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Terms in this set (60)
The major characteristics of
property, plant, and equipment are They are acquired for use in operations and not for
as follows. resale. Only assets used in normal business
operations are classified as property, plant, and
equipment. For example, an idle building is more
appropriately classified separately as an
investment. Land developers or subdividers classify
land as inventory.
They are long-term in nature and usually
depreciated. Property, plant, and equipment yield
services over a number of years. Companies
allocate the cost of the investment in these assets
to future periods through periodic depreciation
charges. The exception is land, which is
depreciated only if a material decrease in value
occurs, such as a loss in fertility of agricultural land
because of poor crop rotation, drought, or soil
erosion.
They possess physical substance. Property, plant,
and equipment are tangible assets characterized
by physical existence or substance. This
differentiates them from intangible assets, such as
patents or goodwill. Unlike raw material, however,
property, plant, and equipment do not physically
become part of a product held for resale.
,Historical cost The value of an asset measured by the cash or cash
equivalent price of obtaining the asset and
bringing it to the location and condition necessary
for its intended use.
measures the cash or cash equivalent price of
obtaining the asset and bringing it to the location
and condition necessary for its intended use.For
example, companies likeKellogg Co.consider the
purchase price, freight costs, sales taxes, and
installation costs of a productive asset as part of
the asset's cost. It then allocates these costs to
future periods through depreciation. Further,
Kelloggadds to the asset's original costany related
costs incurredafter the asset's acquisition, such as
additions, improvements, or replacements,if they
provide future service potential. Otherwise,
Kellogg expenses these costs immediately.1
Subsequent to acquisition, companies should not
write up property, plant, and equipment to reflect
fair value when it is above cost. The main reasons
for this position are as follows.
Historical cost involves actual, not hypothetical,
transactions and so is the most reliable.
Companies should not anticipate gains and losses
but should recognize gains and losses only when
the asset is sold.
, However, if the fair value of the These situations occur when the asset is impaired
property, plant, and equipment is and in situations where the asset is being held for
less than its carrying amount, the sale. A long-lived asset classified as held for sale
asset may be written down. should be measured at the lower of its carrying
amount or fair value less costs to sell. In that case,
a reasonable valuation for the asset can be
obtained, based on the sales price. A long-lived
asset is not depreciated if it is classified as held for
sale. This is because such assets are not being used
to generate revenues (see Underlying Concepts).
Fair value is relevant to inventory but less so for
property, plant, and equipment which, consistent
with the going concern assumption, are held for
use in the business, not for sale like inventory.
Solutions | 2026 Edition | Pass Guaranteed
Save
Terms in this set (60)
The major characteristics of
property, plant, and equipment are They are acquired for use in operations and not for
as follows. resale. Only assets used in normal business
operations are classified as property, plant, and
equipment. For example, an idle building is more
appropriately classified separately as an
investment. Land developers or subdividers classify
land as inventory.
They are long-term in nature and usually
depreciated. Property, plant, and equipment yield
services over a number of years. Companies
allocate the cost of the investment in these assets
to future periods through periodic depreciation
charges. The exception is land, which is
depreciated only if a material decrease in value
occurs, such as a loss in fertility of agricultural land
because of poor crop rotation, drought, or soil
erosion.
They possess physical substance. Property, plant,
and equipment are tangible assets characterized
by physical existence or substance. This
differentiates them from intangible assets, such as
patents or goodwill. Unlike raw material, however,
property, plant, and equipment do not physically
become part of a product held for resale.
,Historical cost The value of an asset measured by the cash or cash
equivalent price of obtaining the asset and
bringing it to the location and condition necessary
for its intended use.
measures the cash or cash equivalent price of
obtaining the asset and bringing it to the location
and condition necessary for its intended use.For
example, companies likeKellogg Co.consider the
purchase price, freight costs, sales taxes, and
installation costs of a productive asset as part of
the asset's cost. It then allocates these costs to
future periods through depreciation. Further,
Kelloggadds to the asset's original costany related
costs incurredafter the asset's acquisition, such as
additions, improvements, or replacements,if they
provide future service potential. Otherwise,
Kellogg expenses these costs immediately.1
Subsequent to acquisition, companies should not
write up property, plant, and equipment to reflect
fair value when it is above cost. The main reasons
for this position are as follows.
Historical cost involves actual, not hypothetical,
transactions and so is the most reliable.
Companies should not anticipate gains and losses
but should recognize gains and losses only when
the asset is sold.
, However, if the fair value of the These situations occur when the asset is impaired
property, plant, and equipment is and in situations where the asset is being held for
less than its carrying amount, the sale. A long-lived asset classified as held for sale
asset may be written down. should be measured at the lower of its carrying
amount or fair value less costs to sell. In that case,
a reasonable valuation for the asset can be
obtained, based on the sales price. A long-lived
asset is not depreciated if it is classified as held for
sale. This is because such assets are not being used
to generate revenues (see Underlying Concepts).
Fair value is relevant to inventory but less so for
property, plant, and equipment which, consistent
with the going concern assumption, are held for
use in the business, not for sale like inventory.
