intermediate accounting spiceland 5th 6th 7th edition solution Chap010.docx

intermediate accounting spiceland 5th 6th 7th edition solution Chap010.docx

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intermediateaccountingspiceland5th6th7theditionsolutionChap010

Chapter10Property,Plant,andEquipmentandIntangibleAssets:

AcquisitionandDisposition

QuestionsforReviewofKeyTopics

Question10-1

Thedifferencebetweentangibleandintangiblelong-lived,revenue-producingassetsisthatintangibleassetslackphysicalsubstanceandtheyprimarilyrefertotheownershipofrights.

Question10-2

Thecostofproperty,plant,andequipmentandintangibleassetsincludesthepurchaseprice（lessanydiscountsreceivedfromtheseller）,transportationcostspaidbythebuyertotransporttheassettothelocationinwhichitwillbeused,expendituresforinstallation,testing,legalfeestoestablishtitle,andanyothercostsofbringingtheassettoitsconditionandlocationforuse.

Question10-3

Thecostofadevelopednaturalresourceincludestheacquisitioncostsfortheuseofland,theexplorationanddevelopmentcostsincurredbeforeproductionbegins,andtherestorationcostsincurredduringorattheendofextraction.

Question10-4

Purchasedintangiblesarevaluedattheiroriginalcosttoincludethepurchasepriceandallothernecessarycoststobringtheassettoconditionandlocationforuse.Researchanddevelopmentcostsincurredtointernallydevelopanintangibleassetareexpensedintheperiodincurred.Filingandlegalcostsforbothpurchasedanddevelopedintangiblesarecapitalized.

Question10-5

Goodwillrepresentstheuniquevalueofthecompanyasawholeoverandaboveallidentifiabletangibleandintangibleassets.Thisvalueresultsfromacompany’sclienteleandreputation,itstrainedemployeesandmanagementteam,itsuniquebusinesslocation,andanyotheruniquefeaturesofthecompanythatcan’tbeassociatedwithaspecificasset.

Becausegoodwillcan’tbeseparatedfromacompany,itisnotpossibleforabuyertoacquireitwithoutalsoacquiringthewholecompanyorasubstantialportionofit.Goodwillwillappearasanassetinabalancesheetonlywhenitwaspaidforinconnectionwiththeacquisitionofanothercompany.Thecapitalizedcostofgoodwillequalsthepurchasepriceoftheacquiredcompanylessthefairvalueofthenetassetsacquired.Thefairvalueofthenetassetsequalsthefairvalueofallidentifiabletangibleandintangibleassetslessthefairvalueofanyliabilitiesofthesellingcompanyassumedbythebuyer.

AnswerstoQuestions（continued）

Question10-6

Alump-sumpurchasepricegenerallyisallocatedbasedontherelativefairvaluesoftheindividualassets.Therelativefairvaluepercentagesaremultipliedbythelump-sumpurchasepricetoarriveattheinitialvaluationofeachoftheseparateassets.

Question10-7

Assetsacquiredinexchangefordeferredpaymentcontractsarevaluedattheirfairvalueorthepresentvalueofpaymentsusingarealisticinterestrate.Theoretically,bothalternativesshouldleadtothesamevaluation.

Question10-8

Assetsacquiredthroughtheissuanceofequitysecuritiesarevaluedatthefairvalueofthesecuritiesifknown;ifnotknown,thefairvalueoftheassetsreceivedisused.

Question10-9

Donatedassetsarevaluedattheirfairvalues.

Question10-10

Whenanitemofproperty,plant,andequipmentissold,againorlossisrecognizedforthedifferencebetweentheconsiderationreceivedandtheasset’sbookvalue.Retirementsandabandonmentsarehandledinasimilarfashion.Theonlydifferenceisthattherewillbenomonetaryconsiderationreceived.Alossisrecordedfortheremainingbookvalueoftheasset.

Question10-11

Thebasicprincipleusedtovalueassetsacquiredinanonmonetaryexchangeistousethefairvalueofasset（s）givenupplus（minus）monetaryconsideration-cash-paid（received）.

Question10-12

Thetwoexceptionsare

（1）whenfairvalueisnotdeterminableand

（2）whentheexchangelackscommercialsubstance.

Question10-13

GAAPrequirethecapitalizationofinterestincurredduringtheconstructionofassetsforacompany’sownuseaswellasforassetsconstructedforsaleorlease.Assetsqualifyingforcapitalizationexcludeinventoriesthatareroutinelymanufacturedinlargequantitiesonarepetitivebasisandassetsthatareinuseorreadyfortheirintendedpurpose.Onlyassetsthatareconstructedasdiscreteprojectsqualifyforinterestcapitalization.

AnswerstoQuestions（continued）

Question10-14

Averageaccumulatedexpendituresforaperiodisanapproximationoftheaverageamountofdebtthecompanywouldhavehadoutstandingifitborrowedallofthefundsnecessaryforconstruction.Ifconstructionexpendituresareincurredequallythroughouttheperiod,theaverageaccumulatedexpendituresfortheperiodcanbeestimatedbyaddingtheaccumulatedexpendituresatthebeginningoftheperiodtotheaccumulatedexpendituresattheendoftheperiodanddividingbytwo.Ifexpendituresontheprojectareunequalthroughouttheperiod,individualexpenditures,perhapsexpendituresgroupedbymonth,shouldbeweightedbytheamountoftimeoutstandinguntiltheendoftheconstructionperiodortheendofthecompany’sfiscalyear,whichevercomesfirst.

