Plant Assets Free Essay Example

Anything that can be used productively to general sales for the company can fall into this category. Buildings are assets that often hold larger amounts of value, most commonly as office space or a physical space for customers to make transactions. For smaller businesses, this may be one storefront location, while larger businesses may own multiple locations or facilities. Offices aren’t the only buildings that can serve as a plant asset. Especially for larger companies, buildings can also include storage centers for equipment, warehouses for merchandising and sales, or on-site centers that benefit employees and staff. A plant asset is an asset with a useful life of more than one year that is used in producing revenues in a business’s operations.

In such a case, the productivity of the asset for the partial year is used in computing the depreciation. Goodwill is not amortized because it is considered to have an indefinite life. Goodwill represents the value of all favorable attributes that relate to a business enterprise, including exceptional management, desirable location, good customer relations, skilled employees, etc. If the life is indefinite or perpetual, the cost is not amortized.

Plant Assets Definition

PP&E has a useful life longer than one year, so plants are considered a non-current asset. Plants are a part of the property, plants, and equipment, or PP&E, account. A current asset is any asset that will provide an economic benefit for or within one year. If you picture a business as a process that creates wealth for the owners, PP&E are the physical machine.

The composite rate is then applied to the average of the beginning and ending balances of the account. The major limitation of the cash flow production method is that it is not appropriate in situation in which depreciation is a function of time instead of activity.

Some of it was purchased under longterm payment plans for which the interest charges approximated prevailing rates. What costs should Magilke capitalize for the new equipment purchased this year?

The cost should be handled as an addition, improvement or replacement depending on the type of major repair made. The cost of improvements is accounted for by charges to the appropriate property accounts and the elimination of the cost and accumulated depre¬ciation associated with the replaced components, if any. Replacements involve an “in kind” substitution of a new asset or part for an old asset or part. Accounting for major replacements requires entries to retire the old asset or part and to record the cost of the new asset or part.

Fixed percentage on a declining balance — theoretical; not usually used. This method is easy to apply when assets are purchased during the year. When the productivity of the asset varies significantly from one period to another, the units-of-activity method results in the best matching of expenses with revenues. When an asset is purchased during the year, it is necessary to prorate the declining-balance deprecation in the first year on a time basis.

What Are The Types Of Capital Expenditures Capex?

PP&E are a company’s physical assets that are expected to generate economic benefits and contribute to revenue for many years. Industries or businesses that require a large number of fixed assets like PP&E are described as capital intensive. Some of the plant assets that depreciate over time include office equipment, vehicles, and machinery. Some of the other assets, such as land and buildings, tend to go up in value especially depending on factors such as location. Land and buildings located in a developing area tend to gain value over time. Plant assets are reported within the property, plant, and equipment line item on the reporting entity’s balance sheet, where it is grouped within the long-term assets section. The presentation may pair the line item with accumulated depreciation, which offsets the reported amount of the asset.

In a deferred payment situation, there is an implicit interest cost involved, and the accountant should be careful not to include this amount in the cost of the asset. Lump sum or basket purchase—sometimes a group of assets are acquired for a single lump sum. When a situation such as this exists, the accountant must allocate the total cost among the various assets on the basis of their relative fair value.

This method of depreciation results in relatively large amount of depreciation in the early years of an assets life and smaller amounts in later years. This method is based on the assumption of the passage of time.

Whether a portion of available cash is used, or the asset is financed by debt or equity, how the asset is financed has an impact on the financial viability of the company. Fixed AssetFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.

In this case, the cost of the new plant asset that the company exchanges the old asset for can be determined by the fair value of the old plant asset plus any amount of cash paid for the exchange. As a result, Exxon would be considered a capital intensive company. Some of the company’s fixed assets include oil rigs and drilling equipment. PP&E are vital to the long-term success of many companies, but they are capital intensive. Companies sometimes sell a portion of their assets to raise cash and boost their profit or net income. As a result, it’s important to monitor a company’s investments in PP&E and any sale of its fixed assets. Property, plant, and equipment (PP&E) are long-term assets vital to business operations and not easily converted into cash.

Investment analysts and accountants use the PP&E of a company to determine if it is on a sound financial footing and utilizing funds in the most efficient and effective manner. Client lists, patents, and intellectual property may also be long-term assets in some normal balance non-manufacturing industries. Non-current assets are assets that have a useful life of longer than one year. If a business sells something to another business, the transaction also usually takes the form of a line of credit, adding to accounts receivable.

Plant Assetsmeans assets that would be included in “property, plant and equipment” reflected in the consolidated balance sheet of Company and its Subsidiaries. In a lease, the lessor gets the tax advantage because it owns the asset. It often will pass these tax savings on to the lessee in the form of lower lease payments. Many companies prefer to keep assets and especially liabilities off their books. Reporting lower assets improves the return on assets ratio . Reporting fewer liabilities makes the company look less risky. Certain types of leases, called operating leases, allow the lessee to account for the transaction as a rental, with neither an asset nor a liability recorded.

