CH 10

CHAPTER 10
Acquisition and Disposition of

Property, Plant, and Equipment
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Topics
Questions
Brief
Exercises
1
Exercises
Problems
Concepts
for Analysis
1, 2, 3, 4,
5, 13
1, 2, 3, 5
1, 6, 7
1. Valuation and classification

of land, buildings, and
equipment.
1, 2, 3, 4,
6, 7, 12,
13, 21
2. Self-constructed assets,
capitalization of overhead.
5, 8, 20, 21
4, 6, 12, 16
3. Capitalization of interest.
8, 9, 10, 11, 2, 3, 4
13, 21
4, 5, 7, 8,
9, 10, 16
1, 5, 6, 7
3, 4
4. Exchanges of assets.
12, 16, 17
8, 9, 10,
11, 12
3, 11, 16,
17, 18,
19, 20
4, 8, 9,
10, 11
5. Lump-sum purchases,
issuance of stock, deferredpayment contracts.
12, 14, 15
5, 6, 7
3, 6, 11, 12, 1, 2, 3, 11
13, 14,
15, 16
6. Costs subsequent to
acquisition.
18, 19, 21
13
21, 22, 23
7. Alternative valuations.
22
8. Disposition of assets.
23
1
3
14, 15
24, 25
Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e Instructors Manual (For Instructor Use Only)
10-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives
Brief
Exercises
Exercises
Problems
1, 2, 3, 4, 5,
11, 12, 13
1, 2, 3, 4,
5, 6, 11
4, 5, 6,
11, 12
1.
Describe property, plant, and equipment.
2.
Identify the costs to include in initial valuation

of property, plant, and equipment.
3.
Describe the accounting problems associated

with self-constructed assets.
4.
Describe the accounting problems associated

with interest capitalization.
2, 3, 4
5, 6, 7, 8,
9, 10
5, 6, 7
5.
Understand accounting issues related

to acquiring and valuing plant assets.
5, 6, 7, 8, 9,
10, 11, 12
11, 12, 13, 14,

15, 16, 17, 18,
19, 20
3, 4, 8, 9,
10, 11
6.
Describe the accounting treatment for costs

subsequent to acquisition.
13
21, 22, 23
7.
Describe the accounting treatment for the

disposal of property, plant, and equipment.
14, 15
24, 25
10-2
2, 4
ASSIGNMENT CHARACTERISTICS TABLE
It
e
m
Description
Level of
Difficu
lty
Time
(minut
es)
E10-1
E10-2
E10-3
E10-4
E10-5
E10-6
E10-7
E10-8
E10-9
E10-10
E10-11
E10-12
E10-13
E10-14
E10-15
E10-16
E10-17
E10-18
E10-19
E10-20
E10-21
E10-22
E10-23
E10-24
E10-25
Acquisition costs of realty.

Acquisition costs of realty.
Acquisition costs of trucks.
Purchase and self-constructed cost of assets.
Treatment of various costs.
Correction of improper cost entries.
Capitalization of interest.
Entries for equipment acquisitions.
Entries for asset acquisition, including self-construction.
Entries for acquisition of assets.
Purchase of equipment with zero-interest-bearing debt.
Purchase of computer with zero-interest-bearing debt.
Asset acquisition.
Nonmonetary exchange.
Analysis of subsequent expenditures.
Entries for disposition of assets.
Disposition of assets.
Moderate
Simple
Simple
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Simple
Simple
Simple
Moderate
Moderate
Moderate
Simple
Moderate
Moderate
Moderate
Moderate
Simple
Simple
Moderate
Simple
1520
1015
1015
2025
3040
1520
2025
2025
2025
2025
1015
1520
2025
1520
1520
2535
1015
2025
1520
1520
2025
1520
1015
2025
1520
P10-1
P10-2
P10-3
P10-4
Classification of acquisition and other asset costs.

