Property, Plant, and Equipment and Intangible Assets Acquisition Part 2

Capitalized cost of goodwill: Fair value of the consideration given in - Fair value of the identifiable net assets acquired exchange for the company (acquisition price) () Fair value of all identifiable tangible and - Fair value of any liabilities of the selling company intangible asset assumed goodwill 1. Acquisition price net asset 2. Net asset = assets (fair value) liability (fair value) Goodwill Goodwill = acquisition cost fair value of net assets = 180 130 = 50 fair value of net assets = fair value of assets liabilities = (50 + 70 + 90 + 40) - 120 Lump-Sum Purchases  Refers to the acquisition of a group of assets for a single sum. Valuation of these assets differs when:   Each asset is indistinguishable o Example: 10 identical delivery trucks purchased for a lump-sum price of $150,000. :1510 Assets have different characteristics and different useful lives: Allocate the lump-sum acquisition price among the separate items. : o Example: Acquisition of a factory that includes assets that are significantly different such as land, building, and equipment. : Lump-Sum Purchases 330,000 2,200,000 = 15% (total) total does not have to equal the lump-sum (2,200,000 > 2,000,000) = % x lump-sum Noncash acquisitions  1. 2. 3. 4.  Companies can also acquire assets without paying cash at the time of the purchase by: Deferred payments (notes payable) () Issuance of equity securities Donated assets Exchange of nonmonetary assets for other assets. Assets acquired in noncash transactions are valued at the fair value of the assets given or the fair value of the assets received, whichever is more clearly evident. () Deferred payments An obligation to make payment in the future: Asset acquired with debtpresent value of note indicative of fair value Noninterest-bearing notefair value of asset is known Issuance of equity securities It can occur when small companies incorporate and the owner or owners contribute assets to the new corporation in exchange for ownership securities. Transactions exchange value either:   The fair value of the assets received by the corporation or, The market value of the shares of corporations whose stock is actively traded. Asset acquired by issuing equity securities if there is not no-par common stock, the par value is $0.0001, issue 500,000 common stock at $10 Cash + 500,000 x $10 Common stock +500,000 x $0.0001 Additional paid-in capital + (cash common stock) Donated Assets    The donation usually is an enticement to do something that benefits the donor. Recorded at their fair values based on either an available market price or an appraisal value Revenue is credited (credit revenuedonation of asset) Donated Assets International Financial reporting standardsgovernment grants U.S. GAAP IFRS Government Grants Both U.S. GAAO and IFRS require that donated assets be valued at their fair values. GAAO Recorded as revenue in the period received Deduct the amount of the grant in determining the initial cost of the asset, or Recorded as revenue in the period received Record the grant as a liability, deferred income, in the balance sheet and recognize it in the income statement systematically over the assets useful life. () Decision Makers perspective Capital budgeting:   Includes decisions pertaining to acquisitions of property, plant, and equipment and intangible assets. Requires management to forecast all future net cash flows generated by the asset(s). Net present value model Present value of future net cash flows > Initial acquisition cost Fixed asset turnover ratio Fixed asset turnover ratio:  Indicates the levels of sales generated by the companys investment in fixed assets Average fixed assets = (beginning book value + ending book value) 2. =+2  The book value, sometimes called carrying value or carrying amount is the cost less accumulated depreciation and depletion. (book value = cost accumulated depreciation depletion) Fixed asset turnover ratio Exchanges  An asset received in an exchange of nonmonetary assets generally is valued at fair value.  Gain or loss is recognized in these transactions for the difference between the fair value and book value of the asset given. Gain/Loss = fair value of asset book value of asset Exchanges The basic steps in recording nonmonetary asset exchanges follow:     Step 1: record the new asset at fair value. Fair value is determined based on the fair value of the asset(s) given up or the fair value of the asset received. In a normal exchange, we expect those two fair values to equal. (fair value of the asset given up = fair value of the asset received) :(=) Step 2: remove the book value of the nonmonetary asset given. Book value equals the recorded cost of the old asset minus its accumulated depreciation. (Book value = cost of old asset accumulated depreciation) :(=-) Step 3: record any cash received or paid. Cash is used to equalize the fair values of the nonmonetary assets in the exchange. (cash = fair value of assets) :(=) Step 4: record any gain or loss. The gain or loss on the exchange equals the difference between fair value and book value of the asset given up in step 2. If fair value is greater, then a gain is recorded. If book value is greater, then a loss is recorded. The gain or loss also can be viewed as the plug that balances debits and credits in the journal entry. (Gain/Loss = fair value of asset book value of asset) :(/=-) Nonmonetary Asset exchange (gain) () new equipment = cash + fair value; Gain/Loss = Fair value Book value Nonmonetary Asset exchange (loss) () Nonmonetary Asset exchange (fair value not determinable) () when fair value is not sure, do not recognize any gain or loss Exchange lacks commercial substance Commercial substance:   present when future cash flows change as a result of the exchange Example: newer models of equipment can increase production or improve manufacturing efficiency causing an increase in revenue or a decrease in operating costs with a corresponding increase in future cash flows. : Exchange lacks commercial substance Gain situation Loss situation Book value of the old asset is used to record Fair value of old asset is used to record the the exchange. exchange (unlikely situation) () Nonmonetary asset exchangeExchange lacks commercial substance