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    Valuation of Tangible Assets 2

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    Nick Shahu
    The document discusses accounting for self-constructed assets and assets acquired through exchange. For self-constructed assets, the cost includes direct costs like materials and labor, as well as allocated indirect costs. Companies track costs through a construction-in-progress account and allocate interest. For exchanges, gains or losses may occur depending on whether fair value differs from carrying value, with commercial substance exchanges recorded at fair value.

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    Valuation of Tangible Assets 2

    Uploaded by

    Nick Shahu
    23 views4 pages
    The document discusses accounting for self-constructed assets and assets acquired through exchange. For self-constructed assets, the cost includes direct costs like materials and labor, as well as allocated indirect costs. Companies track costs through a construction-in-progress account and allocate interest. For exchanges, gains or losses may occur depending on whether fair value differs from carrying value, with commercial substance exchanges recorded at fair value.

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    The document discusses accounting for self-constructed assets and assets acquired through exchange. For self-constructed assets, the cost includes direct costs like materials and labor, as well as allocated indirect costs. Companies track costs through a construction-in-progress account and allocate interest. For exchanges, gains or losses may occur depending on whether fair value differs from carrying value, with commercial substance exchanges recorded at fair value.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    23 views4 pages

    Valuation of Tangible Assets 2

    Uploaded by

    Nick Shahu
    The document discusses accounting for self-constructed assets and assets acquired through exchange. For self-constructed assets, the cost includes direct costs like materials and labor, as well as allocated indirect costs. Companies track costs through a construction-in-progress account and allocate interest. For exchanges, gains or losses may occur depending on whether fair value differs from carrying value, with commercial substance exchanges recorded at fair value.

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    CONTD…………

    • The Financial accounting term self constructed assets refer to those built by the
    company and appearing in the balance sheet.
    • The cost of the self constructed asset would include direct costs such as material and
    labour associated in its construction.
    • Companies can allocate a portion of indirect costs to the asset too.
    • Determining the costs of an asset that is self constructed is more difficult that the one
    that is purchased directly from a vendor or supplier
    • Without a written agreement as to the purchase price or a contract, the company must
    allocate costs to the construction of the asset.
    • Costs such as materials and labour are easy to identify since they can be estimated by
    assigning these costs directly to materials consumed or labour hours needed.
    • Accounting rules allow companies to allocate indirect costs such as building space,
    equipments, electricity ,taxes, supervision, etc.
    • Basic steps for tracking or dealing with Self Constructed Assets:
    1. Make a construction in progress account to be used to track the costs associated
    with the construction of the new asset
    2. Build a unique project to track the construction of the asset.
    3. Collect purchases and other direct costs associated with the construction of this
    asset.
    4. Collect labour costs associated with this asset.
    5. Allocate overhead costs associated with the construction of this asset.
    6. Allocate interest expenses associated with this asset.
    7. Close the project as soon as the asset is ready to be used.
    8. Calculate and book the accumulated costs: Transfer the cost from the CIP account
    to Fixed asset account and start depreciating the asset.

    • Assets acquired in Exchange


    1. Sometimes a new asset purchase is done by exchanging the old asset.
    2. Example, old machinery may be exchanged or land may be exchanged.
    3. Exchanges may have commercial substance or may lack it.
    4. Exchanges that have commercial substance( future cash flows are expected to
    change)should be accounted for at fair value.
    5. Sometimes exchanges may lack commercial substance , for eg, 2 companies may
    swap their stock and neither of the company expects significant change in cash
    flows. Gains are not recorded on exchanges lacking commercial substance
    6. .
    7. Example: Loss implied:
    - A company gives an old equipment ( cost Rs 10,00,000 Rs 7,50,000
    accumulated depreciation) for a new truck. The fair value of the old equipment
    is Rs 1,50,000 which is also the fair value of the new truck.
    -

    Book value of old


    Fair value of new
    asset is Loss implied Rs truck
    1,00,000
    Rs 2,50,000 Is Rs 1,50,000

    2,50,000
    Journal enrty for the above:
    Truck A/C …….DR 150000
    Acc dep A/C ……DR 750000
    Loss A/C………..DR 100000
    To equipment A/C 10,00,000

    Gain Implied:
    ,A company gives an old equipment ( Cost Rs 10,00,000 Rs 7,50,000 accumulated
    depreciation) for a new truck. The fair value of the old equipment is Rs 3,50,000 which is
    also the fair value of the truck.

    Book value of the Fair value of the


    Gain implied
    Old asset is New truck is
    Rs 1,00,000
    Rs 2,50,000 Rs 3,50,000

    Journal entry is:


    Truck A/C …………..DR 3,50,000
    Acc dep A/C…………….DR 7,50,000
    To equipment A/C 10,00,000
    To Profit/gain A/C 1,00,000

    BOOT:
    Sometimes exchange transactions involve boot. The term boot means the additional
    monetary consideration that may be required to be given or received.

    • Fixed asset held for disposal:


    1. On the disposal the fixed asset will be removed from the financial statements.
    2. Those fixed assets that have been retired from active use and are held for disposal
    are recorded at their net book value or net realisable value whichever is lower and
    are shown separately in financial statements.
    3. The loss/gains arising on the disposal are recognised in the profit & loss account.
    4. There are two situations in which the company may dispose the fixed asset.
    5. The first situation is when the company is eliminating the fixed asset without
    receiving any payment in return, i.e, when it is sold as scrap or it has become
    obsolete and is of no use, there is no market price for it.
    6. In the above case, we will have to reverse any accumulated depreciation and
    reverse the original cost.
    7. Example: A company buys a machine for Rs 1,00,000 and charges depreciation of
    rs 10,000 every year over the life of 10 years of the asset. At the end of its useful
    life, the company sells the asset as scarp. Journal entry will be:
    Accumulated dep A/C …………Dr 1,00,000
    To Asset A/C 1,00,000
    8. In above case, if company disposes the asset at the end of 8 years, then journal
    entry will be:
    Accumulated dep A/c…………………Dr 80,000
    Loss A/C ……………………………..Dr 20,000
    To asset A/c 1,00,000
    9. Example: a company buys a machine for Rs 1,00,000, after using the asset for 7
    years, it sells the asset at Rs 25,000. Depreciation charged every year is Rs
    10,000. Journal entry will b:
    Accumulated Dep A/C …………….Dr 70,000
    Cash A/C……………………………Dr 25,000
    Loss A/C……………………………..Dr 5000
    To Asset A/C 1,00,000
    10,00,000

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