Property, Plant, and Equipment (PPE) Classification

Property, Plant, and Equipment (PPE)

• Consists of five types: Land, Buildings, Equipment/Machinery, Furniture and Fixtures, and Land Improvements
• Two conditions necessary to recognize PPE items as assets: • Probable future economic benefits associated with the asset will flow to the enterprise • The cost of the asset can be measured reliably

Measurement of PPE

• Measured at cost, which includes: • Purchase price after deducting trade and cash discounts (net method) • Additional costs of bringing the asset to working condition, such as freight, insurance, installation cost, and testing fees

Initial Cost of PPE

• Additional costs incurred after initial recognition of PPE are either capitalized or expensed

Subsequent Costs of PPE

• Subsequent costs incurred are added to the existing cost of the PPE (capitalized) if the costs: • Extend the useful life of the asset • Increase the capacity of the asset • Substantially improve output quality • Result in substantial reduction in operating cost
• Subsequent costs that are capitalized include: • Additions • Improvements or Betterments • Replacements of major parts
• Subsequent costs that are expensed include: • Costs that only maintain a given level of services • Costs that benefit only the current period • Replacements of minor parts • Rearrangement

Major Types of Subsequent Expenditures

• Ways of Acquiring Plant Assets: • Lump-sum (Basket) Purchase • Deferred Payment (Purchase on Account) • Issuance of shares of stock • Exchanges (with commercial substance or no commercial substance)

Lump-sum (Basket) Purchase

• Acquisition of two or more assets for a lump-sum cost, which is allocated among the assets purchased using their relative (proportionate) fair market values

Deferred Payment (Purchase on Account)

• Buyer issues a note payable for the amount and pays the account in installments
• Cost of the asset is the cash price if given, or the present value of the installment plus any down payment made if cash price is not given

Issuance of shares of stock

• Order of priority in recording the cost of the asset: • Fair value of the asset received • Fair value of the shares issued • Par value of the shares issued

Exchanges

• An exchange has commercial substance when there is a gain or loss that results from the exchange
• Cost of the asset received or acquired is measured at the fair value of the asset given, plus cash paid, if payor, or minus the cash received, if recipient
• If an exchange lacks commercial substance, the cost of the asset acquired is measured at the carrying value of the asset given plus cash paid, if payor or minus cash received, if recipient