Achievable logoAchievable logo
CMA Part 1
Sign in
Sign up
Purchase
Textbook
Practice exams
Support
How it works
Exam catalog
Mountain with a flag at the peak
Textbook
1. External financial reporting decisions
2. Planning, budgeting, and forecasting
3. Performance management
4. Cost management
5. Internal control
6. Technology and analytics
Achievable logoAchievable logo
1.2.4.2 Initial recognition of PPE
Achievable CMA Part 1
1. External financial reporting decisions
1.2. Financial transactions
1.2.4. Property, plant, and equipment
Our CMA Part 1 course is currently in development and is a work-in-progress.

Initial recognition of PPE

3 min read
Font
Discuss
Share
Feedback

The concept map below summarizes the information about PPE accounting relevant for the CMA examinations:

Covering PPE initial recognition, depreciation methods, and impairment rules for assets held for use or sale.
PPE Concept Map
Definitions
Property, plant, and equipment (PPE)
These are non-current assets that are used to create and distribute the company’s products and services. The following types of assets are typically included in the caption:
  • Land and land improvements
  • Buildings
  • Machinery and equipment
  • Furniture and fixtures

The main feature of property, plant, and equipment is that they are not being sold in the ordinary course of business but they are used to create future value for the company by directly or indirectly creating and/or distributing goods or services.

Property, plant, and equipment are initially recorded at historical cost plus incidental costs necessary to bring the asset to its intended location and to make the asset ready for use. This may vary depending on the type of asset being accounted for.

Interest incurred to finance a self-constructed asset can also be capitalized, but this is not covered on the CMA exam.

Examples of capitalizable costs of different types of assets are shown below. Other types of costs may be incurred and should be analyzed individually.

Land

  • Purchase price of land
  • Legal fees
  • Broker’s commission
  • Obligations assumed by the buyer including delinquent taxes related to the land
  • Surveying fees
  • Demolition fees to remove an existing structure
  • Sale of scrap from the demolition (this is a reduction in cost)

Buildings

  • Purchase price
  • Cost of renovations
  • Architect fees
  • Obligations assumed by the buyer including delinquent taxes related to the building
  • If self-constructed, all materials, labor, and overhead connected to construction
  • Insurance during construction

Equipment

  • Purchase price, net of any purchase or cash discounts
  • Freight-in
  • Handling fees
  • Installation cost
  • Legal fees
  • Sales and excise taxes

Watch out: Capitalize only costs necessary to bring an asset to its intended use - items like employee training, abnormal repair costs, and general overhead are expensed instead. Purchase discounts and scrap sale proceeds reduce the asset’s cost; they aren’t recorded as income.

Example: Capitalized cost of equipment

A company buys a machine for $50,000, takes a 2% cash discount, and pays $1,200 freight-in and $800 installation; it also spends $500 training employees afterward. Net cost: $50,000 − $1,000 (discount) + $1,200 + $800 = $51,000. The $500 training cost is expensed, not capitalized.

Answer: $51,000 capitalized; $500 training cost expensed.

Property, Plant, and Equipment (PPE) Overview

  • Non-current assets used in production/distribution
  • Not held for sale in ordinary business
  • Types: land, land improvements, buildings, machinery, equipment, furniture, fixtures

Initial Measurement of PPE

  • Recorded at historical cost
  • Add incidental costs to bring asset to intended location and condition
  • Capitalization of financing costs (interest) for self-constructed assets not tested on CMA

Capitalizable Costs by Asset Type

  • Land

    • Purchase price, legal fees, broker’s commission
    • Assumed obligations (e.g., delinquent taxes), surveying fees
    • Demolition fees (less sale of scrap as cost reduction)

  • Buildings

    • Purchase price, renovation costs, architect fees
    • Assumed obligations (e.g., delinquent taxes)
    • Self-constructed: materials, labor, overhead, insurance during construction

  • Equipment

    • Purchase price, freight-in, handling fees
    • Installation cost, legal fees, sales/excise taxes

Sign up for free to take 7 quiz questions on this topic

Previous
Next  | 1.2.4.3.1 Depreciation of PPE
All rights reserved ©2016 - 2026 Achievable, Inc.

Initial recognition of PPE

The concept map below summarizes the information about PPE accounting relevant for the CMA examinations:

Definitions
Property, plant, and equipment (PPE)
These are non-current assets that are used to create and distribute the company’s products and services. The following types of assets are typically included in the caption:
  • Land and land improvements
  • Buildings
  • Machinery and equipment
  • Furniture and fixtures

The main feature of property, plant, and equipment is that they are not being sold in the ordinary course of business but they are used to create future value for the company by directly or indirectly creating and/or distributing goods or services.

Property, plant, and equipment are initially recorded at historical cost plus incidental costs necessary to bring the asset to its intended location and to make the asset ready for use. This may vary depending on the type of asset being accounted for.

Interest incurred to finance a self-constructed asset can also be capitalized, but this is not covered on the CMA exam.

Examples of capitalizable costs of different types of assets are shown below. Other types of costs may be incurred and should be analyzed individually.

Land

  • Purchase price of land
  • Legal fees
  • Broker’s commission
  • Obligations assumed by the buyer including delinquent taxes related to the land
  • Surveying fees
  • Demolition fees to remove an existing structure
  • Sale of scrap from the demolition (this is a reduction in cost)

Buildings

  • Purchase price
  • Cost of renovations
  • Architect fees
  • Obligations assumed by the buyer including delinquent taxes related to the building
  • If self-constructed, all materials, labor, and overhead connected to construction
  • Insurance during construction

Equipment

  • Purchase price, net of any purchase or cash discounts
  • Freight-in
  • Handling fees
  • Installation cost
  • Legal fees
  • Sales and excise taxes

Watch out: Capitalize only costs necessary to bring an asset to its intended use - items like employee training, abnormal repair costs, and general overhead are expensed instead. Purchase discounts and scrap sale proceeds reduce the asset’s cost; they aren’t recorded as income.

Example: Capitalized cost of equipment

A company buys a machine for $50,000, takes a 2% cash discount, and pays $1,200 freight-in and $800 installation; it also spends $500 training employees afterward. Net cost: $50,000 − $1,000 (discount) + $1,200 + $800 = $51,000. The $500 training cost is expensed, not capitalized.

Answer: $51,000 capitalized; $500 training cost expensed.

Key points

Property, Plant, and Equipment (PPE) Overview

  • Non-current assets used in production/distribution
  • Not held for sale in ordinary business
  • Types: land, land improvements, buildings, machinery, equipment, furniture, fixtures

Initial Measurement of PPE

  • Recorded at historical cost
  • Add incidental costs to bring asset to intended location and condition
  • Capitalization of financing costs (interest) for self-constructed assets not tested on CMA

Capitalizable Costs by Asset Type

  • Land

    • Purchase price, legal fees, broker’s commission
    • Assumed obligations (e.g., delinquent taxes), surveying fees
    • Demolition fees (less sale of scrap as cost reduction)

  • Buildings

    • Purchase price, renovation costs, architect fees
    • Assumed obligations (e.g., delinquent taxes)
    • Self-constructed: materials, labor, overhead, insurance during construction

  • Equipment

    • Purchase price, freight-in, handling fees
    • Installation cost, legal fees, sales/excise taxes

More from Property, plant, and equipment

  • Learning outcomes