Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
WILEY
IFRS EDITION
9-1
PREVIEW OF CHAPTER 9
Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
9-2
9
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
CHAPTER
Plant Assets, Natural Resources, and Intangible Assets
9-3
Plant assets are resources that have
shape),
Referred to as property, plant, and equipment; plant and equipment; and fixed assets.
Plant Assets
Learning Objective 1
Describe how the
historical cost principle applies to plant assets.
LO 1
9-4
Plant assets are critical to a company’s success.
Plant Assets
Illustration 9-1
Percentages of plant assets in relation to total assets
LO 1
9-5
The historical cost principle requires that companies record plant assets at cost.
Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use.
Determining the Cost of Plant Assets
LO 1
9-6
All necessary costs incurred in making land ready for its intended use increase (debit) the Land account.
Costs typically include:
LAND
Determining the Cost of Plant Assets
LO 1
9-7
Illustration: Lew Company Ltd. acquires real estate at a cash cost of HK$2,000,000. The property contains an old warehouse that is razed at a net cost of HK$60,000 (HK$75,000 in costs less HK$15,000 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, HK$10,000, and the real estate broker’s commission, HK$80,000.
Required: Determine the amount to be reported as the cost of the land.
Determining the Cost of Plant Assets
LO 1
9-8
Land
Required: Determine amount to be reported as the cost of the land.
Cash price of property (HK$2,000,000)
Net removal cost of warehouse (HK$60,000)
Attorney's fees (HK$10,000)
10,000
60,000
HK$2,000,000
HK$2,150,000
Cost of Land
Real estate broker’s commission (HK$80,000)
80,000
Determining the Cost of Plant Assets
LO 1
Entry to record the acquisition of the land:
Land 2,150,000
Cash 2,150,000
9-9
LAND IMPROVEMENTS
Includes all expenditures necessary to make the improvements ready for their intended use.
Determining the Cost of Plant Assets
LO 1
9-10
Includes all costs related directly to purchase or construction.
Purchase costs:
Construction costs:
BUILDINGS
Determining the Cost of Plant Assets
LO 1
9-11
Include all costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
EQUIPMENT
Determining the Cost of Plant Assets
LO 1
9-12
Illustration: Zhang Company purchases factory machinery at a cash price of HK$500,000. Related expenditures are for sales taxes HK$30,000, insurance during shipping HK$5,000, and installation and testing HK$10,000. Compute the cost of the machinery.
Machinery
Cash price
Sales taxes
Insurance during shipping
5,000
30,000
HK$500,000
HK$545,000
Cost of Machinery
Installation and testing
10,000
Determining the Cost of Plant Assets
LO 1
9-13
Cash 545,000
Equipment 545,000
Illustration: Zhang Company purchases factory machinery at a cash price of HK$500,000. Related expenditures are for sales taxes HK$30,000, insurance during shipping HK$5,000, and installation and testing HK$10,000. Prepare the journal entry to record these costs.
Determining the Cost of Plant Assets
LO 1
9-14
Illustration: Huang Company purchases a delivery truck at a cash price of HK$420,000. Related expenditures are sales taxes HK$13,200, painting and lettering HK$5,000, motor vehicle license HK$800, and a three-year accident insurance policy HK$16,000. Compute the cost of the delivery truck.
Truck
Cash price
Sales taxes
Painting and lettering
5,000
13,200
HK$420,000
HK$438,200
Cost of Delivery Truck
Determining the Cost of Plant Assets
LO 1
9-15
Illustration: Huang Company purchases a delivery truck at a cash price of HK$420,000. Related expenditures are sales taxes HK$13,200, painting and lettering HK$5,000, motor vehicle license HK$800, and a three-year accident insurance policy HK$16,000. Prepare the journal entry to record these costs.
Equipment 438,200
License Expense 800
Prepaid Insurance 16,000
Cash 455,000
Determining the Cost of Plant Assets
LO 1
9-16
ACCOUNTING ACROSS THE ORGANIZATION
Many Firms Use Leases
Leasing is big business. Who does the most leasing? AWAS (IRL), J.P. Morgan Leasing (USA), and ICBC (CHN) are major lessors. Also, many companies have established separate leasing companies, such as Boeing Capital Corporation (USA), Mitsubishi Heavy Industries (JPN), and John Deere Capital Corporation (USA). And, as an excellent example of the magnitude of leasing, leased planes account for a high percentage of commercial airlines. Leasing is also becoming more common in the hotel industry. Marriott (USA), Hilton (USA), and InterContinental (GBR) are increasingly choosing to lease hotels that are owned by someone else.
