Ch10 Operational.Assets.Acquisition.and.Disposition 2015

Deferred PaymentsThe asset acquired is recorded at the Cash equivalent price market value or Present value of future cash payments using the prevailing market interest rate Whichever is

WELCOME TO

MY CLASS

Property, Plant, and Equipment and Intangible Assets: Acquisition

and Disposition

Chapter 10

Actively Used in Operations

Tangible Property, Plant,

Intangible

No Physical Substance

Types of Operational Assets

Expected to Benefit Future Periods

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.

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.

Net purchase price

Testing and trial runs

Net purchase price

Testing and trial runs

Costs to be Capitalized Equipment

Land is not depreciable.

Land is not depreciable.

 Purchase price

 Real estate commissions

 Attorney’s fees

 Title search

 Title transfer fees

 Title insurance premiums

 Removing old buildings

 Purchase price

 Real estate commissions

 Attorney’s fees

 Title search

 Title transfer fees

 Title insurance premiums

 Removing old buildings

Costs to be Capitalized Land

Separately identifiable costs of

Asset Retirement Obligations

Recognize as a liability and a corresponding increase in the related asset.

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.

Record at fair value, usually the present value of future cash outflows associated with the reclamation or restoration.

Often encountered with natural resource

extraction when the land must be restored to a useable condition.

Often encountered with natural resource

extraction when the land must be restored to a useable condition.

to determine.

Useful life is often difficult

to determine.

Usually acquired for operational

use

Usually acquired for operational

use

Intangible Assets

Intangible Assets

 Goodwill

The initial cost of an

intangible asset

includes the purchase

price and all other costs

necessary to bring it to

condition and location

for use, such as legal

and filing fees.

Costs to be Capitalized

Intangible Assets

 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.

 Internally developed costs (R&D)

that result in patents are expensed

in the period incurred.

 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.

 Internally developed costs (R&D)

that result in patents are expensed

in the period incurred.

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

What is Torch’s patent cost?

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

What is Torch’s patent cost?

Torch’s cost for the new patent is $3,000

The $30,000 R & D cost is expensed as

incurred

Torch’s cost for the new patent is $3,000

The $30,000 R & D cost is expensed as

incurred

Patents

 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.

 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

Copyrights

 A symbol, design, or logo

associated with a business.

 If internally developed, trademarks

have no recorded asset cost.

 If purchased, a trademark is

recorded at cost.

 Registered with U.S Patent Office

and renewable indefinitely in

10-year periods.

 A symbol, design, or logo

associated with a business.

 If internally developed, trademarks

have no recorded asset cost.

 If purchased, a trademark is

recorded at cost.

 Registered with U.S Patent Office

and renewable indefinitely in

10-year periods.

Trademarks

Right to sell products or provide services

purchased by franchisee from

franchisor.

Right to sell products or provide services

purchased by franchisee from

franchisor.

Franchises

Occurs when one

company buys

another company.

The amount by which the purchase price exceeds the fair market value of net assets acquired.

Purchased goodwill is an intangible asset.

Goodwill

Goodwill

Eddy Company paid $1,000,000 to purchase all of

James Company’s assets and assumed James Company’s liabilities of $200,000 James Company’s assets were appraised at a fair value of $900,000

Eddy Company paid $1,000,000 to purchase all of

James Company’s assets and assumed James

Company’s liabilities of $200,000 James Company’s assets were appraised at a fair value of $900,000

Goodwill

What amount of goodwill should be

recorded on Eddy Company books?

a $100,000

b $200,000

c $300,000

d $400,000

What amount of goodwill should be

recorded on Eddy Company books?

Several assets are acquired for a single,

lump-sum price that may be lower than the lump-sum of

the individual asset prices.

Several assets are acquired for a single,

lump-sum price that may be lower than the lump-sum of

the individual asset prices.

Lump-Sum Purchases

Asset 2

Portions of the lump-sum

price attributable to particular

assets are assigned to those

assets

Allocation of the remaining lump-sum price is based on relative values of the individual assets

Allocation of the remaining lump-sum price is based on relative values of the individual assets

On May 13, Dell corp 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?

On May 13, Dell corp 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?

Lump-Sum Purchases

Appraised % of Purchase Assigned Asset Value Value Price Cost

(a) (b)* (c) (b × c) Land $ 87,500 35% $ 200,000 $ 70,000 Building 162,500 65% 200,000 130,000

Total $ 250,000 $ 200,000

* $87,500÷$250,000 = 35%

The building will be apportioned $130,000

of the total purchase price of $200,000.

The building will be apportioned $130,000

of the total purchase price of $200,000.

Lump-Sum Purchases

Prepare the journal entry to record the purchase.

Lump-Sum Purchases

Deferred Payments

The asset acquired is recorded at the

Cash equivalent price (market value)

or

Present value of future cash payments using

the prevailing market interest rate Whichever is more objective and reliable.

The asset acquired is recorded at the

Cash equivalent price (market value)

or Present value of future cash payments using

the prevailing market interest rate

Whichever is more objective and reliable.

Deferred Payments

On May 1, 2006, Fesler, Inc purchased equipment

paying $3,000 down and issuing a note payable

The note requires four annual payments of $2,500

with the first payment due on May 1, 2007 The

note is noninterest-bearing The prevailing market rate of interest on notes of this nature is

12%

Prepare the required journal entries on May 1,

2003, and December 31, 2003 (year-end).

