Principles of Accounting For Long-term Assets

Accounting for long-term assets 1. Plant assets a. Tangible assets used in a company’s operations that have a useful life of more than one accounting period b. The plant assets are also known as the plant and equipment; property, plant and equipment (PP&E); or fixed assets. 2. What is the cost? a. All normal and reasonable expenditures are necessary to get an asset in place and ready for its intended use. b. Ex. cost of the machine, cost minus any discounts, shipping, assembling, installing, testing costs, etc. c. Costs to modify or customize a plant asset however added to the asset’s cost. d. If an asset is damaged during unpacking, the repairs are not added to its cost. Instead, it will be charged to the expense account. 3. What is included in the plant asset? a. Machinery and Equipment b. Buildings c. Land improvements d. Land e. Lump-Sum Purchase 4. Machinery and Equipment a. The costs of machinery and equipment consist of all costs normal and necessary to purchase them and prepare them for the intended use. b. This includes the purchase price, taxes, transportation charges, insurance while in transit, and installing, assembling, and testing of machinery. 5. Buildings a. The building account consists of purchasing and constructing a building that is used in operations. b. Includes purchase price, taxes, title fees, and lawyer fees + expenditures needed for its intended use: repairs and renovations. c. However, the cost such as insurance to cover the assets after is considered operating expenses. 6. Land Improvements a. Assets that increase the benefits of land, have a limited useful life and are depreciated b. Ex. Parking lots, driveways, walkways, fences, and lighting features 7. Land a. All costs necessary to make it ready for the intended use. Ex. real estate commissions, title insurance fees, legal fees, government assessments, removing unwanted structures, and any other property taxes. b. Example of purchase of land entry: 8. Lump-Sum Purchase: also known as lump-sum purchase, group, bulk, or basket purchase a. This occurs when several assets are acquired for a single price. b. Each of the assets must be recorded separately as a fixed asset in the accounting records; to do so, the purchase price is allocated among the various acquired assets based on their relative market value c. Example: 9. Depreciation a. Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset b. How to determine the depreciation: i. Cost, salvage value, and useful life 1. Cost- consists of all necessary and reasonable expenditures to acquire it and to prepare it for its intended use. c. d. e. f. 2. Salvage Value - also called residual value or scrap value, is an estimate of the asset's value at the end of its useful life. 3. Useful Life- Length of time an asset will be productively used in the operations of a business; also called service life or limited life Inadequacy vs Obsolescence i. Inadequacy: Condition in which the capacity of plant assets is too small to meet the company’s production demands ii. Obsolescence: Condition in which, because of new inventions and improvements, a plant asset can no longer be used to produce goods or services with a competitive advantage Straight-line depreciation i. A method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life. Units-of-production depreciation i. The method charges a varying amount to depreciation expense for each period of an asset’s useful life depending on its usage. 1. First, calculate Depreciation per Unit = (Cost- Salvage Value) / Total Estimated Production Unit. 2. Then, use the formula Depreciation Expense = Depreciation Rate per Unit × unit Produced in a Particular Year. The double-declining-balance method i. The method determines the depreciation charge for the period by multiplying a depreciation rate (often twice the straight-line rate) by the asset’s beginning-period book value.