Plant Assets and Depreciation Accounting Help

Plant Assets and Depreciation

Plant Assets and
Depreciation

COMMENTARY STRANDED ASSETS WHO SHOULD FOOT THE BILL?

A $50 billion-a-year battle is raging over a herd of white elephants. Electric and phone companies fear that once deregulated, they will be stuck with annual costs on that scale for the care and feeding of the herd-namely, assets such as nuclear power plants and obsolete telephone switchss that are rendered uneconomical. by the coming onslaught of competition.

This adds up to real mnnej. According to some estimates, roughly $200 billion of electric-utility assets- such as costly generating plants and fuel-purchase contra.cts-will be rendered noncompetitive; or stranded, by retail-market competition. Figme that a utility needs to pull in $20 in annual revenue per $100 in assets to cover profit, taxes, and depreciation. That’s $40 billion a year up for grabs, equal to ?O% of the industry’s total annual revenue.

Plant Assets as a’ “Stream of Future Services”

Plant assets are similar to long-term prepaid expenses. Ownership of a delivery truck, for example, may provide about 100,000 miles of transportation. The cost of the truck is entered in an asset account, which in essence represents the advance purchase of these transportation services ..Similarly, a building represents the advance purchase of many years of housing services. As the years go.by, these services are utilized by the business, and the cost of the plant asset gradually is transferred to depreciation expense.

Major Categories of Plant -Assets

Plant and equipment items are often classified into the following groups:

1. Tangible plant assets. The term “tangible” denotes physical substance, as exemplified by land, a building, or a machine. This category maY,be subdivided into two distinct classifications:

a. Plant property subject to depreciation. Included are plant assets of limited useful life such as buildings and office equipment. .
b. Land. The only plant asset not subject to depreciation is land, which has an un limited term of existe

2. Intangible assets. The term “intangible assets” is’used to describe assets that are used in the operation of the business but have no physical substance and are noncurrent. Examples include patents, copyrights, trademarks, franchises, and goodwill. Current assets such as accounts receivable or prepaid rent are nt included in the intangible classification, even though they are lacking in physical substance.

3. Natural resources. A site acquired for the purpose of extracting or removing some valuable res~urce such as oil, minerals, or timber is .classified as a natural resource. not as land. This type of plant asset is gradually converted into inventory as the natural resource is extracted from the site.

ACQUISITIONS OF PLANT ASSETS

The cost of a plant asset includes all expenditures that are reasonable and necessary for getting the asset to the-desired location and ready for use. Thus many  costs may be included in the cost assigned to a plant asset. These include, for example, sales taxes on the purchase price. delivery costs, and installation costs.

Companies often purchase plant assets. on an installment plan or by issuing  note payable. Interest charges after the asset is.ready for use are recorded as interest expense, not as part of the cost of the asset. But if a company constructs’ a plant asset for its own use the interest charges during the construction period are viewed as part of the asset’s cost.’

Acquisitions of .Plant Assets

Acquisitions of .Plant Assets

Determining Cost An Example

The concept of including in the cost of a plant’ asset all of the incidental charges necessary to put the asset in use is illustrated by the following example. A factory in Minneapolis orders a machine from a San Francisco tool manufacturer at a list price of $10,000. Payment will be made in 4e monthly installments of $250, which include $2,000 in interest charges. Sales taxes of $600 must be paid, as well as freight charges of $1,250. Installation an” other set-up costs amount to $4()().The cost of this machine to be debited to the Machinery account is computed as follows:

Some Special Considerations

Land

When land is purchased, various incidental costs are generally incurred, in addition to the purchase price. These additional costs may include commissions to real estate brokers, escrow fees, legal fees for examining and insuring the title, delinquent taxes paid by the purchaser, and fees for surveying, draining, clearing, and grading the property. All these expenditures become part of the cost of the land.

Land Improvements

Improvements to real estate such as driveways, fences, parking lots, landscaping, and sprinkler systems have a limited life and are therefore subject to depreciation. For this reason, they should be recorded in a separate account entitled Land Improvements.

Buildings

Old buildings are sometimes purchased with the intention of repairing them prior to placing them in use. Repairs made under these circumstances are charged to the Buildings account. After the building has been placed in use, ordinary repairs are considered to be maintenance expense when incurred.

Allocation of a lump-Sum Purchase

Several different types of plant assets often are purchased at one time. Separate controlling accounts are maintained for each type of plant asset ‘such as land buildings and equipment?

When land and buildings (and perhaps other assets) are purchased for a lump sum, the purchase price must be allocated among the types of assets acquired. An appraisal may be needed for this purpose. Assume, for example, that Holiday Workout purchases a complete fitness center from Golden Health Spas. Holiday purchases the entire facility at a bargain price of $800,000. The allocation of this cost on the basis of an appraisal is illustrated as follows

total cost is allocated in

total cost is allocated in

Assuming that Holiday purchased thi- facility for cash. the journal entry to record this acquisition would be: .

The journal entry allocating

The journal entry allocating

In brief, any material expenditure that will benefit several accounting periods is considered a capital expenditure. Any expenditure that will benefit only the current period or that is not material in amount is treated as a revenue expenditure.

Many companies develop formal policy statements defining capital and revenue expenditures as a guide toward consistent accounting practice from year to year. These policy statements often set a minimum dollar amount (such as $5(0) for expenditures that are to be capitalized.

Posted on November 23, 2015 in Plant Assets and Depreciation

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