Professional Documents
Culture Documents
Expected to Benefit Future Periods Tangible Property, Plant, Equipment & Natural Resources
10-2
Costs to be Capitalized
General Rule
The initial cost of an operational asset includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.
Costs to be Capitalized
Equipment
10-3
Net purchase price Taxes Transportation costs Installation costs Modification to building necessary to install equipment Testing and trial runs
10-4
Beaverton Lumber purchased a milling machine for $35,000. In addition to the purchase price, Beaverton made the following expenditures:
freight, $1,500; installation, $3,000; testing, $2,000; Annual personal property tax (not sales or use related) on the machine for the first year, $500.
10-5
Costs to be Capitalized
Land
10-6
Purchase price Real estate commissions Attorneys fees Title search Title transfer fees Title insurance premiums Removing old buildings
Costs to be Capitalized
Land Improvements
10-7
Costs to be Capitalized
Buildings
10-8
10-9
Fullerton Waste Management purchased land and a warehouse for $600,000. In addition to the purchase price, Fullerton made the following expenditures related to the acquisition:
brokers commission, $30,000; title insurance, $3,000 miscellaneous closing costs, $6,000. The warehouse was immediately demolished at a cost of $18,000 in anticipation of the building of a new warehouse.
Determine the amounts Fullerton should capitalize as the cost of the land and the building.
10-10
Purchase price Brokers commission Title insurance Misc. closing costs Demolition of old building
Total cost $657,000 All of the expenditures, including the costs to demolish the old building, are included in the initial cost of the land.
10-11
Lump-Sum Purchases
Several assets are acquired for a single, lump-sum price that may be lower than the sum of the individual asset prices.
Allocation of the lump-sum price is based on relative values of the individual assets.
Asset 1
Asset 2
Asset 3
10-12
Lump-Sum Purchases
On May 13, we purchase land and building for $200,000 cash. The appraised value of the building is $162,500, and the land is appraised at $87,500. How much of the $200,000 purchase price will be charged to the building account?
10-13
Lump-Sum Purchases
* $87,500$250,000 = 35%
The building will be apportioned $130,000 of the total purchase price of $200,000.
Prepare the journal entry to record the purchase.
10-14
Lump-Sum Purchases
GENERAL JOURNAL
Date Description PR Debit
Page 14 Credit
10-15
10-16
Total cost
$639,000
The total must be allocated to the land and building based on their relative market values:
10-17
Costs to be Capitalized
Natural Resources
10-18
Purchase price, exploration and development costs of: Timber Mineral deposits Oil and gas reserves
10-19
Often encountered with natural resource extraction when the land must be restored to a useable condition. Recognize as a liability and a corresponding increase in the related asset. Record at fair value, usually the present value of future cash outflows associated with the reclamation or restoration.
10-20
BE 10-4
Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a wildlife preserve. The companys controller has provided the following three cash flow possibilities for the restoration costs: (1) $500,000, 20% probability; (2) $550,000, 45% probability; and (3) $650,000, 35% probability. The companys credit-adjusted, risk-free rate of interest is 6%.
10-21
Solution
10-22
BE 10-5
Refer to the situation described in BE 10-4. What is the carrying value of the asset retirement liability at the end of one year? Assuming that the actual restoration costs incurred after extraction is completed are $596,000, what amount of gain or loss will Smithson recognize on retirement of the liability?
10-23
Solution BE10-5
Or 429,675 x 1.06
10-24
Noncash Acquisitions
Issuance of equity securities Deferred payments Donated assets Exchanges
The asset acquired is recorded at the fair value of the consideration given or the fair value of the asset acquired, whichever is more clearly evident.
10-25
Intangible Assets
Exclusive Rights.
Intangible Assets
Future benefits less certain than tangible assets. Usually acquired for operational use.
Costs to be Capitalized
Intangible Assets
10-26
Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.
Patents Copyrights
Trademarks
Franchises Goodwill
10-27
Patents
An exclusive right recognized by law and granted by the US Patent Office for 20 years. Holder has the right to use, manufacture, or sell the patented product or process without interference or infringement by others. R & D costs that lead to an internally developed patent are expensed in the period incurred.
