Initial Cost of Long Lived Assets - Online Tutor, Practice Problems & Exam Prep

Long-lived assets, also known as fixed assets or property, plant, and equipment (PPE), include land, land improvements, buildings, and machinery. The initial cost encompasses the purchase price and necessary expenditures to prepare the asset for use, adhering to the historical cost principle. While land is not depreciated, other assets are depreciated over their useful lives. For example, machinery purchased for $10,000 with a 10-year life would incur $1,000 annual depreciation. Understanding these concepts is crucial for accurate financial reporting and compliance with GAAP.

Introduction to Plant Assets (Fixed Assets, PPE)

So let's discuss how we record the purchase of our long-lived assets. Let's check it out. Alright. So long-lived assets. They've got a lot of names. We call them fixed assets, plant assets, property plant and equipment. There's a bunch of names for these things, but they're always going to include these 4 categories. These are the 4 main categories of these plant assets. Okay? So these fixed assets, remember these are long term assets that we're going to use for multiple years. So the 4 categories here. We've got land. The next one is land improvements. So notice there are 2 categories. There's one for the land itself and then one for the improvements of the land. Alright. We'll talk about more of what those are. That's going to be like fences and things like that, that we put onto the land. Then we're going to have buildings. And finally, machinery. Sometimes we call it equipment. Whatever machinery, equipment, it's that category. Okay? So a good acronym that we use for these plant assets, we use PPE. And that stands for Property, Plant and Equipment. Usually when you see this on a balance sheet, when you see this on a financial statement, that's the category that it's going to include all of these things. Because usually when you have a big company, they're not going to list how much land they have, land improvements. They're not going to list those separately. They'll just give you one number for the bulk amount of fixed assets. And they'll just say property, plant and equipment. And then it'll say net after it. And we'll talk about what that net means in a little bit. Okay? So remember, the focus of this lesson is on that initial purchase. What is the initial cost of these plant assets, right? So the rule here, this is the rule that's going to go for all of these. For all of these categories. The rule is that initial cost is going to include the price. So obviously the price we paid plus all necessary expenditures. So necessary expenditures to make the asset ready for use. Alright? So what does this mean? Necessary expenditures to make the asset ready for use? Well, we might have bought some machinery for say $10,000 but what if we have to pay other things too? We'll talk about what all those things can be, but maybe we have to pay taxes on the machinery, right? That's a necessary expenditure. If we didn't pay those taxes, well we wouldn't get the machinery. Maybe we have to pay an installation cost, right? Maybe we don't know how to install the machinery. We need an expert to come in and install it. Well, if we didn't pay for that installation cost, guess what? We can't use the machine. So it wouldn't be ready for use. So all of these things, all these things that make it ready for use, they're included in the initial cost. Okay? So it's not just the price we pay. We have to pay attention to these other necessary expenditures. When we're initially recording these plant assets, what GAAP follows is called the historical cost principle. Okay? So this historical cost principle, it means, well there are 2 principles that GAAP prescribes for different things. There's this historical cost principle that we use for fixed assets, and that means we're going to record it at the historical cost. What we paid for it. Plus in this case, these expenditures. Right? So we're going to record it at that cost and we're not going to change it. Compare that to the other principle. The Fair Value Principle. And in that case, that's more for like investments and stuff. And that means we're going to change the value based on the market of that, the market value of that item. And that doesn't really make sense for fixed assets, right? For an investment, a fair value might make sense because what the investment, the Apple stock, it might be worth this today and we might be selling it very soon. So we are going to want to be changing the price as the price changes and keep it at its fair value. Whereas something like plant assets, something like land, right? This land or a building. Well, the building we're going to use for a long time, right? We're not just going to have the building and then, oh, the building is worth $10,000 more. We should mark that up on our books. That doesn't really make sense. We're going to be using the building for a long time. We shouldn't be changing the value of it because we're not planning on selling it just like an investment like that. This is something that we're going to be using throughout, through our business to help us, you know, create our product, whatever it is. So there's no reason to be changing the value. We're going to leave it at that historical cost. Cool?

