Intermetdiate accounting 4e spiceland sepe tomasssi chap010

Operational Assets: Acquisition and Disposition Insert Book Cover Picture 10 Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 10-2 Types of Operational Assets Actively Actively Used Used in in Operations Operations Expected Expected to to Benefit Benefit Future Future Periods Periods Tangible Tangible Property, Property,Plant, Plant, Equipment Equipment & & Natural Natural Resources Resources Intangible Intangible No No Physical Physical Substance Substance 10-3 Learning Objectives Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets 10-4 Costs to be Capitalized General General Rule Rule The The initial initial cost cost of of an an operational operational asset asset includes includes the the purchase purchase price price and and all all expenditures expenditures necessary necessary to to bring bring the the asset asset to to its its desired desired condition condition and and location location for for use use Costs to be Capitalized Equipment  Net Net purchase purchase price price  Taxes Taxes  Transportation Transportation costs costs  Installation Installation costs costs  Modification Modification to to building building necessary necessary to to install install equipment equipment  Testing Testing and and trial trial runs runs 10-5 10-6 Costs to be Capitalized Land               Purchase Purchase price price Real Real estate estate commissions commissions Attorney’s Attorney’s fees fees Title Title search search Title Title transfer transfer fees fees Title Title insurance insurance premiums premiums Removing Removing old old buildings buildings Land Land is is not not depreciable depreciable Costs to be Capitalized Land Improvements Separately Separately identifiable identifiable costs costs of of Driveways Driveways Parking Parking lots lots Fencing Fencing Landscaping Landscaping Private Private roads roads 10-7 Costs to be Capitalized Buildings   Purchase Purchase price price   Attorney’s Attorney’s fees fees   Commissions Commissions   Reconditioning Reconditioning 10-8 Costs to be Capitalized Natural Resources Purchase Purchase price, price, exploration exploration and and development development costs costs of: of:  Timber Timber  Mineral Mineral deposits deposits  Oil Oil and and gas gas reserves reserves 10-9 10-10 Asset Retirement Obligations Often Often encountered encountered with with natural natural resource resource extraction extraction when when the the land land must must be be restored restored to to aa useable useable condition condition Recognize Recognize as as aa liability liability and and aa corresponding corresponding increase increase in in the the related related asset asset Record Record at at fair fair value, value, usually usually the the present present value value of of future future cash cash outflows outflows associated associated with with the the reclamation reclamation or or restoration restoration 10-64 Interest Capitalization Since Since the the $1,000,000 $1,000,000 of of specific specific borrowing borrowing is is sufficient sufficient to to cover cover the the $225,000 $225,000 of of average average accumulated accumulated expenditures expenditures for for the the year, year, use use the the specific specific borrowing borrowing rate rate of of 10 10 percent percent to to determine determine the the amount amount of of interest interest to to capitalize capitalize Interest Interest == AAE AAE ×× Specific Specific Borrowing Borrowing Rate Rate Interest Interest == $225,000 $225,000 ×× 10% 10% == $22,500 $22,500 10-65 Interest Capitalization IfIf Welling Welling had had not not borrowed borrowed specifically specifically for for this this construction construction project, project, itit would would have have used used the the weighted-average weighted-average interest interest method method The The weighted weighted average average interest interest rate rate on on other other debt debt would would have have been been used used to to compute compute the the amount amount of of interest interest to to capitalize capitalize For For example, example, ifif the the weighted-average weighted-average interest interest rate rate on on other other debt debt is is 12 12 percent, percent, the the amount amount of of interest interest capitalized capitalized would would be: be: Interest Interest Interest Interest == == AAE AAE ×× Weighted-average Weighted-average Rate Rate $225,000 $225,000 ×× 12% 12% == $27,000 $27,000 10-66 Interest Capitalization IfIf specific specific new new borrowing borrowing had had been been insufficient insufficient to to cover cover the the average average accumulated accumulated expenditures expenditures Capitalize this portion using the 12 percent weightedaverage cost of debt Capitalize this portion using the 10 percent specific borrowing rate Other debt AAE Specific new borrowing 10-67 Learning Objectives Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets 10-68 Research and Development (R&D) Research Research Planned Planned search search or or critical critical investigation investigation aimed aimed at at discovery discovery of of new new knowledge knowledge Development Development The The translation translation of of research research findings findings or or other other knowledge knowledge into into aa plan plan or or design design Most Most R&D R&D costs costs are are expensed expensed as as incurred incurred (Must (Must be be disclosed disclosed ifif material.) material.) 10-69 Research and Development (R&D)  R&D R&D costs costs incurred incurred under under contract contract for for other other companies companies are are expensed expensed against against revenue revenue from from the the contract contract  Operational Operational assets assets used used in in R&D R&D should should be be capitalized capitalized ifif they they have have alternative alternative future future uses uses Software Development Costs 10-70 SFAS No 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”   All All costs costs incurred incurred to to establish establish the the technological technological feasibility feasibility of of aa computer computer software software product product are are treated treated as as R&D R&D and and expensed expensed as as incurred incurred   Subsequent Subsequent costs costs to to obtain obtain product product masters masters are are to to be be capitalized capitalized as as an an intangible intangible asset asset 10-71 Software Development Costs SFAS No 86 Costs Expensed as R&D Start of R&D Activity Costs Capitalized Technological Feasibility Operating Costs Date of Product Release Sale of Product Software Development Costs SFAS No 86  Amortization Amortization of of capitalized capitalized computer computer software software costs costs starts starts when when the the product product begins begins to to be be marketed marketed  Two Two methods methods are are allowed: allowed:   Percentage Percentage of of revenue revenue method method Straight-line Straight-line method method 10-72 Software Development Costs SFAS No 86 Disclosure Balance Balance Sheet Sheet  The The unamortized unamortized portion portion of of capitalized capitalized computer computer software software cost cost is is an an asset asset Income Income Statement Statement   Amortization Amortization expense expense associated associated with with computer computer software software cost cost R&D R&D expense expense associated associated with with computer computer software software development development cost cost 10-73 10-74 Oil and Gas Accounting Appendix 10 10-75 Oil and Gas Accounting Two Two acceptable acceptable accounting accounting alternatives alternatives Successful Successful efforts efforts method method Full-cost Full-cost method method Exploration Exploration costs costs resulting resulting in in unsuccessful unsuccessful wells wells (dry (dry holes) holes) are are expensed expensed Exploration Exploration costs costs resulting resulting in in unsuccessful unsuccessful wells wells may may be be capitalized capitalized Political Political pressure pressure has has prevented prevented the the FASB FASB from from requiring requiring all all companies companies to to use use the the successful successful efforts efforts method method 10-76 Oil and Gas Accounting The The Shannon Shannon Oil Oil company company incurred incurred $2,000,000 $2,000,000 in in exploration exploration costs costs for for each each of of 10 10 oil oil wells wells in in 2006 2006 Eight Eight of of the the 10 10 wells wells were were dry dry holes holes Prepare Prepare the the journal journal entries entries to to record record the the exploration exploration costs costs under under both both of of the the acceptable acceptable methods methods Successful Efforts 10-77 Oil and Gas Accounting The The Shannon Shannon Oil Oil company company incurred incurred $2,000,000 $2,000,000 in in exploration exploration costs costs for for each each of of 10 10 oil oil wells wells in in 2006 2006 Eight Eight of of the the 10 10 wells wells were were dry dry holes holes Prepare Prepare the the journal journal entries entries to to record record the the exploration exploration costs costs under under both both of of the the acceptable acceptable methods methods Full Cost 10-78 End of Chapter 10