Mastering Cost of Natural Resources, PP&E, and Intangible Assets, can be done by properly accounting for it. Natural resources are benefits, effective by physical consumption, and costs for it is either determine by a purchase price + cost to transport to location (if purchased), or by DEAR being Development, Exploration, Acquisition, and Restoration Costs (if developed).
Therefore, to help simplify Restoration Costs for instance, consider Asset Retirement Obligations or AROs. Here, you will need to the SRMP accronym, or Scope, Recognition, Measurement, and PV calculations of the ARO.
Things to note are Debiting DEA expenses of DEAR, crediting Cash, and crediting your ARO (adjusted by the weighted average of future cash flows, and the present value of the adjusted weighted average future cash flows).
Then, after debiting accretion expenses, and crediting your ARO, you will then be able to determine the Restoration Cost, and account for it by Debiting the ARO (if a loss debit your loss), and Crediting Cash (if a gain, credit your gain).
Then we get to move onto capitalizing costs for PP&E and Intangible Assets.
Initial cost of equipment can be capitalized and can include purchase price, freight, insurance, project related supplies, and trial runs. For a building you have PARR or purchase price, attorney fees, real estate commissions, or reconditioning costs.
For instance, if you wanted to know a cost of land, remember PARTRAE, or Purchase Price, Attorney Fees, Real Estate Commissions, Title Costs, Recording Fees, any back taxes, mortgages, or Expenditures of removing or restoring buildings. Note that proceeds from a sale of salvaged materials will reduce the cost of land, thus reducing the capitalized amount.
Land Improvements are estimatable, identifiable, and can be capitalized (depreciative over useful life). One more step, until finalizing this part, we can talk about Lump Sum Purchases, which refers to acquisitions of a group of assets. If fair values are identifiable, you may then provide an allocation to the asset, to help determine potential values of an asset if you someone pays below fair value.
For instance, if fair value is at $1M, but you can purchase at 800K, then the group of assets will be re-valued based on allocation percentage, to get to the 800K. Then, you will debit all the assets by the weighted value, and credit cash for 800K. And sometimes, this may give rise to intangible assets, where if it has a finite life, they get amortized.
Let’s say in part of the purchases of a group of assets, there was reputation and certain strategic value props, that required to pay over fair value. This gives rise to Goodwill, in which, represents the difference in purchase price and fair value.
Think about it as it being equal to the difference in fair value of assets minus fair value of liabilities. Therefore, you will debit all the inventory values of the assets, debit goodwill, and then credit the liabilities and cash paid. In relation to Donation assets, donations usually entice an action, that benefits the donor, therefore, it will be recorded at fair value based on market price or appraisal revenue.
Note, that revenue of a donation asset is credited. So, if you buy a building from a town, as a means of relocation, and were given an incentive of 25% of a $40M purchase, you will debit the building for $40M, credit cash $30M (75%), and credit donation of asset revenue by $10M (25%).
And for this final portion, let us discuss Exchanges. Exchanges refers to acquisitions of assets for another asset, in absence of cash. Consider an old asset be traded in for a new asset, and the difference in FAIR VALUE (either paid in cash or other assets) will be the gain or loss recognized. So, if you were to trade in your equipment at a book value of $1M (after accounting for $3M accumulated depreciation) and a fair value of $2M, while paying cash for $1M for a new equipment, you will do the following entry:
Dr. New Equipment at $3M ($2M in fair value + $1M in cash);
Dr. Depreciation $3M;
Cr. Old Equipment $4M;
Cr. Cash 1M;
Cr. Gain $1, where Gain is Fair Value of 2 – Book Value 1 = $1M.
If no cash was involved, new equipment would have been Dr. at $2M, and you would not credit cash. If fair value was not determined, then you would have Dr. New Equipment at $2M (book value + cash) Dr. depreciation at $3M, Cr. Old Equipment at $4M, and Cr. Cash $1M.
Note that exchanges can lack commercial substance, where commercial substance occurs when future cash flows change because of an exchange. So, if there is a lack of commercial substance, a gain situation occurs when book value of an old asset is used to record the exchange, and if there is a loss (highly unlikely), fair value of and old asset is used to record it.
So, you had an old property and you wish to trade it to a new one. Old property is at $1M book, and $2M fair. And the new land was at $3M fair. You decide to pay in cash $1M to match the fair values @$3M, then the entries will be: Dr. New Land $2M (book + Cash Paid), Cr. Old Land $1M, and Cr. Cash of $1M.