Initial Cost of Land

All right. Let's start a discussion on the initial cost of land. So, land, remember, this is just the land itself. Nothing on the land. So if you bought an acre of land, well, we're talking about just the land. Okay? So the land is often purchased as the building site. Right? This is where we're going to build something generally and we'll build a factory or an office on the land. So the cost of the land, remember, it doesn't just include the purchase price, but every necessary expenditure to make it ready for use. So what could that include? Well, let's start there with the purchase price. And sometimes, we pay with cash, but we can also take out a loan, right? Maybe we'll get a loan from the bank to pay for the land or maybe we'll raise some equity and we'll have common stock that we use to pay for the land. So, generally, what you'll see is a note payable. Maybe you'll have cash along with a note payable. Okay? So that that's going to be definitely part of the purchase price of the land. But what about some of these weird things? These are going to be those necessary expenditures. These are the ones they like to use in your class. You'll see closing costs related to titles or attorney fees, right? You have to pay some title search costs, something like that. Real estate broker commission, if you have to pay any commissions. Well, that's going to be included in the initial cost of the land. Property tax and liens that are assumed by the buyer, right? We're going to be the buyer in this case. So if we have to pay any liens that were on the property, this is like, taxes that were never paid before and now you have to pay them. Well, that's going to be included in that cost. Now, this one's pretty interesting and I want you to note. Alright? This is one that they usually like to trick you with. So the cost of any old structures, so the cost of structures. So the cost of removing any old structures on the land, right? Because let's say you're going to build an office on the site, but there's like an old dilapidated building on the site that you have to get rid of. You can't build your office until that old building is gone. Well, it's not ready for use until that old building is gone, right? So the cost of removing that old building, we got to include that into the cost of the land. But, usually, when there's going to be some old building on the site, we're going to get some salvage value. Maybe we have scrap metal. Maybe we can sell, you know, whatever we demolish the building and we can sell some stuff from the building. We might get a little money back. Okay? So less any salvage value. Alright? And then, last but not least, I want to remind you here. Remember that land is not depreciated. This doesn't have to do with the initial cost of the land. But I just want to reiterate to you guys that land is not depreciated. It is the only fixed asset that we're not going to be depreciating. Cool? Alright. So let's jump right in here to an example, and let's see how we can find the initial cost of this land. So the Sexy Times Lingerie Company, STLC, just purchased a plot of land to build its new edible underpants factory. Oh, man. When did I write this? STLC paid $40,000 in cash and signed a 5 year note payable for an additional $160,000. In closing the sale, STLC also paid $1,500 in attorney fees and a broker's commission of $25,100. Furthermore, the land housed a dilapidated warehouse that STLC removed for $12,000 while receiving $3,000 from the scrap metal. After removing the warehouse, STLC paved the portion of the land as a parking lot at a cost of $15,000. So remember, after all these numbers, what is the initial cost of the land? Okay? So we're going to be looking for that initial cost of the land and then we're going to make the journal entry. The journal entry is going to be pretty simple. But let's go ahead, the tricky part is what is included in the cost of the land. Remember, it's the cash we paid, maybe any loans we took out, and then all necessary expenditures to get it ready for use. So let's go ahead and start listing them out. The land it's going to include, we've got the cash we paid, right? We paid $40,000 in cash. Tells us right here, $40,000 in cash and we signed a 5-year note payable for another $160,000. So the bank loaned us $160,000 that we put towards this purchase of land. So the note payable, I'll put NP for the note payable, that was another $160,000 that went into the cost of the land. Right? What else did we do? We had some other