Classification of acquisition costs.
Classification of land and building costs.
Dispositions, including condemnation, demolition, and
trade-in.
Classification of costs and interest capitalization.
Interest during construction.
Nonmonetary exchanges.
Purchases by deferred payment, lump-sum, and
Moderate
Moderate
Moderate
Moderate
3540
4055
3545
3540
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
2030
2535
2030
3545
3040
3040
3545
P10-5
P10-6
P10-7
P10-8
P10-9
P10-10
P10-11
10-3
nonmonetary exchanges.
10-4
ASSIGNMENT CHARACTERISTICS TABLE (Continued)

It
e
m
Description
Level of
Difficu
lty
Time
(minut
es)
CA10-1
CA10-2
Acquisition, improvements, and sale of realty.

Accounting for self-constructed assets.
Moderate
Moderate
2025
2025
CA10-3
CA10-4
CA10-5
CA10-6
Costs of acquisition.
Cost of land vs. buildingethics.
Simple
Moderate
Simple
Moderate
2025
3040
2025
2025
10-5
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
10-6
Describe property, plant, and equipment.

Identify the costs to include in initial valuation of property, plant, and equipment.
Describe the accounting problems associated with self-constructed assets.
Describe the accounting problems associated with interest capitalization.
Understand accounting issues related to acquiring and valuing plant assets.
Describe the accounting treatment for costs subsequent to acquisition.
Describe the accounting treatment for the disposal of property, plant, and equipment.
CHAPTER REVIEW
1. Chapter 10 presents a discussion of the basic accounting problems associated with the
incurrence of costs related to property, plant, and equipment; and the accounting methods
used to retire or dispose of these costs. These assets, also referred to as fixed assets, are
of a durable nature and include land, building structures, and equipment. Fixed assets are
an important part of the operations of most business organizations. They provide the major
means of support for the production and/or distribution of a companys product or service.
2. (L.O. 1)Property, plant, and equipment possess certain characteristics that distinguish
them from other assets owned by a business enterprise. These characteristics may be
expressed as follows: (a) acquired for use in operations and not for resale, (b) long-term
in nature and usually depreciated, and (c) possess physical substance. An asset must be
used in the normal business operations to be classified as a fixed asset. These assets
last for a number of years and their costs must be allocated to the periods which benefit
from their use.
Acquisition of Property, Plant, and Equipment
3. (L.O. 2)Property, plant and equipment are valued in the accounts by most companies at
their historical cost. Historical cost is measured by the cash or cash equivalent price of
obtaining the asset and bringing it to the location and condition necessary for its intended
use. Thus, charges associated with freight costs and installation are considered a part of
the assets cost. The topic of depreciation is presented in Chapter 11.
4. Subsequent to acquisition, companies should not write up property, plant, and equipment
to reflect fair value when it is above cost because (a) historical cost involves actual, not
hypothetical transactions and so is the most reliable, and (b) gains and losses should not
be anticipated, but should be recognized only when the asset is sold.
5. The assets normally classified on the balance sheet as property, plant, and equipment
include land, buildings, and various kinds of machinery and equipment. The cost of each
item includes the acquisition price plus those expenditures incurred in getting the asset
ready for its intended use.
6. The cost of land, cost typically includes
(a) purchase price
(b) closing costs such as title to the land, attorneys fees, and recording fees
(c) costs of grading, filling, draining, and clearing the property
(d) assumption of any liens, mortgages, or encumbrances on the property
(e) any additional land improvements that have an indefinite life
(f) costs of removing an old building from land purchased for the purpose of constructing
a new building
When improvements that have a limited life (fences, driveways, etc.) are made to the land
they should be set up in a separate Land Improvements account so they can be
depreciated over their estimated useful life.
10-7
7. Building costs include materials, labor, and overhead costs incurred during construction.
Any fees such as those incurred for building permits or the services of attorneys and
architects are included in acquisition cost. In general, all costs incurred from excavation of
the site to the completion of the building are considered part of the building costs.
8. With respect to equipment, cost includes the purchase price plus all expenditures related
to the purchase that occur subsequent to acquisition but prior to actual use. These related
costs would include such items as freight charges, insurance charges on the asset while
in transit, assembly and installation, special preparation of facilities, and asset testing costs.
Self-Constructed Assets
9. (L.O. 3)When machinery and equipment to be used by a company are constructed
rather than purchased, a problem exists concerning the allocation of overhead costs.
These costs may be handled in one of two ways: (a) assign no fixed overhead to the cost
of the constructed asset, or (b) assign a portion of all overhead to the construction
process. The second method called a full-costing approach appears preferable
because of its consistency with the historical cost principle. It should be noted that the
cost recorded for a constructed asset can never exceed the price charged by an outside
producer.
Interest Costs During Construction
10. (L.O. 4)Capitalization of interest costs incurred in connection with financing the construction
or acquisition of property, plant, and equipment generally follows the rule of capitalizing
only the actual interest costs incurred during construction. While some modification
to this general rule occurs, its adoption is consistent with the concept that the historical
cost of acquiring an asset includes all costs incurred to bring the asset to the condition
and location necessary for its intended use.
11. To qualify for interest capitalization, assets must require a period of time to get them ready
for their intended use. Assets that qualify for interest cost capitalization include assets
under construction for a companys own use (such as buildings, plants, and machinery)
and assets intended for sale or lease that are constructed or otherwise produced as
discrete projects (like ships or real estate developments). The period during which interest
must be capitalized begins when three conditions are present: (a) expenditures for the
asset have been made; (b) activities that are necessary to get the asset ready for its
intended use are in progress; and (c) interest cost is being incurred.
12. The amount of interest to capitalize is limited to the lower of (a) actual interest cost incurred
during the period or (b) the amount of interest cost incurred during the period that
theoretically could have been avoided if the expenditure for the asset had not been made
(avoidable interest). The potential amount of interest that may be capitalized during an
accounting period is determined by multiplying interest rate(s) by the weighted-average
amount of accumulated expenditures for qualifying assets during the period.
10-8
13. A comprehensive illustration of interest capitalization is shown on pages 544546. This

