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Property, Plant, and Equipment
¾ These tangible assets are used in the operation of a business.
Determining the Cost of Property, Plant, and Equipment
¾ These tangible assets are recorded at historical cost, in accordance with the cost
principle. All the cost required to make the capital assets are capitalized (recorded as
a capital asset), rather than expensed, because they will provide benefits over future
¾ Cost is measured based on the cash paid or cash equivalent. The cash equivalent price
is the fair market value of the asset given up. Of, if that value is not clearly
determinable, the cash equivalent price is the fair market value of the asset received.
Once cost is established, it becomes the basis of accounting for the asset over its
impairment loss should be recorded.
¾ Property, plant and equipment are often subdivided into four classes: Land, land
improvements, buildings, equipment.
¾ Land ± the cost of land includes the purchase price and other related costs (survey and
legal fees). Recurring costs, like property tax, are expenses against the revenues the
land helps generate. Costs to prepare the land for use should also be accounted for
(clearing, filling, draining).
¾ Land Improvements ± The cost of land is not amortized as it has unlimited useful life.
However, the costs of improving land, such as paving or fencing, can be amortized
and should be recorded separately from land.
¾ Buildings ± all costs related to the purchase, preparation for use, and construction
should be included into the cost of building. Additional fees such as interest or legal
fees are included so long as they are during the process of making the building ready
to be used.
¾ Equipment ± the cost of equipment include purchase price and other related costs (i.e.
freight, insurance, assembly, and installation)
¾ Basket Purchase ± this is when capital assets are purchased as a group for a single
price. Each item should have their individual cost to calculate amortization. Costs are
allocated based on their relative fair market values.
¾ This is the allocation of the cost of a capital asset to expense over its useful life in a
rational and systematic manner. The journal entry is DR to amortization expense and
CR to accumulated amortization. Amortization is a process of cost allocation, not a
process of asset valuation. So, it is possible that the net book value and market value
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