closing costs, too, right? $1,500 in attorney fees that we paid. Broker's commission of $25,100. If we didn't pay these, well, we wouldn't get the land, right? So let's add those in here too. $1,500 and I'll put attorney. Broker was another $25,100. The broker. And what else? So here's the tricky one, we've got furthermore that the land housed a dilapidated warehouse. So there's this old building on the land and we couldn't build our factory until we got rid of this old warehouse, right? So we removed it and it cost us $12,000, right? So the warehouse removal, it cost us $12,000 to remove the warehouse, but we received $3,000 in return, right? It cost us $12,000 but we received $3,000 in return, so we got to take that out. Okay? So that's going to reduce the cost of the land, and that was from the scrap metal. Right? The scrap metal got us $3,000 back, so we take that out of the warehouse cost. Okay? And last but not least, after removing the warehouse, STLC paved a portion of the land as a parking lot at a cost of $15,000. So what do you guys think about that one? Well, that's a land improvement, right? Remember when I talked about land, the land itself, just the land, the acre of land that we bought, well that's going to be the land. Anything we put on the land, well that's either going to be a building when we build the building or build the factory. Or it's going to be a land improvement when we're talking about parking lots or fences, anything like that lighting fixtures, that's all going to be land improvements. So that is not included in the cost of the land. We would still make an asset for that, but here we're specifically focused on the land. We're going to focus on land improvements in the next video, but here it's not included in the cost of the land. Okay? So let's go ahead and let's find out what the initial cost of the land is. Pull out a calculator, we had $40,000 in cash, a $160,000 note payable, $1,500 in attorney fees, and $3,000 from the scrap metal we got. Okay. So we end up, $3,000 from the scrap metal we got. Okay. So we end up with $213,000 is what we paid for the land. Not just the cost of the land, but with all these necessary expenditures as well, okay? So what's our journal entry going to look like? Well, we're going to debit land, right? Land is our asset and we're going to debit it for $213,000. Now it tells us we paid cash of $40,000, but we also paid cash for quite a few other things too. Right? We paid cash for the attorney fee, cash for the broker fees. Notice, we don't have an expense. We're not going to have broker's expense. We're not going to have an attorney's expense. Nothing like that. All of those costs, we're saying they got capitalized. When we say something got capitalized, that means it got put into an asset account. Okay? So we capitalized these costs and we did it correctly through GAAP into the land account. So we did take out a note payable, right? We have a note payable and that's a liability, right? We have a note payable for $160,000 so that is going to be a credit here. We're going to have credit to note payable for $160,000. This is a credit $160,000 and then the rest of it we paid in cash, right? We paid the $40,000 in cash for the land, but we paid a bunch of other things in cash as well. These attorney fees, broker fees, removing the warehouse. So how much was that in total? I'm just going to balance out this entry, $213,000 minus $160,000 and that comes out to $53,000. Right? This $53,000 that should make sense. Right? This is going to be the cash we paid here, attorney fee, broker fee, and then the things with the warehouse that another $9,000, the $12,000 minus $3,000. So there we go, that's our entry. We debit land creating that asset for land, and we're going to credit notes payable and credit cash. Cool? So that's about as tricky as these questions get. And generally, when you deal with these types of questions, they're going to stand alone. You're usually not going to obviously with land we don't depreciate, but usually you're not going to have this insane calculation for the cost and then be depreciating when we're talking about a building or equipment. The question is going to stand alone in your class. They're just going to say, hey, what's the cost? And they're usually not going to go as intense as this. But if you could understand what we just went through, you're doing pretty good at this point. Alright? Let's go ahead and let's start talking about land improvements, alright? Let's do that in next video.

