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Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 10

Acquisition and Disposition of Property, Plant, and

Equipment

Learning Objectives

After studying this chapter, you should be able to:

LO 1 Identify property, plant, and equipment and its related costs.
LO 2 Discuss the accounting problems associated with the
capitalization of borrowing costs. (later after LO 5)
LO 3 Explain accounting issues related to acquiring and valuing
plant assets. (skip: government grants)
LO 4 Describe the accounting treatment for costs subsequent to
acquisition.
LO 5 Describe the accounting treatment for the disposal of
property, plant, and equipment.

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PREVIEW OF CHAPTER 10

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Learning Objective 1
Identify property, plant, and
equipment and its related costs.

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Property, Plant, and Equipment

Property, plant, and equipment are assets of a durable nature.
Other terms commonly used are plant assets and fixed assets.
Includes:
• “Used in operations” and not for • Land,
resale.
• Building structures (offices,
• Long-term in nature and usually factories, warehouses), and
depreciated.
• Equipment (machinery,
• Possess physical substance. furniture, tools).

[IAS 16.6] Property, plant and equipment are tangible items that:
• (a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
• (b) are expected to be used during more than one period.
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Acquisition of PP&E
Historical cost measures the cash or cash equivalent price of obtaining the
asset and bringing it to the location and condition necessary for its intended
use.
In general, costs include:
1. Purchase price, including import duties and non-refundable
purchase taxes, less trade discounts and rebates.
2. Costs attributable to bringing the asset to the location and
condition necessary for it to be used in a manner intended by the
company, and:
3. Restoring cost
Companies value property, plant, and equipment in subsequent periods using
either (study in chapter 11)
• cost method or
• fair value (revaluation) method.
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Acquisition of PP&E
Cost of Land
All expenditures made to acquire land and ready it for use.
Costs typically include:
1) purchase price;
2) closing costs, such as title to the land, attorney’s fees, and
recording fees;
3) costs of grading, filling, draining, and clearing;
4) assumption of any liens, mortgages, or encumbrances on
the property; and
5) additional land improvements that have an indefinite life.

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Acquisition of PP&E
Cost of Land Improvements
• Improvements with limited lives, such as private
driveways, walks, fences, and parking lots, are recorded
as Land Improvements and depreciated.

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Acquisition of PP&E
Cost of Buildings

Includes all expenditures related directly to acquisition or

construction. Costs include:
• materials, labor, and overhead costs incurred during
construction and
• professional fees and building permits.
Companies consider all costs incurred, from excavation to
completion, as part of the building costs.

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Acquisition of PP&E
Cost of Equipment

Include all expenditures incurred in acquiring the equipment

and preparing it for use. Costs include:
• purchase price,
• freight and handling charges,
• insurance on the equipment while in transit,
• cost of special foundations if required,
• assembling and installation costs, and
• costs of conducting trial runs.

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Acquisition of PP&E Problem (1 of 3)

E10.1 The expenditures and receipts below are related to land, land
improvements, and buildings acquired for use in a business enterprise.
Determine how the following should be classified:

a. Money borrowed to pay building a. Notes Payable

contractor (signed a note)
b. Payment for construction b. Buildings
from note proceeds
c. Cost of land fill and clearing c. Land
d. Delinquent real estate taxes on d. Land
property assumed by purchaser
e. Premium on 6-month insurance e. Buildings
policy during construction
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Acquisition of PP&E Problem (2 of 3)

E10.1 Determine how the following should be classified:

f. Refund of 1-month insurance f. (Buildings)

premium because construction
completed early
g. Architect’s fee on building g. Buildings
h. Cost of real estate purchased as h. Land
a plant site (land €200,000 and
building €50,000)
i. Commission fee paid to real i. Land
estate agency
j. Installation of fences around property j. Land Improvements
k. Cost of razing and removing building k. Land

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Acquisition of PP&E Problem (3 of 3)

