Question

What is the general rule for cost inclusion for plant assets?

Short answer

Determining the cost of plant assets

• Plant assets are recorded at cost by the cost principle
• Cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.
• These costs include purchase price, freight costs, and installation costs.
• Expenditures that are not necessary like traffic fines, unpacking damage, etc. should be recorded as expenses, losses, or other assets

Step-by-step solution

Plant Assets

Plant assets are tangible long-lived assets (the useful life of more than one financial year) used to produce or sell products and services. Plant assets are also known as property, plant, and equipment (PP&E) assets or fixed assets.

Buildings

A Building account is charged for the costs of purchasing or constructing a building that is used in operations. When purchased, a building’s costs usually include its purchase price, commissions, survey & legal fees, unpaid property taxes, etc. and the cost of construction includes architectural fees, building permit fees, contactor charges, and payment for material, labor, and overhead.

Machinery and equipment

The costs of machinery and equipment consist of all costs normal and necessary to purchase them and prepare them for their intended use. These include purchase price-less discounts, transportation, insurance while in transit, sales and other taxes, purchase commissions, installation, etc.

Land

Costs of land include expenditures necessary to make that property ready for its intended use. When land is purchased for a building site, its cost includes the total amount paid for the land, including any real estate commissions, title insurance fees, legal fees, and any accrued property taxes paid by the purchaser.

Land improvement

Land improvements are additions to land and have limited useful lives. For Example, fencing, paving, lighting, sprinkler system, signs, etc.

Lump-sum assets purchase

The total cost of a combined purchase of land and building is separated based on their relative values. Example: ABC ltd. purchased a group of items consisting of a building appraised at $60,000 and land appraised at $40,000. The $90,000 cost is allocated based on appraised values as shown below: -

	Appraised value	Percentage of total	Apportioned cost
building	$60,000	60%	$54,000 (90,000*60%)
land	$40,000	40%	$36,000 (90,000*40%)
total	$1,00,000	100%	$90,000