Initial Cost of Land (and Leasehold) Improvements

Alright. Let's move on to land improvements here. So remember, there's the land itself, the acreage, right? The land and then the land improvements. Things we build on the land such as driveways, parking lots, fences, sprinklers, right? Things that we add to the land. These are improvements to the land. Well, these differ from the land. These are going to have limited lives, right? So these aren't going to last forever like land does. These have limited lives. So just like any other asset, the cost of the land improvement will be debited to an asset account. In this case, the land improvements account. So this is an asset as well. Alright? Now, sometimes if we don't own something outright, we might lease something. Like when you lease a car, well you don't own the car, right? You're leasing it from the owner for a certain amount of years. Well, you could lease something and you could improve it. You could have leasehold improvements just like we have land improvements. Well, let's say you didn't own the land and you were leasing it from its owner, but you had in the contract the ability to put sprinklers, to put up fences. Right? Those belong to you. They don't belong to the owner. So they would still be part of your assets. So another example here, you could lease a truck. Maybe like FedEx leases a truck and they paint their logo on it, right? That paint, that logo that they painted on it, well, that's their asset, right? And it's going to depreciate, just like any other depreciable asset. So the truck itself, they're not going to depreciate, but they own the improvement, right? Now, the difference here is when we have a land improvement, right? And with most assets, we are going to depreciate them over their useful life. Well, a leasehold improvement, it's only going to be over the term of the lease. Okay? And this isn't such a big deal in your class. You're probably not going to run into it too much, but we'll do an example of it just in case. Land improvements and leasehold improvements, they're pretty much the same thing here. Just remember that land improvements, this is going to be something like you own the land and then this fence. Let's say you build a fence on it and it's going to have a useful life of 20 years, Right? So you would depreciate it over those 20 years. Where a leasehold improvement, maybe you don't have a lease, you build a fence that's going to last 20 years, but you're only going to have the lease for say 5 years. Well, you would do it over the term of the lease, not the whole useful life, right? Because you're only going to have it for those 5 years. Alright? So that's a little tricky thing that can come up with these land improvements is this specific category, leasehold improvements, when you're leasing something. But, for the most part, I'd say focus on the land improvements. And that's just like any other of our fixed assets. We're going to see that we're just depreciating over their useful life. Okay? So remember, land improvements, they are depreciated. Okay? Land is the only one that is not depreciated and like I said, over their useful life. Cool?

So let's go ahead and do this example here. Let's continue with our STLC. So they entered into an agreement to lease an office building for the next 10 years. So notice we're dealing with a lease here, right? They entered an agreement to lease an office building for the next 10 years, so it's a 10-year lease and as part of the agreement, STLC was allowed to build walls inside of the building to separate the office space. STLC paid $20,000 to build the walls inside the office building. The walls are expected to last 20 years. The journal entry to record this transaction would include a debit to land, buildings, leasehold improvements, or an expense. So notice, we built walls for $20,000, right? But we don't own the building, so it's not going to be our building, so we won't be debiting to the building and it's not land either, right? We're not going to debit it to land. So the trick here is that this is a leasehold improvement, right? It's still an asset. We own these walls, so we're going to have a leasehold improvement and that's going to be the debit in this transaction. Alright? We're not going to expense them right away. We're going to have this asset and we're going to depreciate them over their useful life. So when we depreciate it, that's when it's going to be expensed and show up on the income statement. But we started off when we initially buy it, the cost of it is going to this asset. Leasehold improvements for 20,000 and cash is our credit. We paid for it with cash for 20,000. Notice in this case, we didn't have any extra necessary expenditures, right? They didn't mention anything about taxes or anything necessary to put into use. So that's it. We didn't have any extra cost going on here. We just have the 20,000. Alright? So this would be the journal entry to signify that we built these walls here for the $20,000. So the answer here would be a debit to leasehold improvements and remember, that's an asset account, a long-term asset. Cool?