illustration includes both the computations and the related journal entries that should be
made in a situation when an asset is constructed and capitalizable interest is a part of the
transaction.
14. Two special issues relate to interest capitalization. If a company purchases land as a site
for a plant, interest costs capitalized during the period of construction are part of the cost
of the plant, not the land. In addition, companies should generally not net or offset interest
revenue against interest cost, even when construction funds are temporarily invested.
Acquisition and Valuation
15. (L.O. 5)In general, an asset should be recorded at the fair value of what is given up to
acquire it or at the fair value of the asset received, whichever is more clearly evident.
Determining fair value is not always as easy as it might appear. Some problems that may
be encountered in determining proper valuation follow.
16. The purchase of a plant asset is often accompanied by a cash discount for prompt
payment. If the discount is taken, it results in a reduction in the purchase price of the
asset. However, when the discount is allowed to lapse, should a loss be recorded or
should the asset be recorded at a higher purchase price? Currently, while the loss
approach is preferred, both methods are employed in practice.
17. Plant assets purchased on deferred payment contracts should be accounted for at the
present value of the consideration exchanged on the date of purchase. When the
obligation stipulates no interest rate, or the rate is unreasonable, an imputed rate of
interest must be determined for use in calculating the present value. Factors to be
considered in imputing an interest rate are the borrowers credit rating, the amount and
maturity date of the note, and prevailing interest rates. If determinable, the cash exchange
price of the asset acquired should be used as the basis for recording the asset and
measuring the interest element.
18. In some instances a company may purchase a group of plant assets at a single lump sum
purchase price. The best way to allocate the purchase price of the assets to the
individual items is to base the allocation on the relative fair values of the assets acquired.
To determine fair value, a company should use valuation techniques that are appropriate
in the circumstances.
19. When assets are acquired in exchange for a companys own stock, the best measure of
cost is the fair (market) value of the stock issued.
Exchanges of Nonmonetary Assets
20. Nonmonetary assets such as inventory or property, plant, and equipment are items
whose price may change over time. Controversy exists in regard to the accounting for
these assets when one nonmonetary asset is exchanged for another nonmonetary asset.
21. Ordinarily, companies account for the exchange of nonmonetary assets on the basis of
the fair value of the asset given up or the fair value of the asset received, whichever is
clearly more evident. Companies should recognize immediately any gains or losses on the
10-9
exchange. The rationale for immediate recognition is that most transactions have
commercial substance and therefore, should be recognized at the completion of the
earnings process. An exchange has commercial substance if the future cash flows change
as a result of the transaction. An exchange of trucks with different useful lives might have
commercial substance, while an exchange of trucks with no significant difference in useful
lives would probably not.
22. When a transaction involves an exchange of nonmonetary assets, losses are always
recognized. Accounting for gains depends on whether the exchange has commercial
substance. If the exchange has commercial substance, the company recognizes any gain
immediately. Gains are deferred (not immediately recognized) if the exchange has no
commercial substance, unless cash or some other form of monetary consideration is
received, in which case a partial gain is recognized. The portion to be recognized is equal
to the ratio of the cash received to the total consideration received times the total gain
indicated.
23. A gain or loss on the exchange on nonmonetary assets is computed by comparing the
book value of the asset given up with the fair value of that same asset. The examples
shown below demonstrate the various situations where exchanges of nonmonetary assets
are included.
Exchange with Commercial Substance
Al Company exchanged a used machine with a book value of $26,000 (cost $54,000 less
$28,000 accumulated depreciation) and cash of $8,000 for a delivery truck. The machine
is estimated to have a fair value of $36,000.
Cost of truck:
Fair value of machine exchanged....................
Cash paid........................................................
Cost of truck....................................................
Journal entry:
Trucks..............................................................
Accumulated DepreciationMachinery..........
Machinery................................................
Gain on Disposal of Machinery...............
Cash........................................................
$36,000
8,000
$44,000
$44,000
28,000
54,000
10,000
8,000
Exchange with No Commercial Substance

