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CFR Notes Chapter 10

Property, plant, and equipment includes long-term tangible assets like land, buildings, machinery, and equipment used in operations rather than for resale. These assets are initially recorded at cost including purchase price and any costs to prepare the asset for use. Land costs include purchase price, closing costs, improvements, and liens. Building costs include materials, labor, permits, and demolition costs less residual value of old buildings. Equipment costs include purchase price, freight, installation, trial runs, and foundations. These assets are depreciated over their useful lives.

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75 views2 pages

CFR Notes Chapter 10

Property, plant, and equipment includes long-term tangible assets like land, buildings, machinery, and equipment used in operations rather than for resale. These assets are initially recorded at cost including purchase price and any costs to prepare the asset for use. Land costs include purchase price, closing costs, improvements, and liens. Building costs include materials, labor, permits, and demolition costs less residual value of old buildings. Equipment costs include purchase price, freight, installation, trial runs, and foundations. These assets are depreciated over their useful lives.

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Haider Malik
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Property, plant, and equipment includes land, building structures (offices, factories, warehouses), and

equipment (machinery, furniture, tools).

1. They are acquired for use in operations and not for resale. (Property, plant, and equipment
held for possible price appreciation are classified as investments)
2. They are long-term in nature and usually depreciated.( Companies allocate the cost of the
investment in these assets to future periods through periodic depreciation charges.)
3. They possess physical substance.( Tangible)

ACQUISITION OF PROPERTY, PLANT, AND EQUIPMENT

 Companies recognize property, plant, and equipment when the cost of the asset can be
measured reliably, and it is probable that the company will obtain future economic benefits. [2]
For example, when Starbucks (USA) purchases coffee makers for its operations, these costs are
reported as an asset because they can be reliably measured and benefit future periods.
However, when Starbucks makes ordinary repairs to its coffee machines, it expenses these costs
because the primary period benefited is only the current period.

1. Purchase price, including import duties and non-refundable purchase taxes, less trade
discounts and rebates. For example, British Airways (GBR) indicates that aircraft are stated at
fair value of the consideration given after offsetting manufacturing credits.
2. Costs attributable to bringing the asset to the location and condition necessary for it to be
used in a manner intended by the company. For example, when Skanska AB (SWE) purchases
heavy machinery from Caterpillar (USA), it capitalizes the costs of purchase, including delivery
costs.

Cost of Land

1. The purchase price;


2. Closing costs, such as title to the land, attorney’s fees, and recording fees
3. Costs incurred in getting the land in condition for its intended use, such as grading, filling,
draining, and clearing
4. Assumption of any liens, mortgages, or encumbrances on the property;
5. Any additional land improvements that have an indefinite life

Special assessments for local improvements, such as pavements, streetlights, sewers, and drainage
systems should be charged as costs to the Land account because they are relatively permanent in
nature, also charge landscaping to land account as well.

It records separately any improvements with limited lives, such as private driveways, walks, fences,
and parking lots, to the Land Improvements account. These costs are depreciated over their
estimated lives.

Generally, land is part of property, plant, and equipment. However, if the major purpose of
acquiring and holding land is speculative, a company more appropriately classifies the land as an
investment. If a real estate concern holds the land for resale, it should classify the land as inventory
Cost of Buildings

(1) Materials, labor, and overhead costs incurred during construction


(2) Professional fees and building permits. Generally, companies contract others to construct their
buildings. Companies consider all costs incurred, from excavation to completion, as part of the
building costs

if a company purchases land with an old building on it, then the cost of demolition less its
residual value is a cost of getting the land ready for its intended use and relates to the land
rather than to the new building

Start-up costs, such as promotional costs related to the building’s opening or operating losses
incurred initially due to low sales, should not be capitalized. Also, general administrative
expenses (such as the cost of the finance department) should not be allocated to the cost of the
building

Cost of Equipment

 The term “equipment” in accounting includes delivery equipment, office equipment, machinery,
furniture and fixtures, furnishings, factory equipment, and similar fixed assets. The cost of such
assets includes the purchase price, freight and handling charges incurred, insurance on the
equipment while in transit, cost of special foundations if required, assembling and installation
costs, and costs of conducting trial runs. Any proceeds from selling any items produced while
bringing the equipment to the location and condition for its intended use (such as samples
produced when testing equipment) should reduce the cost of the equipment. Costs thus include
all expenditures incurred in acquiring the equipment and preparing it for use.

DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT

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