Operational Assets - Property, Plant, and

Equipment

Chapter 10

Kieso, Weygandt, Warfield

Capital Expenditures vs Revenue Expenditures

Capital Expenditures – Cash outflows for goods and services that will provide future economic benefit beyond the current period.

Assets XXXX

Cash XXXX

Revenue Expenditures – Cash Outflows for goods and services beneficial only to the current period

Expense XXXXCash XXXX

Operational [Tangible] Assets

1. Acquired for use in Operations2. Not held for resale3. Expected lives are long-term4. Must have physical substance5. Used to generate revenue

** Examples include Equipment, Land, Building

Costs to be Capitalized

General Rule

The initial cost of an operational asset includes the purchase price and all expenditures

necessary to bring the asset to its desired condition and

location for use.

General Rule

The initial cost of an operational asset includes the purchase price and all expenditures

necessary to bring the asset to its desired condition and

location for use.

Net purchase priceTaxesTransportation

costsInstallation costsModification to

buildingnecessary to install equipment

Testing and trial runs

Net purchase priceTaxesTransportation

costsInstallation costsModification to

buildingnecessary to install equipment

Testing and trial runs

Costs to be Capitalized ---- Equipment

Land is not depreciable.Land is not depreciable.

Purchase price Real estate commissions Attorney’s fees Title search Title transfer fees Title insurance

premiums Removing old buildings Material costs of

improvements that are permanent in nature

Purchase price Real estate commissions Attorney’s fees Title search Title transfer fees Title insurance

premiums Removing old buildings Material costs of

improvements that are permanent in nature

Costs to be Capitalized ---- Land

Separate identifiable costs of Driveways Parking lots Fencing Private roads

Separate identifiable costs of Driveways Parking lots Fencing Private roads

Costs to be Capitalized ---- Land Improvements

Purchase price Architectural fees Cost of permits Excavation costs Construction costs

Purchase price Architectural fees Cost of permits Excavation costs Construction costs

Costs to be Capitalized ---- Buildings

The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. Identify each expenditure as part of the cost of the land, building, or land improvements asset account.

1. Payment for construction from note proceeds - $275,0002. Cost of land fill and clearing - $8,0003. Delinquent real estate taxes on property assumed by purchaser -

$7,0004. Architect’s fee on building - $22,0005. Cost of real estate purchased as a plant site - [land $200,000 and

building $50,000]6. Commission fee paid to real estate agency - $9,0007. Installation of fences around property – $4,0008. Cost of razing and removing old building - $11,0009. Proceeds from salvage of demolished building - $5,00010. Cost of parking lots and driveways - $19,00011. Cost of trees and shrubbery planted (permanent in nature) -

$14,00012. Ground excavation costs for basement of new building - $3,00013. Interest paid during construction on money borrowed for

construction - $13,000

Answer to Question from Previous Slide

LandCost of fill and clearing $8,000Delinquent taxes $7,000Cost of Land and old Bldg 250,000Commission to Realtor $9,000Cost of removing old Bldg $11,000Proceeds fr old Bldg salvage ($5,000)Cost of trees & shrubs $14,000

$294,000

BuildingPmt for construction $275,000Architect Fee $22,000Excavation costs $3,000Interest during construction $13,000

$313,000

Land ImprovementsFences $4,000Parking lots and driveways $19,000

$23,000