Plant Assets Aquisition
The term property, plant and equipment, also called fixed assets, includes all tangible assets with a service life of more than one year that are used in the operation of the business and are not acquired for the purpose of resale. This includes equipment, furniture, tools, machinery, buildings and land. These assets are expected to provide services to the company for a number of years. Except for land, plant assets decline in value over their useful lives. Plant assets are usually subject to depreciation.
Depreciation methods are not covered in detail in this paper. The book value of plant assets is the cost of the asset less accumulated depreciation. This amount is not an indication of the market value of the asset, which may be much higher than the book value in most cases. The difference between the market and book value of assets is an unrecorded asset. Also I’m going to include in this paper intangible assets that in some cases have more material significance than plant assets in the financial statements.
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3) Cost Subsequent to Acquisition
The cost principle requires that companies record plant assets at historical cost. APB Opinion No. 6 states that property, plant and equipment should not be written up to reflect appraisal, market or current values which are above cost. Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use. Examples are: purchase price, fright and installation cost are part of factory machinery. Expenditures to acquire new plant assets or to extend the life or enhance the value of existing plant assets are capital expenditures.
For the cost to be capitalized, one of three conditions must be present: (a) the useful life of the asset must be increased, (b) the quantity of service produce from the asset must be increased, or (c) the quality of the units produce must be enhanced. Additions result in the creation of new assets, they should be capitalized. Improvements and replacements are substitutions of one asset for another. Improvements substitute a better asset for one currently used, whereas a replacement substitute a similar asset. The mayor problem in accounting for improvements and replacements concerns differentiating these expenditures from normal repairs.
It should be capitalized only if an improvement or replacement increases the future service potential of the asset. Capitalization may be accomplished by: (a) substituting the cost of the new asset for the cost of the asset replaced, (b) capitalizing the new cost without eliminating the cost of the asset replaced, or (c) debiting the expenditure to accumulated depreciation. Reinstallation cost are generally carried forward as a separate asset and amortized against future income. Expenditures to repair or maintain plant assets that do not extend the life or enhance the value of the assets are known as operating expenditures.
They usually are fairly small amounts that occur frequently throughout the service life. Examples are: motor tune-ups and oil changes and painting of buildings. Classification of Plant Assets: Land: companies often use as a building site for a manufacturing plant or office site. The cost of land includes (1) the purchase price, (2) closing cost such as title and attorney’s fees, (3) real estate broker’s commission, and (4) accrued property taxes and other liens on the land assumed by the purchaser.
All necessary cost uncured in making land ready for its intended use increase the land account. When a company acquires a vacant lot, its cost includes expenditures for cleaning, draining, filling, and grading. If the land has a building on it that must be removed to make the site ready for construction of a new office building, the company includes all demolition and removal costs, less any proceeds from salvage materials, in the Land account. Buildings: when a building is purchase, such cost includes the purchase price, closing costs (insurance, attorney’s fees, etc. and real estate broker’s commission. Cost to make the building ready for its intended use consists of expenditures for remodeling rooms and offices, replacing roofs, etc. When a new building is constructed, its cost consists of the contract price plus payments made by the owner for architect’s fees, building permits and excavation costs. Equipment: includes assets used in operations such as office furniture, machinery, trucks, etc. The cost of the equipment consists of the purchase price, sales tax, freight charges and insurance paid by the purchaser.
Two criteria apply in the determining the cost of equipment: (1) the frequency of the cost-one time or recurring, and (2) the benefit period-the life of the asset or one year. Interest Cost: capitalization of interest cost incurred in connection with financing the construction of property, plant, and equipment is addressed in FASB Statement No. 34, “Capitalization of Interest Cost “. The profession generally follows the rule of capitalizing only the actual interest cost incurred during construction.