Among the principal topics related to the accounting for Property, Plant and Equ

Question

Among the principal topics related to the accounting for Property, Plant and Equipment of a company are Acquisition and Retirement. Required: (1) Explain the expenditures that a company capitalizes when it acquires equipment for cash.(2) Assume that a company cannot determine the market value of equipment by reference to a similar purchase for cash. Explain how the company determines the capitalizable cost of equipment purchased by exchanging it for each of the following three items.(a) Bonds having an established market price.(b)Common Stock not having an established market price.(c)Similar equipment having a determinable market value. (3)Explain the factors that a company uses to determine whether it capitalizes expenditures relating to Property, Plant and Equipment already in use.(4)Explain how a company accounts for the gain or loss on the sale of Property, Plant and Equipment for cash?

Explanation / Answer

1) Expenditures that are capitalized: making the equipment ready to its intended use (installation, modification) and shipping to bring the equipment to its intended place of use. 2) a) the market price of the bonds b) the market price of the bonds c) the market price of the equipment 3) If the expenditure significantly increases the life of the property, plant of equipment, it is capitalized. For example, a new engine significantly increases the life of the a truck,thus the installation of a new engine would be capitalized. However, regular maintence is expensed immediately. Therefore, an oil change is regular maintenance; therefore it is not capitalized. 4) The gain or loss is determined based on the sales price of the equipment minus the equipment's book value. (Book value is determined by cost minus accumulated depreciation). Thus, if we sell a piece of equipment with a book value of 350 for 500 cash or another piece of equipment with a market value of 500, then our gain is 150 dollars.

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