VALUATION OF PP&E

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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 Exchanges of Non-Monetary Assets

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 10-10
Accounting for Exchanges

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 Exchanges of Non-Monetary Assets

Exchanges—Loss Situation
Companies recognize a loss immediately whether the exchange
has commercial substance or not.
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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 Exchanges of Non-Monetary Assets

Illustration: Information Processing, Inc. trades its used machine for a

new model at Jerrod Business Solutions Inc. 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 10-11
Computation of Cost of
New Machine

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 Exchanges of Non-Monetary Assets

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

ILLUSTRATION 10-12
Computation of Loss
Loss on on Disposal of Used
Machine
Disposal

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 Exchanges of Non-Monetary Assets

Exchanges—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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 Exchanges of Non-Monetary Assets

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 10-13
Computation of
Semi-Truck Cost

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 Exchanges of Non-Monetary Assets

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 7,000
Cash 11,000

ILLUSTRATION 10-14
Computation of Gain
Gain on on Disposal of Used
Trucks
Disposal

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 Exchanges of Non-Monetary Assets

Exchanges—Gain Situation
Lacks Commercial Substance. Now assume that
Interstate Transportation Company exchange lacks
commercial substance.

Interstate defers the gain of $7,000 and reduces the basis of

the semi-truck.

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 Exchanges of Non-Monetary Assets

Illustration: Interstate records the exchange transaction as

follows:

Trucks (semi) 53,000

Accumulated Depreciation—Trucks 22,000
Trucks (used) 64,000
Cash 11,000

ILLUSTRATION 10-15
Basis of Semi-Truck—
Fair Value vs. Book Value

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 Exchanges of Non-Monetary Assets

Summary of Gain and Loss Recognition

on Exchanges of Non-Monetary Assets
ILLUSTRATION 10-16

Disclosure include
 nature of the transaction(s),
 method of accounting for the assets exchanged, and
 gains or losses recognized on the exchanges.

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 VALUATION OF PP&E

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. AG Company received a

€500,000 subsidy from the government to purchase lab
equipment on January 2, 2015. 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 Grants

Example 1: Grant for Lab Equipment. If AG 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, 2015, are:

ILLUSTRATION 10-17
Government Grant
Recorded as Deferred
Revenue

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 Government Grants

Example 1: Grant for Lab Equipment. If AG chooses to reduce

the cost of the lab equipment, AG 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, 2015, are: ILLUSTRATION 10-18
Government Grant Adjusted to Asset

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 Acquisition and Disposition
10 of Property, Plant, and
Equipment
L E A R N IN G O B J E C T IV E S

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and 5. Understand accounting issues related
equipment. to acquiring and valuing plant assets.
2. Identify the costs to include in initial 6. Describe the accounting
valuation of property, plant, and treatment for costs subsequent
equipment. to acquisition.
3. Describe the accounting problems 7. Describe the accounting treatment for
associated with self-constructed assets. the disposal of property, plant, and
4. Describe the accounting problems equipment.
associated with interest capitalization.

10-16
 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

10-18 ILLUSTRATION 10-21 Summary of Costs Subsequent to Acquisition LO 6

 Acquisition and Disposition
10 of Property, Plant, and
Equipment
L E A R N IN G O B J E C T IV E S

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and 5. Understand accounting issues related
equipment. to acquiring and valuing plant assets.
2. Identify the costs to include in initial 6. Describe the accounting treatment for
valuation of property, plant, and costs subsequent to acquisition.
equipment. 7. Describe the accounting
3. Describe the accounting problems treatment for the disposal of
associated with self-constructed assets. property, plant, and equipment.
4. Describe the accounting problems
associated with interest capitalization.

10-19
 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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 DISPOSITION OF PP&E

Sale of Plant Assets

Illustration: Barret Company 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 x ½) 600

Accumulated Depreciation—Machinery 600

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 DISPOSITION OF PP&E

Illustration: Barret Company recorded depreciation on a machine

costing $18,000 for 9 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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 DISPOSITION OF PP&E

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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 DISPOSITION OF PP&E

Illustration: Camel Transport Corp. had to sell a plant located on

company property that stood directly in the path of an interstate
highway. Camel received $500,000, which substantially exceeded
the book value of the land of $150,000 and the book value of the
building of $100,000 (cost of $300,000 less accumulated
depreciation of $200,000). Camel made the following entry.

Cash 500,000
Accumulated Depreciation—Buildings 200,000
Buildings 300,000
Land 150,000
Gain on Disposal of Plant Assets 250,000

10-24 LO 7
 COPYRIGHT

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