 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at introduction to long term assets, sometimes they're called plant assets, fixed asset and property, plant and equipment. This topic is covered in financial accounting and obviously covered on the CPA FAR section. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, tax and finance lectures. This is a list of all the courses that I covered, including many CPA questions. If you like my recording, please click on the like button, share them, put them in playlist. If they benefit you, it means they might benefit other people. So please share the wealth and connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources that you can use if you are studying for your CPA exam or if you would like to supplement your accounting education. So when we talk about plant asset or fixed asset, this is the picture that should come to mind. Office building, delivery truck, business vehicles, chairs, office furniture, computers, warehouses, bulldozers. Those are the assets that should come to mind. This is the asset that we're going to be dealing with. So what is common about these assets and how can we define them? For one thing, those assets are tangible in nature. You can see them, you can touch them, you can touch a car, you can touch an office building, you can touch a delivery truck. They are actively used in operation. What does that mean? It means we use them to operate the business. We don't sell them. The purpose of that is not to sell them. The purpose is to use them in the active of the business, day-to-day operation. In other words, we don't buy, we don't buy the vehicle for the purpose of reselling the vehicle. We're not a car dealership, unless we are, but we're assuming here that we are not. So those are actively used in operation. They are not held for sale, and that's the most important part. That's going to build the future chapter. They benefit future period. Those assets, they don't benefit one year or two years. They benefit several years. This is going to take us to the concept of depreciation, because they benefit the company for several years, which we'll talk about in the next session. And sometimes they are called property, plant, and equipment, short, P, P, and E. When we are dealing with property, plant, and equipment or plant assets, we have to take care of four issues. First is the cost, the acquisition. When we buy the property, plant, and equipment, we have to determine the acquisition cost. How much did we pay for this asset? Therefore, we need to record it at cost. And in this session, we will work on this topic. The other three topics are allocate cost-to-period benefit. Number two is depreciation, which we'll talk about that in the next session. And number three, allocate for subsequent expenditure. Allocate the expenditure that we're going to be spending on this asset for future period. Allocate the expenditure. And last but not least is the disposal of the asset. And we'll talk about this in a different session. Last is we dispose of the asset. We can sell the asset, we can exchange the asset, so we can have a sale, sell it, we can exchange the asset, we can exchange the asset into another asset. Those are the ways that we can get rid of an asset. This is what we can do. We can either sell it or exchange it. In this session, we'll focus on the acquisition and let's take a look at acquisition. So what is the general rule? The general rule is acquisition costs include all normal and reasonable expenditure necessary to get the asset in place ready for its intended use. So this is the general rule. Now, to be specific, acquisition costs would include obviously the purchase price, whatever you pay for something, plus in addition to that, expenditure needed to prepare the asset for its intended use. So we're going to take the purchase price plus those necessary expenditure, plus those necessary expenditure. Now, let's be more specific. Let's assume we're buying a machinery, machinery and equipment. Well, when you buy a machinery, usually the largest component of it is the purchase price, whatever you pay for it. Then you're going to have to pay taxes, so let's assume we bought a machinery for 100,000. That's the purchase price, 100,000. Then we bought paid taxes of $6,000. The 6% sales tax, we're going to be assuming 6% sales tax, that's $6,000. To transport this asset, we're going to pay $1,000, transportation charge, insurance in transit, $500 because we had to pay insurance to make sure if something happened in transit, it's insured. Installing, assembling and testing is another $500. So how much did that, what's the cost of this asset? What's 106, 7, 8, 108,000. This is the total cost because all these costs are considered necessary to buy this asset. So this is the necessary cost. So if we bought this asset and paid cash, we debit the asset machinery 108, and we credit cash 108, and we credit cash 108. Now let's assume we bought a building. What's included in the cost of the building? Well, obviously the cost of purchase or if you build it, the cost of construction, any brokerage fee, if you bought it, you had to pay brokerage fee, that's separate taxes in case you needed to pay taxes for the purchase, attorney fees, title fees. These are all considered necessary costs. Let's first jump to land. Let's assume you bought land. What's included in the cost of the land? What's included is purchase price, real estate commission. So if you bought a land for again, let's use $100,000. The real estate commission is 6%, that's $6,000. Title, search and transfer fee is $1,000. Surveying fee, let's assume you paid $2,000. And what are the title search? When you buy a land, you want to make sure the title is free and clear. It doesn't have anyone else on the title. And transfer fee is to put that land