SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department

ACCT 1056- Intermediate Accounting 2

Lesson 5: Property, Plant and Equipment, Part 1

Topic: Property, Plant and Equipment Part 1

Learning Outcomes: At the end of this module, you are expected to:
1. Identify specific items of PPE
2. To illustrate the recognition of PPE
3. To understand the initial and subsequent measurement of
PPE

LEARNING CONTENT

PAS 16 is the standard that governs PPE. The objective of PAS 16 is to prescribe the
accounting treatment for property, plant, and equipment. The principal issues are the
recognition of assets, the determination of their carrying amounts, and the depreciation charges
and impairment losses to be recognized in relation to them.

Property, Plant and Equipment – are tangible assets that are held for use in production or
supply of goods or services, for rental to others, or for administrative purposes and are expected
to be used during more than one period.

Accordingly, the major characteristics in the definition of PPE are:

a. The PPE are tangible assets, meaning with physical substance.

b. The PPE are used in business, meaning used in production or supply of goods or
services, for rental purposes and for administrative purposes.
c. The PPE are expected to be used over a period of more than one year.

Recognition of PPE- an item of PPE shall be recognized when:

a. It is probable that future economic benefits associated with the asset will flow to the
entity
b. The cost of the asset can be measured reliably

Measurement at recognition

An item of PPE that qualifies for recognition as an asset shall be measured at cost.
Cost is the amount of cash or cash equivalent paid and the fair value of the other consideration
given to acquire an asset at the time of acquisition or construction.

Elements of cost

a. Purchase price, including import duties and nonrefundable purchase taxes, after
deducting trade discounts and rebates.
b. Cost directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in manner intended by management.
c. Initial estimate of the cost dismantling and removing the item and restoring the site on
which it is located, the obligation for which an entity incurs.

Directly attributable costs

Examples of directly attributable cost are the following:

a. Costs of employee benefits arising directly from the acquisition of PPE.

b. Cost of site preparation
c. Initial deliver and handling cost
d. Installation and assemble cost
e. Professional fees
f. Cost of testing whether the asset is functioning properly

Cost not qualifying for recognition- this are cost that are expensed rather than
recognized as an element of cost of PPE.

a. Cost of opening new facility

b. Cost of introducing a new product or service including advertising and promotion.
c. Cost of conducting business in a new location or with a new customer, including the cost
of training of staffs.
d. Administration and other general overhead cost
e. Initial operating losses
f. Cost of relocating or recognizing part or all of an entity’s operations

Measurement after recognition

After initial recognition, an entity shall choose either the cost model or the revaluation model
as the accounting policy for PPE. The entity shall apply such accounting policy to an entire
class of PPE.

The cost model means that the PPE are carried at cost less accumulated depreciation and any
accumulated impairment loss.

The revaluation model means that the PPE are carried at revalued carrying amount. The
revalued carrying amount is the fair value at the date of revaluation less accumulated
depreciation and subsequent accumulated impairment loss.

Acquisition of the property

There are many ways of acquiring a property and each presents a costing problem for
accounting purposes namely:
 a. Cash basis – the cost of the PPE is the cash price equivalent at the recognition date
b. On account subject to cash discount – the cost of the PPE is equal to the invoice price
minus the discount, regardless of whether the discount is taken.
c. Installment basis – The cost of the PPE is the cash price equivalent. In the absence of
the cash price equivalent the cost of the PPE is the sum of cash down payment and
the present value of the note.
d. Issuance of share capital – The cost of the PPE is equal to the following with the order of
priority.
1. Fair Value of the property received
2. Fair value of the shares issued
3. Par value or stated value of the shares issued
e. Issuance of bonds payable - The cost of the PPE is equal to the following with the order
of priority. (1) Fair value of the asset received (2) Fair value of the bonds payable issued.
f. Exchange with commercial substance – The cost of the PPE is equal to the following:
1. Fair value of asset given plus cash payment or minus cash received
2. Fair value of the asset received
g. Exchange without commercial substance- the cost of the PPE is equal to the carrying
amount of the asset given up plus cash payment or minus cash received
h. Donation - The cost of the PPE is measured at fair value and accounted as:
1. Income – if the donor is unrelated party
2. Donated capital – if the donor is a shareholder
3. Government grant – if the donor is government
i. Construction – the cost of self-constructed PPE shall include the following:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental overhead specifically identifiable or traceable to the
construction.

