ch10 - Part I

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
10-1
Acquisition and CHAPTER 10
Disposition of Property,
Plant, and Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify property, plant, and 4. Describe the accounting
equipment and its related costs. treatment for costs subsequent
to acquisition.
2. Discuss the accounting
problems associated with 5. Describe the accounting
interest capitalization. treatment for the disposal of
property, plant, and equipment.
3. Explain accounting issues
related to acquiring and valuing
plant assets.
10-2
PREVIEW OF CHAPTER 10
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
10-3
Property, Plant, and LEARNING OBJECTIVE 1
Identify property, plant, and
Equipment equipment and its related costs.
Property, plant, and equipment are assets of a durable nature.

Other terms commonly used are plant assets and fixed assets.
► “Used in operations” and not Includes:

for resale. ▪ Land,
▪ Building structures
► Long-term in nature and
(offices, factories,
usually depreciated. warehouses), and
▪ Equipment
► Possess physical substance.
(machinery, furniture,
tools).
10-4 LO 1
Acquisition of Property, Plant, and
Equipment (PP&E)
Historical cost measures the cash or cash equivalent price of

obtaining the asset and bringing it to the location and condition
necessary for its intended use.
In general, costs include:
1. Purchase price, including import duties and non-refundable

purchase taxes, less trade discounts and rebates.
2. Costs attributable to bringing the asset to the location and

condition necessary for it to be used in a manner intended
by the company.
10-5 LO 1
Acquisition of Property, Plant, and
Equipment (PP&E)
Companies value property, plant, and equipment in

subsequent periods using either the
◆ cost method or
◆ fair value (revaluation) method.
10-6 LO 1
Acquisition of PP&E
Cost of Land
All expenditures made to acquire land and ready it for use.
Costs typically include:
(1) purchase price;
(2) closing costs, such as title to the land, attorney’s fees, and
recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) assumption of any liens, mortgages, or encumbrances on
the property; and
(5) additional land improvements that have an indefinite life.
10-7 LO 1
Acquisition of PP&E
Cost of Land
◆ Improvements with limited lives, such as private
driveways, walks, fences, and parking lots, are recorded
as Land Improvements and depreciated.
◆ Land acquired and held for speculation is classified as

an investment.
◆ Land held by a real estate concern for resale should be

classified as inventory.
10-8 LO 1
Acquisition of PP&E
Cost of Buildings
Includes all expenditures related directly to acquisition or
construction. Costs include:
◆ materials, labor, and overhead costs incurred during

construction and
◆ professional fees and building permits.
Companies consider all costs incurred, from excavation to

completion, as part of the building costs.
10-9 LO 1
Acquisition of PP&E
Cost of Equipment
Include all expenditures incurred in acquiring the equipment
and preparing it for use. Costs include:
◆ purchase price,
◆ freight and handling charges,
◆ insurance on the equipment while in transit,
◆ cost of special foundations if required,
◆ assembling and installation costs, and
◆ costs of conducting trial runs.
10-10 LO 1
Acquisition of PP&E
E10.1: The expenditures and receipts below are related to land, land
improvements, and buildings acquired for use in a business enterprise.
Determine how the following should be classified:
a. Money borrowed to pay building contractor a. Notes Payable

(signed a note)
b. Payment for construction from note proceeds b. Buildings
c. Cost of land fill and clearing c. Land
d. Delinquent real estate taxes on property d. Land
assumed by purchaser
e. Premium on 6-month insurance policy during e. Buildings
construction
10-11 LO 1
Acquisition of PP&E
E10.1: Determine how the following should be classified:
f. Refund of 1-month insurance premium f. (Buildings)

because construction completed early
g. Architect’s fee on building g. Buildings
h. Cost of real estate purchased as a plant site h. Land
(land €200,000 and building €50,000)
i. Commission fee paid to real estate agency i. Land
j. Cost of razing and removing building j. Land
k. Installation of fences around property k. Land
Improvements
10-12 LO 1
Acquisition of PP&E
E10.1: Determine how the following should be classified:
l. Proceeds from residual value of demolished l. (Land)

building
m. Interest paid during construction on money m. Buildings
borrowed for construction
n. Land
n. Cost of parking lots and driveways
Improvements
o. Cost of trees and shrubbery planted o. Land
(permanent in nature)
p. Excavation costs for new building p. Buildings
10-13 LO 1
Acquisition of PP&E
Self-Constructed Assets
Costs include:
◆ Materials and direct labor
◆ Overhead can be handled in two ways:

1. Assign no fixed overhead.
2. Assign a portion of all overhead to the construction

process.
Companies use the second method extensively.
10-14 LO 1

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Property, plant, and equipment are assets of a durable nature.

► “Used in operations” and not Includes:

Historical cost measures the cash or cash equivalent price of

In general, costs include:

1. Purchase price, including import duties and non-refundable

2. Costs attributable to bringing the asset to the location and

Companies value property, plant, and equipment in

◆ fair value (revaluation) method.

◆ Land acquired and held for speculation is classified as

◆ Land held by a real estate concern for resale should be

◆ materials, labor, and overhead costs incurred during

◆ professional fees and building permits.

Companies consider all costs incurred, from excavation to

◆ freight and handling charges,

◆ insurance on the equipment while in transit,

◆ cost of special foundations if required,

◆ assembling and installation costs, and

◆ costs of conducting trial runs.

a. Money borrowed to pay building contractor a. Notes Payable

E10.1: Determine how the following should be classified:

f. Refund of 1-month insurance premium f. (Buildings)

E10.1: Determine how the following should be classified:

l. Proceeds from residual value of demolished l. (Land)

◆ Overhead can be handled in two ways:

2. Assign a portion of all overhead to the construction

Companies use the second method extensively.

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