LO 1
9-17
Process of allocating to expense the cost
of a plant asset over its useful (service) life
in a rational and systematic manner.
Depreciation
Learning Objective 2
Explain the concept
of depreciation and
how to compute it.
LO 2
9-18
Depreciation is a process of:
Question
LO 2
Depreciation
9-19
FACTORS IN COMPUTING DEPRECIATION
Illustration 9-6
Three factors in computing depreciation
• HELPFUL HINT
Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the balance sheet as a deduction from plant assets.
LO 2
9-20
Management selects the method it believes best measures an asset’s contribution to revenue over its useful life.
Examples include:
DEPRECIATION METHODS
LO 2
9-21
Illustration: Bob’s Florist purchased a small delivery truck on January 1, 2017.
Cost €13,000
Expected residual value €1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000
Required: Compute depreciation using the following.
(a) Straight-Line. (b) Units-of-Activity. (c) Declining-Balance.
DEPRECIATION METHODS
LO 2
9-22
STRAIGHT-LINE METHOD
ILLUSTRATION 9-8
Formula for straight-line method
LO 2
9-23
Illustration:
2017
€ 12,000
20%
€ 2,400
€ 2,400
€ 10,600
2018
12,000
20
2,400
4,800
8,200
2019
12,000
20
2,400
7,200
5,800
2020
12,000
20
2,400
9,600
3,400
2021
12,000
20
2,400
12,000
1,000
2017
Journal Entry
Depreciation Expense 2,400
Accumulated Depreciation 2,400
Illustration 9-9
Straight-line depreciation
schedule
STRAIGHT-LINE METHOD
LO 2
9-24
Assume the delivery truck was purchased on April 1, 2017.
Partial Year
Illustration:
STRAIGHT-LINE METHOD
LO 2
9-25
UNITS-OF-ACTIVITY METHOD
Illustration 9-10
Formula for units-of-activity method
LO 2
9-26
Illustration:
2017
15,000
€ 0.12
€ 1,800
€ 1,800
€ 11,200
2018
30,000
0.12
3,600
5,400
7,600
2019
20,000
0.12
2,400
7,800
5,200
2020
25,000
0.12
3,000
10,800
2,200
2021
10,000
0.12
1,200
12,000
1,000
Depreciation Expense 1,800
Accumulated Depreciation 1,800
2017
Journal Entry
Illustration 9-11
Units-of-activity depreciation
schedule
UNITS-OF-ACTIVITY METHOD
LO 2
9-27
DECLINING-BALANCE METHOD
Illustration 9-12
Formula for declining-balance method
LO 2
9-28
Illustration:
2017
€ 13,000
40%
€ 5,200
€ 5,200
€ 7,800
2018
7,800
40
3,120
8,320
4,680
2019
4,680
40
1,872
10,192
2,808
2020
2,808
40
1,123
11,315
1,685
2021
1,685
40
685*
12,000
1,000
* Computation of €674 (€1,685 x 40%) is adjusted to €685.
Depreciation Expense 5,200
Accumulated Depreciation 5,200
2017
Journal Entry
Illustration 9-13
Double-declining-balance depreciation schedule
DECLINING-BALANCE METHOD
LO 2
9-29
Illustration:
DECLINING-BALANCE METHOD
Partial Year
LO 2
9-30
ILLUSTRATION 9-14
Comparison of depreciation methods
Annual depreciation varies considerably among the methods, but total depreciation expense is the same (€12,000) for the five-year period.
COMPARISON OF METHODS
LO 2
9-31
ILLUSTRATION 9-15
Patterns of depreciation
COMPARISON OF METHODS
LO 2
9-32
COMPONENT DEPRECIATION
Depreciation
LO 2
9-33
Illustration: Lexure Construction builds an office building for HK$4,000,000. The building is estimated to have a 40-year useful life, however HK$320,000 of the cost of the building relates to personal property and HK$600,000 relates to land improvements. Because the personal property has a depreciable life of 5 years and the land improvements have a depreciable life of 10 years, Lexure must use component depreciation. Assuming that Lexure uses straight-line depreciation and no residual value, component depreciation for the first year of the office building is computed as follows.
COMPONENT DEPRECIATION
LO 2
Illustration 9-16
Component depreciation computation
9-34
Tax laws often do not require corporate taxpayers to use the same depreciation method on the tax return that is used in preparing financial statements.