Illustration 1: Acquisition on cash basis (basket price)

An entity acquired a land and building at a single cost of P11,000,000. At the time of the
acquisition, the land has a fair value of P2,000,000 and the building,P8,000,000. What is the
initial cost of the land and building respectively?

The computation for the cost of the building and land is as follows:
Fair value Fraction Allocated cost
Land 2,000,000 2/10 2,200,000
Building 8,000,000 8/10 8,800,000
10,000,000 11,000,000

Illustration 2: Acquisition on account

Jerome company acquired an equipment for P50,000 on account with credit term of 3/15, n/30.
The purchased price is exclusive of 12% VAT. Jerome company is a VAT registered person and
any input vat is refundable. What is the initial cost of the equipment?

Solution:
Purchase price exclusive of VAT 50,000
Cash discount (3% x 50,000) (1,500)
Cash price equivalent P48,500
The entry to record the transactions is as follows:
Gross method Net method
Equipment 50,000 Equipment 48,500
 Input Vat 6,000 Input Vat 6,000
Accounts Payable 56,000 Accounts Payable 54,500
(To record the purchase) (To record the purchase)

*Payment within the discount period *Payment within discount period

Accounts Payable 56,000 Accounts Payable 54,500
Cash 54,500 Cash 54,500
Equipment 1,500
*Payment beyond discount period
*Payment beyond discount period Accounts Payable 54,500
Accounts Payable 56,000 Purchase discount loss 1,500
Purchase discount loss 1,500 Cash 56,000
Cash 56,000
Equipment 1,500
Illustration 3: Acquisition on account (Installment basis) – with cash price equivalent
On January 1, 2020 Jebs company acquired an equipment with an installment price of P80,000
and a cash price equivalent of P65,000. Jebs paid P20,000 as down payment and issued a 1-
year noninterest-bearing note of P60,000 payable in equal semi-annual installments on July 1
and Dec 31, 2020. What is the initial cost of the equipment?

Answer: The equipment will be initially recognized at its cash price equivalent of P65,000.

The entry to record the purchase is as follows:

Equipment 65,000
Discount on note payable 15,000
Cash 20,000
Note payable 60,000

Illustration 4: Acquisition on account (Installment basis) – without cash price equivalent

On January 1, 2020, Pats company purchased an equipment with an installment price
P260,000, by paying P20,000 down payment and issuing 3-year noninterest bearing note of
P240,000 payable in 3 equal annual installments starting December 31,2020. The prevailing
rate for the same type of note is 12%. What is the initial cost of the equipment?

The formula for the initial cost of the equipment in the absence of cash price equivalent is as
follows: (PV of the note + down payment)

PV of an ordinary annuity of 1 @ 12% for 3 periods = 2.4018

Multiplied by: Annual installments P80,000
Present value of the note P192,144
Add: Initial down payment P20,000
Initial carry cost of the equipment P212,144

The entry to record the purchase is as follows

Equipment 212,144
Discounts on note payable 27,856
Cash 20,000
Note payable 240,000

Illustration 5: Acquisition though issuance of share capital

A piece of land was acquired by issuing 20,000 shares with par value of P50. At the time of
acquisition, the fair value of the land is P1,600,000 and the share is quoted at P90 per share.
What is the initial cost of the land?

