 Hello and welcome to this session in which we will discuss property, plant, and equipment. These assets are also known as fixed asset or long-term assets just in case your textbook or your CPA review course use a different term. What are these property, plant, and equipment known as PP&E? We're looking at land, office building, equipment, machinery, computer. You need to know what is common between them. What are the common characteristics? How do we consider something as property, plant, and equipment and not something else? The first thing is that asset must be used and notice the word must, must be used in operation. What does that mean? It means you are using this asset to conduct your business on a day-to-day basis. Otherwise, for example, you might have a piece of land. That's a possibility. But you could have bought that piece of land as an investment. Well, that's an investment. It's no longer property, plant, and equipment because it's not used in operation. Also, you could be in the business of buying and selling land where land becomes inventory. It's part of your inventory. That's what you do. You sell land and land is inventory. So for something to be considered, for an asset to be considered property, plant, and equipment, it must be used in operation. It's used for a long period of time. Usually it's longer than a year. And that's why property, plant, and equipment, they get depreciation. We depreciate them. We're going to talk about that later on versus if they are shorter period of time, we might expense them. We don't have to depreciate them. Also, they must have a physical existence. What does that mean? It means we can touch them. We can see them in contrast to other asset called intangible assets, and we'll have a whole chapter about intangible assets later. So property, plant, and equipment, we are physically looking at the asset. We can touch the asset. Those are some characteristics, three common characteristics between old property, plant, and equipment. How to value property, plant, and equipment. In other words, how to record them on the books. Before we talk about valuation, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. I don't replace your CPA review course nor your accounting course. I'm a useful addition. I'm a supplemental material. I explain the material differently than your CPA review course, which will help you understand the material better, which will help you do better on the exam. I can maybe help you add 10 to 15 points on your exam and finish it and get done with it. Your risk is one month of subscription. Give it a try. You like it. You keep it. Otherwise, that's your risk. Your potential gain is actually passing the exam. I believe the risk reward criteria is pretty straightforward. I do have resources for other college courses, and my CPA supplemental material are aligned with your Becker, Wiley, Roger, and Gleam, so it's very easy to go back and forth between your CPA review course and the end my material. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other. Connect with me on Instagram, Facebook, Twitter, and Reddit. Initially, property, plant, and equipment are recorded at historical cost. What is historical cost? It means how much we paid for them. Now we could have paid cash or we could have paid something other than cash. For example, we could have an exchange. The point is, what did you gave up? What did you give up? Usually, if it's cash, that's easy. We know how much we paid. Sometime you're going to be trading an asset for another asset. We're going to have to deal with that later. It's called an exchange. Sometime we might issue stocks for that land. Sometime we might issue a loan. We might have to take care of the discount. How do we handle the loan? What is our true cost? Historical cost is considered reliable and that's why we use historical cost initially. Subsequent to historical cost, once we buy this asset, the asset is reported at book value. What is the book value? It's the cost of the asset, what we paid for it, minus any depreciation that we have accumulated so far, which is called accumulated depreciation. No gains and losses is recognized unless the asset is sold. This is when we recognize the gain or the loss, otherwise we don't do so. Here I'm talking about US generally accepted accounting principle. So let's take a look at land. What's included in the cost of the land? Obviously the purchase price, what we paid for the land. Any closing cost, what could be considered the closing cost? Recording that land, attorney fees that help us close the deal, title fees to have that title in our name, cost of grading, filling, drainage, and clearing the land. All these costs are considered, costs necessary to get the asset ready for its intended use. Removing an old building, removing an old building, okay? Removing of old building, that's considered also part of the cost of the land. Now let's assume when you remove that building, you find out you can sell some scrapes, maybe some pipelines that were part of that building. Well if it costs you $10,000 to remove the building, then you sold the $1,000 worth of scrapes. That's gonna reduce your cost, that means your cost is $9,000. Any assumption of liens or mortgages? If you are responsible for the loan now, if you bought a building and you didn't pay a penny for it but now you are responsible for $10,000 or for a million dollar because you took over the loan, well that's your cost. Your loan is your cost because you are responsible for that debt. Additional land improvement with indefinite life and this is very important to differentiate between indefinite and indefinite. So you added something to that land but whatever you added has an indefinite life. Now a few things have indefinite life. Let me give you an example. For example, if you planted a cedar tree, cedar tree is considered to have an indefinite life, therefore it will be considered part of the land and land not depreciated. And the reason land is not depreciated and this is an important concept I want you to start to kind of let it sink in is it has an indefinite life. Anything with indefinite life is not depreciated because the concept of depreciation is the asset is helping you for a certain period of time. While this asset land has an indefinite life, therefore it cannot be depreciated. Let's contrast land to land improvement and talking about land improvement, those are limited life land improvement versus indefinite life, notice limited versus indefinite life. Like what? If you put a private driveway parking lots, walks, fences, lighting system into that land, that's considered has a limited life and because it has limited life, those assets are treated separately. So you will have an asset for land. Land will have an asset and you will have an account called land improvement. It's a separate asset and with land improvement comes accumulated depreciation. So we're going to have land improvement and we're going to have accumulated depreciation related to that land improvement versus land. It's not depreciable. What about the building? Well, all expenditure necessary, all the costs that we're going to be incurred connected to the purchase or the construction of the building. Like what? Architect fees, building permits, professional fees, material, labor and overhead. What is overhead is anything other than material, direct material and direct labor. And we have a special issue to deal with next is interest. How do we account for interest? We'll talk about that later. What about equipment? Same concept, any expenditure necessary to bring in or prepare the asset for that intended use to prepare the equipment. Interest price of course will be a big one, shipping and handling cost. If you paid any insurance in transit, any installation or assembling that equipment, otherwise you can't use it. Any trial runs to get it ready for its intended use. If you have to put a special foundation for that asset, well that's also going to be part of your cost. Now the only way to help yourself a little bit more is to work MCQs, multiple choice questions and where can you find those? Go ahead, look at MCQs, practice, you need to know how to determine the cost of the asset. At the end of this recording, once again, I'm going to invite you to visit my website forhatlectures.com. I don't replace your CPA review course, I'm a useful addition. Just give it a try, invest in yourself for a month. You find it's helpful, you keep it, you see it's not helping you, you cancel. That's your risk. Good luck, study hard and of course, stay safe.