Al Company trades drill press A for drill press B from another company. Drill Press A has
a book value of $11,000 (cost $32,000 less $21,000 accumulated depreciation) and a fair
value of $8,000. Drill press B has a list price of $38,000, and the seller has allowed a
trade-in allowance of $15,000 on the press.
Cost of new machine:
List price of drill press B...................................
Less trade-in allowance...................................
Cash payment due...........................................
Fair value of drill press A.................................
10-10
$38,000
15,000
23,000
8,000
Cost of drill press B..........................................
$31,000
10-11
Journal entry:
Equipment........................................................
Accumulated DepreciationEquipment..........
Loss on Disposal of Equipment.......................
Equipment................................................
Cash........................................................
31,000
21,000
3,000
Loss verification:
Book value of drill press A...............................
Fair value of drill press A.................................
Loss on disposal of drill press A......................
32,000
23,000
$11,000
8,000
$ 3,000
Exchange with No Commercial Substance

Al Company contracts with Peg Company to exchange delivery vans. Al Company will
trade four Dodge Caravans for four Ford Freestars owned by Peg Company. The fair
value of the Caravans is $51,000 with a book value of $38,000 (cost $65,000 less
$27,000 accumulated depreciation). The Freestars have a fair value of $66,000 and
Al Company gives $15,000 in cash in addition to the Caravans.
OR
Computation of Gain:
Fair value of Caravans.....................................
Book value of Caravans...................................
Total gain (unrecognized).................................
$51,000
38,000
$13,000
Basis of new vans to Al Company:

Fair value of Freestars......................................
Less gain deferred............................................
Basis of Freestar vans......................................
$66,000
13,000
$53,000
Book value of Caravans...............................

Cash paid.....................................................
Basis of Freestar vans..................................
Al Company journal entry:
Freestar Vans...............................................
Accumulated Depreciation...........................
Caravan Vans.......................................
Cash.....................................................
$38,000
15,000
$53,000
53,000
27,000
65,000
15,000
Exchange with No Commercial Substance-Gain Situation

(Some Cash Received)
From the previous example, assume the book value of the Freestar Vans exchanged by
Peg Company was $52,000 (cost $75,000 less $23,000 of accumulated depreciation).
Thus, the total gain on the exchange to Peg Company is as follows:
Fair value of vans exchanged..................................
10-12
$66,000
Book value of vans exchanged................................

