Difficulty: Introductory to Intermediate | Prerequisites: Basic understanding of financial statements, the accounting equation, and the distinction between assets, liabilities, and equity.
Property, plant, and equipment (PPE) is one of the largest line items on most companies' balance sheets and sits at the heart of intermediate accounting. This topic covers how to identify, classify, and measure the cost of long-lived tangible assets under US GAAP. You should already be comfortable with debits and credits, the difference between assets and expenses, and the concept of historical cost. The material here feeds directly into depreciation (Chapter 11), which you cannot do properly without knowing what cost figure to start from.
PPE includes land, land improvements, buildings, equipment, and construction in progress. Each category has its own rules for what costs get capitalised and whether the asset is depreciated. When multiple assets are bought together (a basket purchase), you split the lump-sum price using either the proportional method or the incremental method.
Property, plant, and equipment (PPE)
Tangible, long-lived assets held for use in operations, not for resale. They have physical substance and are expected to provide benefit for more than one accounting period.
In simple terms, these are the big physical things a company owns and uses to run its business.
Historical cost
The amount originally paid to acquire an asset, including all costs necessary to get it ready for its intended use.
Think of it as the "all-in" price tag: purchase price plus every reasonable cost needed before the asset can do its job.
Fair value
The price at which an asset could be bought or sold in an orderly transaction between market participants.
In simple terms, what the asset is worth on the open market right now.
Capitalise
To record a cost as an asset on the balance sheet rather than as an expense on the income statement.
Think of it as "putting the cost on the balance sheet" so it gets spread over future periods through depreciation, rather than hitting the income statement all at once.
Land
Property currently in service as a building site. Not depreciated because land has an unlimited useful life.
Land improvements
Site enhancements that are not permanent, such as sidewalks, driveways, parking lots, and landscaping. These are depreciated because they wear out over time.
Equipment
Tangible property used in a company's operations, such as drills, saws, machines, and tools. Depreciated over its useful life.
Buildings
Permanent or temporary structures used in a company's operations. The building is recorded separately from the land beneath it and is depreciated.
Construction in process (CIP)
Also called construction in progress. A temporary holding account for PPE assets currently being manufactured or built. Costs accumulate here, then transfer to Building, Equipment, etc. once complete, at which point depreciation begins.
Basket purchase (lump-sum purchase)
A single transaction in which several fixed assets are acquired together for one price. The total cost must be allocated among the individual assets.
Proportional method
Allocates the lump-sum purchase price to each asset based on the ratio of each asset's individual fair value to the total fair value of all assets acquired.
Think of it as: each asset gets a slice of the total price proportional to how much it is worth on its own.
Incremental method
Used when the fair value of one or more assets in a basket purchase cannot be determined. Assets with known fair values are recorded at those values; the remainder of the purchase price is assigned to the asset whose fair value is unknown.
Mixed-attribute system
A framework (used by both GAAP and IFRS) in which some accounts are measured at fair value and others at historical cost.
PPE is recorded at historical cost under US GAAP. The cost of each asset includes the purchase price plus every reasonable and necessary cost to get it ready for its intended use.
Purchase price
Reasonable purchase fees: realtor commission, closing costs, title insurance
Site preparation: clearing, grading, filling, draining
Removing existing structures if redeveloping the site
Accounting treatment: never depreciated (unlimited useful life)
When land is purchased with the intent to demolish an existing structure and build something new, the demolition cost and the purchase price of the old structure are both part of the cost of the land, not the new building.
Proceeds from selling salvaged materials (e.g. scrap metal from a demolished building) reduce the cost of the land.
Sidewalks, driveways, parking lots, landscaping, parking lot lighting
Accounting treatment: depreciated (they have a limited useful life)
The key distinction from land itself: land improvements wear out and will eventually need replacing. Land does not.
Tangible property used in operations: drills, saws, machines, tools
Capitalise all reasonable acquisition costs:
Purchase price (net of any discounts)
Installation costs
Sales tax
Freight/shipping
Accounting treatment: depreciated
Permanent or temporary structures used in operations
Recorded separately from the land underneath
Capitalise all reasonable acquisition costs
Accounting treatment: depreciated
A temporary account for PPE being manufactured or built by the company itself
Capitalise all reasonable costs to build (the costs you would have been billed if paying an outside party)
Once construction is complete, the balance transfers out of CIP into Building, Equipment, or whichever account fits
Depreciation begins only after the transfer, not during construction
Three requirements for an item to be classified as PPE:
It is tangible (has physical substance)
It is held for use in operations (not for resale)
It has a useful life longer than one accounting period
Edge cases from the lecture:
Herding dogs used by a country club to keep waterfowl off the greens: yes, this is PPE (tangible, used in operations, useful life beyond one period)
Hotel and meal reimbursement for a consultant installing specialised equipment: yes, capitalise as part of the equipment's cost (a necessary cost to get the asset ready)
A seat licence for a stadium giving the right to buy season tickets for 30 years: no, this is an intangible asset (a right, not a physical thing)
When several assets are acquired in a single transaction for one price, the total must be split among the individual assets. There are two methods.
Used when the fair value of every asset in the bundle is known.
Add up the individual fair values to get the total appraised value
Calculate each asset's ratio: (asset's fair value) / (total fair value)
Multiply each ratio by the actual purchase price paid
Worked example: land, storage facility, and machinery purchased together for $90,000.
