## Property, plant and equipment (PP&E)

Property, plant and equipment include the assets that are expected to be used in operations for more than a year.
Assets classified as property, plant and equipment are tangible assets that have physical substance.
Property, plant and equipment include tangible assets that have physical substance, such as land, buildings, machinery, equipment, vehicles, furniture and fixtures.
Because these assets are expected to be used over multiple accounting periods, they are called as long-lived assets.
Property, plant and equipment are recorded at the acquisition cost when they are initially recorded.
In subsequent periods, accumulated depreciation is subtracted from the acquisition cost to report the carrying amount of the asset, except for land. Land is not depreciated and the acquisition cost of land is reported as carrying amount in the financial statements.
All property, plant and equipment other than land are depreciated over the useful life of the asset.
Depreciation is the process of allocating the cost of property, plant and equipment over the life of the asset.
Depreciation expense is reported in the income statement.
Accumulated depreciation is a contra-asset asset account that is subtracted from property, plant and equipment in the statement of financial position.
If the fair value of property, plant and equipment is lower than the carrying amount, the asset is impaired and an impairment loss is recognized.

Acquisition Cost
Acquisition cost includes all the expenditures required to make an asset ready for the intended use are included in the acquisition cost of the asset. Cost of demolishing an old building on land purchased is included in the acquisition cost of land.

Depreciation
Except for land, the cost of property, plant and equipment is allocated over the life of the asset through depreciation process. The cumulative amount of depreciation is recorded in the accumulated depreciation account.

Carrying Amount (Book Value)
Carrying amount, also called as book value, of an asset is calculated by subtracting the accumulated depreciation from the cost of property, plant and equipment.

Impairment of an Asset
An asset is impaired if the fair value of the asset is lower than the carrying amount (book value) of the asset. If an asset is impaired, the carrying amount is reduced to the fair value and the difference between fair value and carrying amount is recognized as an impairment loss.

Gain or Loss on Disposal
If an asset is sold at the price higher than the carrying amount of the asset at the time of sale, gain on sale of asset is recognized. If the amount recovered from the sale or disposal of the asset is lower than the carrying amount, loss on disposal of asset is recognized.

Review Questions
1. How is the acquisition cost of property, plant and equipment determined?
(1) Expenditures required to make an asset ready for the intended use are included in the acquisition cost of the asset.
(2) Cost of demolishing an old building on land purchased is included in the acquisition cost of land.

2. How is the carrying amount (book value) of property, plant and equipment calculated?
Carrying amount = Acquisition cost – Accumulated depreciation

Exercise 1
Company T had the following balances.
Property, plant and equipment = $720,000 Accumulated depreciation =$170,000
What is the amount of net property, plant and equipment?

Net property, plant and equipment
= Property, plant and equipment – Accumulated depreciation
= $720,000 –$170,000 = $550,000 Exercise 2 Company S had the following balances. Cost of equipment =$300,000
Accumulated depreciation for equipment = $80,000 What is the amount of book value of equipment? Book value of equipment = Cost of the asset – Accumulated depreciation =$300,000 – $80,000 =$220,000

## Noncurrent assets

Noncurrent assets are the assets that are expected to be converted into cash after a year or normal operating cycle, whichever is longer.
Noncurrent assets include property, plant and equipment (PP&E), intangible assets and long-term investments.
Property, plant and equipment include land, buildings, equipment, vehicles, furniture and fixtures.
Intangible assets do not have physical substance, so that they are not tangible. Intangible assets include goodwill, patents, trademarks and copyrights.
Noncurrent assets also include long-term investment assets that are expected to be converted into cash after a year.

Property, Plant and Equipment (PP&E)
In the property, plant and equipment section, the following assets are presented:
1. Land
2. Buildings
3. Machinery and equipment
4. Vehicles
5. Furniture and fixtures

[Note]
Accumulated depreciation is a contra-asset account that is subtracted from property, plant and equipment.

Intangible Assets
The following assets are the examples of intangible assets:
1. Goodwill
2. Patents

Long-term Investments
If the entity has the intention to keep the investments in debt and equity securities for more than a year from the end of the reporting period, such investments are presented as long-term investments.

Review Questions
1. What is a noncurrent asset?
Noncurrent asset is an asset that is expected to be converted into cash after a year.

2. What are the examples of noncurrent assets?
Property, plant and equipment, intangible assets and long-term investments are the examples of noncurrent assets.

3. What are the examples of property, plant and equipment?
Land, buildings, machinery, equipment, vehicle, furniture and fixtures are the examples of property, plant equipment.

4. What are the examples of intangible assets?

## Lower of Cost or Market (LCM)

Lower of Cost or Market (LCM)

1. At the end of each period, inventory is measured at the lower of cost or market.

2. Market = Current replacement cost

3. If current replacement cost > Net realizable value (NRV) of inventory, then
Market = Net realizable value (NRV) of inventory

4. If current replacement cost < (NRV - Normal profit margin), then
Market = NRV – Normal profit margin

5. Net realizable value (NRV) = Selling price – Costs to complete and sell

## Liabilities

CURRENT LIABILITIES

Accounting for Current Liabilities
1. Current liabilities: Liabilities that are expected to be paid within a year or normal operating cycle, whichever is longer.
2. Accounts payable, notes payable, salaries payable, interest payable, current maturities of long-term debt.
3. Sales taxes payable, payroll taxes payable, income taxes payable.

Classification of Liabilities
1. Current liabilities
2. Non-current liabilities
NONCURRENT LIABILITIES

Accounting for Bonds Payable
1. Types of bonds: Callable bonds, convertible bonds, secured bonds.
2. Issuance of bonds at face value (at 100): No discount or premium on bonds payable is recorded.
3. Issuance of bonds at a discount (e.g. at 95): Discount on bonds payable is recorded on debit side.
4. Issuance of bonds at a premium (e.g. at 105): Premium on bonds payable is recorded on credit side.
5. Amortization of discount and premium on bonds payable: Straight-line method, effective interest method
6. Retirement of bonds payable

## Inventory Recording Systems

Inventory Recording Systems
Periodic inventory system
Perpetual inventory system

## Inventory Analysis

Inventory Turnover Ratios
1. Inventory turnover ratio = Cost of goods sold / Average inventory
2. Days in inventory = 365 days / Inventory turnover ratio

Exercise
Cost of goods sold = \$60,000
Beginning inventory = 12,000
Ending inventory = 18,000

Calculate the following:
(1) Inventory turnover ratio
(2) Days in inventory

Average inventory = (Beginning inventory + Ending inventory) / 2
= (12,000 + 18,000) / 2 = 15,000
(1) Inventory turnover ratio = 60,000 / 15,000 = 4.0
(2) Days in inventory = 365 / 4.0 = 91.25

Inventory Errors
1. Cost of goods sold = Beginning inventory + Purchases – Ending inventory
2. If ending inventory is overstated, cost of goods sold is understated.
3. If cost of goods sold is understated, net income is overstated.
4. If ending inventory is understated, cost of goods sold is overstated.
5. If cost of goods sold is overstated, net income is understated.

Exercise
During the physical inventory taking, Entity T counted 100 units of merchandise twice. Because of double counting, ending inventory of Entity T was overstated by 17,000. Which of the following is correct?
a. Total assets was understated by 17,000.
b. Cost of goods sold was overstated by 17,000
c. Net income was overstated by 17,000
d. Total liabilities was overstated by 17,000