E10.1 Determine how the following should be classified:

l. Proceeds from residual value of l. (Land)

demolished building

m. Borrowing costs during construction m. Buildings

on money borrowed for construction
n. Cost of parking lots and driveways n. Land Improvements

o. Cost of trees and shrubbery planted o. Land

(permanent in nature)
p. Excavation costs for new building p. Buildings

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Acquisition of PP&E
Self-Constructed Assets
Costs include:
• Materials and direct labor
• Overhead (include power, heat, light, insurance,
property taxes on factory buildings and equipment,
factory supervisory labor, depreciation of fixed
assets, and supplies), can be handled in two ways:
1. Assign no fixed overhead.
2. Assign a portion of all overhead to the construction
process.
Companies use the second method extensively.
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Learning Objective 2
Discuss the accounting problems
associated with the capitalization of
borrowed funds.

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Interest Costs During Construction

Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost
of that asset and, therefore, should be capitalised. Other borrowing
costs are recognised as an expense. [IAS 23.8]
Three approaches have been suggested to account for the interest incurred
in financing the construction.

ILLUSTRATION 10.1
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Interest Costs During Construction—IFRS

• IFRS requires — capitalizing actual interest (with modification).

• Consistent with historical cost.
• Capitalization considers three items:
1. Qualifying assets.
2. Capitalization period.
3. Amount to capitalize.

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Interest Costs During Construction

Qualifying Assets
Require a substantial period of time to get them ready for
their intended use or sale.
Two types of assets:
• Assets under construction for a company’s own use.
• Assets intended for sale or lease that are constructed or
produced as discrete projects.

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Interest Costs During Construction

Capitalization Period

Begins when:
1. Expenditures for the assets are being incurred.
2. Activities for readying the asset for use or sale are in
progress.
3. Interest costs are being incurred.
Ends when:
The asset is substantially complete and ready for use.

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Interest Costs During Construction

Amount to Capitalize
Capitalize the difference of:
1. Actual interest cost incurred.
2. any investment income on temporary investments of
funds made available from the borrowings.

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Amount to Capitalize
Weighted-Average Accumulated Expenditures
In computing the weighted-average accumulated expenditures,
a company weights the construction expenditures by the
amount of time (fraction of a year or accounting period) that it
can incur interest cost on the expenditure.

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Amount to Capitalize
Interest Rates

Selecting Appropriate Interest Rate:

1. For the portion of weighted-average accumulated expenditures
that is less than or equal to any amounts borrowed specifically
to finance construction of the assets, use the interest rate
incurred on the specific borrowings.
2. For the portion of weighted-average accumulated expenditures
that is greater than any debt incurred specifically to finance
construction of the assets, use a weighted average of interest
rates incurred on all other outstanding debt during the period.

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Comprehensive Example
On November 1, 2021, Shalla Company contracted Pfeifer
Construction Co. to construct a building for $1,400,000 on land
costing $100,000 (purchased from the contractor and included in
the first payment). Shalla made the following payments to the
construction company during 2022.

January 1 March 1 May 1 December 31 Total

$210,000 $300,000 $540,000 $450,000 $1,500,000

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Comprehensive Example
Total Borrowing Costs
Pfeifer Construction completed the building, ready for occupancy, on December
31, 2022. Shalla had the following debt outstanding at December 31, 2022.
15 percent, $1,500,000, 3-year note to finance purchase of land and
construction of the building, dated December 31, 2021, with interest payable
annually on December 31. During 2021, a portion of the proceeds from the
borrowing that had not yet been expended in the project were invested and
earned $60,000 in interest income.
The project began on January 1 and was completed on December 31, so the
capitalization period was the full year of 2022.

