Mastering Cost of Natural Resources, PP&E, and Intangible Assets, can be done by properly accounting for it. Natural resource are benefits upon physical consumption and determined by (Purchase price + cost to transport) or by DEAR (Development, Exploration, Acquisition, and Restoration if developed). For Restoration, consider Asset Retirement Obligations or AROs. To help with AROs, consider SRMP being Scope, Recognition, Measurement, and PV Calculations to determine ARO.
Note that the entries for AROs will be the need to debit DEA of DEAR, Credit Cash, and Credit ARO after adjusting for the PV of the Weighted Average future cash flows). You will need to Dr. Accretion Expenses of the PV of the Restoration Cash Flows, if financing Restoration Costs, and Cr. the AROs.
Once full expense is going to be known and paid out, you will Debit ARO (and if there is a loss, the loss), while Cr. Cash (if there is a gain, then CR. Gain).
In relation to capitalizing costs for PP&E and intangible assets, equipment can be capitalized using Purchase Price, Freight, Insurance, Project Related Expenses, and Trial Runs. For building PP&E, you will have PARR being Purchase Price, Attorney fees, Real Estate Commissions, and Reconditioning Costs.
A cost of land, you can consider PARTRAE being Purchase Price, Attorney Fees, Real Estate Commissions, Title Costs, Recording Fees, Any Back Taxes, mortgages, or liens and Expenditures of removing, restoring, filling, and etc. associated. Proceeds from salvaged materials however, will reduce the cost of land and capitalized amount.
For land improvements, they are estimatable, identifiable, and can be capitalized over a depreciated useful life. Lump sum purchases refer to acquisitions of a group of assets: If Fair Value (“FV”) identifiable, then provide allocation to determine potential values of an asset. Use individual asset weights of FV to determine potential adjustment in determining asset selling price.
Goodwill will equal FV assets – FV liabilities, where Dr. of assets, Dr. Goodwill, and Cr. Cash. Donation Assets will be Dr. Building/Asset, Cr. Cash – Donation of Asset REVENUE, and Cr. Donation of Asset REVENUE.
In Exchanges, it is important to note the entries when trying to match FVs. Gains or losses will be determined by FV – BV of asset sold. Dr. New Equipment, Depreciation, and potential. Losses Cr. Old equipment, Cash, and potential gains. If a lack of commercial substance exists, a gain occurs if BV is used to record exchange, and FV if loss is used (this is unlikely).
Now, let us discuss Self Constructed Assets. A corporation may decide to construct an asset rather than buying an existing one, therefore, it is necessary to account for (i) determining the amount of indirect OH to be allocated to construction and (ii) deciding proper treatment of interest. OH allocation should include the “incremental costs only” and should take a “full cost” (aka as absorption costing) approach. Interest Capitalization implications include Qualifying Assets, Periods of Capitalization, and Average Accumulated Expenditures.
To calculate and determine, the three steps used are Determining Weighted Average Accumulated Expenditures, Calculating the amount of interest to be capitalized, and comparing calculated interest with actual interest (selecting the lower amount of both).
In PP&E, it is critical to discuss R&D, where Research is the planned search in help developing a new product or service or process to improve an existing product, service, or innovate and Development is the translation of research findings. Costs relevant to R&D projects include SAMS (Salaries/Wages/Labor to R&D, A Reasonable allocation of indirect costs, Materials Consumed/Equipment/Facilities/Intangibles for R&D projects, and Services performed by others).
Assets purchased for one single R&D project is expensed immediately, while purchased for multiple R&D projects are depreciated over a useful life. In relation to the timelines, costs incurred at the start of R&D activity are R&D costs (lab research, searching new applications, design for prototypes, and modification during initial process), while after it crosses the line of commercial production, it no longer consists of R&D costs (Engineering in early production phase, Quality control during commercial production, routine to improve existing product during production, adaption for consumers for continuing commercial activity).
So, R&D Salaries and Wages are Dr. R&D Expenses and Cr. Cash.
Supplies consumed will Dr. R&D expense, and Cr. Cash.
Purchase of R&D equipment will Dr. Equipment, and Cr. Cash.
Patent filing will Dr. Patent and Cr. Cash.
Payment for other services will Dr. R&D expense and Cr. Cash.
R&D performed by others will be capitalized as inventory and startup costs will be incurred in the period it was incurred. For Software and Development Costs, amortization of software development being when the product is available for release. R&D expenses is done at the start, cost capitalization is during the span of determining technological feasibility and date of product release, while afterwards it ceases to be R&D.
Development costs can be determined by a straight-line method or a percentage of revenue method. If you can capitalize $1M in costs between tech feasibility and production state, and first year sale was $10M and you anticipate to make $40M in five years, you can do the following:
(1) Capitalize 25% (10M / 40M), which means $250 costs, or
(2) capitalize 20% straight line (1 of five years) at $200K.
Last quick note on R&D is if you have developed technology that you purchased, you will capitalize FV as a finite-life asset and amortize it accordingly, while in process R&D will capitalize FV as an indefinite life intangible asset (where R&D costs incurred after the acquisition are expensed as incurred).