Presentation of PPE: Where is PPE and How Does the PPE Section Look?

PPE is physical assets that create value for the company. But let’s back up a minute. Why is PPE defined as an asset? And where might we find it on the Statement of Financial Position? Let’s look at the definition of an asset:

• a resource controlled by the company,
• as a result of past events, and
• from which economic benefits are expected to flow to the entity.

Is PPE a current asset or non-current asset? Remember that one-year rule? If a company will hold an asset longer than one year, it should be classified as non-current. How long do we expect to use our buildings, land, and equipment? PPE is held for more than a year. Think about a building – a company may use a building for 50 years or longer. Furniture might be used for 10 years, and most computer equipment is useful for at least a year. So we classify PPE as a non-current asset.

In this chapter we will discuss accounting for PPE: how to calculate the cost of an asset and what happens to the value of PPE over time (hint: most assets decrease in value over time as we use them). Here we go!

Asset Cost: What is Involved in Getting an Asset Ready for Use?

A company purchases assets and uses these assets to create value for customers and shareholders. But what is the value of these assets to the company, and how do we record these assets on our Statement of Financial Position?

Let’s start with the cost of the asset to the company. What costs are incurred by a company for a PPE asset?

• The purchase cost,
• costs to get the PPE asset in place, and
• costs to prepare the PPE asset for use.

Notice that these three costs are incurred before the asset is operational. They are capitalized costs, meaning these costs increase the asset balance on the Statement of Financial Position.

We can think of the purchase cost as the sticker price or invoice cost – whatever we pay for the asset itself. We may also have to pay legal fees to purchase an asset. Think of land or buildings – we have to pay the cost of this real estate plus legal fees for title transfer.

Costs of getting the asset in place might be shipping and freight, delivery costs, or import fees.

Lastly, a company adds the cost of getting the asset ready for use. For example, a company purchases computer equipment and has it delivered, but the equipment is still in its box. Clearly the computer equipment is not ready for use. The company has to assemble and install the machinery. These assembly and installation costs are included in computer equipment cost in the company’s accounting records.

But be cautious, not all costs are included in the asset cost. Only costs to that increase the value or useful life of the asset are capitalized, and typically this only includes costs incurred before the asset is operational. This means that repairs and maintenance, which represent basic upkeep of the asset, do not get capitalized. Now you may wonder, if a company pays for maintenance with cash (credit to cash), what will they enter as the balancing debit account? Great question!

If the debit does not meet the definition of an asset, such as repairs and maintenance, what account should we use? What other account type holds a debit balance? Expenses! Let’s use repairs and maintenance expense here. All vehicle oil changes, cleaning costs, replacement cost of oil filters or lightbulbs, paint, or other repair parts and labour would be expensed in this way.

Let’s do a few examples to get the hang of capitalization.

My Turn:

Jody’s Joinery purchases welding equipment for $42,000 cash. The equipment is shipped to Jody’s shop at Jody’s expense. Jody pays one of her machinists to assemble the equipment. Shipping is $700 and the machinist wages are $60 per hour for four hours total assembly time. Once the new welding equipment is up and running, Jody pays $500 in employee training to teach her workers how to safely use the new welding equipment. What is the cost of welding equipment on Jody’s Joinery’s Statement of Financial Position?

Employee training costs are not capitalized because this is past the stage of getting the welding equipment ready for use.

Here comes another problem. This time it’s your turn! Give Speedy Skates a try…

Well done! Good job categorizing costs. Let’s get some more practice in. I’ll do a more complicated problem, then it will be your turn.

My Turn:

Flo’s Flower’s purchases a walk-in fridge to store her floral bouquets. The fridge has a retail value of $115,000, but Flo receives a loyalty discount of 15% which brings the amount owing to $97,750. The fridge is shipped to a local outlet and Flo arranges local delivery for $500. She also arranges a local contractor to install the fridge in the showroom and outfit the fridge with display shelves and hooks. Installation and outfitting costs $600. The first month’s utilities on the fridge are $320. What amount will be shown as the cost of walk-in fridge on Flo’s Flower’s Statement of Financial Position?

The utility costs are expensed because the fridge is already in operation. These costs are not associated with getting the fridge ready for use.

Alright, it’s your turn again. Advise Henry’s Hockey on which costs should be capitalized in this problem.

Beautifully done. Thanks for working through this content! Let’s do just one more. My turn first.

My Turn:

Ryder’s Motorsport purchases a new truck to haul their bike trailer. The truck costs $70,000 and will be paid in monthly installments over the next two years. Ryder outfits the truck with a $2,000 specialized heavy haul hitch to fit the commercial bike trailer. What is the total cost that Ryder will record for the truck?

Alright, very last one. It’s your turn, and this time the company has three assets. It’s a complex problem, but you can do this!

Good work calculating the cost of PPE assets! Now let’s look at how to calculate the value of these PPE assets over time. What happens to the value of an asset over time? Read on. This is the topic of the next section.