Many corporations use
DEPRECIATION AND INCOME TAXES
Depreciation
LO 2
9-35
REVISING PERIODIC DEPRECIATION
Depreciation
LO 2
9-36
Illustration: Arcadia HS, purchased equipment for €510,000 which was estimated to have a useful life of 10 years with a residual value of €10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2020 (year 8), it is determined that the total estimated life should be 15 years with a residual value of €5,000 at the end of that time.
No Entry
Required
Questions:
REVISING PERIODIC DEPRECIATION
LO 2
9-37
Equipment
€510,000
Property, Plant, and Equipment
Accumulated depreciation
350,000
Net book value (NBV)
€160,000
Balance Sheet (Dec. 31, 2019)
Equipment cost €510,000
Residual value - 10,000
Depreciable base 500,000
Useful life (original) 10 years
Annual depreciation € 50,000
x 7 years = €350,000
First, establish NBV at date of change in estimate.
REVISING PERIODIC DEPRECIATION
LO 2
9-38
Net book value €160,000
Residual value (new) 5,000
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation € 19,375
Depreciation Expense calculation for 2020.
Depreciation Expense 19,375
Accumulated Depreciation 19,375
Journal entry for 2020 and future years.
REVISING PERIODIC DEPRECIATION
LO 2
9-39
When there is a change in estimated depreciation:
Question
LO 2
REVISING PERIODIC DEPRECIATION
9-40
Original depreciation expense = [(£36,000 − £6,000) ÷ 6] = £5,000
Accumulated depreciation after 2 years = 2 × £5,000 = £10,000
Book value = £36,000 − £10,000 = £26,000
Book value after 2 years of depreciation £26,000
Less: New salvage value 2,000
Depreciable cost £24,000
Remaining useful life 8 years
Revised annual depreciation (£24,000 ÷ 8) £ 3,000
Chambers plc purchased a piece of equipment for £36,000. It estimated a 6-year life and £6,000 salvage value. Thus, straight-line depreciation was £5,000 per year [(£36,000 − £6,000) ÷ 6]. At the end of year three (before the depreciation adjustment), it estimated the new total life to be 10 years and the new salvage value to be £2,000. Compute the revised depreciation.
>
DO IT!
LO 2
9-41
IFRS allows companies to revalue plant assets to fair value at the reporting date.
If revaluation is used,
Revaluation of Plant Assets
LO 2
9-42
Illustration: Pernice Ltd. applies revaluation to equipment purchased on January 1, 2017, for HK$1,000,000. The equipment has a useful life of 5 years, and no residual value. Pernice makes the following entry to record depreciation for 2017, assuming straight-line depreciation.
Depreciation Expense 200,000
Accumulated Depreciation—Equipment 200,000
At the end of 2017, independent appraisers determine that the asset has a fair value of HK$850,000. The entry to record the revaluation is as follows.
Accumulated Depreciation—Equipment 200,000
Equipment 150,000
Revaluation Surplus 50,000
Revaluation of Plant Assets
LO 2
9-43
As indicated,
Illustration 9-18
Statement presentation of plant assets (equipment) and revaluation surplus
Revaluation of Plant Assets
LO 2
9-44
Illustration: Assume again that Pernice’s equipment has a carrying amount of HK$800,000 (HK$1,000,000 − HK$200,000). However, at the end of 2017, independent appraisers determine that the asset has a fair value of HK$775,000, which results in an impairment loss of HK$25,000 (HK$800,000 − HK$775,000). To record the equipment at fair value and to record this loss, Pernice makes the following entry.
Accumulated Depreciation—Equipment 200,000
Impairment Loss 25,000
Equipment 225,000
The impairment loss of HK$25,000 reduces net income.
Revaluation of Plant Assets
LO 2
9-45
Ordinary Repairs - expenditures to
maintain the operating efficiency and
productive life of the unit.
Additions and Improvements - costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.
Expenditures During Useful Life
Learning Objective 3
Distinguish between
revenue and capital
expenditures, and explain the entries for each.
LO 3
9-46
The Missing Controls
Documentation procedures. The company’s accounting system was a disorganized collection of non-integrated systems, which resulted from a series of corporate acquisitions. Top management took advantage of this disorganization to conceal its fraudulent activities.