Let's check out this other question related to the leasehold improvements. The value of the walls will be depreciated over 10 years, 15 years, 20 years, or not depreciated. They are going to be depreciated, right? Because they are a long-term asset and they're not land. Land is the only one that's not depreciated. So it's definitely not that. Now, this one's a little special case because we're talking about a lease, right? Generally, we would use the useful life and they told us the walls are expected to last 20 years. That's the useful life there, right? The useful life. So if we had owned this building, well we would depreciate it over the 20 years. But we only leased it for 10 years. This is the term of the lease. So since this is a leasehold improvement, we can only depreciate it as long as we're going to be leasing that building. So that's the little trick here is with a leasehold improvement, it will be 10 years. If we owned this building and built these walls, well then we would use the 20-year useful life, okay? So that's a little bit of a trick there. In the end, since it's a leasehold improvement in this case, the answer is going to be 10 years. It would never be 15 years, we're never going to average out the 2, it's always going to be one or the other there. So the answer there is 10 years and you can see nothing too crazy there with the land improvements. We're going to be treating them just as we go on to do buildings and we go on to do machinery, you're going to see that. We're going to be treating them very much the same. The useful life is what's important and the cost is always going to be all those necessary expenditures to get them ready for use. Alright? Let's go ahead and move on to the next video.

Initial Cost of Buildings

Alright, let's move on to the next plant asset, buildings. Buildings are going to be very similar to all the other ones. You're going to see there are a lot of similarities here. It's similar to land and equipment purchases, even similar to those land improvement purchases in that sense. So remember that it's going to include all the costs necessary to make the building ready for use. Right? If we can't use the building without taking this expense, well, then it's not ready for use and that is included in the cost, that initial cost. Okay?

So one little trick with a building is if we constructed the building, so we bought the land and we're going to build an office building on it. Well, if we have to take out a loan to finance that project to build the building itself, we can actually include the interest, the interest from borrowings to finance the project into the cost of the land. Now that's something you're probably going to deal with in higher-level classes, but it's good to know that if we're actually constructing the building. If we're just buying a building, that's different. No, you can't include interest in that case. But if you're building the building, building the building. If you're going to construct the building yourself, well, then you can actually include interest on those borrowings, for financing the project. Alright?

So remember, buildings are depreciated, right? Buildings are depreciated just like land improvements, just like equipment. Only land itself is not depreciated. And again, it's over the useful life. Alright? So you get really familiar with that term. We're going to be dealing with the useful life a lot. So why don't we actually pause right here and we'll jump into a practice problem because I think you guys are ready to try and solve what the initial cost and the journal entry would look like for this building. Alright? So it's going to be really similar to what we did with land. Alright? So if you need to go back and check the land video to get a little more familiar or just jump in and give it a shot. Alright? Let's pause here and then you guys try this one out.

On July 1, STLC purchased a building from EZ Construction by putting $60,000 as a down payment and signing a $320,000 note payable due in fifteen years. The note payable had an interest rate of 6% due semi-annually. Other details related to the purchase include:$4,200 in delinquent real estate taxes payable by STLC; $6,000 in brokerage commissions paid by EZ Construction; $1,100 in attorney fees paid by STLC; $11,000 for a company sign at the entrance to the property; and $2,000 for lighting around the grounds of the building. The building is expected to last forty years. What will be the journal entry to record the purchase of the building on July 1?

