Property, Plant, and Equipment (PPE): The Complete FAR Study Guide
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
PPE shows up across every question format FAR uses: MCQs that test a single calculation, TBSs that ask for a full rollforward schedule, and simulations that hinge on whether a cost gets capitalized or expensed. The material itself follows one logical sequence, from initial recognition through disposal, and once that sequence is clear the calculations stop being the hard part.
This guide works through every PPE task on the 2026 FAR blueprint, with journal entries and worked examples for each one, plus the specific traps that cost candidates points.
2026 FAR blueprint, PPE representative tasks (Area II, Section D). Application-level tasks: calculate gross and net PPE and prepare journal entries; calculate gains or losses on disposal; calculate impairment losses; determine whether an asset qualifies as held for sale; adjust the carrying amount of assets held for sale. Analysis-level tasks: prepare a PPE rollforward from multiple data sources; reconcile differences between the subledger and the general ledger.
In this guide
- What costs go into the initial cost of PPE?
- When do you capitalize a cost versus expense it?
- How do the three depreciation methods work?
- How do you calculate a gain or loss on disposal?
- How do you test and measure an impairment?
- When does an asset qualify as held for sale?
- How do you build a PPE rollforward?
- Frequently asked questions
Why we capitalize fixed assets instead of expensing them immediately, using a car factory example.
Car factory example: capitalize versus expense immediately
Capitalizing a $4,000,000 factory and depreciating it straight-line over 5 years versus expensing the entire cost in Year 1, against $2,000,000 of annual revenue each year:
| Year | Revenue | Capitalized: depr. expense | Capitalized: net income | Expensed: expense | Expensed: 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 years | $10,000,000 | $4,000,000 | $6,000,000 | $4,000,000 | $6,000,000 |
Total net income over five years is identical either way: $6,000,000. The only difference is when it shows up. Capitalizing spreads the cost against the revenue it helped produce, so the income statement stays smooth. Expensing immediately manufactures a Year 1 loss followed by four years of inflated profit with no matching cost, which is exactly the distortion U.S. GAAP capitalization rules exist to prevent.
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What costs go into the initial cost of PPE?
PPE is recorded at historical cost, which includes every cost necessary to bring the asset to its intended location and condition for use. That single rule is the starting point for every PPE calculation on the exam.
| Cost type | Capitalized or expensed? | Why |
|---|---|---|
| Purchase price, net of discounts | Capitalize | Direct acquisition cost |
| Freight and delivery | Capitalize | Required to bring the asset to its location |
| Installation and assembly | Capitalize | Required to bring the asset to working condition |
| Testing and trial runs | Capitalize | Part of making the asset ready for its 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 of a qualifying asset | Capitalize | Avoidable interest must be capitalized under ASC 835 |
Journal entry: acquiring PPE
Machinery costs $50,000, plus $1,500 freight and $2,000 installation. Total capitalized cost: $53,500.
| Account | Debit | Credit |
|---|---|---|
| Machinery | $53,500 | |
| Cash (or accounts payable) | $53,500 |
Lump-sum purchases. When multiple assets are bought for one price, allocate cost by relative fair value. Land and a building bought together for $1,000,000, where land is worth $300,000 and the building $700,000, split 30% to land and 70% to the building.
Land versus buildings. Land is never depreciated. If a company buys land with an existing structure and plans to demolish it, the demolition cost is added to the cost of the land, not expensed, and any salvage from the demolition reduces the land's cost. This exact scenario shows up on FAR MCQs regularly.
When do you capitalize a cost versus expense it?
Once an asset is in service, the question becomes whether a new expenditure gets added to the asset's cost or expensed in the current period. Expenditures that extend useful life, increase efficiency, or expand capacity are capitalized. Expenditures that simply maintain the asset in its current condition are expensed.
| Capitalize (add to asset cost) | Expense as incurred |
|---|---|
| Major overhaul that extends useful life | Routine maintenance and repairs |
| Upgrade that increases capacity or efficiency | Replacing parts to restore normal function |
| Addition of a new component | Lubrication, cleaning, adjustments |
| Betterment that adds new functionality | Recurring minor repairs |
Journal entry: capitalizing an improvement
The company spends $8,000 upgrading the machinery's motor, extending its useful life by three years.
| Account | Debit | Credit |
|---|---|---|
| Machinery | $8,000 | |
| Cash | $8,000 |
The keyword to watch for is "extends useful life." If a question uses that phrase, capitalize the expenditure. If it says the expenditure "maintains normal operating condition," expense it. Nearly every capitalize-vs-expense question on FAR reduces to spotting which phrase is in play.
