Accounting for self-constructed fixed assets

2. Example of accounting for a self-constructed fixed asset

Letís assume that Company ABC needs a new piece of equipment for its production process and no vendor manufactures such equipment. Company ABC decides to self-construct the equipment by purchasing parts and using three of its employees in the construction. The company will also have some indirect costs associated with this self-constructed asset.

On January 4, 20X3, the company paid $100,000 for parts to be used in the equipment construction:

Account Titles

Debit

Credit

Construction in Progress

$100,000

 

      Accounts Payable

 

$100,000

In January 20X3, the company calculated that employees spent 50% of their January time on the new equipment construction and the other 50% was devoted to the manufacturing of products for sale. Employee payroll and benefits amounted to $12,000 and included such categories (not a real-life breakdown of costs Ė for illustration purposes only): $8,000 in payroll, $3,000 in payroll taxes, and $1,000 in health insurance. The company would record these costs as follows (assuming the 50% related to the product manufacturing is an inventory cost):

Account Titles

Debit

Credit

Construction in Progress

$6,000

 

Inventory Work in Process

$6,000

 

      Wages Payable

 

$8,000

      Payroll Taxes Payable

 

$3,000

      Health Insurance Payable

 

$1,000

In January 20X3, the company also determined that $4,000 of indirect costs (overhead) should be allocated to the cost of the equipment. The breakdown of such costs (again, not a real-life one Ė for illustration purposes) is as follows: $3,000 in depreciation expense and $1,000 in electricity. The company would post this journal entry:

Account Titles

Debit

Credit

Construction in Progress

$4,000

 

      Accumulated Depreciation

 

$3,000

      Accrued Expenses - Utilities

 

$1,000

At the end of January, the equipment was completed (e.g., Engineering Services approved equipment for service) and the company transferred it to a fixed asset account:

Account Titles

Debit

Credit

Fixed Assets - Equipment

$110,000

 

     Construction in Progress

 

$110,000

Finally, note that the company would also start depreciating the asset once itís put in service (the company would follow its depreciation policy for equipment).

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