchase price
• Attorney fees
• Real estate agent commissions
• Costs related to title and title search
• Recording fees
• Any back taxes, liens, mortgages, or other
obligations
• Expenditures such as clearing, filling, draining,
and even removing old buildings
Proceeds from the sale of salvaged
materials after purchase reduce the cost of
land
6-5
LO6-1
Land Improvements
• Usually have useful lives that are estimable
• Costs:
– Separately identified and capitalized
– Depreciated over periods benefited by
their use
• Examples:
– Cost of parking lots, driveways, private
roads, fences, and sprinkler systems

6-6
LO6-1
Cost of Buildings
• Cost of acquiring a building usually includes:

– Purchase price
– Realtor commissions and legal fees
– Reconditioning costs

6-7
LO6-1
Cost of Investment Property
• Include
– Cost of land
– Cost of buildings
(see earlier slides)

6-8
LO6-1
Asset Retirement Obligations

An existing legal obligation associated with the
disposition/retirement of a tangible, long-lived asset
Recognized as a liability and measured at fair value (if

value can be reasonably estimated)
• Some companies recognized the AROs gradually over
the life of the asset
• While others did not recognize the obligations until
the asset was retired or sold
Example: Oil and gas exploration company might be required to
restore land to its original condition after extraction is completed
6-9
LO6-1
Intangible Assets
• Represent exclusive rights that provide benefits to the owner
• Lack physical substance
• Difficult to anticipate the timing and the existence of future
benefits attributable to many intangible assets
Purchase intangible assets from other entities
Companies Ex: Existing patent, copyright, trademark
can either:
Develop intangible assets internally
Ex: Develop a new product that is then patented
Amortized Finite useful lives

Not
Indefinite useful lives Amortized
Cost = Purchase price + All other costs necessary to bring the asset to its desired
condition and location for use
6-10
LO6-1
Intangible Assets (concluded)

Specifically identifiable
Patents Copyrights Trademarks
Franchises
Right to Right of protection Right to display a
Exclusive right by
manufacture a given to a creator of word, a slogan, a
franchisor to
product or to use a a published work. symbol, or an
franchisee to use the
process Ex: Song/film/book emblem
franchisor’s
trademark/product
Granted by the US Granted for the life of Registered with US Franchisor
Patent Office for a the creator plus 70 Patent Office for a grants it for a specified
period of 20 years years period of 10 years period of time to the
franchisee
Costs include Costs include Costs include Initial payment plus

purchase price, legal purchase price, legal purchase price, legal periodic payments
fees, filing fees, not fees, filing fees, not fees, filing fees, not over the life of the
including internal including internal including internal franchise agreement
research and research and research and
development development development

6-11
L06-1
Goodwill
• Represents the unique value of a company as a
whole over and above its identifiable tangible
and intangible assets
Goodwill can emerge from a company’s:
Clientele and reputation

Trained employees and
management team
Favorable business
location

6-12
L06-1
Goodwill (continued)
• Because goodwill can’t be separated from a company, it’s not
possible for a buyer to acquire it without also acquiring the
whole company or a portion of it.
Capitalized Cost of Goodwill:
Fair value of the

consideration exchanged Fair value of the net assets
(acquisition price) for the − acquired
company
The fair value of all identifiable tangible and intangible assets

(less)
The fair value of any liabilities of the selling company assumed
6-13
L06-2
Lump-Sum Purchases
• Refers to the acquisition of group of assets for a single sum
Valuation of these assets differs when:
• Each asset is indistinguishable
Example:
1. 10 identical delivery trucks purchased for a lump-sum
price of $150,000
• Assets have different characteristics and different useful
lives
: Allocate the lump-sum acquisition price among
Example: the separate items
1. Acquisition of a factory that includes assets that are
significantly different such as land, building, and
equipment
6-14
L06-3
Noncash Acquisitions
• Companies can also acquire assets without paying
cash at the time of the purchase by:
1. Deferred payments (notes payable)
2. Issuance of equity securities
3. Donated assets
4. Exchanges of nonmonetary assets for other assets
• Assets acquired in noncash transactions are valued at
the fair value of the assets given or the fair value of the
assets received, whichever is more clearly evident

