The Cost of Property, Plant, Equipment

The cost of property, plant, and equipment includes the purchase price of the asset and all expenditures necessary to prepare the asset for its intended use.

 

Land. Land purchases often involve real estate commissions, legal fees, bank fees, title search fees, and similar expenses. To be prepared for use, land may need to be cleared of trees, drained and filled, graded to remove small hills and depressions, and landscaped. In addition, old buildings may need to be demolished before the company can use the land. Such demolition expenses are considered part of the land's cost. For example, if a company purchases land for $100,000, pays an additional $3,000 in closing costs, and pays $22,000 to have an old warehouse on the land demolished, then the company records the cost of the land at $125,000.

Land improvements. The cost of land improvements includes all expenditures associated with making the improvements ready for use. For example, when one business contracts with another business to put a parking lot on a piece of land, the cost of the parking lot is simply the agreed‐upon price. A company that builds its own parking lot would determine the lot's cost by combining the cost of materials and wages paid to employees for building the lot.

Buildings. The cost of buildings includes the purchase price and all closing costs associated with the acquisition of the buildings, including payments by the purchaser for back taxes owed. Remodeling an acquired building and making repairs necessary for it to be used are also considered part of the cost. If a building is constructed for the company over an extended period, interest payments to finance the structure are included in the cost of the asset only while construction takes place. After construction is complete and the building is ready for productive use, interest payments are classified as interest expense.

Equipment, vehicles, and furniture. The cost of equipment, vehicles, and furniture includes the purchase price, sales taxes, transportation fees, insurance paid to cover the item during shipment, assembly, installation, and all other costs associated with making the item ready for use. These costs do not include such things as motor vehicle licensing and insurance, however, even if they are paid when a vehicle purchase occurs. Expenses of this type are normal, recurring operational expenses that do not add lasting value to the vehicle.

 
 
 
 
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