Total take: $7 billion
ANATOMY OF A FRAUD
Bernie Ebbers was the founder and CEO of the phone company WorldCom. The company engaged in a series of increasingly large, debt-financed acquisitions of other companies. These acquisitions made the company grow quickly, which made the stock price increase dramatically. However, because the acquired companies all had different accounting systems, WorldCom’s financial records were a mess. When WorldCom’s performance started to flatten out, Bernie coerced WorldCom’s accountants to engage in a number of fraudulent activities to make net income look better than it really was and thus prop up the stock price. One of these frauds involved treating $7 billion of line costs as capital expenditures. The line costs, which were rental fees paid to other phone companies to use their phone lines, had always been properly expensed in previous years. Capitalization delayed expense recognition to future periods and thus boosted current-period profits.
(continued)
LO 3
9-47
The Missing Controls
Independent internal verification. A fraud of this size should have been detected by a routine comparison of the actual physical assets with the list of physical assets shown in the accounting records.
Total take: $7 billion
ANATOMY OF A FRAUD
Bernie Ebbers was the founder and CEO of the phone company WorldCom. The company engaged in a series of increasingly large, debt-financed acquisitions of other companies. These acquisitions made the company grow quickly, which made the stock price increase dramatically. However, because the acquired companies all had different accounting systems, WorldCom’s financial records were a mess. When WorldCom’s performance started to flatten out, Bernie coerced WorldCom’s accountants to engage in a number of fraudulent activities to make net income look better than it really was and thus prop up the stock price. One of these frauds involved treating $7 billion of line costs as capital expenditures. The line costs, which were rental fees paid to other phone companies to use their phone lines, had always been properly expensed in previous years. Capitalization delayed expense recognition to future periods and thus boosted current-period profits.
LO 3
9-48
Companies dispose of plant assets in three ways—Sale, Retirement, or Exchange.
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
Plant Asset Disposals
LO 4
Learning Objective 4
Explain how to account
for the disposal of a
plant asset.
Illustration 9-19
Methods of plant asset disposal
9-49
RETIREMENT OF PLANT ASSETS
Plant Asset Disposals
LO 4
9-50
Illustration: Hobart ASA retires its computer printers, which cost €32,000. The accumulated depreciation on these printers is €32,000. Prepare the entry to record this retirement.
Accumulated Depreciation—Equipment 32,000
Equipment 32,000
Question: What happens if a fully depreciated plant asset is still useful to the company?
RETIREMENT OF PLANT ASSETS
LO 4
9-51
Illustration: Sunset A/S discards delivery equipment that cost €18,000 and has accumulated depreciation of €14,000. The journal entry is?
Accumulated Depreciation—Equipment 14,000
Loss on Disposal of Plant Assets 4,000
Equipment 18,000
Companies report a loss on disposal in the “Other income and expense” section of the income statement.
LO 4
RETIREMENT OF PLANT ASSETS
9-52
Compare the book value of the asset with the proceeds received from the sale.
SALE OF PLANT ASSETS
Plant Asset Disposals
LO 4
9-53
Illustration: On July 1, 2017, Wright Company sells office furniture for €16,000 cash. The office furniture originally cost €60,000. As of January 1, 2017, it had accumulated depreciation of €41,000. Depreciation for the first six months of 2017 is €8,000. Prepare the journal entry to record depreciation expense up to the date of sale (July 1).
GAIN ON SALE
SALE OF PLANT ASSETS
LO 4
Depreciation Expense 8,000
Accumulated Depreciation—Equipment 8,000
9-54
Illustration: Wright records the sale on July 1 as follows.
Illustration 9-20
Computation of gain on disposal
LO 4
SALE OF PLANT ASSETS
Cash 16,000
Accumulated Depreciation—Equipment 49,000
Equipment 60,000
Gain on Disposal of Plant Assets 5,000
9-55
Illustration 9-21
Computation of loss on disposal
July 1
Illustration: Assume that instead of selling the office furniture for €16,000, Wright sells it for €9,000 on July 1.
LO 4
SALE OF PLANT ASSETS
Cash 9,000
Accumulated Depreciation—Equipment 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000
9-56
Overland Trucking has an old truck that cost £30,000 and has accumulated depreciation of £16,000. Assume two different situations:
What entry should Overland use to record scenario 1?
Cash 17,000
Accumulated Depreciation—Equipment 16,000
Equipment 30,000
Gain on Disposal of Plant Assets 3,000
>
DO IT!
LO 4
9-57
Overland Trucking has an old truck that cost £30,000 and has accumulated depreciation of £16,000. Assume two different situations:
What entry should Overland use to record scenario 2?
>
DO IT!
