Accounting Case Study

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Category: Business and Industry

Date Submitted: 04/01/2013 11:46 AM

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Property, Plant, and Equipment

This case study will focus on the recognition of property, plant, and equipment (PPE) and the subsequent measurement of these assets and how they impact various financial statements. The company’s to be evaluated are Lockheed Martin, and The Boeing Company. These companies are some of the largest in the Aerospace and Defense industry and will give a good look as to how similar companies will account for similar items.

FASB states that “the historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use…If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset” (Paragraph 835-20-05-1). This states that a company is only allowed to record the cost the paid for the asset. Companies are not allowed to overprice an asset on their books, although it may be of greater value to them than anyone else, the company must only record the actual cost at which they paid. Now, if a company must perform repairs, or must prepare the asset for its useful life, this must be added on to the historical cost. For the subsequent measurement of the assets, FASB states that “depreciation expense in financial statements for an asset shall be determined based on the asset’s useful life” (PPE 35-3). This means that each asset must have an estimated life for which it will prove useful for the company. After this time, the asset will no longer be of any use, and will therefore no longer earn depreciation for the company. FASB also states that “the cost of a productive facility is one of the costs of the services it renders during its useful economic life. GAAP require that this cost be spread over the expected useful life in such a way as to allocate it as equitably as...