U

PROPERTY PLANT &

NOTES
CHAPTER

16
S
EQUIPMENT L

BLU
E
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.

Requisites:
a. Tangible, meaning with physical substance
b. Used in business
c. Expected to be used for more than one year. Hence they are classified as noncurrent assets.

Measurement
A. Initial Measurement = at Cost*
B. Subsequent Measurement
Either:
Cost Model = Cost less accumulated depreciation and accumulated impairment losses
Revaluation Model = Fair value at the revaluation date less any subsequent accumulated depreciation
and subsequent accumulated impairment loss.

Cost* Includes Cost* Excludes

   Cost of opening new facility
Purchase price including import duties and

  taxes after deducting trade
nonrefundable purchase Costs of introducing a new product
 or service, like
discounts and rebate.  advertising and promotions
 
Cost directly attributable to bringing the asset to Costs of conducting business in a new location or
the location and condition necessary for it to be with a new class of customer, including costs of staff
  in the manner intended by
capable of operating training
the management.   Administrative and other general overhead costs
 Cost of employee benefits arising directly 
from the construction or acquisition of the Costs incurred while an item capable of operating
item of property, plant and equipment in the manner intended by the management has
 yet to be brought into use or is operated at less
 Cost of site preparation  than full capacity
 Initial delivery and handling cost   Initial operating losses
 Installation and assembly cost 
Costs of relocating
 or reorganizing part or all of an entity’s
  Professional fees operations
 Costs of testing whether the asset is
functioning properly less net proceeds from
selling any items produced while bringing the
asset to that location and condition.


Initial estimate of costs of dismantling and removing
the item and restoring the site on which it is located
Measurement of Cost*
A. Acquisition on a Cash Basis Cost = Cash Price

B. Acquisition on Account Cost = Purchase Price less Cash discount whether taken or not

C. Acquisition on Installment Basis Cost = Cash Price Equivalent

D. Issuance of Share Capital Cost = (in order of priority)

1. fair value of the property, plant and equipment received
2. fair value of the equity instrument issued
3. par or stated value of the equity instrument issued

E. Issuance of Bonds Payable Cost = (in order of priority)

1. Fair value of the bonds
2. Fair value of the asset
3. Face value of the bonds

F. Exchange
Either:
With Commercial Substance Without Commercial Substance

1. No cash is involved, cost of the asset a. On part of the payor – cost of asset
acquired shall be measured in the given plus cash payment
following order of priority: b. On part of the recipient – cost of asset
a. Fair value of property given given minus cash received
b. Fair value of property received
c. Book value of the property given Note: No gain or loss shall be recognized.

2. If cash is involved, the cost of the asset

acquired shall be measured in the
following:
a. On part of the payor - Fair value of
property given plus cash payment.
b. On part of the recipient - Fair value
of property given minus cash
received

G. Trade-in Cost = (in order of Priority)

1. Fair value of the asset given plus cash payment
2. Trade-in value of the asset given plus cash payment ( in effect,
this is the fair value of the asset received)

H. Donation Cost = Fair Value of the Property

Note: Expenses relating to the donation shall be charged against donated capital account.
Directly attributable costs incurred, such as installation and testing cost to bring the
donated asset to the location and condition for its intended use shall be capitalized.
 I. Construction Cost = Direct Materials
Direct Labor
Incremental overhead specifically identifiable or traceable to
the construction
Note: Savings from the construction shall not be recognized in the financial statements.
Cash flows from activities occurring before or during construction that are not necessary
in bringing the asset to condition for use shall not be included in determining the cost of
the asset.

The carrying amount of property, plant and equipment shall be derecognized upon:
a. Disposal
b. Or when no future economic benefits are expected from its use or disposal
Note:Gain or loss on derecognition shall be recognized in P/L.

Fully depreciated property shall not be removed from accounts.

Property Classified as Held for Sale


an item of property, plant and equipment is classified as “held for sale” if the asset
is available for immediate sale in its
 present condition within one year from the date of classification as held for sale.

an entity shall measure a noncurrent asset classified as
held for sale at the lower of its carrying amount or fair value less cost
 to sell. Any writedown is charged to impairment loss.
  
no depreciation shall be recognized anymore.
 
reflected in the statement of financial position separately as current asset
Note: an entity shall not classify as held for sale a noncurrent asset that is to be abandoned.

