![]() ![]() All of these costs may be considered ordinary and necessary to get the land ready for its intended use. Also included are site preparation costs like grading and draining, or the cost to raze an old structure. These costs include the cost of the land, title fees, legal fees, survey costs, and zoning fees. When acquiring land, certain costs are ordinary and necessary and should be assigned to Land. On rare occasion, justification for capitalization of very specialized training costs (where the training is company specific and benefits many periods) is made, but this is the exception rather than the rule. The logic is that the training attaches to the employee not the machine, and the employee is not owned by the company. The normal rule is that training costs are expensed. The acquisition of new machinery is oftentimes accompanied by employee training regarding correct operating procedures. Interest capitalization rules are quite complex, and are typically covered in intermediate accounting courses. Such interest related to the period of time during which active construction is ongoing is capitalized. An exception is interest incurred on funds borrowed to finance construction of plant and equipment. Interest paid to finance the purchase of property, plant, and equipment is expensed. The journal entry to record this transaction is: During installation the lathe’s spindle was bent and had to be replaced for $2,000. In addition, Pechlat agreed to pay freight and installation of $5,000. The lathe had a list price of $90,000, but Pechlat negotiated a 10% discount. An example is repair of abnormal damage caused during installation of equipment.Īssume that Pechlat purchased a new lathe. ![]() ![]() These costs should be expensed as incurred. In contrast, other expenditures may arise that are not “ordinary and necessary,” or benefit only the immediate period. These costs are termed capital expenditures and are assigned to an asset account. Such amounts include the purchase price (less any negotiated discounts), permits, freight, ordinary installation, initial setup/calibration/programming, and other normal costs associated with getting the item ready to use. The correct amount of cost to allocate to a productive asset is based on those expenditures that are ordinary and necessary to get the item in place and in condition for its intended use. In the alternative, many companies relegate the preceding level of detail into a note accompanying the financial statements, and instead just report a single number for “property, plant, and equipment, net of accumulated depreciation” on the face of the balance sheet. Other service or intellectual-based businesses may actually have very little to show within this balance sheet category.īelow is an example of a typical PP&E section on the balance sheet: This is the case for firms that have large investments in manufacturing operations or significant real estate holdings. For some businesses, the amount of Property, Plant, & Equipment can be substantial. Land is listed first, followed by buildings, then equipment. Within the PP&E section, items are customarily listed according to expected life. Note that idle facilities and land held for speculation are more appropriately listed in some other category on the balance sheet, such as Long-term Investments. It typically follows Long-term Investments and is oftentimes referred to as “PP&E.” Items appropriately included in this section are the physical assets deployed in the productive operation of the business, like land, buildings, and equipment. Property, Plant, & Equipment is a separate category on a classified balance sheet. Chapter 24: Analytics for Managerial Decision Making.Chapter 23: Reporting to Support Managerial Decisions.Chapter 22: Tools for Enterprise Performance Evaluation.Chapter 21: Budgeting – Planning for Success.Chapter 20: Process Costing and Activity-Based Costing.Chapter 19: Job Costing and Modern Cost Management Systems.Chapter 18: Cost-Volume-Profit and Business Scalability.Chapter 17: Introduction to Managerial Accounting.Chapter 16: Financial Analysis and the Statement of Cash Flows.Chapter 15: Financial Reporting and Concepts.Chapter 14: Corporate Equity Accounting.Chapter 12: Current Liabilities and Employer Obligations.Chapter 11: Advanced PP&E Issues/Natural Resources/Intangibles.Chapter 10: Property, Plant, & Equipment.Chapter 6: Cash and Highly-Liquid Investments.Chapter 5: Special Issues for Merchants.Chapter 1: Welcome to the World of Accounting. ![]()
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