plant assets are defined as: This is a topic that many people are looking for. unusual-travel-destinations.com is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, unusual-travel-destinations.com would like to introduce to you Accounting for Plant Assets Financial Accounting CPA Exam FAR Ch 9 P 1 . Following along are instructions in the video below:
“And welcome to the session in which we would look at plant asset. So the the first thing. We re going to look at is what are plant asset and do we measure the cost of plant asset so what is a plant asset a plant asset are long lived tangible tangible means they exist they physically exist they are used in operation so we use them in the operation. It means in the business.
Okay and long lived mean they are not current they are not current asset. What is the current asset current asset is an asset that s gonna expire converted the gap converted to cash or be used up for that in the next 12 months well those assets will stay longer than 12 months. So they will stay more than one accounting period. What are some examples land building equipment furniture fixture.
Automobiles bulldozers heavy equipment okay those are plant asset why because when you buy a piece of equipment you will use it for several years when you buy a piece of furniture. You would use it for several years when you buy fixture. You will use them for several years. So they are used for more than one accounting period.
Therefore they are called plant asset or long lived more than one period. They re tangible you can touch them you can see them and they are used in operation. Because a few my land as an investment. It s no longer a plant asset in other words.
The land that you we are referring here to is being used in the business. If you bought a piece of land for speculation purposes to sell it later and make a profit then that s not a plant asset. That s an investment plant asset are different than other assets. Because they are long term as i said earlier lasting several years the cost of plant and this is going to be an important topic.
We re going to be discussing is allocated over the years that the asset expected to be used okay so what s gonna happen is this when we buy a plant asset assuming a vehicle a car what s gonna happen we are going to allocate the cost of the plant asset so once we buy a car vehicle so we buy a car for. 10000 so we debit a car. 10000 assuming we paid cash we credit cash 10000. Now what s gonna happen and let s assume this car is expected to be used for five years.
So for five years. So we expect to use this car for five years so what s gonna happen we re gonna take the cost the cost is ten thousand this is the cost. We re gonna take the cost and allocate the cost spread the cost over five years. Okay year 1 year 2 year 3 year 4 and year 5.
And we re gonna spread the cost equally so we re gonna spread the cost 2000. Every year just for the sake of this example and for simplicity purposes. So this process. The allocation of plant asset over the useful life is called depreciation.
So when you allocate the cost when you allocate this mm mm. Mm mm mm. This process is called depreciation and depreciation will be covered as the next topic. Which is after this recording and this allocation follows the matching principle because this car will serve the company will serve the company for five years because it serves the company.
It serves the company for five years therefore we need to spread the cost over five years. So that s why we allocate this so this is the purpose of the allocation process. But the process is called the official name is depreciation which we ll talk about later. So we need to deal with three things when we come to an asset.
We re gonna deal with the acquisition of the asset. Which is how much it cost us. We re gonna look at the usage and depreciate the car as we use it depreciated then we re gonna dispose of it later on put it for sale so those are the three things that we will deal with there is another minor. Think we have to deal with is when we spend money on the car when we spend money how do we treat this expenditure.
We ll see that later on as well actually in this session. Would look at this topic. A plan asset is recorded at historical cost. What is the historical cost the amount you paid for the s.
And how much did you pay for it this follows. The cost principle. Which is this is what we need to know the cost principle is you record the asset at and how much it costs you which stayed that acquired asset and services should be recorded at their actual cost now what does the cost include so what does the cost include when you want to buy a car what does the cost include well it s gonna obviously include the purchase price plus the taxes plus. Any commission you have to pay plus any other amount paid to get the asset ready for its intended use for example a car you need to buy a license plate.
You will need to pay for registration. Okay for example a car would include the purchase price. The price is twenty three thousand plus taxes of i don t know one thousand keep it simple registration fee 50 license plate 10 what else if there s any other thing you ll just add them up and that s gonna equal to twenty four thousand and sixty dollars that s your cost of the car so you include everything to get the cat the car ready for its intended use okay so purchase price if you re buying land or or building..
