What is 'Property, Plant And Equipment - PP&E'
Property, plant and equipment (PP&E) is a company asset that is vital to business operations but cannot be easily liquidated, and depending on the nature of a company's business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting standard 16 deals with the accounting treatment of PP&E. It is listed separately in most financial statements because it is treated differently in accounting statements, and improvements, replacements and betterments can pose accounting issues depending on how the costs are recorded.
BREAKING DOWN 'Property, Plant And Equipment - PP&E'
PP&E is also called tangible fixed assets. These assets are physical, tangible assets and they are expected to generate economic benefits for a company for a period of longer than one year. Examples of PP&E include land, buildings and vehicles. Industries or businesses that require a large amount of fixed assets are described as capital intensive.
Financial Statement Record
PP&E is recorded in a company's financial statements in the balance sheet. The cost of PP&E considers the actual cost of purchasing and bringing the asset to its intended use. This cost is called the historical cost. For example, when purchasing a building for a company to run its retail operations, the historical cost could include the purchase price, transaction fees and any improvements made to the building to bring it to its destined use. The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to use and depreciation. Amortization is used to devalue these assets as they are used, but land is not amortized because it can increase in value. Instead, it is represented at current market value. The balance of the PP&E account is remeasured every reporting period, and, after accounting for historical cost and amortization, is called the book value. This figure is reported on the balance sheet. #ucp
2. Slide
9-2
Long-lived assets acquired for use in
business operations.
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
The cost of plant assets
is the advance purchase
of services.
As years pass, and the
services are used, the
cost is transferred to
depreciation expense.
Plant AssetsPlant Assets
3. Slide
9-3
L a n d , b u ild in g s ,
e q u ip m e n t ,
fu r n it u r e , fix t u r e s .
L o n g - t e r m
a s s e t s h a v in g
p h y s ic a l s u b s t a n c e .
T a n g i b l e P l a n t
A s s e t s
P a t e n t s , c o p y r ig h t s ,
t r a d e m a r k s ,
fr a n c h is e s , g o o d w ill.
N o n c u r r e n t a s s e t s
w it h n o p h y s ic a l
s u b s t a n c e .
I n t a n g i b l e
A s s e t s
O il r e s e r v e s ,
t im b e r , o t h e r
m in e r a ls .
S it e s a c q u ir e d fo r
e x t r a c t in g v a lu a b le
r e s o u r c e s .
N a t u r a l
R e s o u r c e s
Major Categories of Plant AssetsMajor Categories of Plant Assets
4. Slide
9-4
Acquisition.
Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
Sale or disposal.
Acquisition.
Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
Sale or disposal.
Accountable EventsAccountable Events
5. Slide
9-5
Asset
price
Asset
price
Reasonable and
necessary costs . . .
Reasonable and
necessary costs . . .
. . . for getting
the asset to the
desired location.
. . . for getting
the asset to the
desired location.
. . . for getting
the asset ready
for use.
. . . for getting
the asset ready
for use.
CostCost
Acquisition of Plant AssetsAcquisition of Plant Assets
+
6. Slide
9-6
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
Determining CostDetermining Cost
8. Slide
9-8
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Land
Improvements
Land
Improvements
LandLand
Special ConsiderationsSpecial Considerations
9. Slide
9-9
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
BuildingsBuildings
Special ConsiderationsSpecial Considerations
EquipmentEquipment
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.
10. Slide
9-10
I think I’ll buy the
whole thing; barn,
land, and animals.
Special ConsiderationsSpecial Considerations
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
The total cost
must be
allocated to
separate
accounts for
each asset.
The total cost
must be
allocated to
separate
accounts for
each asset.
Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase
11. Slide
9-11
Capital
Expenditure
Capital
Expenditure
Revenue
Expenditure
Revenue
Expenditure
Any material expenditure
that will benefit several
accounting periods.
Any material expenditure
that will benefit several
accounting periods.
To capitalize an expenditure
means to charge it to an
asset account.
To capitalize an expenditure
means to charge it to an
asset account.
Expenditure for
ordinary repairs
and maintenance.
Expenditure for
ordinary repairs
and maintenance.
To expense an expenditure
means to charge it to an
expense account.
To expense an expenditure
means to charge it to an
expense account.
Capital Expenditures and Revenue
Expenditures
Capital Expenditures and Revenue
Expenditures
12. Slide
9-12
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Cost of
plant
assets
Balance SheetBalance Sheet
Assets:
Plant and
equipment
Assets:
Plant and
equipment
Income StatementIncome Statement
Revenues:
Expenses:
Depreciation
Revenues:
Expenses:
Depreciation
as the services
are received
DepreciationDepreciation
13. Slide
9-13
Book Value
Cost – Accumulated Depreciation
Accumulated Depreciation
Contra-asset
Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
Physical deterioration
Obsolescence
Book Value
Cost – Accumulated Depreciation
Accumulated Depreciation
Contra-asset
Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
Physical deterioration
Obsolescence
DepreciationDepreciation
14. Slide
9-14
Cost - Residual Value
Years of Useful Life
Depreciation
Expense per Year
=
Straight-Line DepreciationStraight-Line Depreciation
15. Slide
9-15
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.
Straight-Line DepreciationStraight-Line Depreciation
16. Slide
9-16
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Salvage ValueSalvage Value
Straight-Line DepreciationStraight-Line Depreciation
17. Slide
9-17
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
Half-Year Convention
In the year of
acquisition, record six
months of
depreciation.
Half-Year Convention
In the year of
acquisition, record six
months of
depreciation.
½
Depreciation for Fractional PeriodsDepreciation for Fractional Periods
18. Slide
9-18
Half-Year ConventionHalf-Year Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31,
2001, for equipment purchased in 2003. The
equipment cost $75,000, has a useful life of 10
years and an estimated salvage value of
$5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1
/2 = $3,500
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1
/2 = $3,500
19. Slide
9-19
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
Declining-Balance MethodDeclining-Balance Method
20. Slide
9-20
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
double-declining balance method.
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
double-declining balance method.
Declining-Balance MethodDeclining-Balance Method
21. Slide
9-21
Compute depreciation for the rest of the
boat’s estimated useful life.
Compute depreciation for the rest of the
boat’s estimated useful life.
Declining-Balance MethodDeclining-Balance Method
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.