Noncurrent assets are the opposite of current assets.Current assetsare short-term assets, which are assets on the balance sheet that are likely to be converted into cash within one year, such as inventory. The acquisition costs of land may include the purchase or contract price, the broker’s commission, title search and recording fees, assumed taxes or other liabilities, and surveying, demolition , and landscaping costs. Machinery and equipment costs may properly include freight and handling, taxes on purchase, insurance in transit, installation, and expenses of testing and breaking-in. If a building is purchased, all repair charges, alterations, and improvements necessary to ready the building for its intended use should be included as a part of the acquisition cost. Remember that plant assets are those parts of a company that serve the firm, are not employees, and can last for more than a year. To compute the annual depreciation expense under the straight-line method, divide the depreciable cost by the asset’s estimated useful life measured in years.

• 4 Companies often purchase plant assets on an installment plan , or by issuing a note payable.
• Depreciation expense transfers that cost to the Income Statement in order to reflect the effect of the items listed above, in the financial statements.
• Among the more usual kinds of revenue expenditures for plant asset are the repairs, maintenance, lubrication, Cleaning and inspection necessary to keep an asset in good working condition.
• Likewise, the balance sheet will also draw a distinction between current liabilities, which are short-term debts that must be paid within a year, and long-term liabilities.
• The total of all these costs would be debited to Land Improvements.
• If the major purpose of acquiring and holding land is speculative, it is more appropriately classified as an investment.

Depending on the industry of the company in question, a current asset could be anything from crude oil to foreign currency. For example, an auto manufacturer may count auto parts as a current asset. On the other hand, a mutual fund may count short term investments or bonds.

Plants

Some accountants have maintained that the equipment account should be charged only with the additional overhead caused by such construction. However, a more realistic figure for cost of equipment results if the plant asset account is charged for overhead applied on the same basis and at the same rate as used for production. Some accountants treat all cash discounts as financial or other revenue, regardless of whether they arise from the payment of invoices for merchandise or plant assets. Others take the position that only the net amount paid for plant assets should be capitalized on the basis that the discount represents a reduction of price and is not income. The latter position seems more logical in light of the fact that plant assets are purchased for use and not for sale and that they are written off to expense over a long period of time. This is an addition to the machine and should be capitalized in the machinery account if material. Freight on equipment returned before installation, for replacement by other equipment of greater capacity.

A current asset is any asset a company owns that will provide value for or within one year. Current assets are often used to pay for day-to-day-expenses and current liabilities (short-term liabilities that must be paid within one year). Current assets are important to ensure that the company does not run into a liquidity problem in the near future.

This cost allocation of plant asset, called depreciation, is recorded in the accounting books periodically. As plant assets are used in the operations of a business, their value to provide service decreases through usage and the passage of time. For example, on June 1, the company ABC decides to exchange its old equipment for a new one in order to have a smoother operation in daily workflow. The net book value of the old equipment is $30,000 which comes from the cost of $50,000 less the accumulated depreciation of $20,000. Property, plant, and equipment are also called fixed assets, meaning they are physical assets that a company cannot easily liquidate. PP&E is depreciated over time and can be sold for its salvage value. When a company purchases PP&E, it is known as a capital expenditure.

We use a simple form of amortization, usually straight-line, to allocate the cost of these items to expenses. DateDescriptionDebitCreditBalanceSep-1Balance forward$5600($5600)Sep-15Disposal of asset$5600$0The asset and related accumulated depreciation have both been removed from the books. DateAccountDebitCreditSep-15Accumulated Depreciation$5,600 Equipment$7,000To record disposal of equipmentNotice the exact opposite of the account balances is entered for each account.

When the land has been purchased for the purpose of constructing a building, all costs incurred up to the excavation for the new building are considered land costs. Removal of old buildings clearing, grading and filling are considered land costs because these costs are necessary to get the land in condition for its intended purpose. Any proceeds obtained in the process of getting the land ready for its intended use, such as salvage receipts on the demolition of an old building are treated as reductions in the price of the land.

How Is Computer Software Classified As An Asset?

This included the preparation of testimony and responses to data requests from various parties interested in the rate case proceeding. All of the depreciation rates in the tudy were accepted by the RUS and approved by the Kentucky Public Service Commission.

Orchid Flower Game Prop Creation In Tutorials, Game Assets, Resources

Next, subtract accumulated depreciation from the result. In most cases, companies will list their net PP&E on their balance sheet when reporting financial results, so the calculation has already been done.

They generally consist of rights or advantages held such as goodwill, patents, copyrights, franchise, trade marks, organization costs, etc. A company investing in PP&E, also called a capital investment, is a good sign for investors.

Understanding Property, Plant, And Equipment Pp&e

Sometimes a company will have to pay to have the item hauled away. Incidental costs are revenue expenditures, and are not included in calculating the capital gain or loss. After selling or disposing of fixed assets, the company no longer has the asset. This requires a journal entry to remove everything in the accounting records relating to the asset. Book value is the difference between the cost of the plant asset and the accumulated depreciation to date.

Author: Laine Proctor