You might have to pay a brokerage fee surveying and legal fees. This is for land so if you wanna survey. The land if you wanna put the put the any legal fees delinquent property taxes those are late late taxes. So if you re buying an asset from another individual you are buying a piece of land or a building and the buyer has the link one basically his he s behind on his taxes on his real estate taxes.
And you re buying this asset. Well you cannot register. The asset until you pay the taxes. Because the government would not let you until the taxes are paid there for delinquent delinquent means late taxes they are part of the cost of the asset transfer fee because you need to put that you need to put that asset into your name you need to transfer.
It there is a fee to put that asset in your name to remove it from the seller to your name cost of clearing the land if you bought a piece of land and you want to clear it to get the land randy. The cost of clearing the land to make it ready. It s part of the cost of the land okay. So this is for land and land improvement.
This is what s included in land and land improvement land and land improvement land and land improvement. Does not include fencing paving sprinkler system lighting system in science. Those separate plant asset are called land improvements so on the prior slide. This is only land.
This is only what s included for the land okay. This is what s considered cost included. When you buy the land those assets are land improvements. Those assets are land improvement.
If you put a fence. If you be paving sprinkler system put lights signs on that land those are separate assets and they re called land improvement. Those are subject to depreciation land land not subject to depreciation remember we depreciate the asset we take the cost when he depreciate the asset. The land is not depreciated because.
We cannot estimate a life for the land to depreciate something you remember one it when we depreciated the car. We said the car would service for five years. The land has unlimited life the land has unlimited life and this is an important concept. Because it has an unlimited life therefore no depreciation because to depreciate something you have to allocate over its life all these assets.
They have a life so they get depreciated. They get depreciated let s take a look at an example smart. A land and land improvement. Smart touch learning.
Pet purchase land on august 1st 450. Thousand. This is the purchase cost with a note payable so they we bought it through a loan. Other costs related to the transaction.
Includes four thousand in delinquent property. Taxes. Two thousand and transfer taxes five thousand to remove the old building this is to remove the old building and 1000. Surveying fees surveying fees is to find out would does your land exactly ends with what are the where does it end the additional costs are paid in cash.
So what are the additional cost the additional costs are the four thousand. The two thousand the one thousand at the 5000 and the 1000 c exhibit. 9. No on the next slide for total cost of the land.
Well. What s the total cost of the land. The total cost is all of this it s 56 61. 62.
If i m at this my math is right this is 5 yes. 60 mm so the land is 60 mm in total cash. We only paid cash the for the to the 5 and the 1 which is 12000. And the notes payable is the 50000 so we bought the land we paid some of it in cash.
Some of it with cash. Some of it in cash and some of it with alone so this is the cost it the cost calculation. This was the note and this was paid in cash so devitt land credit..
Notes payable. Credit cash smart touch learning capitalized. The cost of the land capitalized means put it make it an asset make it as an asset. Because you could capitalize something or you can expense something so every time you spend money do you capitalize it to capitalize an asset means to record the acquisition of land building or other by debiting.
An asset or do you expense it here we capitalize it not expense it because expenses are if there is no future benefit will expense. It the land will give us future benefit therefore. It s an asset building. What do we capitalized for the building.
What do we need to capitalize if we bought a building architect fees building permits contract or charges payment for material and labor. So if you buy in the building. We capitalize all these costs why because we are building the building to get it ready to get it ready so any cost to incur to get it ready we capitalized let s roll let s roll. If we bought a building right up right from a seller.
If it s already built the purchase price delinquent taxes brokerage fees any renovation cost those asks those gets capitalized means they are treated as an asset. He gets included in the cost of the asset. What about if we bought machinery and equipment the cost of machinery and equipment include any purchase price obviously less any discount discount will be a minded if they give you a discount. If we need to transport those machinery and equipment insurance.
