Accounting For PPE
Accounting For PPE
Accounting For PPE
NATURE OF PPE
Characteristics:
1.
Tangible
2.
Long-lived
3.
Used in the business
4.
Not held for resale
Classification of PPE:
1. Land
2. Building
3. Equipment
4. Machinery
5. Furniture and Fixtures
6. Land Improvements
PPE Recognition:
PPE should be recognized as an asset when the following conditions are all present:
It is probable that future economic benefits associated with the asset will flow to the
enterprise; and
The cost of the asset can be measured reliably
Initially, measure and recognize PPE at cost
Initial costs of Plant Assets:
Include all normal, reasonable, and necessary expenditures to obtain the asset and get it
ready for use.
Include the repair and maintenance costs for assets that a business acquired in used or
damaged form.
Cash discount should be deducted, taken or not taken.
Costs not capitalized:
Cost of Land
1. Purchase price
2. Legal fees and other expenditures for establishing clean title
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Landscaping
Paving parking lots
On-property sidewalks
Light structures (for parking and sidewalks)
Fencing
NATURE OF DEPRECIATION
Depreciation is the process of allocating the depreciable amount of an asset over its
useful life in a systematic and rational manner.
Two categories:
1. Physical depreciation wear and deterioration
2. Functional depreciation inadequacy and obsolescence
Factors to be considered in computing periodic depreciation:
1. Cost
2. Salvage value or residual value or scrap value
3. Estimated useful life
Important notes:
Depreciation should begin when an asset is available for use.
Depreciation does not cease when the asset becomes idle or is retired from active
use unless the asset is fully depreciated.
PPE that are classified as held for sale shall not be depreciated.
o PPE classified as held for sale must be presented separately on the face of the
balance sheet.
Pro-forma entry:
Depreciation expense
xxx
Accumulated Depreciation
xxx
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Revenue expenditures
Those that are chargeable to expense account
Normal repairs and maintenance on PPE
Expenditures that result from accidents, neglect, intentional abuse, and theft are
recognized as losses.
PPE RETIREMENT AND DISPOSAL
An item of PPE should be eliminated from the statement of financial position on disposal or
when the asset is permanently withdrawn from use and no future economic benefit are
expected from its disposal.
Loss on sale = Carrying value of the PPE sold > Cash proceeds from sale
Gain on sale = Carrying value of the PPE sold < Cash proceeds from sale
Pro-forma entry:
Cash
xxx
Accumulated Depreciation xxx
PPE
Gain on Sale
xxx
xxx
OR
Cash
xxx
Accumulated Depreciation xxx
Loss on Sale
xxx
PPE
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xxx
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