10-28
Patents
Torch, Inc. has developed a new device. Research and development costs totaled $30,000. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees.
10-29
Copyrights
A form of protection given by law to authors of literary, musical, artistic, and similar works. Copyright owners have exclusive rights to print, reprint, copy, sell or distribute, perform and record the work. Generally, the legal life of a copyright is the life of the author plus 70 years.
10-30
Trademarks
A symbol, design, or logo associated with a business. If internally developed, trademarks have no recorded asset cost.
10-31
Franchises
10-32
Goodwill
Goodwill
Occurs when one company buys another company. Only purchased goodwill is an intangible asset.
The amount by which the purchase price exceeds the fair market value of net assets acquired.
Generally, this represents the present value of future earnings
10-33
Goodwill
Eddy Company paid $1,000,000 to purchase all of James Companys assets and assumed James Companys liabilities of $200,000. James Companys assets were appraised at a fair value of $900,000.
10-34
Goodwill
What amount of goodwill should be recorded on Eddy Company books?
a. b. c. d. $100,000 $200,000 $300,000 $400,000
10-35
Goodwill
What amount of goodwill should be recorded on Eddy Company books?
a. b. c. d. $100,000 $200,000 $300,000 $400,000
10-36
Pro-tech Software acquired all of the outstanding stock of Reliable Software for $14 million. The book value of Reliables net assets (assets minus liabilities) was $8.3 million. The fair values of Reliables assets and liabilities equaled their book values with the exception of certain intangible assets whose fair values exceeded book values by $2.5 million*. Calculate the amount paid for goodwill.
10-37
10-38
Deferred Payments
Note payable
Lets consider an example where we must compute the present value of a noninterest-bearing note.
10-39
Deferred Payments
On January 2, 2012, Midwestern Corporation purchased equipment by signing a noninterest-bearing requiring $50,000 to be paid on December 31, 2013. The prevailing market rate of interest on notes of this nature is 10%. Prepare the required journal entries for Midwestern on January 2, 2012; December 31, 2012 (year-end), and December 31, 2013 (year-end).
10-40
Deferred Payments
Since we do not know the cash equivalent price in this example, we must use the present value of the future cash payment.
Face amount of note $ 50,000 PV of $1, n=2, i=10% 0.82645 = PV of note (rounded) $ 41,323
GENERAL JOURNAL
Date Description PR Debit Page 73 Credit
Jan. 2
10-41
Deferred Payments
GENERAL JOURNAL
Date Description PR Debit
Page 74 Credit
4,132 4,132
Interest = 10% of $41,323 Dec. 31 Interest Expense 2013 Discount on Note Payable Interest = 10% of ($41,323 + $4,132) Dec. 31 Note Payable 2013 Cash 4,545 4,545
50,000 50,000
10-42
10-43
The initial value of machinery and note will be the present value of the note payment:
1
PV = $60,000 (.85734) = $51,440 Present value of $1: n = 2, i = 8% (from Table 2) Interest expense for 2009:
$51,440 x 8% x 6/12 = $2,058
10-44
This ratio measures how effectively a company or its unit managers uses its fixed assets to generate revenue.
10-45
Receivables Management
Dell vs. Apple comparison
Dell 2004 Property, plant, and equipment (net) Net sales $ 1,517 41,444 $ 2003 913 $ 2004 707 8,279 $ Apple 2003 669
10-46
Receivables Management
Dell 2004 Property, plant, and equipment (net) Net sales $ 1,517 41,444 $ 2003 913 $ 2004 707 8,279 $ Apple 2003 669
Dell
$41,444 ($1,517 + $913)/2 = 34.1
Apple
$8,279 = 12.0 ($707 + $669)/2
Dell generated nearly three times the sales dollars for each dollar invested in fixed assets.
10-47
Dispositions
Update depreciation or amortization to date of disposal. Remove original cost of asset and accumulated
depreciation or amortization from the books. The difference between book value of the asset and the amount received is recorded as a gain or loss.
