Property, plant and equipment
A PPE capitalization CPA exam item is really two questions, and candidates lose it on the first. What went into the asset — purchase price plus every cost of getting it to the place and condition needed for its intended use — and only then what is depreciated, which is that cost less salvage value. A fine for improper installation is not a cost of getting the asset ready; it is the cost of getting it wrong.
| Blueprint group | FAR-II-D |
| Area weight | 30–40% |
| Approx. share of the exam | 3.9% |
What the Blueprint asks for here
At this group the Blueprint expects a candidate to calculate the carrying amount of property, plant and equipment at acquisition and at subsequent reporting dates, to determine which expenditures are capitalised and which are expensed, to calculate depreciation under the methods an entity may adopt, and to account for disposals.
This is our paraphrase, not the Blueprint’s wording. verbatim quote pending The authoritative representative-task text is in the AICPA Blueprints, which are published free — download them and read the group directly. We will not print a quotation we have not taken from the source document.
PPE capitalization CPA exam items: depreciation in FAR starts here
Why this group is worth its weight
Property, plant and equipment is one of the largest groups in Area II by question frequency and one of the few where the arithmetic is trivial and the judgement is not. Every item hangs on a capitalisation decision made in the first sentence of the fact pattern, and once that decision is made the rest is division.
What goes into the asset
The cost of an item of property, plant and equipment includes its purchase price and the directly attributable costs of bringing it to the location and condition necessary for it to operate as intended: freight in, insurance while in transit, installation, assembly, testing, and the cost of site preparation. It does not include costs that are not necessary to that outcome — a penalty incurred because the installation was done wrong, training the operators, or the annual insurance premium that covers the asset once it is running. Those are period costs, and the exam includes at least one of them in almost every fact pattern.
From cost to depreciable base
Depreciation allocates the depreciable amount, which is capitalised cost less residual value, over the useful life. Two mistakes account for most of the wrong answers here and they push in opposite directions: dividing the full capitalised cost without removing salvage, and removing salvage from a cost that never included the freight and installation in the first place. Both produce a number that is the right order of magnitude, which is why they survive a sanity check.
Subsequent expenditure and disposal
After acquisition the same test applies with a different label: an expenditure is capitalised if it increases the asset’s capacity, efficiency or useful life, and expensed if it merely maintains the level of service already expected. On disposal the gain or loss is proceeds less carrying amount, and the carrying amount must be brought up to date with depreciation to the date of disposal first — an omission the exam tests directly by putting the disposal part-way through a year.
The standard this group is examined on is published by the standard setter: FASB Accounting Standards Codification. The Blueprint coordinates and weight ranges above come from the AICPA Blueprints. What is ours, and labelled as ours, is the reading, the practice item and the misconception tags.
A practice item
our own practice item Written by us against the public Blueprint. It is not an AICPA question and it is not taken from any review course.
A company acquires a machine for a purchase price of $200,000. It also pays $8,000 of freight to have the machine delivered, $12,000 for installation and testing, a $5,000 fine imposed after the machine was installed incorrectly and had to be repositioned, and a $3,000 annual insurance premium covering the machine in operation. The machine has an estimated residual value of $20,000 and an estimated useful life of eight years. The company uses straight-line depreciation.
What is depreciation expense for the first full year?
| A | $27,500 | |
| B | $25,000 | correct |
| C | $25,625 | |
| D | $22,500 |
The rule
The cost of an item of property, plant and equipment comprises its purchase price and the costs directly attributable to bringing it to the location and condition necessary for it to operate as intended. Costs that are not necessary to that outcome, including penalties, training and insurance on the asset in operation, are expensed as incurred. Straight-line depreciation allocates capitalised cost less residual value evenly over the useful life.
The arithmetic
Capitalised cost is $200,000 + $8,000 freight + $12,000 installation and testing = $220,000. The $5,000 fine and the $3,000 insurance premium are period costs. Depreciable base is $220,000 − $20,000 residual = $200,000, and $200,000 / 8 = $25,000 a year.
What we would ask you first
This is the part of the product that is hard to show without an account, so here it is directly: for each wrong option above, the opening question our tutor asks — before any explanation — targeting the specific mistake that option represents. Choosing A ($27,500) and choosing D ($22,500) are different errors and deserve different first questions.
If you chose A — salvage_ignored
“Your capitalised cost is right, which is the judgement half of this question. Then you divided all of it. Is the company expecting to consume every dollar of that cost over the eight years?”
If you chose C — penalty_capitalised
“You are $625 a year above the answer, which is one eighth of $5,000. One cost in this fact pattern was incurred because something went wrong rather than to get the machine ready. Does that cost make the machine more useful?”
If you chose D — delivery_and_install_expensed
“You depreciated the invoice price only. Freight and installation were both necessary to get the machine where it needed to be and working — where should costs like that go?”
To be precise about what happens next: the exchange is a rate limit, not a gate. Answering well gets you to the full worked explanation in three or four exchanges; answering badly still gets you there. And if you would rather skip it, asking three times gets you the walkthrough.
Common questions
Which costs are capitalised into property, plant and equipment?
The purchase price plus the costs directly attributable to bringing the asset to the location and condition necessary for it to operate as intended: freight in, insurance in transit, site preparation, installation, assembly and testing. Penalties, operator training and insurance covering the asset in operation are expensed.
Is salvage value removed before or after capitalising costs?
After. First establish capitalised cost by adding every directly attributable cost to the purchase price; then subtract residual value to get the depreciable base. Doing it in the other order, or skipping one of the two steps, produces the two most common wrong answers in this group.
Misconception tags in this group
These are the labels our diagnosis attaches when a wrong answer matches a known pattern. They are worth reading even if you never use the product — naming your own error is most of the work.
salvage_ignored— Depreciating the full capitalised cost without removing residual value.penalty_capitalised— Capitalising a cost that arose because something went wrong rather than to make the asset ready.delivery_and_install_expensed— Expensing freight and installation instead of capitalising them.operating_insurance_capitalised— Capitalising insurance that covers the asset in operation rather than in transit.disposal_without_partial_year— Computing a gain or loss on disposal without first depreciating to the disposal date.