CHAPTER 10 REVIEW
Chapter 10 presents a discussion of the basic accounting problems
associated with the incurrence of costs related to property, plant, and
equipment; and the accounting methods used to retire or dispose of these
costs. These assets, also referred to as fixed assets, are of a durable nature
and include land, building structures, and equipment. Fixed assets are an
important part of the operations of most business organizations. They provide
the major means of support for the production and/or distribution of a
company’s product or service.
Property, plant, and equipment
possess certain characteristics
that distinguish them from other assets owned by a business enterprise.
These characteristics may be expressed as follows: (a) acquired for use in
operations and not for resale, (b) long-term in nature and usually
depreciated, and (c) possess physical substance. An asset must be used in
the normal business operations to be classified as a fixed asset. These
assets last for a number of years and their costs must be allocated to the
periods which benefit from their use.
Acquisition of Property, Plant, and Equipment
(S.O. 2) Property, plant and equipment are valued in the accounts at their
Historical cost is measured by the cash or cash equivalent
price of obtaining the asset and bringing it to the location and condition
necessary for its intended use. Thus, charges associated with freight costs
and installation are considered a part of the asset’s cost. The process of
allocating the historical cost of property, plant, and equipment to the periods
benefited by those assets is known as
The topic of
depreciation is presented in Chapter 11.
With minor exceptions, use of a method other than historical cost in valuing
property, plant, and equipment represents a departure from generally
accepted accounting principles. This position is justified on the grounds that:
(a) cost reflects fair value on the date of acquisition, (b) historical cost
involves actual, not hypothetical transactions, and (c) gains and losses
should not be anticipated but should be recognized when the asset is sold.
The assets normally classified on the balance sheet as property, plant, and
equipment include land, buildings, and various kinds of machinery and
equipment. The cost of each item includes the acquisition price plus those
expenditures incurred in getting the asset ready for its intended use. In the