1. Plant Assets - Cost Determination

What are plant assets?

Are tangible assets used in a company's operations that have a useful life of more than one accounting period.

What else can plant assets be called?

Plant assets are also called plant and equipment; property, plant and equipment (PP&E); or fixed assets.

What is the first reason plant assets are different from other asset?

Plant assets are used in operations.

For example, A computer purchased to resell is reported on the balance sheet as inventory. If the same computer is used in operations, it is a plant asset.

What is the second reason plant assets are different from other assets?

Plant assets have useful lives extending over more than one accounting period. This makes plant assets different from current assets such as supplies that are normally used up within one period.

Give another example of plant assets.

Another example is land held for expansion, which is reported as long-term investment. Instead, if this land holds a factory used in operations, the land is a plant asset.

What are the four issues that arise in accounting for plant assets?

1. Computing the costs of plant assets.

2. Allocating thee cost of plant assets.

3. Accounting for subsequent expenditures to plant assets.

4. Recording the disposal of plant assets.

Plant assets are recorded at _____ when acquired.

Plant assets are recorded at cost when acquired

What does the cost of plant assets include?

Includes all expenditures necessary to get an asset in place and ready for use.

For example, what might the cost of a machine include?

It could include its invoice cost minus any discount, plus necessary shipping, assembling, installing, and testing costs. Examples of this are the costs of building a base for a machine, installing electrical hookups, and testing the asset before using it in operations.

What must the cost be for it to be recorded as part of the cost of a plant asset?

To be recorded as part of the cost of a plant asset, an expenditure must be normal, reasonable, and necessary in preparing it for its intended use.

If an asset is damaged during unpacking, are repairs added to the cost?

No.

What account are repairs charged to?

To an expense account.

What are the costs to modify or customize a new plant asset added to?

Added to the asset’s cost.

What does the cost of machinery and equipment consist of?

The costs of machinery and equipment consist of all normal and necessary to purchase them and prepare them for their intended use. These include the purchase price, taxes, transportation charges, insurance while in transit, and the installing, assembling, and testing of the machinery and equipment.

What does a building account consist of?

The costs of purchasing or constructing a building that is used in operations.

What does a purchased building’s cost include?

Its purchase price, taxes, title fees, and lawyer fees. Its costs also include any expenditures to ready it for its intended use, including necessary repairs or renovations.

When a company constructs a building or any plant assets for its own use what does the cost include?

its cost include materials and labor plus indirect overhead cost.

What is included in overhead cost?

includes heat, lighting, power, and depreciation on machinery used to construct the asset.

What else does costs of construction include?

Design fees, building permits, and insurance during construction. However, costs such as insurance to cover the asset after it is being used are operating expenses.

What is land how long is its lifespan?

Land is the earth's surface and has an indefinite (unlimited) life.

What do land costs include?

Includes costs necessary to make it ready for its intedned use.

When land is purchased for a building site, what does its cost include?

Includes the total amount paid for the land, including real estate commissions, title insurance fees, legal fees, and any accrued property taxes paid by the purchaser.

What else is included in the cost?

Payments for surveying, clearing, grading, and draining also are included in the cost of land.

Why are government assessments also included in the cost of land?

These assessments are included because they permanently add to the land's value (and are not depreciated as they are not the company's responsibility.)

These costs are included whether incurred at the time of purchase or later, for items such as public records, sewers, and sidewalks.

Review example under Land under Cost Determination for Plant assets.

What is the entry to record cash purchase of land?

debit Land credit Cash

What is a lump-sum purchase?

Plant assets sometimes are purchased as a group in a single transaction for a lump-sum price.

What are other names for lump-sum purchase?

Group, bulk, or basket purchase.

When we do a lump-sum purchase, how do we allocate the cost of the assets acquired?

We allocate the cost of the assets acquired based on their relative market (or appraised) values.

Review example under Lump-Sum Purchase

Review Need-To-Know 10-1