A company is building a new warehouse. It took out a specific $2M construction loan at 8% and also has a general $5M corporate bond at 6%. The weighted-average accumulated expenditures for the year are $2.5M. How much interest do you capitalize?
Think for a moment. Most candidates jump straight to a single weighted-average rate. That's a trap. The correct judgment requires two steps: you use the specific construction loan rate on expenditures up to the amount of that loan. Only then do you use the weighted-average rate for any excess. The answer is $190,000, not the $150,000 you'd get by misapplying the general rule. This is exactly how the FAR section turns a simple topic into a test of professional judgment.
Property, Plant, and Equipment (PP&E) on the CPA FAR exam tests your ability to account for the acquisition, valuation, depreciation, and disposal of long-term tangible assets. You must master capitalization vs. expensing, calculating depreciation, identifying impairment under ASC 360, and handling nonmonetary exchanges per ASC 845.
Key facts
- Governing Standard
- FASB ASC 360, Property, Plant, and Equipment
- Key Sub-topics
- ASC 835-20 (Interest Capitalization), ASC 845 (Nonmonetary Exchanges)
- Exam Section
- Financial Accounting and Reporting (FAR)
- Question Format
- Multiple-Choice Questions (MCQs) and Task-Based Simulations (TBS)
- Asset Disposal
- Gain or loss is calculated as Proceeds minus the asset's Book Value at the time of disposal.
- FAR Pass Rate
- The AICPA reports the FAR pass rate was 42.74% in Q1 2024 (AICPA), a figure that underscores the section's difficulty.
How to Master FAR's PP&E Section in 7 Days
Property, Plant, and Equipment isn't just another topic; it's a foundational pillar of financial reporting. The rules here ripple into business combinations, consolidations, and leasing. Getting PP&E wrong costs you points across the entire FAR exam.
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Day 1: What Costs Should You Capitalize vs. Expense?
The first judgment call is whether a cost becomes an asset or an immediate expense. Any cost incurred to acquire an asset and prepare it for its intended use must be capitalized.
This principle is the bedrock of PP&E accounting.
What does that include?
- Purchase price, net of any discounts
- Freight-in and insurance during transit
- Installation, assembly, and testing costs
- Sales taxes and import duties
- Costs of title and legal fees
What's typically expensed?
- Routine maintenance and repairs that don't extend the asset's life or improve its efficiency
- Training costs for employees to operate the equipment
- Administrative overhead not directly attributable to acquisition
This decision point is a favorite for MCQ distractors. The examiners will give you a list of costs and ask for the total capitalized amount. Your job is to filter out the expenses with precision.
| Cost Type | Capitalize or Expense? | Rationale (The Examiner's Mindset) |
|---|---|---|
| Invoice Price | Capitalize | The core cost of the asset itself. |
| Freight-in | Capitalize | A necessary cost to get the asset to its location. |
| Installation | Capitalize | A necessary cost to make the asset ready for use. |
| Annual Maintenance | Expense | A period cost; it does not enhance the asset's future benefit. |
| Employee Training | Expense | A cost of human capital, not the physical asset. |
Day 2: How Do You Calculate Capitalized Interest?
For self-constructed assets, you must capitalize borrowing costs during the construction period under ASC 835-20. The amount of interest to capitalize is the lesser of actual interest incurred or "avoidable interest."
Calculating avoidable interest is the key test.
Step 1: Calculate Weighted-Average Accumulated Expenditures (WAAE)
This figure represents the average amount of capital tied up in the project during the period.Step 2: Apply the Correct Interest Rate(s)
This is the critical judgment step from our opening hook.- For WAAE up to the amount of any specific construction debt, use that debt's interest rate.
- For any WAAE exceeding specific construction debt, use the weighted-average interest rate of all other general company debt.
Step 3: Calculate and Compare
Calculate the avoidable interest (WAAE x Rate(s)) and compare it to the total actual interest the company incurred during the period. You capitalize the lower amount.Day 3: Which Depreciation Method Applies (and What if It Changes)?
Depreciation is mechanical, but the exam tests your precision under pressure. You must be fluent in the main methods.
- Straight-Line: (Cost - Salvage Value) / Useful Life.
- Sum-of-the-Years'-Digits (SYD): An accelerated method using a fraction of (Remaining Life / SYD).
- Double-Declining Balance (DDB): An accelerated method using (2 / Useful Life) Book Value. You ignore salvage value in the calculation but do not* depreciate the asset below its salvage value.
