Book cover for Intermediate Accounting

Intermediate Accounting

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

ISBN #9780470374948

13th Edition

695 Questions

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7,109 Students Helped

Homework Questions

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Summary
Learning Objectives
Key Concepts
Example Problems
Explanations
Common Mistakes

Summary

This chapter focuses on the comprehensive accounting requirements for acquiring, capitalizing, and disposing of property, plant, and equipment. It emphasizes the importance of historical cost determination, ensuring all qualifying costs are included, and the proper recognition of gains or losses on disposal. Accurate allocation methods in lump-sum purchases and nonmonetary exchanges are crucial for precise financial reporting and analysis.

Learning Objectives

1

Explain the proper accounting treatment for the acquisition and disposition of property, plant, and equipment.

2

Understand the concept of historical cost and the types of costs that must be capitalized for an asset.

3

Identify the steps needed to correctly recognize gains or losses on asset disposal.

4

Analyze the methods for accurate cost allocation in lump-sum purchases and nonmonetary exchanges.

Key Concepts

CONCEPT

DEFINITION

Historical Cost

The original monetary cost incurred to acquire an asset, including all costs necessary to prepare the asset for use.

Capitalization

The process of recording a cost as a long-term asset rather than expensing it immediately; includes direct, indirect, and financing costs during construction.

Asset Disposal

The process of removing an asset from the accounting records, which involves recognizing any gain or loss relative to its book value.

Lump-Sum Purchase Allocation

The method of distributing a total purchase cost among multiple assets acquired together, based on their relative fair values or other allocation bases.

Nonmonetary Exchanges

Transactions where assets are exchanged without the use of cash, requiring careful measurement to ensure proper accounting recognition.

Example Problems

Example 1

What are the major characteristics of plant assets?

Example 2

Mickelson Inc. owns land that it purchased on January 1 $2000,$ for $\$ 450,000 .$ At December $31,2010,$ its current value is $\$ 770,000$ as determined by appraisal. At what amount should Mickelson report this asset on its December 31 $2010,$ balance sheet? Explain.

Example 3

Name the items, in addition to the amount paid to the former owner or contractor, that may properly be included as part of the acquisition cost of the following plant assets. (a) Land. (b) Machinery and equipment. (c) Buildings.

Example 4

Indicate where the following items would be shown on a balance sheet. (a) A lien that was attached to the land when purchased. (b) Landscaping costs. (c) Attorney's fees and recording fees related to purchasing land. (d) Variable overhead related to construction of machinery. (e) A parking lot servicing employees in the building. (f) cost of temporary building for workers during construction of building. (g) Interest expense on bonds payable incurred during construction of a building. (h) Assessments for sidewalks that are maintained by the city (i) The cost of demolishing an old building that was on the land when purchased.

Example 5

Two positions have normally been taken with respect to the recording of fixed manufacturing overhead as an element of the cost of plant assets constructed by a company for its own use: (a) It should be excluded completely. (b) It should be included at the same rate as is charged to normal operations. What are the circumstances or rationale that support or deny the application of these methods?
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Step-by-Step Explanations

QUESTION

How do you determine the historical cost of an asset and what costs should be capitalized?

STEP-BY-STEP ANSWER:

Step 1: Identify the purchase price of the asset.
Step 2: Include all direct costs necessary to get the asset ready for use such as installation, transportation, and testing fees.
Step 3: Add indirect costs, including financing costs incurred during the construction or acquisition phase, if applicable.
Step 4: Sum these costs to determine the total historical cost that should be capitalized on the balance sheet.
Final Answer: The historical cost of an asset is the sum of all direct, indirect, and financing costs directly attributable to its acquisition and preparation for use.

Historical Cost & Capitalization

QUESTION

How do you recognize and record a gain or loss upon the disposal of an asset?

STEP-BY-STEP ANSWER:

Step 1: Determine the asset’s book value at the time of disposal by subtracting accumulated depreciation from the capitalized cost.
Step 2: Compare the disposal proceeds received with the asset’s book value.
Step 3: Calculate the difference; if the proceeds exceed the book value, a gain is recognized; if they are less, a loss is recognized.
Step 4: Record the gain or loss in the financial statements accordingly.
Final Answer: The gain or loss from asset disposal is determined by comparing the disposal proceeds to the asset's book value and then recording the difference appropriately.

Asset Disposal Recognition

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Common Mistakes

  • Failing to include all necessary direct, indirect, and financing costs in the asset’s historical cost.
  • Incorrectly recording the gain or loss on asset disposal by not properly calculating the book value.
  • Overlooking the proper cost allocation methods in lump-sum purchases, leading to misstatements in asset values.
  • Misunderstanding nonmonetary exchanges by not recognizing that assets exchanged should be recorded based on a fair, measurable value.