While and transit gets added to the cost sales tax and other taxes gets added to the cost if we paid any commission. If we need to pay an installation fee to install those assets because they re not ready before we install them any testing prior to the to the use of the asset because we need to test the asset. We re gonna incur a cost well it s not ready yet so all of those are expenditure cost to get the asset ready therefore we capitalize them we make them an asset. We make them an asset we capitalize them furniture and fixture what are examples of furniture and fixtures dax desks chairs file cabinet those are assets the cost of furniture and fixture include the purchase price less any discount.
All costs associated to get this asset ready for its intended use so all other costs that you could incur okay to get them to get those. Desks chairs and file cabinets. Ready what happened. When you purchase you pay a single price.
A company may pay a single price for several asset as a group. This is called a lump sum purchase okay so the company must identify the cost of each asset purchase the total cost paid is divided among assets. According to the relative fair market value. And i usually i always give this example you buy a pizzeria so you buy a restaurant.
So if you buy a pizzeria you might pay one price and let s assume this price is 200 thousand or let s make it 100 thousand and for that price you bought the building you bought the land and you bought the kitchen equipment. And you bought supplies. Some some supplies were left from the previous owner. So how do you allocate the 100 thousand.
So he paid 100 thousand for everything well first you have to find the fair market value for each one. So you bring an appraisal and the appraisal will say the building is worth 40 thousand. The land is worth fifty thousand. The equipment s are worth twenty thousand and the supplies are worth a hundred thousand so what you need to do you need to add up all your fear market value.
So. Let s do this first. See 40 plus. 50.
Plus. 20. Plus. Then the total fair market value is 120.
Then what you do you need to find out how much is the land worth of the fair value so you ll take. 40000 divided by. 120 the land is worth. 3333.
Which is i took to find this i took 40 divided by 120 to find how much is the land worth. I ll take 50 50 thousand divided by 120. Thousand the land is worth. 4167 percent of the deal.
Again how did i get to 4167. I took 50 thousand divided by 120. So i take each item and divided by the total for the equipment..
It s 20 thousand divided by 120. The equipment is worth sixteen point six seven percent. Which is twenty thousand divided by 120. This is sixteen point six seven and the supplies are worth in total ten thousand ten thousand divided by 120 is point zero seventy eighty eight point three percent 833.
If i add them up hopefully. There s no rounding errors. They should add up to one hundred percent. Now what do i do now how much did i pay i pay the hundred thousand that s how much i.
Paid. So what do i do. Next i allocate so 100000. Times.
33. Is so now i now once i know how much each each one of them is worth now i can do what i can t figure out how much to allocate to each one so allocate to the land because it s worth 33 percent. I would allocate to it thirty three thousand three hundred the building. I will allocate to it forty one thousand six seventy so i ll take this amount times.
The one hundred thousand each amount times the one hundred thousand this is sixteen thousand six seventy and this. Is. 833 times. 833 times 100000.
Is eight hundred in eight thousand three hundred and thirty. And hopefully. If you add them all up they should add up if i did not make any error. They should add up to one hundred thousand.
If there s a rounding error just now it may be a few dollars difference because of the rounding error otherwise they should add up to six hundred thousand okay they should add up to six hundred thousand assuming. There is no some sort of a rounding error. So those are the cost. All okay.
Thirty three thousand at the building. Forty. One thousand six seventy two the land sixteen thousand six seventy two the equipment and eighty three thirty two the supplies so you debit those and you credit cash assuming you paid cash for this felt for this building. This is how you do it with a lump sum purchase.
So let s go back. And see that example so suppose smart touch learning paid. The combined price of they use the one hundred thousand on august first for the land and buildings. So they bought two assets land and building an appraisal.
Indicate that the land is worth thirty thousand in the building is worth ninety. So the land is 30. The the building is 190 those are the fair market value. Okay.
