PROPERTY, PLANT & EQUIPMENT (PPE)

NATURE OF PPE
Characteristics:
1.
Tangible
2.
Long-lived
3.
Used in the business
4.
Not held for resale
Classification of PPE:
1. Land
2. Building
3. Equipment
4. Machinery
5. Furniture and Fixtures
6. Land Improvements
PPE Recognition:
PPE should be recognized as an asset when the following conditions are all present:
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
Initially, measure and recognize PPE at cost
Initial costs of Plant Assets:
Include all normal, reasonable, and necessary expenditures to obtain the asset and get it
ready for use.
Include the repair and maintenance costs for assets that a business acquired in used or
damaged form.
Cash discount should be deducted, taken or not taken.
Costs not capitalized:

Interest on debt incurred to purchase plant assets

The cost of training employees to use plant assets
Annual property taxes and insurance costs
Do not include cost of waste or inefficiency, unnecessary expenditures resulting from
carelessness, vandalism or other abnormal causes. These expenditures that result from
accidents, neglect, intentional abuse, and theft are recognized as losses.

Cost of Land
1. Purchase price
2. Legal fees and other expenditures for establishing clean title

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3. Cost of relocation or reconstruction or property belonging to others in order to

acquire possession
4. Brokers commission
5. Fees for registration and transfer of title
6. Surveying fees
7. Mortgages, encumbrances and interest on such mortgages assumed by buyer
8. Delinquent real estate taxes assumed by buyer
9. Razing or removing unwanted buildings, less any salvage value (if the building has
no fair/assessed value)
10. Grading and leveling
11. Payments to tenants to induce them to vacate the premises
12. Special assessments for paving a public street bordering the land including
sidewalks, sewers, waterlines and streetlights.
Cost of Building
If acquired
1. Purchase price
2. Realtor commissions
3. Legal fees and other expenses incurred in connection with the purchase
4. Reconditioning, renovation and remodeling costs to put a building in a condition
suitable for its intended use.
5. Interest, liens and other encumbrances on the building assumed by the buyer
6. Payments to tenants to induce them to vacate the building
If constructed
1. Architect fees
2. Engineer fees
3. Insurance costs incurred during construction
4. Construction costs (labor, materials and overhead)
5. Excavation costs
6. Interest on money borrowed to finance construction
7. Walkways to and around the building
8. Permits from government agencies
9. Costs of temporary buildings used as construction offices and tools or materials
shed.
10. Cost to demolish old building (less any salvage value) for new building construction.
Cost of Machinery, Equipment, Furniture and Fixtures
1.
2.
3.
4.
5.
6.
7.
8.

Purchase price (net of trade and cash discounts)

Freight, handling, storage and other cost related to the acquisition.
Insurance while in transit
Installation cost, including site preparation and assembling
Cost of testing and trial runs for use
Modifying for use
Repairs (purchase of used equipment)
Reconditioning (purchase of used equipment)

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Cost Land improvements

1.
2.
3.
4.
5.

Landscaping
Paving parking lots
On-property sidewalks
Light structures (for parking and sidewalks)
Fencing

NATURE OF DEPRECIATION
Depreciation is the process of allocating the depreciable amount of an asset over its
useful life in a systematic and rational manner.
Two categories:
1. Physical depreciation wear and deterioration
2. Functional depreciation inadequacy and obsolescence
Factors to be considered in computing periodic depreciation:
1. Cost
2. Salvage value or residual value or scrap value
3. Estimated useful life
Important notes:
Depreciation should begin when an asset is available for use.
Depreciation does not cease when the asset becomes idle or is retired from active
use unless the asset is fully depreciated.
PPE that are classified as held for sale shall not be depreciated.
o PPE classified as held for sale must be presented separately on the face of the
balance sheet.
Pro-forma entry:
Depreciation expense
xxx
Accumulated Depreciation

xxx

CAPITAL AND REVENUE EXPENDITURES

Capital expenditures
Those that are chargeable to asset account.
Increase in the capacity of the asset
Extension of useful life
Improvement of the quality of output
Increase in the assets efficiency

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Revenue expenditures
Those that are chargeable to expense account
Normal repairs and maintenance on PPE
Expenditures that result from accidents, neglect, intentional abuse, and theft are
recognized as losses.
PPE RETIREMENT AND DISPOSAL
An item of PPE should be eliminated from the statement of financial position on disposal or
when the asset is permanently withdrawn from use and no future economic benefit are
expected from its disposal.
Loss on sale = Carrying value of the PPE sold > Cash proceeds from sale
Gain on sale = Carrying value of the PPE sold < Cash proceeds from sale
Pro-forma entry:
Cash
xxx
Accumulated Depreciation xxx
PPE
Gain on Sale

xxx
xxx

OR
Cash
xxx
Accumulated Depreciation xxx
Loss on Sale
xxx
PPE

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