- Units-of-Production: (Cost - Salvage Value) / Total Estimated Units.
The real test is handling a change in estimate. Per ASC 250, this is a change in accounting principle inseparable from a change in accounting estimate. You do not restate prior years. You apply the change prospectively by spreading the remaining book value over the remaining useful life. Our adaptive engine at VoraPrep has dozens of CPA practice questions that specifically target this prospective application rule.
Day 4: How Do You Apply the Impairment Test Under ASC 360?
Impairment exists when an asset's carrying amount on the balance sheet is not recoverable. US GAAP mandates a strict, two-step test for assets held for use.
VoraCorp has a manufacturing machine with a carrying value of $1,000,000. Due to new technology, management performs an impairment test. They project the machine will generate undiscounted net cash flows of $800,000 over its remaining life. The machine's current fair value is $650,000.
Step 1: The Recoverability Test
Compare the asset's carrying amount to the undiscounted future net cash flows it is expected to generate.- Carrying Amount: $1,000,000
- Undiscounted Future Cash Flows: $800,000
- Test: Is $1,000,000 (Carrying Amount) > $800,000 (Undiscounted FCF)? Yes.
- Conclusion: The asset is impaired. Proceed to Step 2. If the undiscounted FCF were greater than the carrying amount, you would stop here and record no impairment.
Step 2: Measure the Impairment Loss
The impairment loss is the amount by which the carrying amount exceeds the asset's fair value.- Carrying Amount: $1,000,000
- Fair Value: $650,000
- Calculation: $1,000,000 - $650,000 = $350,000
- Journal Entry:
- Dr. Impairment Loss $350,000
- Cr. Accumulated Depreciation / Asset $350,000
The asset's new carrying value is $650,000. Under US GAAP, you cannot write this value back up if fair value later recovers.
Day 5: How Does "Commercial Substance" Affect Nonmonetary Exchanges?
Under ASC 845, the accounting for trading assets hinges on commercial substance. An exchange has commercial substance if the company's future cash flows are expected to change significantly as a result.
- If the exchange HAS commercial substance: Account for the transaction at fair value. Recognize all gains and losses immediately.
- If the exchange LACKS commercial substance: This is the trap. You must recognize all losses immediately. However, you generally defer gains unless boot (cash) is received.
(Boot Received / (Boot Received + Fair Value of Other Assets Received)) * Total Indicated Gain
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Day 6: How Do You Account for Asset Disposals?
An asset's life ends with disposal, which can be a sale, retirement, or involuntary conversion. The calculation for the resulting gain or loss is always the same.
Gain or (Loss) = Proceeds Received - Book Value of Asset
Book Value is simply the asset's original cost minus all accumulated depreciation up to the date of disposal.
- Sale: Proceeds are the cash or receivables received.
- Retirement/Abandonment: Proceeds are zero, resulting in a loss equal to the remaining book value.
- Involuntary Conversion: Proceeds are the funds received from insurance.
You must remember to record depreciation expense up to the date of sale, not just to the beginning of the year. This is a common error that throws off the entire calculation.
Day 7: Final Review with Exam-Style MCQs and a TBS
Now, put it all together with high-volume practice. Your goal is to identify the rule being tested within 15 seconds.
Sample Question: During 2026, Harmon Industries revised the estimated useful life of its main production facility from 25 years to a total of 35 years. The facility was purchased on January 1, 2021, for $5,000,000 and had an estimated salvage value of $500,000. Harmon uses the straight-line method. What is the depreciation expense for 2026?Explanation: This is a change in accounting estimate requiring prospective application.Correct Answer: D. The trap is to incorrectly calculate the remaining life or to try to restate prior periods.
- Depreciation for 2021-2025: ($5,000,000 - $500,000) / 25 years = $180,000 per year.
- Accumulated Depreciation: $180,000 * 5 years = $900,000.
- Book Value at Jan 1, 2026: $5,000,000 - $900,000 = $4,100,000.
- New Remaining Useful Life: 35 total years - 5 years passed = 30 years.
- New Annual Depreciation: ($4,100,000 Book Value - $500,000 Salvage Value) / 30 Remaining Years = $3,600,000 / 30 = $120,000.
After drilling MCQs, tackle a full Task-Based Simulation. A PP&E TBS often involves a roll-forward schedule or a series of exhibits. This is where VoraPrep's authentic 1:1 exam simulation builds the confidence you need for exam day.