Characteristics of Property, Plant, and Equipment

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Characteristics of Property, Plant, and Equipment

• Acquired for use in operations
• Long term in nature and usually subject to
  depreciation
• Possesses a physical substance from which the
  asset derives its value

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Acquisition of Property, Plant, and Equipment

• Recorded at the fair value of consideration
  given.
• Includes all costs normal and necessary to get
  the asset ready for its intended use.
• These amounts constitute the historical cost of
  the asset.

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Land

• Purchase Price
• Closing costs
• Cost of preparing the land
• Assumptions of liens or mortgages
• Land improvements with indefinite lives

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Buildings

• If purchased include the purchase price plus all
  costs normal and necessary to get the building
  ready for its intended use
• If constructed all costs from excavation forward
  are included as part of the building

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Equipment

• Include the purchase price plus all costs normal
  and necessary to get the building ready for its
  intended use

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Lump-Sum Purchases

• Sometime a group of assets are purchased in a
  single amount.
• The single amount must be allocated to each asset
  because accounting treatments differ.
• The allocation is made based on a ratio of
  relative fair market values.

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Exchanges of Assets

• Four different accounting treatments
• Dissimilar Assets
• Similar assets--loss situation
• Similar assets--gain situation--no boot
• Similar assets--gain situation--boot

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Gains and Losses
Basis of assets received less book value of
assets given equals the gain or loss
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Establishing Basis

• Hierarchical Order
• FMV of asset given--if known
• FMV of asset received--if more clearly evident
• BV of asset given--last resort

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Dissimilar Assets

• Record the new asset at its basis. Recognize all
  gains and losses

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Similar AssetsLoss Situation

• Record the new asset at its basis. Recognize the
  loss

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Similar AssetsGain Situation--No Boot

• Defer the gain by reducing the basis of the new
  asset

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Similar AssetsGain Situation--Boot

• Recognize only the portion of the gain
  attributable to the boot received

Defer the rest of the gain
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