Property, plant and equipment (PP&E) comprises tangible assets used in operations over multiple periods. Under U.S. generally accepted accounting principles (GAAP), acquisition cost includes qualifying expenditures needed to bring an asset to its intended location and condition.
- Gross cost: recognized asset cost before accumulated depreciation and separately tracked impairment reductions.
- Accumulated depreciation: the cumulative allocation of depreciable cost, presented as a reduction of the related asset.
- Carrying amount: gross cost less accumulated depreciation and any separately maintained impairment balance.
An entity calculates net property, plant and equipment by reconciling these accounts, rather than subtracting depreciation from current market value. When impairment directly reduces the asset account, that reduction must not also be deducted through a separate allowance.
Capitalization requires support under the applicable recognition guidance; anticipated future benefit alone is insufficient to establish an asset. Invoices, acquisition agreements and work descriptions establish the cost's purpose and the asset receiving it.
For self-constructed plant assets, qualifying cost includes direct materials, direct labor and properly attributable construction overhead.
Common mistakes
- Discount ignored. Using $218,000 for Harrow's separate machine overstates its supported $208,000 cost by the $10,000 trade discount.
- Wrong declining-balance base. Applying to $100,000 produces $40,000 depreciation instead of the $48,000 first-year charge.
- Wrong impairment measurement. Example 4's $20,000 recoverability shortfall is not its $240,000 measured impairment loss.
Bottom line
- Capitalize qualifying acquisition and preparation costs, allocate basket purchases using relative fair values, and expense routine maintenance.
- Construction interest follows dated weighted expenditures and qualifying borrowing rates, with capitalization limited to actual interest incurred.
- Depreciation starts when an asset is ready for use, respects residual value and reflects supported estimate changes prospectively.
- Disposal accounting updates depreciation, removes all related asset and contra balances, and compares net proceeds with carrying amount.
Exam shortcut
Set up separate columns for cost, accumulated depreciation and impairment before solving a disposal or reconciliation question. Mark acquisition, ready-for-use, disposal and held-for-sale dates; use each date only for the accounting event it controls. Circle “undiscounted” and “fair value” separately, then identify whether the asset remains held for use or qualifies for sale.
The full lesson (about 9,526 words, 64 min read) adds 7 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.D1
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