Intermediate Accounting 2

PROPERTY, PLANT AND EQUIPMENT

PPE – PAS 16
Tangible Assets
Purposes:
1. Use in production or supply and goods and services
2. Rental to others
3. Administrative Expenses

Initial Valuation – Cost + any attributable cost

1. Cash Basis – Cash Price Equivalent

2. On Account – credit term

- Whether the discount is taken or not, deduct the discount on the purchase price.

3. Installment Basis
a. Cash price equivalent
b. Non cash price equivalent
Down payment
Add: Present Value of Notes payable

4. Issuance of Share Capital

Hierarchy: a. Fair Value of asset received
b. Fair Value of shares
c. Par Value of shares

5. Issuance of Bonds
Hierarchy: a. Fair Value of Bonds
b. Fair Value of Assets received
c. Face value of Bonds

6. Exchange
Hierarchy: a. Fair Value of asset given
b. Fair Value of asset received
c. Carrying amount of Asset Given

payor =cash paid (+)

payee=cash received (-)

* Commercial substance
Lacks commercial substance – benefit asset given = benefit asset received
- Carrying amount of asset given

7. Dealer
a. Fair Value of Asset given + cash paid
b. Trade in Value of Asset Received + cash paid

8. Donation – Fair Value of Asset Received

Shareholder Philanthropist
PPE P xxx   PPE P xxx  
  Donated Capital P xxx   Income   P xxx

* If there are expenses: charge to Donated Capital account

Entry:
Donated Capital P xxx
Cash P xxx

9. Government Grant – If PPE = Fair Value of Asset

- Amounts received from the government

Illustrative Problems
Problem 1

1
On March 11, 2014, Rambo Company, acquired the plant assets of Ina Corporation in exchange for 50,000 ordinary
shares (P 100 par value) which had a fair value of P 180 on the date of the purchase of the property. The property
had the following appraised value:
Land P 1,600,000
Building 4,800,000
Machinery and Equipment 3,200,000
Below is a summary of Rambo’s cash outflows between the acquisition date and December 29, the date when if first
occupied the building.
Repairs to Building 420,000
Construction of bases for machinery to be installed later 540,000
Driveways and parking lots 488,000
Remodeling of office space in building, including new partitions and walls 644,000
Special assessment by the City Government on land 72,000

On December 27, Rambo paid cash for machinery, P 1,120,000 (subject to a 2% cash discount) and freight on
machinery of P 42,000

Compute the total cost of each of the following:

A. Land B. Buildings c. Machinery and Equipment

Solution:
Land Machinery and Equipment
Acquisition Cost 1,600,000 Acquisition Cost ( March 11) 3,200,000
Special assessment by City 72,000 Construction of bases for Machinery 540,000
Acquisition Cost (Dec 27) ( P
Total Cost 1,672,000 1,120,000 x 98%) 1,097,600
Freight 42,000
Building Total Cost 4,879,600
Acquisition Cost 4,800,000
Repairs to Building 420,000
Remodeling of office space in
building 644,000
Total Cost 5,864,000

Problem 2
Hagai Company is a major supplier of computer parts and accessories. To improve delivery services to customers,
the company acquired four new trucks on July 01, 2014. Described below are the terms of acquisition for each truck.
Truck List Price Terms
1 P 600,000 Acquired for a cash payment of P 556,000
Acquired for a downpayment of P 80,000 cash and a 1-year, non-interest bearing note
2 800,000 with a face amount of P 720,000. There was no established cash price for the
equipment. The interest rate for this type of note is 10%.
Acquired in exchange for a computer package that the company carries in inventory.
3 640,000 The computer package cost P 480,000 and is normally sold by Hagai Co. for P
608,000
Acquired by using 40,000 of Hagai Co's ordinary shares. The shares have a par value
4 560,000
per share of P 10 and market value per share of P 13

What is the total cost of the trucks purchased on July 01, 2014?
a. P 2,418,545 b. P 2,458,545 c. P 2,484,000 d. P 2,524,000

Solution:
Truck 1 556,000
Truck 2
Down payment 80,000
PV of note issued
( P 720,000 x 0.90909) 654,545 734,545

1
 Truck 3 608,000
Truck 4 (P 13 x 40,000 shares)   520,000
Total Cost P 2,418,545

Problem 3
The following transactions relate to IMPO Company:
a. The national government grants the company a large tract of land to be used as a plant site. The Land’s fair value
is determined to be P 1,620,000

b. Impo Company issued 280,000 ordinary shares (par value, P 50) in exchange for land and building. The FV of the
property is determined to be P 16,200,000 with the following allocation:
Land P 3,600,000
Building 12,600,000
Total P 16,200,000

Impo company’s ordinary shares are not listed on the stock exchange, but its records show that a block of 2,000
shares was sold by a shareholder a year ago at P 70 per share, and another block of 4,000 shares was sold by another
shareholder 8 months ago at P 63 per share.

c. Impo company constructed machinery during this year. No entry was made to remove from the accounts for
materials, labor and overhead the following costs that are properly chargeable to machinery account.
Raw materials used 250,000
Factory supplies used 18,000
Direct Labor costs incurred 320,000
Incremental overhead caused by construction of machinery ( excluding factory
supplies used) 54,000
60% of direct
Fixed overhead rate applied to regular manufacturing operations
labor cost
The cost of similar machinery would be P 880,000 if it had been purchased from a dealer.

