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Property Plant and Equipment

Plant assets, also known as fixed assets or property, plant and equipment, are tangible assets used in business operations that are not intended for resale. Plant assets are classified into land, buildings, equipment, land improvements, and natural resources. An item can be recognized as a plant asset when it is probable future benefits will flow to the company and its cost can be reliably measured. Initial costs include the purchase price and all other expenditures needed to get the asset ready for use, less any discounts. Depreciation is the allocation of the cost of plant assets over their useful lives using methods like straight-line, units-of-production, declining balance, or sum-of-the-years digits.

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20 views2 pages

Property Plant and Equipment

Plant assets, also known as fixed assets or property, plant and equipment, are tangible assets used in business operations that are not intended for resale. Plant assets are classified into land, buildings, equipment, land improvements, and natural resources. An item can be recognized as a plant asset when it is probable future benefits will flow to the company and its cost can be reliably measured. Initial costs include the purchase price and all other expenditures needed to get the asset ready for use, less any discounts. Depreciation is the allocation of the cost of plant assets over their useful lives using methods like straight-line, units-of-production, declining balance, or sum-of-the-years digits.

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dayan
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© © All Rights Reserved
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Accounting for Plant Assets

Definition/Nature: Plant assets or Fixed Assets or Property, plant and equipment– are
tangible in nature, used in the operations of the business and not held for sale in the
ordinary course of the business.

Classification: Plant assets are subdivided into: 1. Land 2. Buildings 3. Equipment


4. Land Improvements 5. Natural resources (mineral deposits)

Recognition: An item of property, plant and equipment should be recognized as an asset


when it is probable that future economic benefits associated with the asset will flow to
the enterprise and the cost of the asset can be measured reliably. Expenditures related to
the acquisition and use of operational assets are either capital or revenue expenditures.

Initial Measurement: The initial cost of a plant asset such as equipment includes all
expenditures necessary to get it in place and ready for use. Cost includes the purchase
price, import duties , sales tax, transportation charges, insurance, and installation costs.
Trade discounts are to be deducted from the purchase price. Capital expenditures are
costs that prolong the usefulness of the asset and are therefore debited to the asset
account. Ex. Repairs and maintenance, betterments that prolong the life and usefulness
of the asset. Revenue expenditures are expenditures that benefit only the current period
and are chargeable to expense accounts.
The cost of constructing a building includes the fees paid to architects and engineers for
plans and supervision, insurance incurred during construction, and all other necessary
expenditures applicable to the project. Interest incurred on money borrowed for the
construction will be charged to Building account.
The cost of land includes not only the negotiated price but also broker’s commissions,
title fees, surveying fees, and other expenditures connected with the securing the title. If
delinquent real taxes are assumed by the buyer, they are also chargeable to the land
account. The cost of leveling, razing down or removal of any unwanted building , less
any salvage recovered, is chargeable to land.
For land improvements, are depreciable site enhancements that are not permanent,
including driveways, parking lots, private roads, fencing and landscaping.
Natural resources include timber tracts, mineral deposits, and oil and gas deposits.

Recording Acquisitions of Property, Plant and Equipment


I. Acquisition by purchase – a. Cash purchase – 1. Individual 2. Lump-sum purchase
b. Purchase on account – 1. with cash discount 2. deferred payments
II. Noncash acquisition- a. Issuance of equity securities b. Donation c. Lease d.
Business combinations III. Acquisition by exchange – a. Exchange of similar assets b.
Exchange of dissimilar assets IV. Self-construction

Nature of depreciation: Depreciation – periodic cost expiration of the plant assets.


With the passage of time, all plant assets with the exception of land lose their capacity to
yield services. Depreciation is the allocation of the cost of plant assets over its useful
life. Four methods of depreciation:
1. Straight-line method – provides for equal periodic charges to expense over the
estimated life of the asset. D = Cost – salvage value/useful life.
2. Units-of-production method – relates depreciation to the estimated productive
capacity of the asset. D=Cost – salvage value/estimated output or hours
3. Declining-balance Method – yields a declining periodic depreciation charge over
the estimated life of the asset. (Double the rate of the straight line method)
4. Sum-of-the-years Digits method – yields results similar to those obtained by use
of the declining balance method.

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