Property, Plant, and Equipment; Natural Resources; and Intangibles
LONG-TERM PRODUCTIVE ASSETS
A. Classifying Long-term Assets
have physical substance. They are usually classified as property,
plant, and equipment (fixed assets). They include:
Land used in operations.
Buildings, fixtures, and equipment used in operations.
Natural resources used in operations.
have no physical substance. These assets give certain rights to the
owner. They are supported by legal documents.
Examples include patents, copyrights, franchises, licenses, and trademarks.
II. MEASURING THE COST OF ACQUISITION AND MAINTENANCE OF
PROPERTY, PLANT, AND EQUIPMENT.
A. Measuring and Recording Acquisition Cost
Under the cost principle, all reasonable and necessary costs incurred to acquire and
prepare an asset for use should be capitalized (added to the asset account)
: the net cash equivalent paid or to be paid for long-lived assets.
Costs to buy the asset include the invoice price, sales taxes, legal fees, and
Setup costs, including special wiring, platforms (such as a concrete
foundations), and other installation costs.
Costs to place the asset in service (to ready it for use) include expenditures for
testing, adjusting, renovating, and complying with safety requirements.
Generally, financing charges associated with the asset are treated as interest
expense (not capitalized).
Include all costs associated with getting the land ready for its intended use
Tearing down old buildings so new one can be built (subtract value of salvaged
Filling in and leveling land in preparation for building
Various means of acquiring
long-lived assets include:
cash is paid at the time of acquisition.
a note is negotiated with the seller or the bank to finance the purchase.
equity or noncash consideration
: when stock or other noncash consideration
is included as part of the purchase price.
The cash-equivalent cost is measured by the current market value of the stock
or non-cash consideration.
If the value of what is given up is not determinable, the current market value
of what is received should be used for measurement purposes.