10.01 Property, Plant, and Equipment Flashcards
What is property, plant, and equipment?
Property, plant, and equipment (PP&E), also called fixed assets or long-lived assets, are tangible assets acquired for long-term use in the normal course of business. They are not for resale and are generally subject to depreciation. To be included within the PP&E accounts, an asset needs to meet the following conditions: (1) be currently used in operations, (2) have a useful life extending more than one year beyond the balance sheet date, and (3) have physical substance0
What are examples of PP&E accounts?
Plant and Equipment - buildings, machinery, equipment; has a finite useful life
Land - any plot of land; has an indefinite life therefore not depreciated
Land Improvements - parking lot, fencing, lighting; has a finite useful life
Natural Resources - gravel pits, coal mines; will produce income until all resources are extracted and sold
Leasehold Improvements - improvements to leased property; has a finite useful life.
What are the initial capitalized costs of PP&E?
The initial capitalized cost of PP&E includes two components: 1. the acquisition cost and 2. the get-ready costs.
The acquisition cost is either the cash paid for the asset on the acquisition date or the present value of future cash payments if bought on a payment plan. The get-ready costs include all costs incurred to get the asset on the company’s premises and ready for use.
What is a lump-sum purchase?
In a lump-sum purchase, multiple assets are acquired for a single price. If a group of fixed assets (e.g. land with a building) is acquired in a single transaction, the total negotiated price is allocated to the individual assets acquired. This allocation is based on the respective FVs of the individual assets acquired.
When should a cost related to PP&E be capitalized vs expensed?
Expense if the benefits are only for the current period, the amount is immaterial, or the expenditure is for routine maintenance or repair.
Capitalize if the benefits are for the current and future periods, the amount is material, or the expenditure makes the asset improve functionality, make better products or have a longer life.
When a company constructs a fixed asset, what costs should be capitalized?
When a company constructs a fixed assets, costs that are capitalized include the following: direct labor, direct materials, overhead charges, construction period interest.
What three conditions must be met for interest to be capitalized?
- Qualifying expenditures have been made; 2. Activities that are necessary to get the asset ready for its intended use are in progress; 3. Actual interest cost is being incurred.
What is depreciation?
Depreciation is a systematic and rational allocation of capitalized plant asset cost to different reporting periods. The term systematic implies that the allocation is not random but rather is made on an orderly basis. The term rational means that by appealing to the way the asset is used, the process can be supported. The process of depreciation matches the cost of the plant asset to periods in which the asset is used to generate revenue.
What are examples of depreciation methods?
Straight-line; units or production; double declining balance; sum of the years digits.
How does a company recognize the sale or disposal of a fixed asset?
When a company disposes of a fixed asset, it will typically remove the original cost and AD, record any amounts received or due as a result of disposal, and recognize a gain or loss for the difference. The gain or loss is reported in continuing operations as part of other items.
What is impairment of long-lived assets?
Impairment of long-lived assets held for use occurs when the carrying amount of an asset is not recoverable and a write-off is needed.
What are the criteria for determining when an asset is considered held for sale?
There are 6 criteria for determining when an asset is considered held for sale: 1. a plan to sell the component has been committed to by people with the authority to do so; 2. the component is in salable condition and available for immediate sale; 3. action to complete the plan for disposal has been initiated, and a buyer is being actively sought; 4. the sale is probable and expected to be completed and to qualify for recognition within one year; 5. the price at which the component is being marketed is reasonable; 6. it is unlikely that significant changes will be made to the plan or that it will be withdrawn. All criteria must be met for the accounting provisions to apply. Otherwise, the asset is considered in use.
What is a PP&E rollforward?
A PP&E rollforward starts with the beginning balance of PP&E and lists all activity that increased or decreased the account during the period, resulting in the ending balance. The PP&E rollforward includes additions, disposals, depreciation, and any additional adjustments needed to correctly present the PP&E balance in the financial statements.