Total gain..................................................................
52,000
$14,000
Recognized gain due to cash received:

[$15,000 ($15,000 + $51,000)] $14,000 = $3,182
Deferred gain: $14,000 $3,182 = $10,818
Basis of new vans to Peg Company:
Fair value of Caravans...........................
Less gain deferred..................................
Basis of Caravans..................................
Peg Company journal entry:
Cash.......................................................
Caravan Vans.........................................
Accumulated Depreciation.....................
Freestar Vans.................................
Gain on Disposal of Vans...............
$51,000
(10,818)
$40,182
15,000
40,182
23,000
75,000
3,182
Accounting for Contributions

24. Many companies receive assets through donations from other organizations, individuals,
or the federal government. These transactions are known as nonreciprocal transfers.
Assets Received. When an asset is received through donation or gift, the appraisal or
fair value of the asset should be used to establish its value on the books. In theory, the
credit for this transaction could be made to (1) a Donated Capital account that would
appear in stockholders equity, or (2) revenue. A FASB standard states that, in general,
contributions received should be recorded as revenue in the period received.
Assets Contributed. When a plant asset is contributed, recognize contribution expense
for the fair value of the asset donated. The difference between the fair value and the book
value of the contributed asset is reported as a recognized gain or loss.
Other Asset Valuation Methods
25. Valuation of property, plant, and equipment on a basis other than historical cost has been
widely discussed by those concerned with the financial reporting process. However,
historical cost continues to be recognized as the accepted method for valuing these
assets in the financial statements. One valuation approach that is sometimes allowed and
not considered a violation of historical cost is a method referred to as prudent cost. This
concept holds that if for some reason you were ignorant about a certain price and paid too
much for an asset originally, it is theoretically preferable to charge a loss immediately.
Costs Subsequent to Acquisition
26. (L.O. 6)Costs related to plant assets that are incurred after the asset is placed in use are
either added to the asset account (capitalized) or charged against operations (expensed)
10-13
when incurred. In general, costs incurred to achieve greater future benefits from the asset
should be capitalized, whereas expenditures that simply maintain a given level of service
should be expensed.
27. For the costs to be capitalized, one of three conditions must be present: (a) the useful life of
the asset must be increased, (b) the quantity of units produced from the asset must be
increased, or (c) the quality of the units produced must be enhanced. In many instances,
a considerable amount of judgment is required in deciding whether to capitalize or expense
an item. However, consistent application of a capital/expense policy is normally more
important than attempting to provide theoretical guidelines. Generally, expenditures
related to plant assets being used in a productive capacity may be classified as: (a)
additions, (b) improvements and replacements, (c) rearrangement and reinstallation
costs, and (d) repairs.
28. Because additions result in the creation of new assets, they should be capitalized.
29. Improvements and replacements are substitutions of one asset for another. Improvements
substitute a better asset for the one currently used, whereas a replacement substitutes a
similar asset. The major problem in accounting for improvements and replacements
concerns differentiating these expenditures from normal repairs. If an improvement or
replacement increases the future service potential of the asset, it should be capitalized.
Capitalization may be accomplished by: (a) substituting the cost of the new asset for the
cost of the asset replaced, (b) capitalizing the new cost without eliminating the cost of the
asset replaced, or (c) debiting the expenditure to Accumulated Depreciation. The specific
facts related to the situation will aid in determining the most appropriate method to use.
30. Rearrangement and reinstallation costs are generally carried forward as a separate
asset and amortized against future income.
31. Ordinary repairs are expenditures made to maintain plant assets in operating condition.
They are charged to an expense account in the period in which they are incurred. Major
repairs are capitalized as an addition, improvement, or replacement, as appropriate.
Disposition of Plant Assets
32. (L.O. 7)When a plant asset is disposed of, the accounting records should be relieved of
the cost and accumulated depreciation associated with the asset. Depreciation should be
recorded on the asset up to the date of disposal, and any resulting gains or losses should
be recognized.
33. Plant assets may be retired voluntarily or disposed of by sale, exchange, involuntary
conversion, or abandonment.
10-14
LECTURE OUTLINE
Chapter 10 presents issues related to the acquisition and disposition of plant assets. The
chapter, which can generally be covered in three class sessions, deals with three major topics:
1. General principles involved in accounting for the acquisition and disposition of
plant assets:Students should be familiar with these from elementary accounting
courses.
2. Capitalization of interest cost during construction: Students generally have
difficulty with the computational procedures required.
3. Nonmonetary exchanges:This is a difficult topic for some students. Students should
be encouraged to understand the meaning of commercial substance.
A. (L.O. 1)Characteristics of Property, Plant, and Equipment.
1.
Acquired for use in operations and not for resale.
2.
Long-term in nature and usually depreciated, except for land.
3.
Possess physical substance.
B. (L.O. 2)Acquisition and Valuation of Property, Plant, and Equipment.