How do the three depreciation methods work?
Depreciation allocates depreciable cost over an asset's useful life. Depreciable cost is always historical cost minus salvage value, no matter which method is used.
Straight-line
Equal expense every year. Machinery costs $53,500, salvage value $3,500, useful life 10 years.
Double declining balance (DDB)
An accelerated method that front-loads expense by applying twice the straight-line rate to the asset's book value at the start of each year. Salvage value is ignored in the annual calculation, but the asset cannot be depreciated below salvage value.
| Year | Beginning book value | Rate | Depreciation | 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 the $3,500 salvage floor... | ||||
Units of production
Ties depreciation to actual usage instead of time. The machinery is estimated to produce 100,000 units total and produces 12,000 in Year 1.
Year 1 depreciation = $0.50 × 12,000 = $6,000
| Method | Early years | Late years | When to use |
|---|---|---|---|
| Straight-line | Equal to all years | Equal to all years | Usage is consistent across the asset's life |
| Double declining balance | Highest | Lowest | Asset loses value or generates more value early |
| Units of production | Varies with usage | Varies with usage | Wear ties to output, not time |
Partial-year depreciation. When an asset is placed in service mid-year, most FAR questions prorate the first year for months in service. Straight-line depreciation of $5,000/year on an asset bought October 1 recognizes only 3 months: $5,000 × 3/12 = $1,250. Always check the acquisition date.
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How do you calculate a gain or loss on disposal?
When a PPE asset is sold or retired, the gain or loss equals proceeds minus book value at disposal.
Book value = historical cost − accumulated depreciation
Machinery (cost $53,500) is sold after 6 years of $5,000/year straight-line depreciation. Accumulated depreciation is $30,000, so book value is $53,500 − $30,000 = $23,500.
Sold at a gain: proceeds of $40,000
$40,000 exceeds the $23,500 book value: 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 |
Sold at a loss: proceeds of $18,000
$18,000 is less than the $23,500 book value: 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 |
Retired with no proceeds
If the asset is simply abandoned, the entire remaining book value becomes a loss.
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation | $30,000 | |
| Loss on retirement of asset | $23,500 | |
| Machinery | $53,500 |
Depreciate first, then dispose. If an asset is sold mid-year, record depreciation for the partial year up to the disposal date before recording the sale entry. Skipping this step is one of the most common errors candidates make on PPE TBSs.
How do you test and measure an impairment?
An asset is impaired when its carrying amount exceeds the sum of undiscounted future cash flows it is expected to generate. Testing for impairment of assets held and used is a two-step process under U.S. GAAP.
- Recoverability test: is the asset impaired? Compare carrying amount to the sum of undiscounted expected future cash flows. If carrying amount is higher, the asset is impaired and you move to step 2. If not, no impairment is recognized.
Impaired if: carrying amount > sum of undiscounted future cash flows
- Measurement: how big is the loss? The impairment loss is carrying amount minus fair value. Fair value, not undiscounted cash flows, measures the loss. The written-down amount becomes the asset's new cost basis, and future depreciation is recalculated from there.
Impairment loss = carrying amount − fair value
An asset has a carrying amount of $500,000, undiscounted future cash flows of $480,000, and a fair value of $420,000. Step 1: $500,000 > $480,000, so it is impaired. Step 2: loss = $500,000 − $420,000 = $80,000.
| Account | Debit | Credit |
|---|---|---|
| Impairment loss | $80,000 | |
| Accumulated depreciation (or reduce the asset directly) | $80,000 |
Undiscounted cash flows decide whether an impairment exists. Fair value decides how big it is. FAR questions on impairment almost always hand you all three numbers at once, and mixing up which one does which job is the single most common impairment error on the exam. Also remember: once recorded, an impairment on an asset held and used cannot be reversed under U.S. GAAP, even if the asset later recovers value. IFRS permits reversal; U.S. GAAP does not.
