CFA Level 1

AAA

Assets - Long Term Asset Basics

Distinguishing Features of Long Term Assets
Long-term assets are assets that are typically used in the production process of a company and have a useful life of more then one year.

Long-term assets typically include property, plant (building and land) and equipment (PP&E). These assets are reported at cost (book value) at initiation, and are depreciated over time (except for land). Once an asset has started to depreciate, it is said to be reported at its carrying value. If an asset becomes obsolete before its time or it has lost its revenue-generating ability, it must be written off and this is referred to as asset impairment.

Property, Plant and Equipment (PP&E)
The cost of PP&E includes all costs related to their acquisition and all necessary expenses required to make them useful for the company.

Example 1:
Company ABC purchased a machine for $2m. To get this machine ready for use, it paid a total of $200,000 for transportation and insurance, brokerage fees, set-up costs and legal fees, among others. So the total cost is $2.2m.

Journal entry:

Company ABC bought a piece of land for $2m and an additional $100,000 went to expenses resulting from the search for the land, real estate commission, title transfer, surveying and landscaping. Total cost is $2.1m.

Journal entry:

Company ABC incurred a total of $20m in additional costs to build on this land. This included, among others, costs for materials, labor, construction plans and interest cost incurred during the construction phase.

Journal entry:

Depreciation Accounting
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