Alright. How did you guys do? Were you able to find the initial cost? Let's check it out. On July 1st, STLC purchased the building from EZ Construction by putting $60,000 as a down payment and signing a $320,000 note payable due in 15 years. The note payable had an interest rate of 6% due semiannually, and then we've got some other details here. So, we've got $4,200 in delinquent real estate taxes payable by STLC. So, STLC is going to have to pay these. $6,000 in brokerage fees paid by Easy Construction. Notice who's paying for those. $1,100 in attorney fees paid by STLC, and then $11,000 for a company sign at the entrance of the property. What does that sound like? A company sign at the entrance of the property? That sounds like a land improvement. Right? An improvement to the land, to the area. Yeah. That, I don't think, has to do with the building itself. So that's not going to be included in the cost of the building. And $2,000 for lighting around the grounds of the building. Again, that's not the building itself, right? That sounds like a land improvement. So the lighting around the building is a land improvement. That's not going to be included in the cost either. Lastly, it tells us the useful life. The building is expected to last 40 years. So that's going to be important once we start depreciating the building over its useful life. But for the initial cost of the building, we don't really have to worry about that 40-year useful life. So what will be the journal entry to record the purchase of the building on July 1st? So to make that journal entry, we need to find out what was the total cost and all of the necessary expenditures to get this ready for use. So, let's see what we got. We've got a building here and let's total up all the things that we spent. So first, we've got the down payment, so that was a cash down payment of $60,000 and we signed a note payable, right? Note payable of $320,000. What about this interest? There's interest of 6% due semiannually on the note. Well, remember with interest, we can only include it in the cost if we had constructed the building ourselves. But we purchased the building from another company. We didn't construct it, so we cannot capitalize the interest. That is not going to be part of the cost of the land. So that's not going to be in here at all. I'm going to scratch it out. So our other details, the $4,200 in delinquent real estate taxes. We have to pay for that, right? STLC is paying for that, and if we didn't pay for that, well, we couldn't use the building. So that is definitely going to be included in our cost and that is I'll say taxes right here and that's $4,200. $6,000 in brokerage commissions, that sounds like we would include it, except it was paid by Easy Construction. Well, if Easy Construction had to pay, we didn't have to pay it. That's no necessary expenditure for us, so we're not going to include that. I'm going to scratch that out. That's not included by us. $1,100 in attorney fees paid by STLC. We paid for that, so that's going to be included. I'll write attorney here and that was $1,100 in attorney fees, and that was it, the rest was land improvements there, right? So we've got everything lined up here. Let's go ahead and add up all of our totals. We've got $60,000 plus $320,000 plus $4,200 plus $1,100, and we get $385,300, all right? That's going to be the total cost of the building. This is going to be the asset that we make for the building is going to be $385,300. So when we make our journal entry, we're going to debit the building, right? And this is an account, an asset, right? This is an asset. So this is a debit, increasing the value by $385,300. So that's a debit to buildings. What's going to be our credits? Well, we paid $60,000 in cash, but we paid for other things in cash as well, right? Well, let's look at each of the other things. Well, we know we had the note payable, so let's put the notes payable in there as a credit. Notes payable, that's going to be a credit for $320,000, and then what else do we have? Notice the taxes. It says the taxes are payable by STLC. It doesn't technically say we paid them. Now, if you put this as cash right now, I think it's okay if you had added that to the cash total. But just for a technicality, I want to show you that this could actually be something like this. We could actually have something like real estate taxes payable or taxes payable, right? Because maybe we didn't pay them yet. Maybe we're going to pay them later on. The government hasn't come after us to pay those taxes yet. So we have taxes payable. If we had paid it in cash, well that would increase the amount of cash that we paid. And then the attorney fees, it does say paid by STLC. So since we paid for those, we're going to assume that was cash. So we've already dealt with the note payable, the taxes. So the $60,000 in cash, plus the $1,100 that we're assuming was also paid in cash to the attorney, we're going to include that there. So we add those together and that's going to come out to $61,100. There we go. This is going to balance, right? Our debits equal $385,300, and if we add up all of those credits, let me get out of the way. If we add up all those credits, those also equal $385,300. So we are balanced here, and notice we're eventually going to have to pay those taxes off, right? So we'll see those taxes go away once we pay them. So, if you had just put the taxes payable as cash, you could probably give yourself a pat on the back. I think you did pretty well on this. So if you got this problem right, I think you're doing pretty good with the cost of these assets, right? Alright. Let's go ahead and move on to the last category, machinery or equipment. Alright? Let's check it out.

Initial Cost of Equipment and Machinery

Alright. Here we go with equipment and machinery. Remember, these terms are pretty much interchangeable: Equipment and Machinery. This is going to be very similar to what we've talked about with land and buildings as well. We're going to be looking for all costs necessary to make the equipment ready for use. Okay?