Question10-15

Applyingthespecificinterestmethod,theinterestrateonanyconstructionrelateddebtisuseduptotheamountoftheconstructiondebtandanyexcessaverageaccumulatedexpendituresismultipliedbyaweighted-averageinterestrateofallotherdebt.Theweighted-averagemethodmultipliesaverageaccumulatedexpendituresbytheweighted-averageinterestrateofalldebt,includinganyconstruction-relateddebt.

Question10-16

GAAPdefinesresearchanddevelopmentasfollows:

Researchisplannedsearchorcriticalinvestigationaimedatdiscoveryofnewknowledgewiththehopethatsuchknowledgewillbeusefulindevelopinganewproductorserviceoranewprocessortechniqueorinbringingaboutasignificantimprovementtoanexistingproductorprocess.

Developmentisthetranslationofresearchfindingsorotherknowledgeintoaplanordesignforanewproductorprocessorforasignificantimprovementtoanexistingproductorprocesswhetherintendedforsaleoruse.

Question10-17

GAAPspecificallyexcludesfromcurrentR&Dexpensethecostofproperty,plant,andequipmentandintangibleassetsthathave“alternativefutureuses”beyondthecurrentR&Dproject.However,thedepreciationoramortizationoftheseassetswillbeincludedasR&DexpensesinthefutureperiodstheassetsareusedforR&Dactivities.Iftheassethasnoalternativefutureuse,itscostisexpensedasR&Dimmediately.

Question10-18

GAAPrequiresthecapitalizationofsoftwaredevelopmentcostsincurredaftertechnologicalfeasibilityisestablished.Technologicalfeasibilityisestablished“whentheenterprisehascompletedallplanning,designing,coding,andtestingactivitiesthatarenecessarytoestablishthattheproductcanbeproducedtomeetitsdesignspecificationsincludingfunctions,features,andtechnicalperformancerequirements.”Costsincurredaftertechnologicalfeasibilitybutbeforetheproductisavailableforgeneralreleasetocustomersarecapitalizedasanintangibleasset.Thesecostsincludecodingandtestingcostsandtheproductionofproductmasters.CostsincurredaftercommercialproductionbeginsusuallyarenotR&Dexpenditures.

AnswerstoQuestions（concluded）

Question10-19

Thecostofdevelopedtechnologyiscapitalizedandexpensedoveritsexpectedusefullife.Developedtechnologyrelatestothoseprojectsthathavereachedtechnologicalfeasibility.Before2009,thecostofin-processR&Dwasexpensedintheperiodoftheacquisition.Now,thecostofin-processR&Discapitalizedandtreatedasanindefinitelifeintangibleassetandnotamortized.IftheR&Dprojectiscompletedsuccessfully,weswitchtothewayweaccountfordevelopedtechnologyandamortizethecapitalizedamountovertheestimatedperiodtheproductorprocessdevelopedwillprovidebenefits.Iftheprojectinsteadisabandoned,weexpensetheentirebalanceimmediately.Researchanddevelopmentcostsincurredaftertheacquisitiontocompletetheprojectareexpensedasincurred,consistentwiththetreatmentofanyotherR&Dnotacquiredinanacquisition.

Question10-20

Otherthansoftwaredevelopmentcostsincurredaftertechnologicalfeasibilityhasbeenestablished,U.S.GAAPrequiresallresearchanddevelopmentexpenditurestobeexpensedintheperiodincurred.IASNo.38drawsadistinctionbetweenresearchactivitiesanddevelopmentactivities.Researchexpendituresareexpensedintheperiodincurred.However,developmentexpendituresthatmeetspecifiedcriteriaarecapitalizedasanintangibleasset.

Question10-21

TheperiodicamortizationpercentageforcapitalizedcomputersoftwaredevelopmentcostsunderU.S.GAAPisthegreaterof

（1）theratioofcurrentrevenuestocurrentandanticipatedrevenuesor

（2）thestraight-linepercentageovertheusefullifeofthesoftware.ThisapproachisallowedunderIFRS,butnotrequired.

Question10-22

Thesuccessfuleffortsmethodallowscompaniestocapitalizeonlyexplorationcostsresultinginsuccessfulwells.Thefull-costmethodallowscompaniestocapitalizeallexplorationcostsincurredwithinageographicalarea.

BRIEFEXERCISES

BriefExercise10-1

Capitalizedcostofthemachine:

Purchaseprice$35,000

Freight1,500

Installation3,000

Testing2,000

Totalcost$41,500

Note:

Personalpropertytaxesonthemachinefortheperiodafteracquisitionarenotpartofacquisitioncost.Theyareexpensedintheperiodincurred.

BriefExercise10-2

Capitalizedcostofland:

Purchaseprice$600,000

Broker’scommission30,000

Titleinsurance3,000

Miscellaneousclosingcosts6,00