Cash 10,000
Accumulated Depreciation—Equipment 16,000
Loss on Disposal of Plant Assets 4,000
Equipment 30,000
LO 4
9-58
Natural resources consist of standing timber
and resources extracted from the ground, such
as oil, gas, and minerals.
IFRS defines extractive industries as those businesses involved in finding and removing natural resources located in or near the earth’s crust.
Standing timber is considered a biological asset under IFRS. In the years before they are harvested, the recorded value of biological assets is adjusted to fair value each period.
Extractable Natural Resources
Learning Objective 5
Compute periodic
depletion of
extractable natural
resources.
LO 5
9-59
Acquisition cost of an extractable natural resource is the
Depletion is the allocation of the cost to expense in a rational and systematic manner over the resource’s useful life.
Extractable Natural Resources
LO 5
9-60
Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million tons of coal and no residual value. In the first year, Lane extracts and sells 250,000 tons of coal. Lane computes the depletion expense as follows:
Extractable Natural Resources
LO 5
HK$5.00 per ton x 250,000 tons =
HK$1,250,000 annual depletion
Illustration 9-22
Computation of depletion cost per unit
9-61
Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million tons of coal and no residual value. In the first year, Lane extracts and sells 250,000 tons of coal. Lane records the depletion as follows:
Inventory (coal) 1,250,000
Accumulated Depletion 1,250,000
Journal entry:
Extractable Natural Resources
LO 5
9-62
Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.
Limited life or indefinite life.
Common types of intangibles:
Intangible Assets
Learning Objective 6
Explain the basic
issues related to
accounting for
intangible assets.
LO 6
9-63
Limited-Life Intangibles:
Indefinite-Life Intangibles:
Accounting for Intangible Assets
Similar to property, plant, and equipment, IFRS permits revaluation of intangible assets to fair value, except for goodwill.
Companies classify Amortization Expense as an operating expense in the income statement.
LO 6
9-64
PATENTS
Accounting for Intangible Assets
LO 6
9-65
Illustration: National Labs purchases a patent at a cost of NT$720,000. National estimates the useful life of the patent to be eight years. National records the annual amortization for the ended December 31 as follows.
Amortization Expense 90,000
Patents 90,000
Cost NT$720,000
Useful life ÷ 8 years
Annual expense NT$ 90,000
Dec. 31
PATENTS
LO 6
9-66
COPYRIGHTS
Accounting for Intangible Assets
LO 6
9-67
TRADEMARKS AND TRADE NAMES
Accounting for Intangible Assets
LO 6
9-68
FRANCHISES AND LICENSES
Accounting for Intangible Assets
LO 6
9-69
GOODWILL
Accounting for Intangible Assets
LO 6
9-70
Global Insight
Should Companies Write Up Goodwill?
SoftBank Corp. (JPN) at one time was the country’s largest Internet company. It boosted the profit margin of its mobile phone unit from 3.2% to 11.2% through what appeared to some as accounting tricks. What did it do? It wrote down the value of its mobile phone-unit assets by half. This would normally result in a huge loss. But rather than take a loss, the company wrote up goodwill by the same amount. How did this move increase earnings? The assets were being depreciated over 10 years, but the company amortizes goodwill over 20 years. (Amortization of goodwill was allowed under the accounting standards it followed at that time.) While the new treatment did not break any rules, the company was criticized by investors for not providing sufficient justification or a detailed explanation for the sudden shift in policy.
Source: Andrew Morse and Yukari Iwatani Kane, “SoftBank’s Accounting Shift Raises Eyebrows,” Wall Street Journal (August 28, 2007), p. C1.
LO 6
9-71
Expenditures that may lead to
All R & D costs are expensed when incurred.
Research and Development Costs
LO 6
9-72
Illustration: Laser Scanner Ltd. spent NT$1 million on
research and NT$2 million on development of new products. Of the NT$2 million in development costs NT$400,000 was incurred prior to technological feasibility and NT$1,600,000 was incurred after technological feasibility had been demonstrated. The company would record these costs as follows.
Research and Development Expense 1,400,000
Development Costs 1,600,000
Cash 3,000,000
Research and Development Costs
LO 6
9-73
Which of the following statements is false?
Question
LO 6
Accounting for Intangible Assets
9-74
1. The allocation of the cost of an extractable natural resource to expense in a rational and systematic manner.
2. Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.
3. An exclusive right granted by a government to reproduce and sell an artistic or published work.
Depletion
Intangible Assets
Copyrights
Illustration: Identify the term most directly associated with each statement.
>
DO IT!