1. Historical cost is the usual basis for valuation. This is the cash or cash equivalent price
of obtaining the asset and bringing it to the location and condition necessary for its
intended use.
2.
Subsequent to acquisition, companies should not write up property, plant, and

equipment to reflect fair value when it is above cost. The main reasons for this position
are: (1) historical cost involves actual, not hypothetical, transactions and so is the most
reliable, and (2) companies should not anticipate gains and losses, but should
recognize gains and losses only when the asset is sold.
3.
Components of cost.
a.
Cost of Land:All expenditures made to acquire the land and prepare it for use
are included in the cost of the land. Special assessments for relatively permanent
improvements such as pavements and drainage systems are included in the
land account. Improvements with limited lives (fences, parking lots) are recorded
separately as Land Improvements and depreciated over their estimated lives.
b.
Cost of Buildings:All expenditures related directly to acquisition or construction

are capitalized as part of the building cost. This includes attorneys and architects
fees, building permits, and all costs incurred beginning with excavation and ending
with completion of the building.
10-15
c.
Cost of Equipment:All expenditures incurred in acquiring the equipment and

preparing it for use are included. This includes the purchase price, freight charges,
insurance while in transit, assembling and installation costs, the cost of conducting
trial runs, and a deduction for cash discounts whether taken or not.
d.
(L.O. 3)Self-Constructed Assets:Such assets may cause valuation problems

because of the assignment of overhead. The options are to assign a portion of all
overhead costs, or assign no fixed overhead costs. The first option, which is called
the full-costing approach, is preferred because many believe that it results in a
better matching of costs with revenues.
C. (L.O. 4)Interest Costs During Construction.

1. Basic principle:Interest cost incurred during the construction of plant assets is part of
the cost of acquiring the assets and preparing them for their intended use. Like other
acquisition costs, interest cost should be capitalized and depreciated over the expected
useful life of the assets involved.
2. Describe the computational steps involved in determining the amount of interest to be
capitalized.
TEACHING TIP
Illustration 10-1 provides a step-by-step description of interest capitalization.
10-16
a.
Determine which assets qualify for capitalization of interest.
b.
Determine the capitalization period.
c.
Compute the expenditures made during the capitalization period.
d.
Compute the weighted-average accumulated expenditures.
e.
Compute avoidable interest.Typically, this computation is difficult for students.

They must pay attention to the dates of construction expenditures and to the date
of specific construction loans and other outstanding general debt.
f.
Compute the actual interest cost incurred.
g.
Determine the interest cost to be capitalized.
TEACHING TIP
Illustration 10-2 provides a numerical example of interest capitalization for self-constructed
special-purpose equipment.
Illustration 10-3 provides a flowchart diagram of the GAAP requirements on capitalization of
interest.
3. Special issues related to interest capitalization.
a.
Interest costs incurred in the purchase of land to be used for a building site are
part of the buildings cost, not the land.
b.
Interest costs incurred on land being developed for lot sales, are part of the lands cost.
c.
Interest revenue earned on funds borrowed to finance construction of assets is not

netted against the interest expense incurred.
D. (L.O. 5)Acquisition and Valuation of Plant Assets.