6-15
LO6-3
Deferred Payments
An obligation to make payment in the future
Example: A machine is acquired for $15,000 and the
buyer signs a note requiring the payment of $15,000
sometime in the future plus interest at a realistic
interest rate.
Journal Entry Debit Credit

Machine 15,000
Note payable 15,000

6-16
L06-4
Issuance of Equity Securities

• Can occur when small companies incorporate and the
owner or owners contribute assets to the new
corporation in exchange for ownership securities
• Transaction’s exchange value either:
– the fair value of the assets received by the
corporation or
– the market value of the shares of corporations
whose stock is actively traded.

6-17
LO6-4
Donated Assets
• The donation usually is an enticement to do
something that benefits the donor
• Recorded at their fair values based on either an
available market price or an appraisal value
• Revenue is credited

6-18
LO6-5
Decision Makers’ Perspective

Capital budgeting:
• Includes decisions pertaining to acquisitions of
property, plant, and equipment and intangible assets
• Requires management to forecast all future net cash
flows generated by the asset(s)
Net present value model

Present value of Initial
>
future net cash flows acquisition cost

6-19
LO6-5
Fixed-Asset Turnover Ratio

Fixed-Asset Turnover Ratio:
• Indicates the level of sales generated by the
company’s investment in fixed assets
Book value, sometimes called

carrying value or carrying amount
(cost less accumulated depreciation and depletion)

6-20
LO6-6
Dispositions
• Gain or loss recognized for the difference between
the consideration received and the book value of the
asset sold
Consideration received $XXX

Less: Book value of asset sold (XXX)
Gain/loss on sale of asset $XXX

6-21
LO6-6
Understanding Gains and Losses

• A gain on the sale of a depreciable asset means the
asset was sold for more than its book value.
– The net increase in the book value of total assets
is an accounting gain (not an economic gain).
• A loss signifies that the cash received is less than

the book value of the asset being sold.
– There is a net decrease in the book value of total
assets.

6-22
LO6-6
Exchanges
• Refers to the acquisition of an asset in exchange for an
asset other than cash
Old asset Traded-in New asset acquired
(Fair value) (Fair value)
Difference
Paid in cash or other asset
• Gain or loss is recognized in these transactions for the

difference between the fair value and book value of the
asset given
6-23
LO6-6
Exchange Lacks Commercial

Substance
Commercial Substance:
• Present when future cash flows change as a result of the
exchange
• Example: Newer models of equipment can increase production
or improve manufacturing efficiency causing an increase in
revenue or a decrease in operating costs with a corresponding
increase in future cash flows.
Exchange Lacks Commercial Substance
Gain Situation Loss Situation
• Book value of the old asset is • Fair value of old asset is used
used to record the exchange. to record the exchange
(unlikely situation).
6-24
LO6-7
Self-Constructed Assets
• A company might decide to construct an asset for its
own use rather than buy an existing one
• Identifying the cost is difficult because there is no
external transaction to establish an exchange price
Two Critical Issues
Determining the amount Deciding on the proper

of indirect manufacturing treatment of interest
costs (overhead) to be (actual or implicit)
allocated to the incurred during
construction construction
6-25
LO6-7
Self-Constructed Assets
(continued)
Overhead Allocation
The treatment of manufacturing overhead cost and its

allocation:
1. Inclusion of only the incremental overhead costs
2. Full-cost approach
Interest Capitalization
1. Capitalized and then allocated as depreciation
6-26
LO6-7
Interest Capitalization
Qualifying Assets
• Assets that are constructed for a company’s own use as
well as assets constructed as discrete projects for sale or
lease
• Only interest incurred during the construction period is
eligible for capitalization
Period of Capitalization
• Begins when construction begins and the first expenditure is
made as long as interest costs are actually being incurred
Average Accumulated Expenditures
• Approximates the average debt necessary for construction