ILLUSTRATION 10.2

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Comprehensive Example January 1

Journal Entries Land 100,000
Buildings (or Construction in Process) 110,000
Cash 210,000
March 1
Buildings 300,000
Cash 300,000
May 1
Buildings 540,000
Cash 540,000
December 31
Buildings 450,000
Cash 450,000
Buildings (Capitalized Borrowing Cost) 225,000
Cash 225,000
Cash 60,000
Buildings (Capitalized Borrowing Cost) 60,000
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Comprehensive Example
Project Funded by General Debt
When the project is funded by general debt, some additional
calculations and steps are included in the process.
To illustrate, assume the same facts as the previous illustration, but,
instead of any specific debt, the project is funded by the general debt of
the company. Assume that Shalla had the following two debt obligations
outstanding during 2022.
General Debt
1. 10 percent, $1,000,000, 5-year note payable, dated December 31,
2018, with interest payable annually on December 31.
2. 12 percent, $1,500,000, 10-year bonds issued December 31, 2017,
with interest payable annually on December 31.

When the project is funded by general debt, the company will need to
determine the average carrying amount of the project during the period.
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Comprehensive Example
Average Carrying Amount of Calculations

ILLUSTRATION 10.3

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Comprehensive Example
Capitalization Rate
The second amount that is needed when borrowing costs from general debt are being
used, and there is more than one general debt obligation, is the weighted-average
borrowing costs. This amount is called the capitalization rate and is computed as follows.

By combining these two amounts, the amount of borrowing cost available for
capitalization is now computed.

The final step when the borrowing cost of general debt is used is to apply the
constraint that the amount capitalized cannot exceed the actual borrowing costs
incurred during the period. In 2022, total borrowing costs were $280,000
[($1,000,000 x 0.10) + $1,500,000 x 0.12)]. The amount capitalized will be lower
of actual, or the amount computed by multiplying the average carrying amount
by the capitalization rate.
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Comprehensive Example
December 31, 2022 Journal Entry

All of the other entries presented in a previous slide would be the same except
for the interest entries on December 31, which would be as follows.

December 31
Buildings (Capitalized Borrowing Cost) 91,840
Interest Expense ($280,000 − $91,840) 188,160
Cash 280,000

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Comprehensive Example (read by yourself)

Project Funded by a Blend of Specific Debt and
General Debt
Specific Construction Debt
• 15 percent, $750,000, 3-year note payable to finance purchase construction
of the building, dated December 31, 2021, with interest payable annually on
December 31. Idle funds from this borrowing were invested during early 2022
and earned $40,000 in investment income.
Other Debt
• 10 percent, $500,000, 5-year note payable, dated December 31, 2018, with
interest payable annually on December 31.
• 12 percent, $1,500,000, 10-year bonds issued December 31, 2017, with
interest payable annually on December 31.
In this case, the expenditures are first allocated to the specific debt to the
extent possible. Then, the remainder of the expenditures are allocated to the
general debt.
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Comprehensive Example
Project Funded by a Blend of Specific Debt and
General Debt—Allocation of Expenditures

ILLUSTRATION 10.4

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Comprehensive Example
Project Funded by a Blend of Specific Debt and
General Debt—Summary of Borrowing Costs
The borrowing costs of the specific debt for this project is $72,500 based on the
borrowing costs of $112,500 ($1,500,000 x .15) less the investment income of $40,000.
The capitalization rate on the general debt is 11.5% [(.10 x ($500,000 ÷ $2,000,000)] + [.12
x ($1,500,000 ÷ $2,000,000)]. This results in a potential amount of borrowing costs to be
capitalized of $23,000 ($200,000 x .115). Since this amount is lower than the actual
borrowing costs of the general debt of $230,000 [($500,000 x .10) + ($1,500,000 x .12)],
$23,000 will be capitalized from the general borrowings.

ILLUSTRATION 10.5

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Comprehensive Example
Project Funded by a Blend of Specific Debt and
General Debt—December 31 Journal Entry

December 31
Buildings (Capitalized Borrowing Cost ) ($112,500 + $23,000) 135,000
Interest Expense ($23,000 − $23,000 ) 207,000
Cash ($112,500 + $230,000) 342,500
Cash 40,000
Buildings (Capitalized Borrowing Coast) 40,000

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Borrowing Cost Disclosures

ILLUSTRATION 10.6

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Learning Objective 3
Explain accounting issues related to
acquiring and valuing plant assets.

