Understanding Long Term Assets and Accounting for Property,

School: University of Michigan - Course: ACC 300 - Subject: Accounting

Long Term Assets - PP&E ACC 300 Agenda •Economics of Property, Plant and Equipment •Accounting for PP&E •Measurement issues •Management bias •Bookkeeping mechanics This document is authorized for use byVy Dang, from 8/29/2022 to 12/19/2022, in the course: ACC 300 - Financial Accounting - Kama, Anderson, Mehta (Fall 2022), University of Michigan, Ann Arbor. Any unauthorized use or reproduction of this document is strictly prohibited*.

2 Economics of PP&E Product OperationsInvestingFinancing •As firms create value they often use assets that have long lives •Every period some value is used up and some remains AssetPurchasedFurtherInvestmentFurther Investment 2. Asset Sold ReportingPeriod End Reporting Period End Asset UsedAsset Used Portion of Asset Remains 1. Portion of Asset Remains Economic Reality •Assets and their use ~ Examples -You buy a car for personal use »Drive to work, play, and everything else - Ahigh end livery company buys a car »Always need clean and new-looking cars for high end clients (BBA graduates), after a few years sell or use for lower end clients (faculty mostly) This document is authorized for use byVy Dang, from 8/29/2022 to 12/19/2022, in the course: ACC 300 - Financial Accounting - Kama, Anderson, Mehta (Fall 2022), University of Michigan, Ann Arbor. Any unauthorized use or reproduction of this document is strictly prohibited*.

3 Accounting for PP&E - Purchase We start by determining if the cost is an asset and can be capitalized The cost to buy or make the asset, including amounts necessary to transport and prepare the asset for use Land Purchase Price +Surveying Costs +Fees, Permits, And Closing Costs +Real Estate Commissions +Clearing/Grading Costs +Assumption of Any Liens Or Mortgages +Demolition Costs -Salvage Proceeds Equipment Purchase Price+Freight Costs+Sales Tax+Transit Insurance +Installation Costs+Assembly Costs+Testing CostsBuildings Contract Purchase Price +Design Costs +Fees and Permits Self-Constructed Assets Construction Costs (DM, DL, Overhead) +Design Costs+Fees and Permits+Interest Costs During Construction+Insurance Costs During ConstructionDr.Property, Plant & Equipment45,000 Cr.Cash,Liability,or Common Stock45,000