Slide 1Noncash AcquisitionsNoncash AcquisitionsExample 5Example 5: ContinuedDispositionsExchangesExample 6Example 6: ContinuedDiscussion QuestionsDiscussion QuestionsExchange Lacks Commercial SubstanceExample 7Example 7: ContinuedExample 7: ContinuedAccounting for ContributionsDiscussion QuestionsDiscussion QuestionsDisposition of PP&EExample 8Example 8: ContinuedDisposition of PP&EE10-25E10-25: ContinuedExample 9Example 9: ContinuedExample 9: ContinuedExample 10Example 9: ContinuedExample 9: ContinuedExample 9: ContinuedCHAPTER 10ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENTSommers – ACCT 3311Noncash AcquisitionsThe asset acquired is recorded at the fair value of the consideration given or the fair value of the asset acquired, whichever is more clearly evident.•Issuance of equity securities•Deferred payments•Donated Assets•ExchangesNoncash AcquisitionsIssuance of Equity Securities•Asset acquired is recorded at the fair value of the asset or the market value of the securities, whichever is more clearly evident.•If the securities are actively traded, market value can be easily determined.•If the securities given are not actively traded, the fair value of the asset received, as determined by appraisal, may be more clearly evident than the fair value of the securities.Donated Assets•On occasion, companies acquire assets through donation.•The receiving company is required to record –The donated asset at fair value.–Revenue equal to the fair value of the donated asset.Example 5On January 1, 2011, Byner Company purchased a used tractor. Byner paid $5,000 down and signed a noninterest-bearing note requiring $25,000 to be paid on December 31, 2013. The fair value of the tractor is not determinable. An interest rate of 10% properly reflects the time value of money for this type of loan agreement. The company’s fiscal year-end is December 31.•Prepare the journal entry to record the acquisition of the tractor.•How much interest expense will the company include in its 2011 and 2012 income statements for this note?•What is the amount of the liability the company will report in its 2011 and 2012 balance sheets for this note?Example 5: ContinuedPrepare the journal entry. How much interest expense will the company include in its 2011 and 2012 income statements for this note?What is the amount of the liability the company will report in its 2011 and 2012 balance sheets for this note?DispositionsSteps:1. Update depreciation to date of disposal.2. Remove original cost of asset and accumulated depreciation from the books.3. Record what you received.4. The difference between book value of the asset and the amount received is recorded as a gain or loss.ExchangesGenerally cost of asset acquired is: –fair value of asset given up plus cash paid or minus cash received or–fair value of asset acquired, if it is more clearly evident•In the exchange of operational assets, fair value is used except in rare situations in which the fair value cannot be determined or the exchange lacks commercial substance.•When fair value cannot be determined or the exchange lacks commercial substance, the asset(s) acquired are valued at the book value of the asset(s) given up, plus (or minus) any cash exchanged. No gain is recognized.Example 6Southern Company owns a building that it leases. The building’s fair value is $1,400,000 and its book value is $800,000 (original cost of $2,000,000 less accumulated depreciation of $1,200,000). Southern exchanges this for another building owned by the Eastern Company. The building’s book value on Eastern’s books is $950,000 (original cost of $1,600,000 less accumulated depreciation of $650,000). Eastern also gives Southern $140,000 to complete the exchange. The exchange has commercial substance for both companies. Prepare the journal entries to record the exchange on the books of Southern.Example 6: ContinuedSouthern Company owns a building that it leases. The building’s fair value is $1,400,000 and its book value is $800,000 (original cost of $2,000,000 less accumulated depreciation of $1,200,000). Southern exchanges this for another building owned by the Eastern Company. The building’s book value on Eastern’s books is $950,000 (original cost of $1,600,000 less accumulated depreciation of $650,000). Eastern also gives Southern $140,000 to complete the exchange. The exchange has commercial substance for both companies. Prepare the journal entries to record the exchange on the books of Eastern.Discussion QuestionsQ10–16 Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for each situation.Discussion QuestionsQ10–16 Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchangelacks commercial substance. Explain to Stan the differences in accounting for each situation.Exchange Lacks Commercial Substance•When exchanges are recorded at fair value, any gain or loss is recognized for the difference between the fair value and book value of the asset(s) given-up. To preclude the possibility of companies engaging in exchanges of appreciated assets solely to be able to recognize gains, fair value can only be used in legitimate exchanges that have commercial substance.A nonmonetary exchange is considered to have commercial substance if the company:1. expects a change in future cash flows as a result of the exchange, and2. that expected change is significant relative to the fair value of the assets exchanged.Example 7The Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the land currently is worth $72,000. Tinsley gave $14,000 in cash to complete the transaction.What is the fair value of the new parcel of land received by Tinsley?Example 7: ContinuedThe Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the land currently is