LO 6
9-75
Illustration: Identify the term most directly associated with each statement.
4. A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area.
5. Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred.
Franchises
Research Costs
>
DO IT!
LO 6
9-76
Statement Presentation
Learning Objective 7
Indicate how plant
assets, natural
resources, and
intangible assets
are reported.
Illustration 9-23
Presentation of property, plant, and equipment, and intangible assets
LO 7
9-77
Each Korean won invested in assets produced ₩1.65 in sales for LG. If a company is using its assets efficiently, each investment in assets will create a high amount of sales.
Statement Analysis
Illustration 9-24
Asset turnover formula and computation
LO 7
9-78
$460,000 + $540,000
2
$420,000 ÷
= .84
Solution
The asset turnover is computed as follows.
Net Sales ÷ Average Total Assets = Asset Turnover
Paramour Company reported net income of $180,000, net sales of $420,000, and had total assets of $460,000 on January 1, 2017, and total assets on December 31, 2017, of $540,000. Determine Paramour’s asset turnover for 2017.
>
DO IT!
LO 7
9-79
loss on the exchange of plant assets.
APPENDIX 9A
Exchange of Plant Assets
Learning Objective 8
Explain how to account for the exchange of plant
assets.
LO 8
9-80
Cost of used trucks €64,000
Less: Accumulated depreciation 22,000
Book value 42,000
Fair market value of used trucks 26,000
Loss on disposal €16,000
Fair market value of used trucks €26,000
Cash paid 17,000
Cost of semi-truck €43,000
Illustration: Roland NV exchanged used trucks (cost €64,000 less €22,000 accumulated depreciation) plus cash of €17,000 for a new semi-truck. The used trucks had a fair market value of €26,000.
Loss Treatment
Illustration 9A-1
Cost of semi-truck
Illustration 9A-2
Computation of loss on disposal
LO 8
9-81
Equipment (new) 43,000
Accumulated Depreciation—Equipment 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old) 64,000
Cash 17,000
Illustration: Roland NV exchanged used trucks (cost €64,000 less €22,000 accumulated depreciation) plus cash of €17,000 for a new semi-truck. The old trucks had a fair market value of €26,000.
Prepare the entry to record the exchange of assets by Roland NV.
Loss Treatment
LO 8
9-82
Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also paid €3,000.
Cost of old equipment €40,000
Less: Accumulated depreciation 28,000
Book value 12,000
Fair market value of old equipment 19,000
Gain on disposal € 7,000
Fair market value of old equipment €19,000
Cash paid 3,000
Cost of new equipment €22,000
Gain Treatment
Illustration 9A-3
Cost of new delivery equipment
Illustration 9A-4
Computation of gain
on disposal
LO 8
9-83
Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also paid €3,000.
Prepare the entry to record the exchange of assets by Mark Express.
Gain Treatment
Equipment (new) 22,000
Accumulated Depreciation—Equipment (old) 28,000
Equipment (old) 40,000
Gain on Disposal of Plant Assets 7,000
Cash 3,000
LO 8
9-84
In exchanges of assets in which the exchange has commercial substance:
Question
Exchange of Plant Assets
LO 8
9-85
Key Points
Similarities
A Look at U.S. GAAP
Learning Objective 9
Compare the accounting for long-lived assets under IFRS and U.S. GAAP.
LO 9
9-86
Key Points
Differences
A Look at U.S. GAAP
LO 9
9-87
Key Points
Differences
A Look at U.S. GAAP
LO 9
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Key Points
Differences
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Looking to the Future
With respect to revaluations, as part of the conceptual framework project, the Boards will examine the measurement bases used in accounting. It is too early to say whether a converged conceptual framework will recommend fair value measurement (and revaluation accounting) for plant assets and intangibles. However, this is likely to be one of the more contentious issues, given the longstanding use of historical cost as a measurement basis in GAAP. The IASB and FASB have identified a project that would consider expanded recognition of internally generated intangible assets. IFRS permits more recognition of intangibles compared to GAAP. Thus, it will be challenging to develop converged standards for intangible assets, given the long-standing prohibition on capitalizing internally generated intangible assets and research and development costs in GAAP.
A Look at U.S. GAAP
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GAAP Self-Test Questions
Which of the following statements is correct?
A Look at IFRS
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GAAP Self-Test Questions
Research and development costs are:
A Look at IFRS
A Look at U.S. GAAP
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GAAP Self-Test Questions
Value-in-use is defined as:
A Look at IFRS
A Look at U.S. GAAP
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