Property, Plant, and Equipment (PPE): The Complete FAR Study Guide
Property, Plant, and Equipment (PPE): The Complete FAR Study Guide
Initial cost, capitalizing vs. expensing, depreciation methods, disposals, impairment, and assets held for sale -- everything the 2026 FAR blueprint tests on PPE.
PPE is one of the most consistently tested FAR topics because it shows up across every question format: MCQs that test your ability to calculate a balance, TBSs that ask you to prepare a rollforward schedule, and simulations that require you to identify whether a cost should be capitalized or expensed. The good news is that PPE follows a logical sequence from initial recognition through disposal, and once you understand that sequence, the calculations become straightforward.
This guide covers every PPE task identified in the 2026 FAR blueprint, with journal entries, worked examples, and the specific traps the exam uses to cost candidates points.
2026 FAR Blueprint: PPE Representative Tasks (Area II, Section D)
The following tasks are directly tested on the FAR exam for Property, Plant, and Equipment. Application-level tasks involve calculation and journal entry preparation. Analysis-level tasks require you to use multiple data sources to reconcile balances.
- Application: Calculate gross and net PPE balances and prepare journal entries
- Application: Calculate gains or losses on disposal of long-lived assets
- Application: Calculate impairment losses on long-lived assets
- Application: Determine whether an asset qualifies to be reported as held for sale
- Application: Adjust carrying amount of assets held for sale and calculate the loss
- Analysis: Prepare a rollforward of the PPE account balance using various sources of data
- Analysis: Reconcile differences between the subledger and general ledger for PPE
Jump to:
Video: Fixed Assets and the Matching Principle Explained
This video walks through why we capitalize fixed assets instead of expensing them immediately, using a car factory example to show how the matching principle works on the income statement.
Car Factory Example: Capitalize vs. Expense Immediately
The table below compares what happens to the income statement when you capitalize a $4,000,000 factory (and depreciate it over 5 years) versus expensing the entire cost in Year 1. This is the core logic behind the matching principle and why PPE must be capitalized under U.S. GAAP.
| Year | Revenue | Capitalize & Depreciate ($4M cost / 5-yr straight-line = $800K/yr) |
Expense Immediately (entire $4M expensed in Year 1) |
||
|---|---|---|---|---|---|
| Depr. Expense | Net Income | Expense | Net Income | ||
| Year 1 | $2,000,000 | $800,000 | $1,200,000 | $4,000,000 | ($2,000,000) |
| Year 2 | $2,000,000 | $800,000 | $1,200,000 | $0 | $2,000,000 |
| Year 3 | $2,000,000 | $800,000 | $1,200,000 | $0 | $2,000,000 |
| Year 4 | $2,000,000 | $800,000 | $1,200,000 | $0 | $2,000,000 |
| Year 5 | $2,000,000 | $800,000 | $1,200,000 | $0 | $2,000,000 |
| Total (5 yrs) | $10,000,000 | $4,000,000 | $6,000,000 | $4,000,000 | $6,000,000 |
Key Takeaway: Over the full five years, total net income is identical under both approaches ($6,000,000). The difference is when that income is recognized. Capitalizing and depreciating produces a smooth, consistent income statement that matches costs to the revenue each year. Expensing immediately creates a misleading picture, a massive Year 1 loss followed by inflated profits with no matching costs in Years 2 through 5. That distortion is exactly why U.S. GAAP requires capitalization.
