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Acquisition and disposition of ppe
-Understand ppe and its related cost
-describe the accounting problems associated with self-constructed assets
-describe the accing problems associated with interest capitalization
-understand accing issues related to acquiring and valuing plant assets
-describe the accing treatment for costs subsequent to acquisition
-describe the accing treatment for the disposal of ppe.
amounts for companies\'capital expenditures are reported on a company\'s balance sheet and directly affect such items as total assets,depreciation expense,cash flows , and net income
acquisition
-acquisition costs:land, building, equipment
-self-constructed assets
-interest costs
-observations
valuation
-cash discounts
-deferred-payment contracts
-lump-sum purchases
-stock issuance
-nonmonetary exchanges
-contributions
-other valuation methods
costs subsequent to acquisition
-additions
-improvements and replacements
-rearrangement and reinstallation
-repairs
-summary
disposition
-sale
-involuntary conversion
-miscellaneous problems
PPE (plant assets. fixed assets)
acquired for use in operations and not for resale
long-term in nature and usually depreciated
possess physical substance
historical cost measures the cash and cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use
companies like Kellogg Co. consider the purchase price, freight costs, sales taxes, and installation costs of a productive asset as part of the assset\'s cost. It then allocates these costs to future periods through depreciation. Further, Kellogg adds to the assets original cost any related costs incurred after the asset\'s acquisition, such as additions, improvments or replacements, if they provide future service potential.Otherwise, Kellogg expenses these costs immediately
Cost of land -all the costs to get the land in condition for its intended purpose(the sale of cleared timber and salvage receipts,on the demolition of an old building can cause reductions in the cost of the land)
sometimes could be held as an investment(speculative purpose) and inventory when a real estate,holds the land for resale
Cost of buildings
companies consider all costs incurred, from excavation to completion, as part of the building costs
self-constructed assets
occasionally, companies construct their own assets
Direct costs are easy to traced, but the assignment of indirect costs of manufacturing creates special problems. These indirect costs, called overhead or burden, include power, heat, light, insurance, property taxes on factory buildings and equipment, factory supervisory labor, depreciation of fixes assets, and supplies. handling these in one of two ways
- assign no fixed overhead to the cost of the constructed asset
-assign a portion of all overhead to the construction process
Interest costs during construction
-capitalize no interest charge during construction
-charge construction with all costs of funds employed, whether identifiable or not
-capitalize only the actual interest costs incurred during the construction(GAAP method)
capitalization
-qualifying assets
-capitalization period
-amount to capitalize
Avoidable interest
-weightes-average accumulated expenditures
expenditures =sum. (amount * capitalization period)
-for the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowes specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings.
-for the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period
should write off capitalized interest cost as part of depreciation over the useful life of the assets involved and not over the term of the debt
Capitalized interest reported in the income stm
Special issues
-expenditures for land
-interest revenue
land for a particular use -qualify for capitalization
land for structure- qualify for capitalization of the plant. not the land
land for lot sales- capitalization of interest
land for speculation- not qualified
interest revenue
IFRS requires that interest revenue earned on specific borrowings should offset interest costs capitalized.under GAAP , companies should not net or offset interest revenye against interest cost
Valuation of ppe
cash discount /two point of views
-one considers the discount-whether taken or not -as a reduction in the cost of asset
-the other argue that failure to take the discount should not always be considered a loss
The former was most preferred for now
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