The historical cost of acquiring an asset comprises the costs necessary to get it to its intended condition and location, according to FASB.
This means that the acquisition cost of property, plant, and equipment includes all reasonable and necessary costs to transport and prepare the asset for use.
Equipment acquisition costs include transportation, insurance in transit, installation, testing, and standard repairs before use.
All of these fees are needed to prepare the equipment for operation.
However, the acquisition cost does not include unanticipated charges like shipping damage repairs, purchase discounts lost, or, in most situations, financing costs.
These costs, together with typical repairs and maintenance in following periods, constitute period expenses.
Each property, plant, and equipment asset has certain acquisition cost conventions.
Example: When buying land, real estate commissions, title fees, legal expenses, draining, grading, and clearing costs, and outstanding property taxes must be included.
However, the accountant’s judgment must often choose which items to capitalize.
Property, plant, and equipment purchased with cash have a clear acquisition price.
The asset’s net cash equivalent price paid plus all other costs to prepare it for usage.
Consider the Miller Company buying a lathe from Arnold. The lathe costs $15,000 and has 2/10, n/30 periods.
If the reduction is not accepted, the $300 should be considered interest instead of equipment cost.
Others to Buy Property, Plant, and Equipment
An firm can buy property, plant, and equipment in various means besides cash.
Basket purchases, noncash trades like business capital shares, donation, and self-construction are examples.
Cost determination in these buys is sometimes more complicated than in cash transfers and requires specific care.
Group or Basket Purchases
Businesses commonly buy their property, plant, and equipment in one big amount, whether for cash or not.
Buying a building frequently includes buying the ground on which it sits.
The agreed-upon purchase price includes the building and land, and it may be more or less than their fair market values.
Thus, the purchase amount must be divided among the assets. This is crucial because buildings depreciate but land does not. Appraisals or property records determine allocation.
Say the H. Jones Company buys an office facility and property. The purchase costs $1 million.
In this case, the acquisition cost is used to register assets, even though their evaluated values may be higher.
Non-cash transactions can buy property, plant, and equipment. A company may buy land and give the seller equity.
The cost technique demands that the asset acquisition price equal any cash given and the fair market value of any non-monetary consideration in these transactions.
If the fair market value of the non-cash consideration cannot be determined with reasonable accuracy, the market value of the purchased asset should be used.
Consider the Orange firm, a major public firm, buying downtown Los Angeles land for its corporate office. The Orange Company gives the seller 10,000 shares of capital stock for the land.
The land should be recorded at Orange Company’s fair market value if its stock is not quoted on an exchange and it is difficult to value.
Collection by Donation
An enterprise may receive donated property, plant, or equipment.
A community may offer General Motors or another large firm site land to develop its facility in order to attract them.
If the historical cost principle were followed, accountants would assign zero land cost in these uncommon cases.
Since this would be misleading, accountants register the asset at its fair market value upon receipt. The credit goes to Donated Capital, a stockholders’ equity account.
Assume the WLH Corporation receives 100 acres of land from Lost Acres for free. The land’s fair market value is $100,000 at donation.
The company may build a building or piece of equipment. Known as self-constructed assets.
These assets cost money to buy, including construction materials and labor and some overhead. Supervisory labor, utilities, and plant depreciation are overhead.
Since interest is the time worth of money, it is usually considered an expense.
Thus, interest on notes used to buy property, plant, or equipment is expensed.
The FASB released Statement 34 in 1979, requiring interest to be capitalized and included in the acquisition cost of certain non-current, non-monetary assets in restricted instances.
Statement 34 requires that interest incurred in the construction of an enterprise’s own or another entity’s assets be capitalized as part of the asset’s acquisition or production cost if it takes a long time to use them.
Naturally, capitalized interest requirements are complicated.