Question

What costs are included in the initial cost of property, plant, and equipment when they are purchased? What is the rationale for including costs in addition to the purchase price of the asset? please answer in your own words, do not use the outside resources

Answer 1

Property, Plant and equipment are long term assets that a corporation acquires in its usual course of business to meet its daily operational needs. Often, Property, Plant and equipment are called as the Fixed assets of the company . They are generally tangible assets that is used by a business on a regular basis.

A cost involved in the purchase of property, plant and equipment will be capitalized if it provides future economic benefits. All expenses that are incurred to get an asset into a working conditions are eligible to be capitalized. Otherwise, the costs are just expensed and would not be capitalized.

In order to calculate the costs of plant and equipment when they are purchased, it becomes necessary to add the following costs:-

1.) Shipping/Freight Costs:- Shipping costs to be borne by the buyer will have to be included in the price of plant and machinery during their capitalization. Shipping is done from the vendor to the buyer . These should be capitalized as part of the Property , plant and equipment expenses because it is necessary for getting the asset into usable condition.

2.) Installation charges :- Few machines, equipment, etc required complex techniques because of the hardware and other setup charges. These expenses are necessary to get the asset to working condition. As such, these are capitalized.

3.) Overhaul of existing equipment :- When a property, plant or equipment is procured as a replacement to an existing property, plant or equipment, the expenses involved in the overhaul of the existing systems should be included in the cost of the property, plant and equipment. This is because, overhaul is a mandatory process involved in placing the assets into use.

4.) Sales tax :- Any taxes paid on purchase of plant and machinery should be also included in the cost of property plant and machinery.

5.) Miscellaneous expenses:- Other miscellaneous expenses like Handling costs, costs of site preparation to accomodate the property, plant and equipment are also costs that needs to be capitalized in arriving at the cost of the property, plant and equipment.

Following is an excerpt on how the calculation of costs involved on the purchase of property , plant and equipment can be done/are included:-

Particulars	Amount
Cost of the asset	XXX
Add:- Sales tax	XXX
Add:- Freight	XXX
Add:- Installation costs	XXX
Add:- Handling costs	XXX
Capitalized cost of property, plant and equipment	XXX

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