Intermediate Accounting

IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 10
Acquisition and Disposition of Property, Plant, and
Equipment
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Copyright ©2020 John Wiley & Sons, Inc.
Learning Objectives

After studying this chapter, you should be able to:

LO 1 Identify property, plant, and equipment and its related costs.
LO 2 Discuss the accounting problems associated with the
capitalization of borrowing costs.
LO 3 Explain accounting issues related to acquiring and valuing
plant assets.
LO 4 Describe the accounting treatment for costs subsequent to
acquisition.
LO 5 Describe the accounting treatment for the disposal of
property, plant, and equipment.

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Property, Plant, and Equipment
Property, plant, and equipment are assets of a durable nature.
Other terms commonly used are plant assets and fixed assets.

• “Used in operations” and Includes:

not for resale. • Land,
• Long-term in nature and • Building structures
usually depreciated. (offices, factories,
• warehouses), and
Possess physical
• Equipment (machinery,
substance.
furniture, tools).

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Acquisition of 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.
Companies value property, plant, and equipment in subsequent periods
using either the
• cost method or
• fair value (revaluation) method.
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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.

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Acquisition of PP&E
Cost of Land Improvements

• Improvements with limited lives, such as private

driveways, walks, fences, and parking lots, are recorded as
Land Improvements and depreciated.

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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.

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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.

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 Acquisition of PP&E Problem (1 of 3)
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 a. Notes Payable

contractor (signed a note)
b. Payment for construction from b. Buildings
note proceeds
c. Cost of land fill and clearing c. Land
d. Delinquent real estate taxes on d. Land
property assumed by purchaser
e. Premium on 6-month insurance e. Buildings
policy during construction
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 Acquisition of PP&E Problem (2 of 3)
E10.1 Determine how the following should be classified:

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

premium because construction
completed early
g. Architect’s fee on building g. Buildings
h. Cost of real estate purchased as h. Land
a plant site (land €200,000 and
building €50,000)
i. Commission fee paid to real i. Land
estate agency
j. Installation of fences around property j. Land Improvements
k. Cost of razing and removing building k. Land
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 Acquisition of PP&E Problem (3 of 3)
E10.1 Determine how the following should be classified:

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

demolished building

m. Borrowing costs during construction m. Buildings

on money borrowed for construction
n. Cost of parking lots and driveways n. Land Improvements

o. Cost of trees and shrubbery planted o. Land

(permanent in nature)
p. Excavation costs for new building p. Buildings

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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.

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Valuation of Property, Plant, and
Equipment
Companies should record property, plant, and equipment:
• at the fair value of what they give up or
• at the fair value of the asset received,
whichever is more clearly evident.

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Valuation of PP&E

Cash Discounts — Discounts for prompt payment.

Deferred-Payment Contracts — Assets purchased on long-
term credit contracts are valued at the present value of the
consideration exchanged.
Lump-Sum Purchases — Allocate the total cost among the
various assets on the basis of their relative fair market values.
Issuance of Shares — The market price of the shares issued is
a fair indication of the cost of the property acquired.

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Exchanges of Non-Monetary Assets

Ordinarily accounted for on the basis of:

• the fair value of the asset given up or
• the fair value of the asset received,
whichever is clearly more evident.
Companies should recognize immediately any gains or losses
on the exchange when the transaction has commercial
substance.

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Meaning of Commercial Substance

Exchange has commercial substance if the future cash flows

change as a result of the transaction. That is, if the two parties’
economic positions change, the transaction has commercial
substance.

ILLUSTRATION 10.8

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Exchanges of Non-Monetary Assets
Loss Situation (Has Commercial Substance)
Companies recognize a loss if the exchange has commercial
substance.
Rationale: Companies should not value assets at more than
their cash equivalent price. If the loss were deferred, assets
would be overstated.

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Loss Situation (Has Commercial
Substance)
Illustration: Information Processing SA trades its used machine for a new model at Jerrod
Business Solutions N V. The exchange has commercial substance. The used machine has a
book value of €8,000 (original cost €12,000 less €4,000 accumulated depreciation) and a
fair value of €6,000. The new model lists for €16,000. Jerrod gives Information Processing
a trade-in allowance of €9,000 for the used machine. Information Processing computes
the cost of the new asset as follows.

ILLUSTRATION 10.9

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Loss Situation (Has Commercial Substance)
Journal Entry and Computation of Loss

Illustration: Information Processing records this transaction as

follows:
Equipment 13,000
Accumulated Depreciation—Equipment 4,000
Loss on Disposal of Equipment 2,000
Equipment 12,000
Cash 7,000

Loss on Disposal ILLUSTRATION 10.10

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Exchange of Non-Monetary Assets
Gain Situation (Has Commercial Substance)
Company usually records the cost of a non-monetary asset
acquired in exchange for another non-monetary asset at the
fair value of the asset given up, and immediately recognizes a
gain.

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Gain Situation (Has Commercial
Substance)
Illustration: Interstate Transportation Company exchanged a number of used
trucks plus cash for a semi-truck. The used trucks have a combined book value of
$42,000 (cost $64,000 less $22,000 accumulated depreciation). Interstate’s
purchasing agent, experienced in the secondhand market, indicates that the
used trucks have a fair market value of $49,000. In addition to the trucks,
Interstate must pay $11,000 cash for the semi-truck. Interstate computes the
cost of the semi-truck as follows.