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Valuation of PP&E
Companies should record property, plant, and equipment at fair
value.
Some special notes:
Cash Discounts for prompt payment: reduce purchase price.
Deferred-Payment Contracts — Assets purchased on long-term
credit contracts are valued at the present value of the consideration
exchanged.
Lump-Sum Purchases (when a company purchases a group of assets
at a single lump-sum price.)— Allocate the total cost among the
various assets on the basis of their relative fair market values.
When companies acquire property by Issuance of Shares — The
market price of the shares issued is a fair indication of the cost of
the property acquired.
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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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Meaning of Commercial Substance

IAS 16 para 25
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.

Defer = not recognize

ILLUSTRATION 10.8

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Exchanges of Non-Monetary Assets

Has Commercial Substance
Loss Situation
Companies recognize a loss if the exchange has commercial
substance. Rationale: Companies should not value assets at more
than their cash equivalent price. If the loss were deferred, assets
would be overstated.
Gain Situation
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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Loss Situation (Has Commercial Substance)

Illustration: Information Processing SA trades its used machine for a new

model at Jerrod Business Solutions N V. 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 10.9

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Loss Situation (Has Commercial Substance)

Journal Entry and Computation of Loss

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

Loss on Disposal

ILLUSTRATION 10.10
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Gain Situation (Has Commercial Substance)

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 10.11

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Gain Situation (Has Commercial Substance)

Journal Entry and Computation of Gain

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

Gain on Disposal

ILLUSTRATION 10.12
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Exchanges of Non-Monetary Assets

Lacks Commercial Substance
Now assume that Interstate Transportation Company exchange lacks
commercial substance. The economic position of Interstate did not change
significantly as a result the this exchange.
Interstate “defers” the gain of $7,000 and reduces the basis of the semi-truck.

ILLUSTRATION 10.13

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Lacks Commercial Substance

Journal Entry

Illustration: Interstate records the exchange transaction as

follows:

Truck (semi) 53,000

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

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Learning Objective 4
Describe the accounting treatment for costs
subsequent to acquisition.

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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

Major Types of Expenditures
Additions. Increase or extension of existing assets.
Improvements and Replacements. Substitution of a better
or similar asset for an existing one.
Rearrangement and Reorganization. Movement of assets
from one location to another.
Repairs. Expenditures that maintain assets in condition for
operation.

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Summary of Costs Subsequent to Acquisition of

Property, Plant, and Equipment

ILLUSTRATION 10.19

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Learning Objective 5
Describe the accounting treatment for
the disposal of property, plant, and
equipment.

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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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Sale of Plant Assets

Updating Depreciation to Date of Sale

Illustration: Barret Group 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 × ½) 600

Accumulated Depreciation — Machinery 600

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Sale of Plant Assets

Journal Entry to Record Sale of Asset
Illustration: Barret Group 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. 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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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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Involuntary Conversion Example

Illustration: Camel Transport Corp. had a manufacturing plant located on
company property that stood directly in the path of a tornado. As a result of the
tornado, which occurred on May 16, 2022, the plant was completely destroyed.
Camel was eventually able to reach a settlement with its insurance company for
the full fair value of the plant. The settlement was reached on March 18, 2023.
At the time of the tornado, the building had a carrying value of $3,500,000
(original cost of $6,000,000 less accumulated depreciation of $2,500,000). The
amount of the settlement with the insurance company was $8,000,000. Camel
made the following entries.
2022
May 16 Loss from Tornado 3,500,000
Accumulated Depreciation ─ Buildings. 2,500,000
Buildings 6,000,000
2023
Mar. 18 Cash 8,000,000
Gain from Insurance Settlement 8,000,000
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