Navigating Property, Plant, and Equipment (PPE) Accounting for the U.S. FAR CPA Exam

Written By Kyle Ashcraft

Understanding the accounting for Property, Plant, and Equipment (PPE) is crucial for anyone preparing for the U.S. FAR CPA exam. PPE consists of long-term, tangible assets used in the operation of a business. This article will delve into the specifics of recognizing, measuring,capitalizing, and depreciating PPE under U.S. Generally Accepted Accounting Principles (U.S. GAAP).

Definitions

Property, Plant, and Equipment (PPE)

PPE assets are tangible items that:

1. Have a useful life of more than one year.

2. Are used in the production or supply of goods and services, for rental, or for administrative purposes.

Recognition and Measurement

PPE is initially recognized at its historical cost, which includes not only the purchase price but also any costs necessary to bring the asset to its intended use. Subsequent to initial recognition, PPE is generally accounted for using the cost model, which involves depreciating the asset over its useful life.

Capitalizing Expenditures

Capital expenditures increase the asset’s useful life, efficiency, or capacity. In contrast, revenue expenditures merely maintain the asset in its normal operating condition and are expensed as incurred.

Examples

Example 1: Journal Entry for Purchasing PPE Suppose a company buys machinery for $50,000. The entry would be:

  • Debit Machinery $50,000

  • Credit Cash $50,000

Example 2: Journal Entry for Capitalizing an Improvement

Let’s say the company spends $5,000 to upgrade the machinery, thereby extending its useful life. The entry would be:

  • Debit Machinery $5,000

  • Credit Cash $5,000

Example 3: Journal Entry for Depreciating PPE

Assuming the machinery has a useful life of 10 years with no salvage value, the annual depreciation would be $5,500 ($55,000 / 10 years). The entry for one year would be:

  • Debit Depreciation Expense $5,500

  • Credit Accumulated Depreciation $5,500

Example 4: Journal Entry for Selling PPE

If the machinery is later sold for $40,000, and the accumulated depreciation at that time is $22,000, the entry would be:

  • Debit Cash $40,000

  • Debit Accumulated Depreciation $22,000

  • Credit Machinery $55,000

  • Credit Gain on Sale of Machinery $7,000

Depreciation Methods

Under U.S. GAAP, common methods for depreciating PPE include:

1. Straight-Line Method

2. Double Declining Balance Method

3. Units-of-Production Method

Disclosures

Transparent disclosure of accounting policies for PPE, including depreciation methods and rates, is crucial under U.S. GAAP. This allows stakeholders to understand the asset’s accounting treatment and compare financial statements across companies.


Kyle Ashcraft
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