ILLUSTRATION 10.11

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Gain Situation (Has Commercial
Substance)
Journal Entry and Computation of Gain
Illustration: Interstate records the exchange transaction as follows:
Truck (semi) 60,000
Accumulated Depreciation—Trucks 22,000
Trucks (used) 64,000
Gain on Disposal of Trucks 12,000
Cash 7,000

Gain on Disposal ILLUSTRATION 10.12

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Exchanges of Non-Monetary Assets
Lacks Commercial Substance
Now assume that Interstate Transportation Company exchange lacks commercial
substance. The economic position of Interstate did not change significantly as a
result the this exchange.
Interstate defers the gain of $7,000 and reduces the basis of the semi-truck.

ILLUSTRATION 10.13

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Lacks Commercial Substance
Journal Entry

Illustration: Interstate records the exchange transaction as

follows:
Truck (semi) 53,000
Accumulated Depreciation — Trucks 22,000
Trucks (used) 64,000
Cash 11,000

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Government Grants

Government Grants are assistance received from a

government in the form of transfers of resources to a
company in return for past or future compliance with certain
conditions relating to the operating activities of the company.
IFRS requires grants to be recognized in income (income
approach) on a systematic basis that matches them with the
related costs that they are intended to compensate.

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Government Grants
Example 1: Grant for Lab Equipment
Spectrum AG received a €500,000 subsidy from the
government to purchase lab equipment on January 2, 2022.
The lab equipment cost is €2,000,000, has a useful life of five
years, and is depreciated on the straight-line basis.
IFRS allows AG to record this grant in one of two ways:
1. Credit Deferred Grant Revenue for the subsidy and
amortize the deferred grant revenue over the five-year
period.
2. Credit the lab equipment for the subsidy and depreciate
this amount over the five-year period.

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Government Grant Recorded as
Deferred Revenue
Example 1: Grant for Lab Equipment. If Spectrum chooses to
record deferred revenue of €500,000, it amortizes this amount
over the five-year period to income (€100,000 per year). The
effects on the financial statements at December 31, 2022, are:

ILLUSTRATION 10.15

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Government Grant Reduces Cost of Lab
Equipment
Example 1: Grant for Lab Equipment. If Spectrum chooses to
reduce the cost of the lab equipment, Spectrum reports the
equipment at €1,500,000 (€2,000,000 − €500,000) and depreciates
this amount over the five-year period. The effects on the financial
statements at December 31, 2022, are:

ILLUSTRATION 10.16

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Government Grants
Grant for Past Losses
Flyaway Airlines has incurred substantial operating losses over the
last five years. The City of Plentiville does not want to lose airline
service and therefore agrees to provide a cash grant of $1,000,000
to the airline to pay off its creditors so that it may continue service.
Because the grant is given to pay amounts owed to creditors for
past losses, Flyaway Airlines should record the income in the period
it is received.
Cash 1,000,000
Grant Revenue 1,000,000

If the conditions indicate that Flyaway must satisfy some future

obligations related to this grant, then it is appropriate to credit
Deferred Grant Revenue and amortize it over the appropriate
periods in the future.
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Costs Subsequent to Acquisition

Recognize costs subsequent to acquisition as an asset when

the costs can be measured reliably and it is probable that the
company will obtain future economic benefits.
Evidence of future economic benefit would include increases
in
1. useful life,
2. quantity of product produced, and
3. quality of product produced.

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Costs Subsequent to Acquisition
Major Types of Expenditures
Additions. Increase or extension of existing assets.
Improvements and Replacements. Substitution of a better
or similar asset for an existing one.
Rearrangement and Reorganization. Movement of assets
from one location to another.
Repairs. Expenditures that maintain assets in condition for
operation.

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Summary of Costs Subsequent to
Acquisition of Property, Plant, and
Equipment

ILLUSTRATION 10.19

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Disposition of Property, Plant, and
Equipment
A company may retire plant assets voluntarily or dispose of
them by
• Sale,
• Exchange,
• Involuntary conversion, or
• Abandonment.
Depreciation must be taken up to the date of disposition.

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Sale of Plant Assets
Updating Depreciation to Date of Sale

Illustration: Barret Group recorded depreciation on a

machine costing €18,000 for nine years at the rate of €1,200
per year. If it sells the machine in the middle of the tenth
year for €7,000, Barret records depreciation to the date of
sale as:

Depreciation Expense (€1,200 × ½) 600

Accumulated Depreciation — Machinery 600

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Sale of Plant Assets
Journal Entry to Record Sale of Asset
Illustration: Barret Group recorded depreciation on a machine
costing €18,000 for nine years at the rate of €1,200 per year. If
it sells the machine in the middle of the tenth year for €7,000,
Barret records depreciation to the date of sale. Record the
entry to record the sale of the asset:
Cash 7,000
Accumulated Depreciation — Machinery 11,400
Machinery 18,000
Gain on Disposal of Machinery 400

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Involuntary Conversion
Sometimes an asset’s service is terminated through some
type of involuntary conversion such as fire, flood, theft, or
condemnation.
Companies report the difference between the amount
recovered (e.g., from a condemnation award or insurance
recovery), if any, and the asset’s book value as a gain or loss.
They treat these gains or losses like any other type of
disposition.

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Involuntary Conversion Example
Illustration: Camel Transport Corp. had a manufacturing plant located on company property that
stood directly in the path of a tornado. As a result of the tornado, which occurred on May 16, 2022,
the plant was completely destroyed. Camel was eventually able to reach a settlement with its
insurance company for the full fair value of the plant. The settlement was reached on March 18,
2023. At the time of the tornado, the building had a carrying value of $3,500,000 (original cost of
$6,000,000 less accumulated depreciation of $2,500,000). The amount of the settlement with the
insurance company was $8,000,000. Camel made the following entries.

2022
May 16 Loss from Tornado 3,500,000
Accumulated Depreciation ─ Buildings. 2,500,000
Buildings 6,000,000
2023
Mar. 18 Cash 8,000,000
Gain from Insurance Settlement 8,000,000

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Copyright
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