6-27
LO6-8
Research and Development

(R&D)
Research Development
• Planned search or • Translation of research
critical investigation to findings into a plan or
discover new knowledge design for a new
that helps developing a product or process or
new product or service improving existing
or a new process or product or processes,
technique or improving whether intended for
an existing product or sale or use
processes
6-28
LO6-8
Determining R&D Costs

Includes costs relevant to R&D projects, such as:
• Salaries, wages, and other labor costs of R&D personnel
• Costs of materials consumed, equipment, facilities, and
intangibles used in R&D projects
• Costs of services performed by others
• A reasonable allocation of indirect costs related to the
R&D activities
Asset purchased for Asset purchased for more than a
single R&D project single R&D project
• Cost is considered • Depreciation or amortization of
R&D and expensed the asset included as R&D
immediately in the expense in the current and future
current year periods
6-29
Research and Development LO6-8
Expenditures
Costs incurred Costs incurred

are R&D costs are non-R&D costs

6-30
LO6-8
R&D Performed for Others and

Start-Up Costs
R&D Performed for Others
• R&D costs are capitalized as inventory and carried
forward into future years until the project is
completed
Start-Up Costs
• Refers to one-time preopening costs
• Includes organization costs
• Expensed in the period incurred

6-31
LO6-8
Software Development Costs

• Amortization of capitalized software development
costs begins when the product is available for general
release to customers
• The periodic amortization percentage:
Percentage-of- Straight-line
revenue method > method
Percentage-of- Straight-line
revenue method < method

6-32
LO6-8
Research and Development

Expenditures—Computer
Software
“[W]hen the enterprise has completed all planning, designing,

coding, and testing activities that are necessary to establish that
the product can be produced to meet its design specifications
including functions, features, and technical performance
requirements.”
6-33
LO6-8
Purchased Research and

Development
In case of purchased research and development
Developed technology In-process research and
development
• Capitalize its fair value as • Capitalize the fair value of
a finite-life intangible in-process R&D as an
asset and amortize that indefinite-life intangible
amount over its useful asset
life
R&D costs incurred after the acquisition

is expensed as incurred
6-34
LO6-8
Start-Up Costs
• Start-up costs include organization costs related to
organizing a new entity
– Example: legal fees and state filing fees to incorporate
• Companies are required to expense all the costs
related to a company’s start-up and organization
activities in the period incurred, rather than capitalize
those costs as an asset

6-35

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Chapter 6

Property, Plant, and

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Property, plant, and Intangible assets:

Purchase Donation Exchange

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

• Cost of acquiring a building usually includes:

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Cost of Investment Property

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Asset Retirement Obligations

Recognized as a liability and measured at fair value (if

Amortized Finite useful lives

Intangible Assets (concluded)

Costs include Costs include Costs include Initial payment plus

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Clientele and reputation

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Capitalized Cost of Goodwill:

Fair value of the

The fair value of all identifiable tangible and intangible assets

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Journal Entry Debit Credit

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Issuance of Equity Securities

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Decision Makers’ Perspective

Net present value model

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Fixed-Asset Turnover Ratio

Book value, sometimes called

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Consideration received $XXX

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Understanding Gains and Losses

• A loss signifies that the cash received is less than

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

• Gain or loss is recognized in these transactions for the

Exchange Lacks Commercial

Determining the amount Deciding on the proper

The treatment of manufacturing overhead cost and its

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Research and Development

Determining R&D Costs

Costs incurred Costs incurred

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

R&D Performed for Others and

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Software Development Costs

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

Research and Development

“[W]hen the enterprise has completed all planning, designing,

Purchased Research and

R&D costs incurred after the acquisition

Copyright © 2018 McGraw-Hill Education Asia Pty Ltd

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