Acquisition and Disposition of Property, Plant, and Equipment:

School: Dammam Community College - Course: A 321 - Subject: Accounting

ACCT 201 FINANCIAL ACCOUNTING Week 8 Interactive learning activity CHAPTER 10 Acquisition and Disposition of Property, Plant, and Equipment LEARNING OBJECTIVES 1.Describe property, plant and equipment. 2.Identify the costs to include in initial valuation of property, plant, and equipment. 3.Describe the accounting problems associated with self-constructed assets. 4.Describe the accounting problems associated with interest capitalization. 5.Understand accounting issues related to acquiring and valuing plant assets. 6.Describe the accounting treatment for costs subsequent to acquisition. 7.Describe the accounting treatment for the disposal of property, plant, and equipment. Basic Terms: Property, plant, and equipmentpossess certain characteristics that distinguish them from other assets owned by a business enterprise. These characteristics may be expressed as follows: (a) acquired for use in operations and not for resale, (b) long- term in nature and usually depreciated, and (c) possess physical substance. An asset must be used in the normal business operations to be classified as a fixed asset. These assets last for a number of years and their costs must be allocated to the periods which benefit from their use. Capitalization of interest costincurred in connection with financing the construction or acquisition of property, plant, and equipment generally follows the rule of capitalizing only the actual interest costs incurred during construction.While some modification to this general rule occurs, its adoption is consistent with the concept that the historical cost of acquiring an asset includes all costs incurred to bring the asset to the condition and location necessary for its intended use Government grantsare assistance received from a government in the form of some type of asset, or forgiveness of debt, or loans at below-market interest rates. The accounting for government grants is somewhat unsettled. The IFRS requires that grants used to acquire property, plant and equipment be accounted for using the income approach. The general rule is that such grants should be recognized in income on a systematic basis that matches them with the related costs that they are intended to compensate. This is accomplished by (a) recording the grant as Deferred Grant Revenue, which is recognized as income on a systematic basis over the useful life of the asset, or (b) deducting the grant from the carrying amount of the assets received from the grant, thereby recognizing the grant in income as a reduction of depreciation expense. Dispositions Plant assets may be retired voluntarily or disposed of bysale, exchange, involuntary conversion, or abandonment. When a plant asset is disposed of, depreciation should be taken up to the date of disposal, and the accounting records should be relieved of the cost and accumulated depreciation associated with the asset. The difference between the asset's book value and any amounts received or recovered should be recognized as a gain or loss. The gain or loss is reported in the "Other income and expense" section of the income statement. Self-Constructed Assets:Such assets may cause valuation problems because of the assignment of overhead. The options are to assign a portion of all overhead, or assign no fixed overhead. The first option is preferred. Excess overhead should be recorded as a period loss. Interest CostsDuring Construction. 1.Basic principle:Interest cost incurred during construction of plant assets is part of the cost of acquiring the assets and preparing them for their intended use. Like other acquisition costs, interest cost should be capitalized and depreciated over the expected useful life of the assets involved. 2.Describe the computational steps involved in determining the amount of interest to be capitalized.