Cost Principle for Asset Evaluation
Cost Principle for Computing the Cost of Plant Assets
Plant assets are recorded at cost when acquired. This is consistent with the cost principle. Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. The cost of a factory machine, for instance, includes its invoice cost less any cash discount for early payment, plus any necessary freight, unpacking, assembling, installing, and testing costs. Examples are the costs of building a base or foundation for a machine, providing electrical hookups, and testing the asset before using it in operations. To be recorded as part of the cost of a plant asset, expenditure must be normal, reasonable, and necessary in preparing it for its intended use. If an asset is damaged during unpacking, the repairs are not added to its cost. Instead, they are charged to an expense account. Nor is a paid traffic fine for moving heavy machinery on city streets without a proper permit part of the machinery’s cost; but payment for a proper permit is included in the cost of machinery. Charges are sometimes incurred to modify or customize a new plant asset. These charges are added to the asset’s cost.
Land
When land is purchased for a building site, its cost includes the total amount paid for the land, including any real estate commissions, title insurance fees, legal fees, and any accrued property taxes paid by the purchaser. Payments for surveying, clearing, grading, and draining also are included in the cost of land. Other costs include government assessments, whether incurred at the time of purchaser later, for items such as public roadways, sewers, and sidewalks. These assessments are included because they permanently add to the land’s value.
Land Improvements
Land has an indefinite (unlimited) life and is not usually used up over time. Land improvements such as parking lot surfaces, driveways, fences, shrubs, and lighting systems, however, have limited useful lives
Plant assets are recorded at cost when acquired. This is consistent with the cost principle. Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. The cost of a factory machine, for instance, includes its invoice cost less any cash discount for early payment, plus any necessary freight, unpacking, assembling, installing, and testing costs. Examples are the costs of building a base or foundation for a machine, providing electrical hookups, and testing the asset before using it in operations. To be recorded as part of the cost of a plant asset, expenditure must be normal, reasonable, and necessary in preparing it for its intended use. If an asset is damaged during unpacking, the repairs are not added to its cost. Instead, they are charged to an expense account. Nor is a paid traffic fine for moving heavy machinery on city streets without a proper permit part of the machinery’s cost; but payment for a proper permit is included in the cost of machinery. Charges are sometimes incurred to modify or customize a new plant asset. These charges are added to the asset’s cost.
Land
When land is purchased for a building site, its cost includes the total amount paid for the land, including any real estate commissions, title insurance fees, legal fees, and any accrued property taxes paid by the purchaser. Payments for surveying, clearing, grading, and draining also are included in the cost of land. Other costs include government assessments, whether incurred at the time of purchaser later, for items such as public roadways, sewers, and sidewalks. These assessments are included because they permanently add to the land’s value.
Land Improvements
Land has an indefinite (unlimited) life and is not usually used up over time. Land improvements such as parking lot surfaces, driveways, fences, shrubs, and lighting systems, however, have limited useful lives