This is the fair market value so. Here s what we do the market value is 30 and 90 120. The land represent 25 percent of the sale. The building represents 75 percent of the sale if you paid one hundred thousand one hundred thousand times.
25 percent the. 5000 for the land and 75000 for the building in my example. I used four different answer. That s the same concept first you would use the percentage of the total value then you will take this percentage and multiply.
It by the purchase price so this is the formula here in front of you so this is you debit. The land that the building and assuming you bought it on credit you you credit notes payable. Assuming you ve signed along to buy this to buy those assets. So what happened when you incur expenditure.
When you incur additional cost after you buy the asset you treat those expenditure s2s to under two categories. What am. I talking about here..
This is a topic that i told you we ll cover briefly so when you buy this car. Let s go back to that picture. Because picture is worth a thousand world if when we buy the car. We have to determine the cost so what we learn here is to determine how to determine the cost that we did.
The usage depreciation would look at later. What happened. When you incur additional costs on the car. When he incurred additional cost.
How do you have to treat this additional cost that additional expenditure well there are two ways to treat the additional expenditure. Two ways when you incur cost. There are the capital way and the revenue expenditure is it a capital expenditure. Or revenue.
Expenditure accountant. Divided spending on plant asset. After acquisition into two categories capital. Expenditure.
Or revenue. Expenditure and how do we determine if something is capital or revenue. Well there s not really clear rules. But we ll try to follow as much as possible if the expenditure increases.
The assets capacity efficiency or extend its life. So if we spend money on this car and by spending. The money we increase its capacity efficiency or extended. That s life.
Let s assume for a vehicle. We change the timing belt okay or we put a better engine a bigger engine a better engine well. That s gonna extend increase its efficiency and extend its life under those circumstances we capitalized and what do we mean we capitalize the expenditure. We assume that they are asset.
We add them to the asset. Okay. So if the expenditure increase the life of the asset makes it better makes it produce more of a better quality. It s an asset.
If the expenditure are to maintain the car in a work in order. Well you need to change oil filter right minor expenses change tires. Those are expenses you expense them those are called revenue expenditure. Why because they keep the asset.
They maintain the answer in a work and order you need to change the oil you need to change the filter. Okay those you have to do this those cannot be considered an asset. But if you took an engine. Defeated the engine out and put a new better engine.
That s gonna extend the life of the asset. The car then it s a capital expenditure. This is how we differentiate between the two between if it s a capital or revenue. And this is a well good this is a summary so capital expenditure you debit an asset so major engine or transmission overhaul for a car modification for new use if you modify the asset into a new usage addition to storage capacity.
If it s a computer you added if it s a server you added more capacity to it if it s a computer server anything that increase the life and in any of those you never be answered. They re not expenses then you depreciate them over the over their life revenue expenditure will include a repair of transmission or engine oil change lubrication replacement of tile or windshield paint job those are revenue expenditure they re maintaining the asset and working order again in the real world. The rules are not 100 clear because an expenditure well sometimes it s right on the border well it can be considered a repair or it could be considered really an extraordinary repair. Which is if it s an extraordinary it appear it s an asset.
So the rules are not clear but for our purposes. They re gonna be pretty straightforward either a repair they increase the life of the asset they make it better they increase its capacity or not or they keep it in a working order we determine if it s an expense or an expenditure well if you have any questions about this topic by only in see me or email me or see me in class next topic. We re going to be working with is depreciation how do we depreciate the asset ” ..
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historical cost, property plan and equipment, self constructed asset, interest capitalization, Plant assets, property plant and equipment, PPu0026E, fixed assets, depreciation expense, accumulated depreciation, gain on disposal of plant assets, acquisition cost, land improvement, salvage value, residual value, useful life, straight line method, units of production, double declining balances, MACRS, ACRS, book value, carrying value,
Accountancy (Field Of Study), plant assets, historical cost, property plan and equipment, self constructed asset, interest capitalization, Plant assets, prop…