eding eortized bu ldnos value at the date of sale. D t the date of sale. Dis. yo

Question

eding eortized bu ldnos value at the date of sale. D t the date of sale. Dis. your answer how to determine the net How nswer hforyou each be depreciated or amortized the sale of the land and building BU Case 9-9 Accounting for Property, Plant Among the principal topics related to the accounting for the equipment of a company are acquisitions and retirements. cuss the ra Required a. What expe nditures should be capitalized when equipment is acquired for h Assume the market value of equipment is not determinable by reference derermine the capitalized cost of equipment purchased by exchanineit to a similar purchase for cash. Describe how the acquiring company should each of the following i. Bonds having an established market price i Common stock not having an established market price ii. Similar equipment not having a determinable market price ery plant, and equipment already in use should be capitalized. or equipment. c. Describe the factors that determine whether expenditures relating to prop d. Describe how to account for the gain or loss on the sale of property, pla nt

Explanation / Answer

a. When equipment is acquired for cash, all expenditures which are necessary to make the equipment ready for intended use are treated as capital expenditure. Few examples of such expenditure:
- Purchase cost of the equipment.
- Cartage or freight paid on acquiring the equipment.
- Legal fees or brokerage paid to acquire the equipment.
- Wages paid to workers for erecting the equipment.

b. Capitalized cost of equipment in case the market value of equipment is not determinable:-

i. Bonds having an established market price: In case the equipment is purchased in exchange of the bonds having an established market price, the market value of the bonds issued in exchange of equipment will be the capitalized cost of the equipment.

ii. Common stock not having an established market price: In this case, the capitalized cost of equipment would be the book value of common stock issued in exchange of the equipment. It may include face value of the common stock as well as "Capital in excess of par".

iii. Similar equipment not having a determinable market price: In such case, the capitalized cost of the equipment would be the the book value of the old equipment echanged for the new equipment.

c. Factors determining whether an expenditure on an asset already in use should be capitalized or not:

- Whether an expendture results in the extension or improvement of the equipment. If it rresults in the extension or improvement, it would be capitalized.

- Whether the expenditure increases the earning capacity of the equipment. If it increases the earning capacity, it would be capitalized.

d. Accounting for gain or loss on the sale of property, plant and equipment:

- Loss: If the equipment is sold at a loss, the amount of loss would lead to a decrease in the profits of the company and will be debited to the retained earnings account.

- Profit: There can be two possible situations in this case:-

- Asset is sold at a price more than its book value but less than its historical cost: In such case, any profit on sale of properrty, plant and equipment would increase the profits of the company and will be credited to retained earnings account.

- Asset is sold at a price more than its historical cost: In such case, the part of profit upto the historical cost of the asset would increase the profits of the company and will be credited to the retained earnings account. And the other part of the profit which exceeds the historical cost will be a capital profit to be credited to the capital reserve account.

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