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Get My Free CPA 101 CourseInitial Cost of PPE FAR
The historical cost principle applies at the point of acquisition. The asset's initial carrying value includes not just the invoice price, but all the following costs that are directly attributable to getting the asset ready to operate:
| Cost Type | Capitalized or Expensed? | Why |
|---|---|---|
| Purchase price (net of discounts) | Capitalize | Direct acquisition cost |
| Freight and delivery charges | Capitalize | Required to bring the asset to its location |
| Installation and assembly costs | Capitalize | Required to bring the asset to working condition |
| Testing and trial runs | Capitalize | Part of making the asset ready for intended use |
| Sales tax on the purchase | Capitalize | Directly attributable to the purchase |
| Insurance during transit | Capitalize | Required to transport the asset safely |
| Routine repairs after the asset is in service | Expense | Maintenance, not acquisition |
| Training employees to use the asset | Expense | Not a cost of the asset itself |
| Interest during self-construction (qualifying asset) | Capitalize | Avoidable interest must be capitalized under ASC 835 |
Journal Entry: Acquiring PPE
A company purchases machinery for $50,000 plus $1,500 in freight and $2,000 for installation. The total capitalized cost is $53,500.
| Account | Debit | Credit |
|---|---|---|
| Machinery | $53,500 | |
| Cash (or Accounts Payable) | $53,500 |
Common Trap: Land vs. Buildings. Land is never depreciated. When a company purchases land with an existing structure and plans to demolish it, the demolition cost is added to the cost of the land, not expensed. The salvage received from the demolition reduces the cost of the land. This specific scenario shows up on FAR MCQs regularly.
Lump-Sum Purchases: When multiple assets are acquired for a single price, the cost is allocated to each asset based on their relative fair values. For example, if land and a building are purchased together for $1,000,000 and the land has a fair value of $300,000 while the building is worth $700,000, the land gets 30% ($300,000) and the building gets 70% ($700,000) of the purchase price.
Capitalize vs. Expense: Subsequent Expenditures High-Yield
The rule is straightforward: expenditures that extend the asset's useful life, increase its efficiency, or expand its capacity are capitalized. Expenditures that simply maintain the asset in its current operating condition are expensed.
Capitalize (Add to Asset Cost)
- Major overhaul that extends useful life
- Upgrade that increases capacity or efficiency
- Addition of a new component
- Betterment that adds new functionality
Recorded as: Debit Asset / Credit Cash
Expense as Incurred
- Routine maintenance and repairs
- Replacing parts to restore normal function
- Lubrication, cleaning, and adjustments
- Recurring minor repairs
Recorded as: Debit Repairs Expense / Credit Cash
Journal Entry: Capitalizing an Improvement
The company spends $8,000 to upgrade the machinery's motor, extending its useful life by three years.
| Account | Debit | Credit |
|---|---|---|
| Machinery | $8,000 | |
| Cash | $8,000 |
Kyle's 90+ Score Insight: FAR questions about capitalizing vs. expensing are almost always testing one of two scenarios: a major overhaul (capitalize) vs. routine maintenance (expense), or a lump-sum purchase where you need to separate components. The keyword to watch for is "extends useful life." If the question uses that phrase, the expenditure gets capitalized. If it says "maintains normal operating condition," it gets expensed.
Depreciation Methods FAR
The FAR exam tests three depreciation methods. You need to know the annual depreciation calculation for each and understand which produces the highest depreciation expense in the early years of an asset's life.
Method 1: Straight-Line
Allocates equal depreciation expense to each year of useful life. This is the simplest method and the most common on exam questions.
Example: Machinery costs $53,500, has a salvage value of $3,500, and a 10-year useful life.
Annual Depreciation = ($53,500 − $3,500) ÷ 10 = $5,000 per year
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | $5,000 | |
| Accumulated Depreciation | $5,000 |
Method 2: Double Declining Balance (DDB)
An accelerated method that front-loads depreciation expense into the early years of an asset's life. DDB applies a rate equal to twice the straight-line rate to the asset's book value at the beginning of each year. Importantly, salvage value is ignored in the annual calculation, but the asset cannot be depreciated below its salvage value.
