IFA Chapter 10

IFA Chapter 10 PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment (PP&E) are assets of a durable nature. Cost of Land Includes all expenditures to acquire land and ready it for use . Costs typically include: (1) purchase price ; (2) closing costs , such as title to the land , attorney's fees , and recording fees ; (3) costs of grading, filling, draining, and clearing; (4) assumption of any liens, mortgages, or encumbrances on the property; and (5) additional land improvements that have an indefinite life. Improvements with limited lives, such as private driveways, walks, fences, and parking lots, are recorded as Land Improvements and depreciated. u Land acquired and held for speculation is classified as an investment . u Land held by a real estate concern for resale should be classified as inventory . Cost of Buildings Includes all expenditures related directly to acquisition or construction . Costs include: u materials, labor, and overhead costs incurred during construction and u professional fees and building permits. Cost of Equipment Include all expenditures incurred in acquiring the equipment and preparing it for use . Costs include: u purchase price, u freight and handling charges, u insurance on the equipment while in transit, u cost of special foundations if required, u assembling and installation costs, and u costs of conducting trial runs. Self-Constructed Assets Costs include: 1) Materials and direct labor 2) Overhead can be handled in two ways: 1) Assign no fixed overhead. 2) Assign a portion of all overhead to the construction process. Companies use the second method extensively. Interest Costs During Construction Three approaches have been suggested to account for the interest incurred in financing the construction.
Capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the useful life of that asset , rather than being expensed in the period the cost was originally incurred. Interest Costs During Construction u GAAP requires — capitalizing actual interest (with modification). u Consistent with historical cost. u Capitalization considers three items: u Qualifying assets. u Capitalization period. u Amount to capitalize. Qualifying Assets Require a period of time to get them ready for their intended use. Two types of assets: u Assets under construction for a company's own use. u Assets intended for sale or lease that are constructed or produced as discrete projects. Capitalization Period Begins when: 1. Expenditures for the asset have been made. 2. Activities for readying the asset are in progress . 3. Interest costs are being incurred. Ends when: The asset is substantially complete and ready for use. Amount to capitalize Capitalize the lesser of: Actual interest costs. Avoidable interest - the amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset.
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