Acquisition and Disposition
of Property, Plant, and Equipment
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
(L.O. 2) Property, plant and equipment are valued in the accounts by most companies at
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
of depreciation is presented in Chapter 11.
Subsequent to acquisition, companies should not write up property, plant, and equipment
to reflect fair value when it is above cost because (a) historical cost involves actual, not
hypothetical, transactions and so is the most reliable and (b) gains and losses should not
be anticipated but should be recognized only when the asset is sold.