Example continued: Same asset. DDB rate = 2 ÷ 10 = 20%.
| Year | Beginning Book Value | DDB Rate | Depreciation Expense | Ending Book Value |
|---|---|---|---|---|
| 1 | $53,500 | 20% | $10,700 | $42,800 |
| 2 | $42,800 | 20% | $8,560 | $34,240 |
| 3 | $34,240 | 20% | $6,848 | $27,392 |
| ...continues until book value reaches $3,500 salvage... | ||||
Method 3: Units of Production
Ties depreciation to actual usage rather than the passage of time. Useful when wear and tear is driven primarily by how much the asset is used, such as machinery, vehicles, or equipment with a measurable output capacity.
Annual Depreciation = Depreciation per Unit × Units Produced This Year
Example continued: The machinery is estimated to produce 100,000 units total. In Year 1, it produces 12,000 units.
Depreciation per unit = ($53,500 − $3,500) ÷ 100,000 = $0.50 per unit
Year 1 depreciation = $0.50 × 12,000 = $6,000
| Method | Early Years Depreciation | Late Years Depreciation | When to Use |
|---|---|---|---|
| Straight-Line | Equal to all years | Equal to all years | Most common; when usage is consistent across the asset's life |
| Double Declining Balance | Highest (front-loaded) | Lowest | When an asset loses value quickly or generates more value early in its life |
| Units of Production | Varies with usage | Varies with usage | When wear and tear is directly tied to output rather than time |
Common Trap: Partial-Year Depreciation. When an asset is placed in service mid-year, most FAR questions require prorating the first year's depreciation for the number of months the asset was in service. For example, if straight-line depreciation is $5,000 per year and the asset was purchased on October 1, only three months of depreciation are recognized in Year 1: $5,000 × 3/12 = $1,250. Watch for the acquisition date in any depreciation question.
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Disposals: Calculating Gains and Losses High-Yield
Book Value = Historical Cost − Accumulated Depreciation
There are three possible disposal outcomes:
Gain on Sale
Proceeds exceed book value. The asset was sold for more than its remaining carrying amount. Recognized as a gain on the income statement.
Loss on Sale
Proceeds are less than book value. The asset was sold for less than its remaining carrying amount. Recognized as a loss on the income statement.
No Gain or Loss
Proceeds exactly equal book value. This is rare in practice but common in exam questions testing the mechanics of the entry.
Journal Entry: Selling PPE at a Gain
The machinery (cost: $53,500) is sold for $40,000 after 6 years of straight-line depreciation ($5,000/year). Accumulated depreciation = $30,000. Book value = $53,500 − $30,000 = $23,500. Proceeds of $40,000 exceed book value of $23,500, resulting in a gain of $16,500.
| Account | Debit | Credit |
|---|---|---|
| Cash | $40,000 | |
| Accumulated Depreciation | $30,000 | |
| Machinery | $53,500 | |
| Gain on Sale of Machinery | $16,500 |
Journal Entry: Selling PPE at a Loss
Same asset, but sold for $18,000 instead. Book value is still $23,500. Proceeds of $18,000 are less than book value of $23,500, resulting in a loss of $5,500.
| Account | Debit | Credit |
|---|---|---|
| Cash | $18,000 | |
| Accumulated Depreciation | $30,000 | |
| Loss on Sale of Machinery | $5,500 | |
| Machinery | $53,500 |
Partial-Year Depreciation Before Disposal: If an asset is sold mid-year, you must first record depreciation for the partial year up to the disposal date before recording the sale entry. FAR questions regularly test whether you remember this step. The failure to record partial-year depreciation before disposal is one of the most common errors candidates make on PPE TBSs.
Retirement with No Proceeds
If an asset is simply retired (abandoned) rather than sold, no cash is received. Any remaining book value becomes a loss.
| Account | Debit | Credit |
|---|---|---|
| Accumulated Depreciation | $30,000 | |
| Loss on Retirement of Asset | $23,500 | |
| Machinery | $53,500 |
Impairment of Long-Lived Assets FAR
Under U.S. GAAP, testing for impairment of assets held and used is a two-step process:
Recoverability Test: Is the asset impaired?
