Corporatefinanceinstitute com 1 The Corporate Finance Institute Accounting For more eBooks please visit

corporatefinanceinstitute.com
39
The Corporate Finance Institute
Accounting
Repairs and Replacements of PPE
The nature of PPE assets is that some of these assets need to be 
regularly fixed or replaced to combat equipment failures or to adopt 
more sophisticated technology. For example, it is normal for companies 
to repair or replace old factories or automobiles with new assets when 
necessary. The general rule in accounting for repairs and replacements 
is that repairs and maintenance work is expensed while replacements 
of assets are capitalized. Repairs are easy to record, it is simply a debit 
to repair or maintenance expense and a credit to cash. Replacements, 
however, are a bit more complicated. For replacements, the old cost of 
the asset is derecognized from the company’s books and the new cost 
of the replacement is recorded/recognized. 
Bundled Purchases
Finally, it is fairly common to see companies purchasing a group of 
assets as a bundle in a single transaction. To account for these bundled 
transactions, accountants will use the proportional method, also 
known as the relative fair value method. This is a method that calculate 
each asset’s apportioned cost based on the fair value of each of the 
individual assets in relation to the purchase price. For example, let’s 
say that XYZ Company paid $80 million for a bundle purchase of land, 
building, and machinery and the fair value of each are $30 million, $50 
million, and $20 million respectively. Using the following table, we can 
calculate the cost allocation for each individual asset. 
Asset
Fair Value
% of Total 
Fair Value
Total Price
Cost Allocation
Land
$30 Million
30%
$80 Million
30% * $80M = $24M
Building
$50 Million
50%
$80 Million
50% * $80M = $40M
Machinery
$20 Million
20%
$80 Million
20% * $80M = $16M
Total
$100 Million
100%
$80 Million
$80 Million

---