8.5 Accounting for Acquisition of Long-Lived Assets

Lump Sum Purchase of Plant Property and Equipment (Group Purchase)

  • Occurs when several fixed assets are acquired for a single lump sum price.
  • The lump sum price might be lower than the sum of the individual asset prices.
  • Requires allocating a portion of the lump sum purchase price to each individual asset acquired.
  • Allocation is based on the relative fair values or assessed values of the assets using a proportional method (weighted average of fair values).

Proportional Method

  • Each asset is valued according to the ratio of its individual fair value to the total fair value of the entire group of assets purchased.
Example: Pitchfork Company Acquires Plant Assets
  • Pitchfork Company acquired plant assets of Wildcat Company for 2,100,0002,100,000 cash.
  • Fair values:
    • Land: 400,000400,000
    • Building: 1,200,0001,200,000
    • Machinery: 800,000800,000
  • Total fair value: 2,400,0002,400,000
  • Allocation:
    • Land: 400,0002,400,000≈16.67%\frac{400,000}{2,400,000} \approx 16.67\%. Thus, 0.1667 \times 2,100,000 = $350,000
    • Building: 1,200,0002,400,000=50%\frac{1,200,000}{2,400,000} = 50\%. Thus, 0.50 \times 2,100,000 = $1,050,000
    • Equipment: 800,0002,400,000≈13\frac{800,000}{2,400,000} \approx \frac{1}{3}. Thus, \frac{1}{3} \times 2,100,000 = $700,000
  • Journal Entry:
    • Debit Land: 350,000350,000
    • Debit Building: 1,050,0001,050,000
    • Debit Equipment: 700,000700,000
    • Credit Cash: 2,100,0002,100,000

Acquisition of Plant Assets by Issuing Shares of Stock

  • Assets are recorded at either:
    • The fair value of the asset being received (if the cash selling price is known and most reliable).
    • The fair value of the stock being issued (if the stock's trading price is more objective and reliable).
  • If the company is publicly held and the shares are actively traded, the fair value of the stock is typically more reliable.
  • If the stock is not publicly traded, the fair value of the asset is the more reliable measure.

Example: Sparky Company Issues Stock for Land

  • Sparky Company issued 13,000 shares of common stock (par value of 5050 per share) in exchange for land.
  • Land appraised at 810,000810,000. Stock traded at 6060 per share on the New York Stock Exchange.
  • Since the stock is actively traded, the fair value of the stock is used to value the land.
  • Fair value of land: 13,000 \text{ shares } \times $60 \text{/share } = $780,000
  • Journal Entry:
    • Debit Land: 780,000780,000
    • Credit Common Stock: 13,000 \text{ shares } \times $50 \text{/share } = $650,000
    • Credit Additional Paid-in Capital: 13,000 \text{ shares } \times ($60 - $50) = $130,000
  • If the stock is not actively traded:
    • Debit Land: 810,000810,000
    • Credit Common Stock: 650,000650,000
    • Credit Additional Paid-in Capital: 810,000 - $650,000 = $160,000

Acquisition of Plant Assets Through Donation

  • Assets are sometimes donated to companies as an incentive to locate in a local community.
  • Fixed assets received as a contribution are recognized at the fair value of the asset being received.
  • The company debits the asset at its fair value and credits contribution revenue.

Example: Land Donated to Sparky's Sustainable Enterprises

  • The Phoenix Economic Development Council donated land with a fair value of 200,000200,000 to Sparky's Sustainable Enterprises.
  • Journal Entry:
    • Debit Land: 200,000200,000
    • Credit Contribution Revenue: 200,000200,000