Compare the asset's carrying amount to the sum of its undiscounted expected future cash flows. If the carrying amount exceeds undiscounted future cash flows, the asset is impaired and you proceed to Step 2. If the carrying amount is less than or equal to undiscounted future cash flows, no impairment is recognized.
Measurement: How much is the impairment loss?
The impairment loss is the difference between the asset's carrying amount and its fair value. Note that fair value (not undiscounted cash flows) is used to measure the loss. The asset's new carrying amount after the write-down becomes its new cost basis, and future depreciation is recalculated from that new basis.
Impairment Example
An asset has a carrying amount of $500,000. The expected future cash flows (undiscounted) total $480,000, and the asset's fair value is $420,000.
Step 1: $500,000 > $480,000, so the asset IS impaired.
Step 2: Impairment loss = $500,000 − $420,000 = $80,000
| Account | Debit | Credit |
|---|---|---|
| Impairment Loss | $80,000 | |
| Accumulated Depreciation (or directly reduce asset) | $80,000 |
Critical Distinction: Undiscounted for Testing, Fair Value for Measuring. FAR questions on impairment almost always present three numbers: carrying amount, undiscounted cash flows, and fair value. You use undiscounted cash flows only to determine whether an impairment exists. You use fair value to calculate the actual dollar amount of the loss. Confusing these two numbers is the most common impairment error on the exam.
Impairment Reversals Under U.S. GAAP: Once an impairment is recorded for an asset held and used, it cannot be reversed under U.S. GAAP. The new lower carrying amount becomes the asset's new cost basis. This is in contrast to IFRS, which does permit reversals. If you see a question involving an asset that has recovered in value after an impairment write-down, the answer under U.S. GAAP is that no recovery is recognized.
Assets Held for Sale FAR
Criteria to Qualify as Held for Sale
An asset must meet all of the following criteria to be classified as held for sale:
Management has committed to a plan to sell the asset.
The asset is available for immediate sale in its present condition.
An active program to find a buyer has been initiated.
The sale is probable within 12 months.
The asset is being actively marketed at a reasonable price.
It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Measurement: Lower of Carrying Amount or Fair Value Less Costs to Sell
Record at the LOWER of the two
If the fair value less costs to sell is lower than the carrying amount, a loss is recognized for the difference. This loss is presented separately on the income statement. Unlike assets held and used, the lower of carrying amount or fair value less costs to sell test uses fair value reduced by estimated selling costs, not undiscounted cash flows.
Held-for-Sale Example
An asset with a carrying amount of $600,000 is reclassified as held for sale. Its fair value is $550,000 and estimated costs to sell are $20,000. Fair value less costs to sell = $550,000 − $20,000 = $530,000.
Since $530,000 < $600,000 carrying amount, a loss of $70,000 is recognized.
| Account | Debit | Credit |
|---|---|---|
| Loss on Reclassification to Held for Sale | $70,000 | |
| Asset Held for Sale (at $530,000) | $70,000 reduction |
Depreciation Stops When Held for Sale. The moment an asset qualifies as held for sale, depreciation ceases. FAR questions sometimes present a scenario where time passes after an asset is classified as held for sale and ask for the year-end balance. The answer never includes depreciation after the reclassification date. If the question implies you should continue depreciating, that is a distractor.
PPE Rollforward and Reconciliation Analysis-Level TBS
The rollforward connects every transaction that affected PPE during the period into a single reconciliation. Understanding it is essential for the analysis-level tasks in the 2026 FAR blueprint.
