Fixed Assets (Property Plant & Equipment)
| Fixed assets are recorded at historical cost per US GAAP requirements. |
Land
The main difference between land and other property plant and equipment is that land is not subject to a depreciation expense, but retains its value at its historical cost for years or even decades.
Land is recorded on a company’s balance sheet at historical cost. As many years or even decades go by, the market value of the land may be substantially different from the value originally recorded. In real estate markets like New York, Chicago, or San Francisco where companies acquired land for a fraction of what the market would demand even today, the balance sheet still reflects the purchase of land at its historical cost.
Permanent land improvements can increase the recorded value of land, such as landscaping, sewer installation, and other permanent improvements. Improvements that are not permanent, however, such as fences and parking lots, are recorded in a separate account and depreciated similar to plant and equipment.
Like other property plant and equipment, write-downs may occur for impairments to land, such as the detection of a toxic waste site nearby or on the land. Otherwise, land remains on the balance sheet at the original or historical cost the company paid for it.
Other Fixed Assets (PP&E)
Buildings, plant, and equipment are recorded at historical cost and depreciated over the useful life of the asset. This includes vehicles, trucks, computers, plants, equipment, and other assets that are considered “used up” over time. The historical cost recorded also includes freight charges, in-transit insurance, applicable taxes, assembly, installation, testing, and any other costs necessary to get the equipment operational. Depreciation then aims to measure the consumption of the asset over time, eventually reducing the value to zero.
For example, an asset acquired for $10,000 with a ten year useful life and depreciated evenly over time, called the “straight – line method,” would incur a $1,000 depreciation expense annually until the asset value is zero on the balance sheet. The $1,000 depreciation expense is a real expense that reduces net income each year.
Therefore, buildings, machinery, and equipment are recorded at historical costs but adjusted for depreciation over time. The asset may still produce and have value after it is fully depreciated, but the asset value will not be reflected on the balance sheet after it is fully depreciated.
If Sunny sold the asset recorded at $10,000 less $5,000 depreciation expense after five years for $5,500, Sunny would recognize a realized gain of $500 against the fair value of $5,500.
Sale of Equipment
| Account and Explanation | Debits | Credits |
| Cash | $5,500 | |
| Accumulated Depreciation | ||
| Equipment | $10,000 | |
| Gain on Sale of Equip. | $500 | |
| To record sale of asset at original cost less depreciation. |
Therefore, assets on the balance sheet are recorded at historical cost less depreciation until sold.
Once the asset is sold, a realized gain or loss is recognized for the fair value of the asset against its book value (historical cost less depreciation).
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