On June 30, 2013, MeLo Inc. sold equipment for $6,350 cash. The equipment was purchased on January 1, 2008, at a cost of $15,000. The equipment was depreciated using the straight-line method over an estimated 10-year life with zero residual value. MeLo last recorded depreciation on the equipment on December 31, 2012, its year-end. Prepare the journal entries necessary to record the disposition of this equipment.
10-48
Dispositions
Update depreciation to date of sale.
June 30, 2013: Depreciation expense ($15,000 10 years) ) ....... Accumulated depreciation ........
To update depreciation to date of sale.
750
750
Remove original asset cost and accumulated depreciation. Record the gain or loss.
June 30, 2013: Accumulated depreciation ............................................ Cash ....................... Loss on sale . Equipment ...............
To record sale of equipment.
10-49
Exchanges
General Valuation Principle: Cost of asset acquired is: fair value of asset given up plus cash paid or minus cash received or fair value of asset acquired, if it is more clearly evident
In the exchange of assets fair value is used except in rare situations in which the fair value cannot be determined or the exchange lacks commercial substance. When fair value cannot be determined or the exchange lacks commercial substance, the asset(s) acquired are valued at the book value of the asset(s) given up, plus (or minus) any cash exchanged. No gain or loss is recognized.
10-50
Matrix Inc.
Cost of asset given up Accumulated depreciation Book value $ $ 600,000 400,000 200,000
10-51
Self-Constructed Assets
10-52
Interest Capitalization
10-53
Interest Capitalization
Welling, Inc. is constructing a building for its own use. Construction activities started on May 1 and have continued through Dec. 31. Welling made the following qualifying expenditures: May 1, $125,000; July 31, $160,000, Oct. 1, $200,000; and Dec. 1, $300,000. Welling borrowed $1,000,000 on May 1, from Bubs Bank for 10 years at 10 percent to finance the construction. The loan is related to the construction project and the company uses the specific interest method to compute the amount of interest to capitalize.
10-54
Interest Capitalization
10-55
Interest Capitalization
Since the $1,000,000 of specific borrowing is sufficient to cover the $225,000 of average accumulated expenditures for the year, use the specific borrowing rate of 10 percent to determine the amount of interest to capitalize. Interest = AAE Specific Borrowing Rate Interest = $225,000 10% = $22,500
GENERAL JOURNAL
Date Description PR Debit
Page 14 Credit
22,500 22,500
10-56
Research
Planned search or critical investigation aimed at discovery of new knowledge . . .
Development
The translation of research findings or other knowledge into a plan or design . . .
10-57
R&D
costs incurred under contract for other companies are expensed against revenue from the contract. Operational assets used in R&D should be capitalized if they have alternative future uses.
10-58
All costs incurred to establish the technological feasibility of a computer software product are treated as R&D and expensed as incurred. Costs incurred after technological feasibility is established and before the software is available for release to customers are capitalized as an intangible asset.
Costs Expensed as R&D
Costs Capitalized
Operating Costs
Technological Feasibility
Sale of Product
10-59
Amortization of capitalized computer software costs starts when the product begins to be marketed. Two methods, the percentage-of-revenue method and the straight-line method, are compared and the method producing the largest amount of amortization is used.
Balance Sheet The unamortized portion of capitalized computer software cost is an asset. Income Statement Amortization expense associated with computer software cost. R&D expense associated with computer software development cost.
Disclosure
10-60
Except for software development costs incurred after technological feasibility, all research and development expenditures are expensed in the period incurred. Direct costs to secure a patent are capitalized.
Research expenditures are expensed in the period incurred. Development expenditures that meet specified criteria are capitalized as an intangible asset. Direct costs to secure a patent are capitalized.
10-61
Maxtor Technology incurred the following costs during the year related to the creation of a new type of personal computer monitor:
What amount should Maxtor report as research and development expense in its income statement?
10-62
Note: The patent filing and related legal costs and the costs of adapting the product to a particular customers needs are not included as research and development expense.