So when we have taxes or any of those things that we've talked about so far, there are going to be some special cases when it comes to equipment. This includes unique accommodations for the equipment. Sometimes you buy a piece of equipment that doesn't fit in your factory correctly, and you have to build a special platform for the equipment before you can use it. Well, if you didn't build that special platform, then you couldn't use the equipment, right? It wouldn't be ready for use. We're going to include that in the cost of the equipment.

Another cost to consider is any delivery expenses. If they're going to deliver the equipment to us and we have to pay for that delivery, well, guess what? If we didn't pay for that delivery, we wouldn't have the equipment, and it wouldn't be ready for use. So that's going to be included in the cost as well.

Lastly, remember, with equipment, we might have a machine that we're using to produce our product. If we have to insure that equipment or maintain it, or we have ongoing taxes for using the equipment, there's a main point regarding maintenance costs. For example, if we have to oil the machine every year, that doesn't go into the initial cost; it was already ready for use. Once it's ready for use and operating, all those other costs are going to be expensed. That's not going to be included in the cost.

So remember, we're going to get it ready for use, and then there's going to be a point where it's ready. After that, those are going to be expenses. Like we discussed, equipment is depreciated. This is going to be depreciated just like buildings and land improvements. The land itself is not depreciated; I'm going to keep reiterating that. Land improvements are depreciated, buildings are depreciated, and equipment is depreciated, again, over the useful life of the equipment. I was just testing you guys there to see if you were paying attention.

So it's going to be depreciated over the useful life of the equipment. Cool? Let's go ahead and pause here. I think you guys are ready after that tricky one with the building. I think you're ready to find the initial cost of this equipment. Let's do this practice problem and see if you got it right. Alright. Let's do it.

Here’s what students ask on this topic:

What are the main categories of long-lived assets?

The main categories of long-lived assets, also known as fixed assets or property, plant, and equipment (PPE), include land, land improvements, buildings, and machinery. These assets are used over multiple years and are essential for the operations of a business. Land refers to the actual plot of land owned, while land improvements include additions like fences and parking lots. Buildings encompass structures such as offices and factories. Machinery, or equipment, includes tools and machines used in production. Understanding these categories is crucial for accurate financial reporting and compliance with GAAP.

How is the initial cost of long-lived assets determined?

The initial cost of long-lived assets includes the purchase price plus all necessary expenditures to make the asset ready for use. This adheres to the historical cost principle under GAAP. For example, if you purchase machinery for $10,000, you must also include costs like taxes, installation fees, and delivery charges. These additional costs are necessary to prepare the asset for its intended use. Therefore, the initial cost is not just the purchase price but also these essential expenditures.

Why is land not depreciated while other long-lived assets are?

Land is not depreciated because it does not wear out or become obsolete over time, unlike other long-lived assets such as buildings, machinery, and land improvements. These other assets have limited useful lives and their value decreases due to wear and tear, usage, and obsolescence. Depreciation allocates the cost of these assets over their useful lives. However, land remains constant in its utility and value, so it is recorded at its historical cost without depreciation.

What expenditures are included in the initial cost of land?

The initial cost of land includes the purchase price and all necessary expenditures to make it ready for use. These expenditures can include closing costs related to titles, attorney fees, real estate broker commissions, property taxes, and the cost of removing old structures. For example, if you purchase land for $100,000 and incur $5,000 in attorney fees and $10,000 in removal costs for an old building, the initial cost of the land would be $115,000. These costs are capitalized and included in the land's asset account.

What is the historical cost principle in accounting for long-lived assets?

The historical cost principle in accounting states that long-lived assets should be recorded at their original purchase cost plus any necessary expenditures to make them ready for use. This principle ensures that the asset's value remains consistent on the balance sheet, reflecting the actual amount spent to acquire and prepare the asset. Unlike the fair value principle, which adjusts asset values based on market conditions, the historical cost principle maintains the asset's recorded value over time, providing stability and consistency in financial reporting.