Characteristics of Property, Plant, and Equipment
Assets categorized by a company as property, plant, and equipment must (a) be held for
use in the business and not for investment, (b) have an expected life of more than one
year, and (c) be tangible in nature.
Sometimes these assets are referred to as plant assets,
fixed assets, or operational assets.
A company records assets included in its property, plant, and equipment category initially
at their acquisition cost (historical cost).
The company then allocates the cost of the assets,
other than land, as an expense to the periods in which it consumes the assets and receives
the benefits in order to comply with the matching principle.
This process is called
The major types of assets classified as property, plant, and equipment are
land, buildings, equipment, machinery, furniture and fixtures, leasehold improvements, and
natural resources (also called wasting assets).
Acquisition of Property, Plant, and Equipment
The cost of a company's property, plant, and equipment is the cash outlay or its equivalent
that is necessary to acquire the asset and
put it in operating condition.
This cost includes
the contract price (less any available discounts), freight, assembly, installation, and testing
Costs incurred to obtain the benefits of the asset are capitalized
when they are
recorded as an asset.
The recorded value of land
includes (a) the contract price, (b) the costs of closing the
transaction and obtaining title (such as commissions, options, legal fees, title search,
insurance, and past due taxes), (c) the costs of surveys, and (d) the costs of preparing the
land for its particular use (such as the cost of removing an old building) if such
improvements have an indefinite life.
The costs of land improvements that have a limited
life (such as sidewalks) are separately capitalized and depreciated if the company is
responsible for maintaining them.
If the local government has the responsibility for
maintaining such improvements, then the costs are added to the cost of the land.
land has an unlimited economic life and its residual value is unlikely to be less than its
acquisition cost it generally is not