10 - Intermediate Acctg 9th Ed McGraw Hill Ch-10 Property, Plant, and Equipment and Intangible Assets - Learning Objectives

LO10-2 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

If a lump-sum purchase involves different assets, it is necessary to allocate the lump-sum acquisition price among the separate items according to some logical allocation method. A widely used allocation method is to divide the lump-sum purchase price according to the individual assets' relative fair values.

LO10-5 Calculate the fixed-asset turnover ratio used by analysts to measure how effectively managers use property, plant, and equipment.

A key to profitability is how well a company manages and utilizes its assets. Financial analysts often use activity, or turnover, ratios to evaluate a company's effectiveness in managing its assets. Property, plant, and equipment (PP&E) usually are a company's primary revenue-generating assets. Their efficient use is critical to generating a satisfactory return to owners. One ratio that analysts often use to measure how effectively managers use PP&E is the fixed-asset turnover ratio. The ratio is calculated by dividing net sales by average fixed assets.

LO10-3 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Assets acquired in exchange for deferred payment contracts are valued at their fair value or the present value of payments using a realistic interest rate.

LO-10-9 Discuss the primary differences between U.S. GAAP and IFRS with respect to the acquisition of property, plant, and equipment and intangible assets.

IAS No. 20 requires that government grant be recognized income over the periods necessary to match them on a systematic basis with the related costs that they are intended to compensate. Other than software development costs incurred after technological feasibility has been established, U.S. GAAP requires all research and development expenditure to be expensed in the period incurred. IAS No. 38 draws a distinction between research activities and development activities. Research expenditure are expensed in the period incurred. HOWEVER, development expenditures that meet specified criteria are capitalized as an intangible asset.

LO10-8 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Research and development costs incurred to internally develop an intangible asset are expensed in the period incurred. Filing and legal costs for developed intangibles are capitalized.

LO10-6 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

The basic principle used for nonmonetary exchanges is to value the asset(s) received based on the fair value of the asset(s) given up. In certain situation, the valuation of the asset(s) received is based on the book value of the asset(s) given up.

LO10-7 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

The cost of a self-constructed asset includes identifiable materials and labor and a portion of the company's manufacturing overhead costs. In addition, GAAP provides for the capitalization of interest incurred during construction. The amount of interest capitalized is equal to the average accumulated expenditures for the period multiplied by the appropriate interest rates, not to exceed actual interest incurred.

LO10-4 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donations.

Assets acquired through the issuance of equity securities are valued at the fair value of the securities if known: if not known, the fair value of the assets received is used. Donated assets are valued at their fair value.

LO10-1 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

The initial cost of property, plant, and equipment and intangible assets acquired in an exchange transaction includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use. The cost of a natural resource includes the acquisition costs for the use of land, the exploration and development costs incurred before production begins, and restoration costs incurred during or at the end of extraction. Purchased intangible assets are valued at their original cost to include the purchase price and legal and filing fees.