On May 1, 2006, Fesler, Inc purchased equipment

paying $3,000 down and issuing a note payable

The note requires four annual payments of $2,500

with the first payment due on May 1, 2007 The

note is noninterest-bearing The prevailing

market rate of interest on notes of this nature is

12%

Prepare the required journal entries on May 1,

2003, and December 31, 2003 (year-end).

Annuity payment $ 2,500

x PVA $1, n=4, i=12% 3.03735

= PV of note (rounded) $ 7,593 + Down payment 3,000

Since we do not know the cash equivalent

price in this example, we must use the present value of the future cash payments

GENERAL JOURNAL Page ##

Date Description PR Debit Credit

GENERAL JOURNAL Page ##

Date Description PR Debit Credit

Dec 31 Interest Expense 607

Discount on Note Payable 607

$7,593 × 12% × 8/12 = $607

Deferred Payments

Example

Deferred Payments - Example

Issuance of Equity Securities

 Asset acquired is recorded at the fair value of the asset or the market value of the securities,

whichever is more clearly evident.

 If the securities are actively traded, market value can be easily determined.

 If the securities given are not actively traded, the fair value of the asset received, as determined by appraisal, may be more clearly evident than the

fair value of the securities.

 Asset acquired is recorded at the fair value of the asset or the market value of the securities ,

whichever is more clearly evident.

 If the securities are actively traded, market value

can be easily determined.

 If the securities given are not actively traded, the

fair value of the asset received, as determined by appraisal, may be more clearly evident than the

fair value of the securities.

Issuance of Equity Securities - Example

Ex: p.544 – Text Book

 Revenue equal to the fair

value of the donated asset.

 Revenue equal to the fair

value of the donated asset.

Recently, in an effort to lure a facility for Dell Computers to Nashville, TN, the city donated land

for the new facility.

The deal created about 3,000 jobs

locally.

Donated Assets - Example

Ex: p.544 – Text Book

 Update depreciation to date of

disposal.

 Remove original cost of asset

and accumulated depreciation

from the books.

 The difference between BV of the

asset and the amount received is

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 asset had a useful life of 10 years and no salvage 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.

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 asset had a useful life of 10 years and no salvage 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.

Dispositions

Page 9 Date Description PR Debit Credit

June 30 Depreciation Expense 750

Page 9 Date Description PR Debit Credit

June 30 Accumulated Depreciation 8,250

Cash 6,350 Loss on Sale 400

Equipment 15,000

($15,000 ÷ 10 years) × 5½ years = $8,250

GENERAL JOURNAL

 Remove original cost of asset and

accumulated depreciation from the books.

 Record the gain or loss

Dispositions

EXCHANGE – OLD RULES

Text book – Page 548

EXCHANGE – NEW RULES

NEW RULES

In the exchange of operational assets fair

value is used except in rare situations in which

the fair value cannot be determined or the

exchange lacks commercial substance.

In the exchange of operational 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.

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.

Exchange Lacks Commercial Substance

A nonmonetary exchange is considered to have commercial substance if the company:

 expects a change in future cash flows as a

result of the exchange, and

 that expected change is significant relative to

the fair value of the assets exchanged.

A nonmonetary exchange is considered to have commercial substance if the company:

 expects a change in future cash flows as a

result of the exchange, and

 that expected change is significant relative to

the fair value of the assets exchanged.

Matrix, Inc exchanges one unique operational

asset for another operational asset Due to the nature of the assets exchanged, Matrix could not determine the fair value of the asset given up or received The asset given up had

a cost to Matrix of $600,000, and accumulated depreciation of $400,000 Matrix exchanged

the asset and paid $100,000 cash.

Let’s record this unusual transaction.

Matrix, Inc exchanges one unique operational

asset for another operational asset Due to the nature of the assets exchanged, Matrix could not determine the fair value of the asset given up or received The asset given up had

a cost to Matrix of $600,000, and accumulated depreciation of $400,000 Matrix exchanged

the asset and paid $100,000 cash.

Let’s record this unusual transaction.

Fair Value Not Determinable

In addition, Matrix paid $100,000 cash to

acquire the operational asset.

In addition, Matrix paid $100,000 cash to

acquire the operational asset.

Fair Value Not Determinable

Matrix, Inc.

The journal entry below shows the proper

recording of the exchange.

Matrix, Inc.

The journal entry below shows the proper

recording of the exchange.

Fair Value Not Determinable

Matrix, Inc exchanged new equipment and

$10,000 cash for equipment owned by Float, Inc Below is information about the asset exchanged

by Matrix Record the transaction assuming the

exchange has commercial substance.

Matrix, Inc exchanged new equipment and

$10,000 cash for equipment owned by Float, Inc Below is information about the asset exchanged

by Matrix Record the transaction assuming the

exchange has commercial substance.

Exchanges

Exchange Has Commercial Substance

$205,000 fair value + $10,000 cash

Equipment received should be valued at book value

of equipment transferred plus cash paid.

Equipment received should be valued at book value

of equipment transferred plus cash paid.

Exchange Does Not Have

Commercial Substance

$200,000 book value + $10,000 cash

Amgen, Co exchanged similar equipment and $10,000

cash for equipment owned by Versa, Inc.

Using the information below, record the exchange on the

books of Amgen and Versa.

Amgen, Co exchanged similar equipment and $10,000

cash for equipment owned by Versa, Inc.

Using the information below, record the exchange on the

books of Amgen and Versa.

Review – Assets Exchange