Rollforward Example
Use the following information to prepare a PPE rollforward for the year:
| Item | Amount |
|---|---|
| Beginning gross PPE | $200,000 |
| Beginning accumulated depreciation | $80,000 |
| Acquisitions during the year | $45,000 |
| Cost of assets disposed of | $15,000 |
| Accumulated depreciation on disposed assets | $9,000 |
| Current year depreciation expense | $18,000 |
| Rollforward | Gross PPE | Accum. Depr. | Net PPE |
|---|---|---|---|
| Beginning balance | $200,000 | $80,000 | $120,000 |
| Acquisitions | $45,000 | -- | $45,000 |
| Disposals | ($15,000) | ($9,000) | ($6,000) |
| Depreciation expense | -- | $18,000 | ($18,000) |
| Ending balance | $230,000 | $89,000 | $141,000 |
Kyle's 90+ Score Insight: The rollforward format is the most common TBS structure for PPE on the FAR exam. The trap is in the disposal row: you need to remove both the original cost and the accumulated depreciation of the disposed asset, not just the book value. If you only remove the book value, both your gross PPE and your accumulated depreciation will be wrong. Build the habit of always asking: "What was the original cost of this asset, and how much has it depreciated?"
Subledger vs. General Ledger Reconciliation: The 2026 blueprint also tests your ability to identify differences between the PPE subledger (the detailed listing of individual assets) and the general ledger control account. Common causes of differences include assets that were disposed of but not removed from the subledger, new acquisitions recorded in the general ledger but not yet entered into the subledger, or accumulated depreciation calculated differently in the two systems. On a TBS, you will typically be given both records and asked to determine which one is correct and what adjustment is needed.
FAR PPE: Frequently Asked Questions
What costs are included in the initial cost of PPE?
The initial cost includes all costs necessary to bring the asset to its intended location and condition: purchase price, freight, installation, assembly, testing, and sales tax on the purchase. Training employees to use the asset is not capitalized. For self-constructed assets, avoidable interest during construction is also capitalized under ASC 835.
What is the difference between a capital expenditure and a revenue expenditure?
A capital expenditure extends the asset's useful life, increases its efficiency, or expands its capacity and is added to the asset's cost (capitalized). A revenue expenditure simply maintains the asset in its normal operating condition and is expensed as incurred in the current period. The key phrase to watch for in FAR questions is "extends useful life," which signals capitalization.
Which depreciation method produces the highest depreciation expense in Year 1?
Double declining balance (DDB) produces the highest depreciation in the early years of an asset's life because it applies the DDB rate to the full undepreciated book value at the beginning of each year. Straight-line produces equal expense each year. Units of production depends on usage and may be higher or lower depending on how much the asset is used in a given period.
How is an impairment loss calculated under U.S. GAAP?
First, test for impairment by comparing the carrying amount to the sum of undiscounted future cash flows. If the carrying amount exceeds undiscounted cash flows, the asset is impaired. Then measure the loss as the difference between the carrying amount and the asset's fair value. The asset is written down to fair value, and depreciation is recalculated from the new basis going forward. Impairment reversals are not permitted under U.S. GAAP.
What happens to depreciation when an asset is classified as held for sale?
Depreciation ceases immediately on the date the asset is classified as held for sale. The asset is then measured at the lower of its carrying amount or fair value less costs to sell. If the fair value less costs to sell is lower, a loss is recognized. No further depreciation is recorded while the asset remains classified as held for sale.
How do you prepare a PPE rollforward for a FAR TBS?
Start with the beginning gross PPE balance, add acquisitions, and subtract the original cost of any disposed assets to get ending gross PPE. Separately, start with beginning accumulated depreciation, add current-year depreciation expense, and subtract the accumulated depreciation associated with disposed assets to get ending accumulated depreciation. Net PPE is ending gross PPE minus ending accumulated depreciation.
Working through FAR and need a new perspective on a topic?
PPE is one of the highest-tested areas in FAR, and it connects directly into impairment, leases, and long-term liabilities. If calculations like the rollforward or impairment write-down are not clicking after working through the material on your own, a tutoring session can walk you through the exact logic the AICPA expects in a fraction of the time it takes to figure it out independently.
Kyle Ashcraft is a CPA who scored a 95 on FAR and 90+ on all four CPA exams. Kyle founded Maxwell CPA Review, a boutique exam-prep company offering a comprehensive CPA exam review course and private FAR tutoring.