Asset | Fair Value | Ratio | Allocated Cost |
|---|---|---|---|
Land | $30,000 | 30,000 / 100,000 = 30% | $27,000 |
Storage Facility | $50,000 | 50,000 / 100,000 = 50% | $45,000 |
Machinery | $20,000 | 20,000 / 100,000 = 20% | $18,000 |
Total | $100,000 | 100% | $90,000 |
Notice the total allocated cost equals the actual purchase price ($90,000), not the total appraised value ($100,000).
Used when the fair value of at least one asset in the bundle cannot be determined (e.g. highly specialised equipment with no comparable market).
Assign each asset with a known fair value its appraised amount (up to the purchase price)
Whatever is left over goes to the asset whose fair value is unknown
Worked example: same $90,000 purchase, but the machinery's fair value is indeterminable.
Asset | Allocated Cost |
|---|---|
Land | $30,000 (appraised value) |
Storage Facility | $50,000 (appraised value) |
Machinery | $10,000 (remainder: 90,000 - 30,000 - 50,000) |
Total | $90,000 |
Students often think land improvements and land are the same account. They are not. Land has an unlimited useful life and is never depreciated. Land improvements (parking lots, sidewalks) wear out and must be depreciated.
Students sometimes expense costs like freight, installation, and sales tax on equipment. These are necessary to get the asset ready for use and should be capitalised as part of the equipment's cost.
When demolishing a building to use the land, students often put the demolition cost in the Building account. It belongs in Land, because the demolition was done to prepare the land for its intended use.
In a basket purchase, students sometimes record each asset at its appraised fair value. The total recorded must equal the actual purchase price paid, not the sum of the fair values.
⚠️ Know which costs go to Land vs. Land Improvements vs. Building. This is a favourite exam question: you are given a list of costs and asked to compute the balance in each account.
⚠️ Be able to work a basket purchase using both the proportional and incremental methods. Expect a problem where one fair value is missing, forcing you to use incremental.
⚠️ Understand why land is not depreciated (unlimited useful life) while everything else in PPE is.
⚠️ Remember that CIP does not start depreciating until the asset is complete and transferred to its final account.
True or false: Land improvements are never depreciated. (False. Land improvements have limited lives and are depreciated. Land itself is never depreciated.)
Fill in the blank: When multiple assets are purchased together for one price, this is called a ______ purchase. (basket / lump-sum)
True or false: Sales tax on purchased equipment should be expensed immediately. (False. It is capitalised as part of the equipment's cost.)
Fill in the blank: CIP stands for ______ and is used to accumulate costs while an asset is being ______. (Construction in Process/Progress; built/manufactured)
True or false: In the incremental method, all assets are recorded at their individual fair values. (False. Only assets with determinable fair values are recorded at those values; the remainder goes to the asset with the unknown fair value.)
Q: A company purchases land for $125,000. Closing costs are $5,000, foundation work is $15,000, cost to remove an existing structure is $10,000, and proceeds from selling scrap metal from the demolished structure are $3,000. Paving a parking lot costs $10,000, landscaping costs $12,000, and parking lot lighting costs $10,000. What amount is recorded in the Land account?
A: Land = $125,000 + $5,000 + $15,000 + $10,000 - $3,000 = $152,000. The parking lot ($10,000), landscaping ($12,000), and parking lot lighting ($10,000) are land improvements, not land.
Q: A company pays $90,000 for land, a storage facility, and machinery. The individual fair values are $30,000, $50,000, and $20,000 respectively. Using the proportional method, what cost is allocated to the storage facility?
A: Storage facility ratio = $50,000 / $100,000 = 50%. Allocated cost = 50% x $90,000 = $45,000.
Q: Same facts as above, but the machinery's fair value is indeterminable. Using the incremental method, what cost is allocated to the machinery?
A: Land is recorded at $30,000 and the storage facility at $50,000 (their known fair values). Machinery gets the remainder: $90,000 - $30,000 - $50,000 = $10,000.
Q: A company buys equipment for $50,000. Freight costs $2,000, installation costs $3,000, and sales tax is $4,000. What is the total capitalised cost of the equipment?
A: $50,000 + $2,000 + $3,000 + $4,000 = $59,000. All of these are necessary costs to get the equipment ready for use.
Q: Explain why land is not depreciated but a parking lot on that same land is.
A: Land has an unlimited useful life; it does not wear out. A parking lot is a land improvement with a finite useful life; it will deteriorate and eventually need replacement, so its cost is allocated over that life through depreciation.
This material connects directly to depreciation methods (straight-line, sum-of-the-years' digits, declining balance, units of production), because the cost figure you establish at acquisition is the starting point for every depreciation calculation. It also feeds into asset disposal and impairment testing: you cannot calculate a gain or loss on disposal without knowing the original capitalised cost and accumulated depreciation. The basket purchase allocation logic (proportional method) mirrors the relative fair value approach used elsewhere in the course, including inventory allocation.
PPE, property plant and equipment, fixed assets, tangible assets, long-lived assets, capital assets, land account, land improvements, equipment cost, building cost, construction in progress, CIP, construction in process, basket purchase, lump-sum purchase, proportional method, incremental method, fair value allocation, historical cost, capitalise vs expense, acquisition cost, GAAP mixed-attribute system, IFRS PPE, ACCT MIS 3200, Chapter 10, Chapter 11, LO 10-1, LO 10-2, LO 10-6