Requirement: Prepare journal entries for each transactions

Solutions:
Journal Entries:
a. Land 1,620,000
Deferred Income - government grant 1,620,000
b. Land 3,600,000
Buildings 12,600,000
Ordinary share capital (P50 x 280,000) 14,000,000
Share Premium 2,200,000
c. Machinery 834,000
Raw Materials 250,000
Direct Labor 320,000
Factory Overhead *264,000

* Applied Factory Overhead (60% x P 320,000) 192,000

Variable overhead 54,000
Factory supplies used 18,000
Total P 264,000

  Total Cost
Land 5,220,000
Building 12,600,000
Machinery 834,000

Intermediate Accounting 2 - Property, Plant and Equipment

ASSESSMENT TEST

Problem 1
Paula Company had the following property acquisitions during the current year:

1
 *Acquired a tract of land and building in exchange for 50,000 ordinary shares of P100 par value with a
market price of P120 per share on the date of acquisition. The last property tax bill indicated assessed value of P1,
200, 000 for the land and P2, 800, 000 for the building. However, the land has a fair value of P2, 000, 000 and the
building has a fair value of P3, 500, 000.
*Received land from a major shareholder as an inducement to locate a plant in the city. No payment was
required but the entity paid P50, 000 for legal expenses for land transfer. The land is fairly valued at P1, 000, 000.
*Acquired a welding machine with an invoice price of P3, 000, 000 subject to a cash discount of 10%
which was not taken. The entity incurred cost of P50, 000 in removing the old welding machine prior to the
installation of the new one. Welding supplies were acquired at a cost of P150, 000.
 What is the total increase in property, plant and equipment as a result of the acquisitions?
a. 9, 200, 000 b. 9, 250, 000 c. 9, 700, 000 d. 9, 450, 000

Problem 2
Kervin Company acquired three items of machinery as follows:
*During 2014, the entity purchased a machine for P500, 000 down and four monthly installments of P1,
250, 000. The cash price of the machine was P4, 700, 000.
*On January 1, 2014, the entity purchased a machine for P2, 000, 000 in exchange for a noninterest bearing
note requiring four payments of P500, 000. The first payment was made on January 1, 2014. The rate of interest for
this note at date of issuance was 10%. The present value of an ordinary annuity of 1 at 10% is 3.17 for four periods.
The present value of an annuity of 1 in advance at 10% is 3.49 for four periods.
*On January 1, 2014, the entity acquired a machine by issuing a four-year, noninterest bearing note for P2,
000, 000. The note is due on January 1, 2018. The entity has a 10% interest for this type of note. The present value
of 1 at 10% for 4 years is 0. 68.
 What is the total cost of the three machines?
a. 7, 645, 000 b. 7, 805, 000 c. 8, 505, 000 d. 8, 605, 000

Problem 3
Jowee Company exchanged an old machine, costing P3, 000, 000 and 50% depreciated, for a used machine and paid
a cash difference of P500, 000. The fair value of the old machine was determined to be P1, 800, 000.
 What amount should be recorded as cost of the machine received in exchange?
a. 1, 800, 000 b. 2, 300, 000 c. 1, 300, 000 d. 2, 000, 000

Problem 4
On January 1, 2014, AAnnibelle Company received a grant of P9, 000, 000 fom the foreign government in order to
defray safety and environmental costs within the area where the entity is located. The safety and environmental costs
are expected to be incurred over three years, respectively, P1, 000, 000, P2, 000, 000 and p3, 000, 000.
 What income from the government grant should be recognized in 2014?
a. 9, 000, 000 b. 1, 500, 000 c. 3, 000, 000 d. 4, 500, 000

Problem 5
Karlene Company and Erika Company are fuel oil distributors. To facilitate the delivery of oil to customes, the two
entities exchanged ownership of barrels of oil without physically moving the oil. Karlene paid Erika P1, 500, 000 to
compensate for a difference in the grade of oil. It was reliably determined that the configuration of the cash flows of
the asset received does not differ from the configuration of the cash flows of the asset transferred. On the date of
exchange, the oil inventory of Karlene has a carrying amount of P5, 000, 000 and fair value of P7, 000, 000. The oil
inventory of Erika has a carrying amount of
P6, 000, 000 and fair value of P8, 500, 000.
 What amount should Karlene record as a cost of the oil inventory received in exchange?
a. 4, 500, 000 b. 6, 500, 000 c. 7, 000,000 d. 8, 500, 000

Problem 6
Keshia Company purchased a machine for P3, 000, 000 on January 1, 2014. The entity received a government grant
of P500, 000 in respect og this asset. The policy is to depreciate the asset over 5 years on a straight line basis and to
treat the grant as deferred income. On January 1, 2016, the grant became fuly repayable because of noncompliance
with conditions.
 What is the loss on repayment of grant in 2016?
a. 500, 000 b. 300, 000 c. 200, 000 d. 100, 000

Problem 7

1
Natalie Company purchased a machine for P 6, 600, 000 on January 1, 2014 and received a government grant of
P600, 000 towards the capital cost. The policy is to treat the grant as a reduction in the cost of the asset. The
machine is to be depreciated on a straight line basis over 10 years with a residual value of P500, 000. On January 1,
2016, the grant became fully repayable because of noncompliance with conditions.
 What is the depreciation for 2014?
a. 610, 000 b. 600, 000 c. 660, 000 d. 550, 000
 What is the depreciation for 2016?
a. 610, 000 b. 600, 000 c. 780, 000 d. 730, 000

Problem 8
On January 1, 2014, Bryan Company received from the government a P5, 000, 000 three-year, zero-interest loan
evidenced by a promissory note. The prevailin rate of interest for a loan of this type is 10%. The present value of 1
at 10% for three periods is .751.
 What is included in the journal entry to record the loan and grant?
a. Debit discount on note payable P1, 245, 000 c. Credit deferred grant income P1, 245, 000
b. Credit note payable P5, 000,000 d. All of these are included in the journal entry

 What is the grant income for 2014?

a. 1, 245, 000 b. 415, 000 c. 375, 500 d. 0