Chapter 9: Reporting and Analyzing Long-Lived Assets
Notes From Video(s)
Learning Objective 1: Explain the Accounting for Plant Asset Expenditures
Plant Asset Expenditures
- Resources that have three characteristics
→ Physical substance
→ Used in the operations of the business
→ Are not intended for sale to customers
- Expected to be of use to the company for a number of years
- Also called:
→ Property, plant, and equipment
→ Plant and equipment
→ Fixed assets
- Experience a decline in service potential over their useful lives (land excluded)
Determining the Cost of Plant Assets
• Based on the historical cost principle
o Historical cost principle requires that companies record plant assets at cost
• Cost consists of all expenditures necessary to acquire an asset and make it ready
for its intended use
• Cost is measured by the cash paid or by the cash equivalent price
o The cash equivalent price is equal to the fair value of the asset given up or
the fair value of the asset received, whichever is more clearly determinable
• Once the cost is established, it remains the basis of accounting for the plant asset
over its useful life
o *Current fair value is not used to increase the recorded cost after acquisition
o
Land
- Companies increase the “Land” account for all necessary cost incurred for making
the land ready for its intended use
o “Cost” included all necessary cost incurred in making land ready for its
intended use. This can include:
▪ Cash purchase price
▪ Closing costs such as title and attorney’s fees
, ▪ Real estate brokers’ commissions
▪ Accrued property taxes and other liens on land assumed by
purchaser
▪ Clearing, draining, filling, and grading (if vacant land is purchased)
▪ All demolition and removal costs (if any building is torn down), less
any proceeds from salvaged materials
▪ Even if the fair value of the land increases after acquisition, the
company will not increase the land’s recorded costs
Land Improvements
- =structural additions that are made to land
o Includes all expenditures necessary to make the improvements ready for
their intended use
- Unlike land, land improvements have limited useful lives
o As such, they are depreciated over useful lives as they will eventually need
replacement
- Examples:
o Driveways, parking lots, fences, and underground sprinklers
Buildings
• = facilities used in operations
o Includes:
▪ Stores
▪ Offices
▪ Factories
▪ Warehouses
▪ Airplane hangars
• All necessary expenditures related to the purchase or construction to make the
facility ready for its intended use are charged to the building account
• Cost included as Buildings
o Purchase price, Closing costs (eg. Attorney's fees, title insurance) and real
estate broker’s commission
o Remodeling and replacing or repairing the roof, floors, electrical wiring, and
plumbing
Construction Cost of Buildings
• All expenditures related to the purchase or construction
o Contract price, architects’ fees, building permits, excavation costs
, o Interest costs incurred to finance the project when a significant period of
time is required to get the building ready for use
▪ Limited to interest costs incurred during the construction period
• Included in Building costs
Equipment
• = assets used in operations, such as check-out counters, office furniture, factory
machinery, computer, printers, delivery trucks
• Cost includes:
o Cash purchase price
o Sales taxes
o Freight charges
o Insurance during transit paid by purchaser
o Expenditures for assembling, installing, and testing
Expenditures During Useful Life
• Classified as either Revenue or Capital expenditures
o Revenue expenditures
→ Also called ordinary repairs
→ Usually small amount that occur frequently
→ Expenditures to maintain the operating efficiency and productive life
of an asset
→ Debited to Maintenance and Repairs Expense account
→ Ex:
•Motor tune-ups and oil changes, painting of buildings, and
replacing of worn-out gears on machinery
o Capital expenditures
→ Additions and improvements
• Costs incurred to increase the operating efficiency, productive
capacity, or useful life of a plant asset
• increase the company’s investment in productive facilities
→ Usually material in amount
→ Occur infrequently
→ Debited to the plant asset account affected
Materiality
→ Refers to the impact of an item on a company’s financial operations
Notes From Video(s)
Learning Objective 1: Explain the Accounting for Plant Asset Expenditures
Plant Asset Expenditures
- Resources that have three characteristics
→ Physical substance
→ Used in the operations of the business
→ Are not intended for sale to customers
- Expected to be of use to the company for a number of years
- Also called:
→ Property, plant, and equipment
→ Plant and equipment
→ Fixed assets
- Experience a decline in service potential over their useful lives (land excluded)
Determining the Cost of Plant Assets
• Based on the historical cost principle
o Historical cost principle requires that companies record plant assets at cost
• Cost consists of all expenditures necessary to acquire an asset and make it ready
for its intended use
• Cost is measured by the cash paid or by the cash equivalent price
o The cash equivalent price is equal to the fair value of the asset given up or
the fair value of the asset received, whichever is more clearly determinable
• Once the cost is established, it remains the basis of accounting for the plant asset
over its useful life
o *Current fair value is not used to increase the recorded cost after acquisition
o
Land
- Companies increase the “Land” account for all necessary cost incurred for making
the land ready for its intended use
o “Cost” included all necessary cost incurred in making land ready for its
intended use. This can include:
▪ Cash purchase price
▪ Closing costs such as title and attorney’s fees
, ▪ Real estate brokers’ commissions
▪ Accrued property taxes and other liens on land assumed by
purchaser
▪ Clearing, draining, filling, and grading (if vacant land is purchased)
▪ All demolition and removal costs (if any building is torn down), less
any proceeds from salvaged materials
▪ Even if the fair value of the land increases after acquisition, the
company will not increase the land’s recorded costs
Land Improvements
- =structural additions that are made to land
o Includes all expenditures necessary to make the improvements ready for
their intended use
- Unlike land, land improvements have limited useful lives
o As such, they are depreciated over useful lives as they will eventually need
replacement
- Examples:
o Driveways, parking lots, fences, and underground sprinklers
Buildings
• = facilities used in operations
o Includes:
▪ Stores
▪ Offices
▪ Factories
▪ Warehouses
▪ Airplane hangars
• All necessary expenditures related to the purchase or construction to make the
facility ready for its intended use are charged to the building account
• Cost included as Buildings
o Purchase price, Closing costs (eg. Attorney's fees, title insurance) and real
estate broker’s commission
o Remodeling and replacing or repairing the roof, floors, electrical wiring, and
plumbing
Construction Cost of Buildings
• All expenditures related to the purchase or construction
o Contract price, architects’ fees, building permits, excavation costs
, o Interest costs incurred to finance the project when a significant period of
time is required to get the building ready for use
▪ Limited to interest costs incurred during the construction period
• Included in Building costs
Equipment
• = assets used in operations, such as check-out counters, office furniture, factory
machinery, computer, printers, delivery trucks
• Cost includes:
o Cash purchase price
o Sales taxes
o Freight charges
o Insurance during transit paid by purchaser
o Expenditures for assembling, installing, and testing
Expenditures During Useful Life
• Classified as either Revenue or Capital expenditures
o Revenue expenditures
→ Also called ordinary repairs
→ Usually small amount that occur frequently
→ Expenditures to maintain the operating efficiency and productive life
of an asset
→ Debited to Maintenance and Repairs Expense account
→ Ex:
•Motor tune-ups and oil changes, painting of buildings, and
replacing of worn-out gears on machinery
o Capital expenditures
→ Additions and improvements
• Costs incurred to increase the operating efficiency, productive
capacity, or useful life of a plant asset
• increase the company’s investment in productive facilities
→ Usually material in amount
→ Occur infrequently
→ Debited to the plant asset account affected
Materiality
→ Refers to the impact of an item on a company’s financial operations
