F2 M4 PP&E: Cost Basis

property, plant, & equipment (PP&E)

or fixed assets, are assets that are acquired for use in operations and not for resale; expects to use for more than one accounting period (long-term) and are subject to depreciation (expect for land)

land (property)

is a long-term tangible asset acquired for use in operations and recorded at historical cost; shown separately on balance sheet (or notes); not subject to depreciation, unless it’s land improvements to this asset

buildings (plant)

are long-term tangible assets used in business operations, such as factories, warehouses, and offices; are depreciate over their useful life; shown separately on balance sheet (or notes) and are recorded at historical cost

equipment

includes long-term tangible assets used in operations such as machinery, tools, furnitures, etc.; recorded at historical cost and depreciated over its useful life; shown separately on balance sheet (or notes)

accumulated depreciation

a contra-asset account; is the total depreciate expense recorded on a depreciable PP&E asset since it was placed in service; reduces assets carrying value, but not an asset’s original cost account; does not apply to land; when an asset is sold or written off, remove this item along with the original cost

historical cost

is the cash or cash equivalent price paid to acquire a PP&E asset, plus accounts necessary to bring it to the intended location and condition for use is the gross balance in the asset account

donated fixed assets

are recorded at fair market value along with incidental costs incurred (to place asset in service); result in recognition of a gain on the income statement; a debit to fixed asset at fair market value and a credit to gain on nonreciprocal transfer

cost of land

includes all costs necessary to acquire the land and prepare it for its intended use; add purchase price, brokerage commissions, legal, title, recording, & surveying, title insurance, draining, clearing, grading, & filling, costs to raze an existing building, and taxes or other obligations assumed by buyer; subtract salvaged material from demolished building, existing buildings sold, and standing timber or other resources removed

land improvements

are depreciable additions made to land that increase its usefulness, but are separate from the land itself; capitalize these items; add fences, water & sprinkler systems, sidewalks, paving (driveways), landscaping, and lighting; interest costs during construction period should be added to this based on the weighted average of accumulated expenditures

cost of plant

means that cost of a building used in operations; add purchase price, deferred maintenance required to make building usable, alterations & improvements, architect’s fees, construction costs, costs of digging foundation, and construction-period interest when applicable

basket purchase

occurs when land and a building are purchase together for one lump-sum price; allocate the total cost between land and buildings based on their relative appraised fair values

*total cost x (land or building appraised value/total appraised values)

cost of equipment

includes all expenditures directly related to acquiring or constructing the equipment and preparing it for use; add invoice price (less cash and other discounts), freight-in, insurance while in transit or under construction, installation charges, testing & preparation for use, sales & federal excise taxes, and construction-period interest when applicable

capitalize

when it increases the asset’s quantity, quality, usefulness, or useful life; recorded as an asset and depreciated over useful life; additions (A), improvements (I), and replacements (R); examples include extraordinary repairs such as replacing a shingle roof with a luxurious tin roof, extending an asset’s life, land improvements such as sidewalks, etc.

expense

are costs to maintain the asset in its existing condition; examples include ordinary repairs and maintenance such as oil changes in car, normal painting, routine cleaning, fixing a minor problem, etc.

additions (A)

increase the quantity of a fixed asset and are capitalized; a debit to asset (machinery, etc.) and a credit to cash/AP; examples include adding a new building, adding a new production line, etc.

improvements (I)

(betterments), improve the quality of a fixed asset and are capitalized; examples include upgrading equipment to improve performance, etc.

replacements (R)

a new, similar asset is substituted for the old asset and are capitalized; if carry value is known, remove the old asset and its accumulated depreciation, recognize any gain/loss, and capitalize new asset; if carry value is unknown, the asset’s life is extended and there is a debit to accumulated depreciation and a credit to cash/AP for the cost of the replacement (or improvement)

cost to capitalize when company is constructing a fixed asset

direct materials, direct labor, overhead (including any applicable idle plant capacity costs), extraordinary repairs & maintenance, and construction-period interest; for construction period interest, this stops when there are intentional delays (ex: poor market), but continues during ordinary delays (ex: required permit or approval)

construction-period interest

is capitalized as part of the cost of a qualifying fixed asset; based on weighted average of accumulated expenditures (WAAE) as part of the cost of producing fixed assets; applies when expenditures for asset have been made, activities to prepare asset for intended use are underway and company is incurring interest costs (ex: land improvements, made internally, and made for resale)

weighted-average accumulated expenditures (WAAE)

is the average amount invested in a construction project during the period, weighted by how long each expenditure was outstanding

*sum of → (expenditures in total x (months outstanding, or % rate per month/12))

interest rates on a company constructing fixed assets

for a specific construction loan, apply its interest rate to the WAAE financed by that loan, up to the loan amount; if accumulated expenditures exceed the specific construction loan, applying the weighted-average interest rate on the company’s other debt (borrowings) to the excess (different from loan interest rate); only capitalize this during the construction period, any remaining of this is expensed

avoidable interest (capitalized)

only capitalize interest on money spent, not on the total amount borrowed

*(WAAE financed by specific loan x specific rate) + (excess WAAE x weighted-average rate on other debt) = capitalized interest (with exceptions)

actual interest costs

are the total interest expense the company incurs on all of its borrowings during the construction period; total capitalized interest costs for any particular period may not exceed this (if so, them the remaining is expensed); capitalize interest is the lower of the actual interest cost incurred or computed capitalized interest (avoidable interest)

interest income does not reduce capitalized interest

interest earned by temporarily investing in unused construction loan proceeds is accounted for separately (interest income) and is not subtracted from interest eligible for capitalization

disclosure of items in constructing a fixed asset

total interest cost incurred during the period and capitalized interest cost for the period (if any)

weighted average interest rate

*((face value 1/total value) x % interest) + ((face value 2/total value) x % interest) = capitalized interest rate