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CHAPTER 1 CHAPTER 1 PROPERTY, PLANT AND EQUIPMENT 05/21/2023 1 Classification of Asset Assets Current Assets Long term Assets Plant Assets Natural Resources Intangible Assets 05/21/2023 2 Characterist[.]
CHAPTER PROPERTY, PLANT AND EQUIPMENT 05/21/2023 Classification of Asset Assets Current Assets Long term Assets Plant Assets Natural Resources Intangible Assets 05/21/2023 Characteristics of Plant Assets Fixed (plant) Assets – are tangible long-lived resources that are used in the operation of the business Plant assets include: land, buildings, equipment, etc Unique features of PPE include: Acquired for use not for re-sale Long term in nature and subjected to depreciation Posses physical substance 05/21/2023 Acquisition costs of Plant Assets The cost of a plant asset is the amount of all expenditures incurred to acquire the asset and make it ready for use Cost of land includes: purchase price, closing costs, costs incurred in getting the land in condition for its intended use, assumption of any liens on the land NB:- the salvage value of the old building removed from the land is deductible while determining cost of land 05/21/2023 Acquisition costs…cont’d Costs of building include: purchase price, professional fees that means, the costs architect fees to design the building, construction costs incurred from excavation to completion and costs of building permits Costs of machineries and equipment include: purchase price, shipping costs like freight, handling charges and insurance on the equipment while in transit, installation, assembly and installation and set up costs or costs of conducting trial runs 05/21/2023 Special Considerations while determining cost of PPE A Cash Discounts: discount amount is not part of cost of plant asset B Deferred payments: when PPE acquired by issuing long term debt, cost of the asset is present value of future cash payment Suppose that ABC Company purchased land by issuing a Br 500,000, 5-year noninterest bearing note on January of year when the market rate of interest was 10%; the note is to be repaid in equal installments of Br 100,000 on December 31 of year 05/21/2023 1, year 2, year 3, year and Year 05/21/2023 Cont’d… C Issuance of securities: the cost of the plant asset is equal to either the fair market value of the securities issued or the fair market value of the plant assets themselves provided that the fair market value of the securities is not determinable Example: Mega Corporation purchased machinery by issuing 2,000 shares of common stock with a par value of Br 40 and a fair market value of Br 75 Suppose that the fair market value of the machinery was Br 154,000 Cost of the machinery= 2000*75= 150,000 05/21/2023 Cont’d… D Lump-sum purchase: refers to a situation where group of assets acquired at a single price In such cases, the single price is allocated to each asset based on weight of each asset determined from market value of assets Example: ABC Company purchased an existing factory for a single sum of Birr 2,100,000 This price includes the costs of title to the land, factory building and equipment An independent appraisal estimated the market values of the assets (if these would be purchased separately) at Birr 800,000 for the land, Birr 1,000,000 for the factory and Birr 700,000 for the building 05/21/2023 Cont’d… Step 1: Determine the percentage of the market value of each asset to the total sum Assets Market value Percentage Land Br 800,000 32% Factory 1,000,000 40% Building 700,000 28% 2, 500, 000 100% Step 2: Multiply the percentage of each asset’s market value by lump sum price Land (0.32 × Br 2,100,000) 672,000 Factory (0.40 × Br 2,100,000) .840,000 Building (0.28 × Br 2,100,000) .588,000 Cash .2,100,000 05/21/2023 10