1. Cash Discounts:The asset should be recorded at the current cash equivalent price at
the date of acquisition. It is preferable to exclude the cash discount from the recorded
cost of the asset, whether the discount is taken or not. Any discount not taken should
be recorded as an expense.
2. Deferred-Payment Contracts:Assets purchased on long-term credit contracts should
be accounted for at the present value of the consideration exchanged at the date of the
transaction. When no interest rate is stated, or if the specified rate is unreasonable, an
appropriate rate should be imputed. (At this point, it would be useful to review the
procedure for computing the present value of a note.)
3. Lump-Sum Purchases:Total cost should be allocated on the basis of relative fair
values of the assets acquired. To determine fair value, a company should use the
market, income or cost valuation approach. The company should assume the highest
and best use of the asset in determining the fair value.
4. Issuance of Stock:The market price of stock issued is a fair indication of the cost of
the property acquired. If the stocks market price is not determinable, use the fair value
of the property acquired.
5. Exchanges of property, plant, and equipment (nonmonetary assets). In presenting
this topic, it is important to emphasize both the basic accounting procedures and the
basic accounting principles involved.
a.
Commercial substance is the basis for immediate recognition of any gain or loss
on the exchange.
b.
Basic accounting procedures.
10-17
TEACHING TIP
Illustration 10-4 provides an overview of the accounting procedures employed in the exchange of
nonmonetary assets. Illustration 10-5 illustrates these accounting procedures in a flowchart.
(1) Compute the book value of the old asset.
(2) Compute the total gain or loss.
(3) Determine the amount of gain or loss to be recognized.
(4) Prepare the journal entry to record the exchange.
TEACHING TIP
Illustration 10-6 provides a numerical example of an exchange that lacks commercial
substance with cash paid and received. Remind students to ensure that their entry balances;
this is frequently overlooked.
6.
Accounting for contributions (nonreciprocal transfers).

a.
Acquisition:The fair value of the asset should be used to record the asset on the
companys books. The corresponding credit which the company will record is
contribution revenue in the amount of the assets fair value.
b.
Disposition:When a plant asset is contributed, two types of income statement

accounts may be affected.
(1) Contribution expense should be recorded at the fair value of the asset.
(2) A gain or loss should be recorded for the difference between the fair value and
the book value of the asset.
7.
Other Asset Valuation Methods. The prudent cost concept states that it is theoretically
preferable to charge a loss immediately if a company ignorantly pays too much for an
asset originally.
E. (L.O. 6)Costs Subsequent to Acquisition.In general, costs incurred to achieve greater

future benefits should be capitalized, but expenditures that simply maintain a given level of
services should be expensed.
1.
10-18
In order to capitalize costs, one of three conditions must be present:

a.
The useful life of the asset must be increased.
b.
The quantity of units produced from the asset must be increased.
c.
The quality of the units produced must be enhanced.
TEACHING TIP
Illustration 10-7 provides a comparative summary of costs subsequent to the acquisition of
property, plant, and equipment.
2.
Additions.Any additions should be capitalized because a new asset is created.
3. Improvements and Replacements.If the expenditure increases the future service