Answer: P1,600,000. The fair value of the asset received is the top priority in getting the initial
cost of the property. The entry to record the acquisition is as follows:
Land 1,600,000
Share capital 1,000,000
Share premium 600,000

Assuming that the fair value of the land is not given, the initial cost of the land is P1,800,000
(20,000 x 90). The entry to record the acquisition is as follows:
Land 1,800,000
Share capital 1,000,000
Share premium 800,000

Assuming that both of the fair value of the land and share is not given, the initial cost of the land
is P1,000,000 which is the par value of shares issued. The entry to record the acquisition is as
follows:
Land 1,000,000
Share capital 1,000,000

Illustration 6: Acquisition through issuance of bonds payable

On January 1, 2020, Anthony company acquired a building with a fair value of P950,000 by
issuing a 3-year, 10% P1,000,000 bond. Principal is due on January 1, 2023 but interest is due
at each year end. The prevailing market rate of interest is 12%. The PV of the future cash flows
from the bonds discounted at 12% is P951,963. What is the initial cost of the building?

PPE acquired through issuance of bonds are initially recognized at (1) Fair value of the asset
received (2) Fair value of the bonds issued.

Since in the problem both of the fair value of the asset received and bonds issued are given the
initial cost of the building is P950,000. If the fair value of the asset received is indeterminable
the fair value of the bonds will be the initial cost of the building.

Illustration 7: Exchange
Jerome Company exchanged equipment Jebs Company, the following data relating to the
exchange is show below:
Jerome Company Jebs Company
Equipment 1,600,000 2,000,000
Accumulated Depreciation 900,000 1,350,000
Carrying Amount 700,000 650,000
Fair Value 600,000 800,000
Cash paid by Jerome to Jebs 200,000 200,000

Case 1: Assuming that the exchange has a commercial substance, what is the cost of the new
equipment on the books of Jerome and Jebs respectively?

Jerome Books Jebs Books

Fair value of the asset given: 600,000 Fair value of the asset given: 800,000
Add: Cash Payment 200,000 Less: Cash Received (200,000)
 Cost of the new Asset 800,000 Cost of the new Asset 600,000

The entry to record the exchange

Equipment-new 800,000 Equipment-new 600,000

Accumulated Depreciation 900,000 Accumulated Depreciation 1,3500,000
Loss on Exchange 100,000 Cash 200,000
Eqpt-Old 1,600,000 Equipment-Old 2,000,000
Cash 200,000 Gain on exchange 150,000

Case 2: Assuming that the exchange lacks commercial substance, what is the cost of the new
equipment on the books of Jerome and Jebs respectively?

Jerome Books Jebs Books

Carrying amount of the asset given: 700,000 Carrying amount of the asset given: 6500,000
Add: Cash Payment 200,000 Less: Cash Received (200,000)
Cost of the new Asset 900,000 Cost of the new Asset 450,000

The entry to record the exchange

Equipment-new 900,000 Equipment-new 450,000

Accumulated Depreciation 900,000 Accumulated Depreciation 1,3500,000
Eqpt-Old 1,600,000 Cash 200,000
Cash 200,000 Equipment-Old 2,000,000

Illustration 8: Donation
Barbie company received a donation of equipment from Jerome company. The equipment has a
fair value of P143,000. And necessary cost for the installation of the equipment amounted to
P13,000.

Case 1: Assuming Jerome company is an unrelated party, what is the entry to record the
donation?

Answer:
Equipment 143,000
Cash 13,000
Income from donation 130,000

Case 2: Assuming Jerome company is a shareholder of Barbie company, what is the entry to
record the donation
Equipment 143,000
Cash 13,000
Donated Capital 130,000

*** END of LESSON 5***

REFERENCES

Textbooks

1. Millan, Z. V. (2022) Intermediate Accounting Volume 1A, Baguio City: Bandolin Enterprise.
2. Valix, C. and Peralta, J. (2022) Intermediate Accounting Volume 1, GIC Enterprises & Co.,
Inc., Manila