in your name at the county or at the state level. You have to pay a fee. Surveying fee to determine where does your land start and end, that's $2,000. And property taxes here, we need to be more specific. That's if the property taxes are passed due. In other words, the seller is giving you the asset, but they have passed due taxes. It means they did not pay their taxes. So if you want to buy this land, the county will not allow you to put that land into your name unless you pay the taxes. That's why the past due taxes are included in the price of the land because you cannot purchase the land unless you pay for those taxes. Now, we have something. So if you might have bought a piece of land and put a fence around that piece of land. If you put that fence around that piece of land, that fence is not considered part of the land. The fence is a separate asset. It's called land improvement. So this is a new separate asset. Land improvement is a separate asset than the land. Like if you had a driveway on that land, walks, you planted shrubs, parking lots, anything that you do to that land, that's a separate asset called land improvement. Now, all the long-term assets that we talked about up to this point with the exception of land are depreciable. We depreciate. So land improvement is depreciate. We depreciate land improvement. Now, why do we depreciate land improvement? Because those land improvement, parking lots, driveways, fences, and shrubs, they have limited life. They have limited life. What does it mean they have limited life? It means they're going to serve us for a period of time, maybe three years, maybe six years, maybe 15 years, but it's limited. Same with all the other property, plant, and equipment in machinery. All these assets, they serve you for multiple years, but it's a limited amount of time, maybe 10, 15, 20 years. On the other hand, land, land, what we need to know about land, land is not depreciable. Now, why is land not depreciable? I always ask this question in class, and the typical answer is because land does not lose value, not true. The reason we don't depreciate land because it has unlimited or infinite life. So when you depreciate something, and we'll learn about depreciation in the next session, you have to determine the life of the asset over how many years you are going to depreciate something. And if you don't have a specific life or the life is unlimited, you don't depreciate. So you don't depreciate something with unlimited life. That's what we're trying to say. Therefore, land is not depreciable, and that's the only plant asset that we don't depreciate because it does not have a limited life. It does not have a limited life. It's considered to have infinite or unlimited life. Now, the other topic we're going to talk about is something called lump sum purchase. And why do we worry about lump sum purchase? That's very common in the real world because when you buy, when you buy a business, especially when you buy a business, you purchase with one price. So you pay one price for a bunch of assets. So let's assume you're going to be buying this pizzeria. And for the sake of illustration, let's assume you paid $100,000 for this pizzeria. This is how much you paid. I guess it doesn't matter. So what do you buy? You're going to buy the building itself, you're going to buy the land, and you're going to buy the kitchen equipment, and you paid $100,000. Now, we're dealing here with three different assets. The land is separate than the building. The building is separate than the kitchen, and the kitchen is separate from the land. So what you did is you paid $100,000 for the building, land, and equipment. So you bought one, two, three different assets. Now, how do you allocate this $100,000 to the three different assets? Here what we have to use is the relative fair market value. And this is an important concept in accounting. It's called relative fair market value. What you have to find out is the appraised or market value for each asset separately. So simply put your ask an expert, or you just basically try to guess to the best of your knowledge. What is the fair value of the building? And let's assume the fair value of the building happens to be $70,000. The fair value of the land happens to be $40,000. And the fair value of the equipment happens to be $20,000. This is the fair value. Here's what you need to do now. Now you need to find out what's the relative fair value for each asset separately. So simply put what you need to do is to find the total value, which is $130,000, then find the relative value for each asset separately. We have to find the relative fair value for the building. The building is worth $30,000 out of $130,000. That's going to give us $53.84, 53.84%. The land is worth $40,000 out of $130,000. That's approximately $30.76. And the equipment is $200,000 out of $130,000 total value. That's $15.38. Now if we add them up rounded, it's going to be 100%. Now how do we allocate the $100,000 now? Now we know of the $100,000 we allocate $53.84 to the building. It means $53,840. Of the $100,000, we're going to allocate $30.76, which is $30,760. And out of the equipment, for the equipment, we're going to allocate $15,38. As I told you, it's due to rounding. It may not add up exactly to $100,000, but this is how we compute a lump sum purchase. In the next session, what we will do is we would look at depreciation expense. So after you determine the cost, you have to allocate the cost to expense. You have to allocate the cost to expense, and this process is called depreciation. If you like this recording, please click on the like button, subscribe, share with other, share with other. And if you're looking to supplement your education, visit my website for head lecturers.com. Study hard, stay motivated, and please stay safe. Good luck.