potential of the asset, a company should capitalize it. If the carrying value of the old
component is known, the substitution approach is used, which removes the cost of the
old asset and replaces the it with the cost of the new asset. If the carrying value of the
old asset is unknown, the cost of the new asset is capitalized and the cost of the old
asset remains in the accounting records. If the new asset acquired does not improve the
quantity or quality of the original asset, but instead extends the useful life, the company
debits the expenditure to Accumulated Depreciation.
4. Rearrangement and Reinstallation. The proper accounting treatment depends on
whether the carrying value of the original installation is known (treated as a
replacement) or unknown. If a company can determine or estimate the original
installation cost and the accumulated depreciation to date, it handles the rearrangement
and reinstallation cost as a replacement. If not, which is generally the case, the
company should capitalize the new costs (if material in amount) as an asset to be
amortized over future periods expected to benefit.
5. Repairs.
a. Ordinary repairs should be expensed in the period incurred.
b. Major repairs should be treated as an addition, improvement, or replacement.
F. (L.O. 7)Dispositions of Plant Assets.Depreciation up to the date of disposition must be
recorded. The cost and accumulated depreciation of the asset must be removed from the
books, any cash received must be recorded, and a gain or loss is recognized.
1.
Sale of Plant Assets.
2.
Involuntary Conversion.Gains or losses are the same in any other type of disposition
regardless of whether any resulting cash proceeds are going to be reinvested in re placement assets.
3.
Abandonment. The gain or loss is the difference between the assets scrap value (if any)
and its book value.
10-19
10-20
ILLUSTRATION 10-1
CAPITALIZATION OF INTEREST COST
10-21
ILLUSTRATION 10-2
CAPITALIZATION OF INTEREST EXAMPLE
10-22
ILLUSTRATION 10-2 (continued)
10-23
ILLUSTRATION 10-3
FLOWCHART FOR DETERMINING CAPITALIZATION
OF INTEREST COST
10-24
ILLUSTRATION 10-4
ACCOUNTING FOR NONMONETARY EXCHANGES
10-25
10-26
ILLUSTRATION 10-5
NONMONETARY EXCHANGE FLOWCHART
10-27
10-28
ILLUSTRATION 10-6
EXCHANGE OF NONMONETARY ASSETS
(WITH AND WITHOUT BOOT)
10-29
ILLUSTRATION 10-6 (continued)
10-30
ILLUSTRATION 10-7
SUMMARY OF COSTS SUBSEQUENT TO ACQUISITION
OF PROPERTY, PLANT, AND EQUIPMENT
10-31
10-32

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CHAPTER 10

Acquisition and Disposition of

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

1. Valuation and classification

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Describe property, plant, and equipment.

Identify the costs to include in initial valuation

Describe the accounting problems associated

Describe the accounting problems associated

Understand accounting issues related

11, 12, 13, 14,

Describe the accounting treatment for costs

Describe the accounting treatment for the

ASSIGNMENT CHARACTERISTICS TABLE

Acquisition costs of realty.

Classification of acquisition and other asset costs.

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Acquisition, improvements, and sale of realty.

Describe property, plant, and equipment.

13. A comprehensive illustration of interest capitalization is shown on pages 544546. This

Exchange with No Commercial Substance

Cost of drill press B..........................................

Exchange with No Commercial Substance

Basis of new vans to Al Company:

Book value of Caravans...............................

Exchange with No Commercial Substance-Gain Situation

Book value of vans exchanged................................

Recognized gain due to cash received:

Accounting for Contributions

Acquired for use in operations and not for resale.

Long-term in nature and usually depreciated, except for land.

Possess physical substance.

B. (L.O. 2)Acquisition and Valuation of Property, Plant, and Equipment.

Subsequent to acquisition, companies should not write up property, plant, and

Cost of Buildings:All expenditures related directly to acquisition or construction

Cost of Equipment:All expenditures incurred in acquiring the equipment and

(L.O. 3)Self-Constructed Assets:Such assets may cause valuation problems

C. (L.O. 4)Interest Costs During Construction.

Determine which assets qualify for capitalization of interest.

Determine the capitalization period.

Compute the expenditures made during the capitalization period.

Compute the weighted-average accumulated expenditures.

Compute avoidable interest.Typically, this computation is difficult for students.

Compute the actual interest cost incurred.

Determine the interest cost to be capitalized.

Interest revenue earned on funds borrowed to finance construction of assets is not

D. (L.O. 5)Acquisition and Valuation of Plant Assets.

Basic accounting procedures.

Accounting for contributions (nonreciprocal transfers).

Disposition:When a plant asset is contributed, two types of income statement

E. (L.O. 6)Costs Subsequent to Acquisition.In general, costs incurred to achieve greater

In order to capitalize costs, one of three conditions must be present:

The useful life of the asset must be increased.

The quantity of units produced from the asset must be increased.

The quality of the units produced must be enhanced.

Additions.Any additions should be capitalized because a new asset is created.

3. Improvements and Replacements.If the expenditure increases the future service

Sale of Plant Assets.

ILLUSTRATION 10-2 (continued)

ILLUSTRATION 10-6 (continued)

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