When does an asset qualify as held for sale?
When management commits to a plan to sell a long-lived asset, it gets reclassified as held for sale and measured at the lower of carrying amount or fair value less costs to sell. Depreciation stops immediately.
An asset must meet all of the following to qualify:
- 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 the plan will change significantly or be withdrawn.
An asset with a $600,000 carrying amount is reclassified as held for sale. Fair value is $550,000 and estimated costs to sell are $20,000, so fair value less costs to sell is $530,000. Since $530,000 is less than $600,000, a loss of $70,000 is recognized.
| Account | Debit | Credit |
|---|---|---|
| Loss on reclassification to held for sale | $70,000 | |
| Asset held for sale (written down to $530,000) | $70,000 |
Depreciation stops the moment an asset is classified as held for sale. If a FAR question describes time passing after reclassification and asks for the year-end balance, the answer never includes depreciation from after that date. A question implying otherwise is testing whether you remember this.
How do you build a PPE rollforward?
A rollforward reconciles the beginning and ending PPE balance using acquisitions, disposals, and depreciation. It is a common analysis-level TBS format on the FAR exam.
Ending accumulated depreciation = beginning accumulated depreciation + depreciation expense − accumulated depreciation on disposals
Net PPE = ending gross PPE − ending accumulated depreciation
Given: beginning gross PPE $200,000, beginning accumulated depreciation $80,000, acquisitions $45,000, cost of disposed assets $15,000, accumulated depreciation on those disposals $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 |
On the disposal row, remove both the original cost and the accumulated depreciation of the disposed asset, never just the book value. Removing only book value throws off gross PPE and accumulated depreciation in opposite directions. Before touching the disposal row, always ask: what was this asset's original cost, and how much had it depreciated?
The 2026 blueprint also tests reconciling the PPE subledger against the general ledger control account. Common causes of a mismatch: a disposed asset never removed from the subledger, a new acquisition booked to the general ledger but not yet entered in the subledger, or accumulated depreciation calculated differently in the two systems. On a TBS, expect to be handed both records and asked which one is right and what adjustment fixes it.
Frequently asked questions
What costs are included in the initial cost of PPE?
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 capitalized under ASC 835.
What is the difference between a capital expenditure and a revenue expenditure?
A capital expenditure extends useful life, increases efficiency, or expands capacity, and is capitalized. A revenue expenditure maintains the asset in its normal operating condition and is expensed as incurred. Watch for the phrase "extends useful life": it signals capitalization.
Which depreciation method produces the highest depreciation expense in Year 1?
Double declining balance, because it applies its rate to the full undepreciated book value at the start of each year. Straight-line is equal every year. Units of production depends entirely on usage.
How is an impairment loss calculated under U.S. GAAP?
First compare carrying amount to undiscounted future cash flows to determine whether the asset is impaired. If it is, measure the loss as carrying amount minus fair value, and recalculate depreciation from the new basis. Impairment reversals are not permitted under U.S. GAAP.
What happens to depreciation when an asset is classified as held for sale?
It stops immediately. The asset is then measured at the lower of carrying amount or fair value less costs to sell, and a loss is recognized if that number is lower than carrying amount.
How do you prepare a PPE rollforward for a FAR TBS?
Beginning gross PPE plus acquisitions minus the original cost of disposals equals ending gross PPE. Beginning accumulated depreciation plus current-year depreciation minus accumulated depreciation on disposals equals ending accumulated depreciation. Net PPE is ending gross PPE minus ending accumulated depreciation.
Working through FAR and need a different angle on a topic?
PPE connects directly into impairment, leases, and long-term liabilities. If the rollforward or an impairment write-down still is not clicking after working through this on your own, a tutoring session can walk through the exact logic the AICPA expects, faster than working it out alone.
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.