Chapter 10 Property, Plant, and Equipment and Intangible Assets: Acquisition

Vocabulary flashcards covering key concepts related to property, plant, and equipment and intangible assets, acquisition costs, and related accounting treatments.

Property, Plant, and Equipment (PPE)

Long-lived, revenue-producing assets used in operations (e.g., land, buildings, machinery, equipment, vehicles, furniture, and fixtures).

Land

Real property used in operations; capitalized cost includes purchase price, closing costs, back taxes, liens, and other expenditures; salvage proceeds reduce cost.

Land improvements

Enhancements to land (parking lots, driveways, fences, landscaping, sprinklers) that are separately identifiable and depreciated.

Buildings

Structures used in operations (warehouses, factories, offices); cost includes purchase price, commissions, attorney fees, and reconditioning.

Equipment

Broad category including machinery, computers, vehicles, furniture; capitalized costs include purchase price, transportation, installation, testing, and related fees.

Natural resources

Productive assets that are physically consumed (timber, minerals, oil and gas); costs include acquisition, exploration, development, and restoration.

Intangible assets

Assets with no physical substance; finite-lived intangibles are amortized; indefinite-lived intangibles (e.g., goodwill) are not amortized but tested for impairment.

Patents

Exclusive 20-year right to manufacture or use a process; amortized over finite useful life.

Copyrights

Exclusive right to benefit from a creative work; generally life of creator plus 70 years; amortized over useful life.

Trademarks

Exclusive right to display a name, slogan, or symbol identifying a company/product; typically renewed every 10 years with USPTO.

Franchises

Contractual right granting an exclusive right to use a franchisor’s trademark or product rights; franchise fees and related costs are capitalized over the life of the franchise.

Goodwill

The excess of the purchase price over the fair value of identifiable net assets; not separable, not amortized, and tested for impairment.

Acquisition costs

All expenditures to bring an asset to its condition and location for use (purchase price, taxes, transportation, installation, testing, legal fees).

Capitalized cost

Initial amount recorded as an asset, including all expenditures necessary to bring the asset to use; depreciated or amortized over time.

Cost of land

Total cost to acquire land and prepare it for use (purchase price, closing costs, commissions, back taxes, clearing/removal costs); salvage of materials reduces cost.

Land improvements cost

Costs of improving land that are capitalized and depreciated (parking areas, driveways, fences, landscaping, sprinklers).

Cost of buildings

Costs to acquire and prepare the building for use (purchase price, realtor commissions, legal fees, reconditioning, remodeling).

Cost of natural resources

Costs to acquire or develop natural resources (acquisition, exploration, development, restoration).

Intangible assets and their acquisition costs

Costs of acquiring finite-lived intangibles (patents, copyrights, trademarks, franchises, software) and related development costs; include purchase price and legal/filing fees.

Initial valuation

Purchase price plus all expenditures necessary to bring the asset to its desired condition and location for use.

Asset Retirement Obligation (ARO)

A legal obligation to retire a tangible long-lived asset; recognized as a liability at fair value and added to the asset’s capitalized cost.

Present value

Value today of future cash outflows, calculated using a discount rate; used to measure expected restoration costs and other obligations.

Fair value

Current price that would be received to sell an asset or paid to transfer a liability in an orderly transaction.

Lump-sum purchases

Acquisition of multiple assets for one sum; allocate the price among assets using relative fair values (relative fair value method).

Noncash acquisitions

Acquisitions of assets without cash (notes payable, equity securities, donations); assets are valued at the fair value of the asset given or received.

Deferred payments (notes payable)

Asset acquisition by promising future payment; recorded at present value; interest expense recognized over time.

Nonmonetary asset exchange

Exchange of assets without cash; record new asset at fair value, remove old asset at book value, adjust for cash moved, and recognize gain or loss.

Exchange with/without commercial substance

If future cash flows change due to the exchange (commercial substance), recognize gains; if not (lacks commercial substance), typically no gain is recognized and the asset is recorded at BV plus any cash involved.

Start-up costs

Costs to organize a new entity (legal and filing fees); expensed in the period incurred.

R&D costs

Costs related to research (expensed as incurred) and development (may be capitalized if criteria are met); direct costs to secure patents are capitalized.

Internal-use software costs

Preliminary project costs expensed; costs during application/development stage capitalized as intangible assets.

Cloud computing costs

Treated as an intangible asset if the customer can take possession and run the software; otherwise expensed as incurred.

Donated assets

Assets donated to a company; recorded at fair value; revenue recognized from the donation.

Government grants (GAAP vs IFRS)

Donations of assets valued at fair value; recognized as revenue or deferred income and recognized systematically over the asset’s life.

Fixed-Asset Turnover Ratio

Net sales divided by average PP&E (beginning plus ending book values divided by 2); measures how efficiently fixed assets generate sales.

Net present value (NPV) model

Present value of future net cash flows compared with initial acquisition cost to assess whether to acquire an asset.

Overhead allocation for self-constructed assets

Allocating overhead costs to construction projects; full-cost (full-costing) method is generally used for self-constructed assets.

Oil and gas accounting methods

Exploration costs: Successful efforts (expensing dry holes) vs Full-cost method (capitalizing all exploration costs and expensing as oil/gas is produced).