Illustrative Problems

1. Raynum Corporation had the following transactions regarding its property plant and equipment:
a. Issued P5 par 200, 000 ordinary shares out of its 400, 000 authorized sharesin exchange for 4, 000, 000
cash and land with a fair market value of 2, 500, 000. On the same date, the shares of Raynum Corporation
are selling at P26.
b. Incurred the following expenses for the construction of building:
Direct Materials 1, 000, 000
Site Labor Cost 2, 500, 000
Incremental Costs Incurred 250, 000
Interest imputed from financing the construction 400, 000
Wasted Materials (300, 000 normal) 800, 000
Total Costs Incurred 4, 950, 000

Building could have been purchased from outside parties at 5, 250, 000

c. Purchased machinery for 250, 000 cash.

d. Purchased truck #1 for 500, 000 3/10, n/30. The discount was not availed.
e. Purchased truck #2 at an installment price of 600, 000 by issuing notes. The installment will be payable in 3
equal installment. The cash price equivalent of the purchase is 450, 000.
f. Issued 8% 1, 000 bonds of 1, 000par to finance the purchase of equipment. The bonds are selling in the
market at 98. The equipment’s fair value at that time was 900, 000.
g. An investment in equity security valued at the market for 700, 000 and costing 800, 000 was exchanged for
an equipment with a fair value of 750, 000. Additional cash payment was made by Raynum for 30, 000.
 h. Raynum entity traded an old equipment with a dealer of a new model. The following data are available:
Old equipment:
Cost 1, 000, 000
Accumulated depreciation 750, 000
Book Value 250, 000
Fair Value 300, 000
Trade-in Value 400, 000

New equipment:
List Price 2, 000, 000
Trade-in value of old equipment (400, 000)
Cash Payment 1, 600, 000

The following journal entries shall be made in the books of Raynum Corporation regarding its transaction involving
property, plant and equipment:

ACCOUNT TITLE Debit Credit

a. Cash 4, 000, 000
Land 2, 500, 000
Share Capital – ordinary shares 1, 000, 000
Share Premium – ordinary shares 5, 500, 000

b. Building 4, 650, 000

Abnormal wastes 300, 000
Cash 4, 950, 000

c. Machinery 250, 000

Cash 250, 000

d. Truck No. 1 485, 000

Accounts Payable 485, 000

Accounts Payable 98, 000

Purchase Discount Lost 2, 000
Cash 100, 000

e. Truck No. 2 450, 000

Discount on Notes Payable 150, 000
Notes Payable 600, 000

f. Equipment 980, 000

Discount on Bonds Payable 20, 000
Bonds Payable 1, 000, 000
 g. Equipment 730, 000
Loss on Exchange 100, 000
Investment in Equity Security 800, 000
Cash 30, 000

h. Equipment – new 1, 900, 000

Accumulated Depreciation 750, 000
Equipment – old 1, 000, 000
Cash 1, 600, 000
Gain on exchange 50, 000

Note:

The discount on the notes and bonds shall be amortized through the credit term using simple amortization method since no effective interest rate is
given.

In journal entry (g), fair value of the asset given is determinable and therefore shall be used in measuring the value of the asset received.

Using journal entry (g), in case the transaction lacks commercial substance, the value of the asset received shall be the cost of asset given plus the cash
payment.

In journal entry (h), fair value approach is used since the fair value of the asset given is determinable. However, if the fair value is not
determinable, then trade-in value approach shall be used. Under trade-in value approach, the list price of the asset acquired shall be the cost
measurement of the asset to be recorded.
 U
LAND, BUILDING &

NOTES
CHAPTER

17
S
MACHINERIES L

BLU
E
CAPITALIZABLE COSTS

Land Building Machinery

Purchased Constructed
a. Purchase price a. Purchased price a. Material used, labor a. Purchase price
b. Attorney’s fees and other b. Legal fees and other employed and b. Freight, handling,
expenditures for expenses incurred in overhead directly storage and other
establishing clean titles connection with the attributable to cost related to the
c. Broker’s commission purchase construction acquisition
d. Escrow fees c. Unpaid taxes up to b. Building permit or c. Insurance while in
e. Fees for registration and the date of purchase license transit
transfer of title assumed by the buyer c. Architect fee d. Installation cost,
f. Cost of relocation or d. Interest, liens and d. Superintendent fee including site
reconstruction of other encumbrances e. Cost of excavation preparation and
property belonging to assumed by the buyer f. Cost of temporary assembling
others in order to acquire e. Payments to tenants building used as e. Cost of testing and
possession to induce them to construction office trial run, and other
g. Mortgages, vacate the building and tools or materials cost necessary in
encumbrances and purchased shed preparing the
interest on such f. Any renovating or g. Expenditures incurred machinery for use
mortgages assumed by remodeling costs during the f. Initial estimate of
the buyer incurred to put the construction period cost of dismantling
h. Unpaid taxes up to date building purchased in such as borrowing and removing the
of acquisition assumed by a condition suitable cost and insurance machinery and
the buyer for its intended use, h. Expenditures for restoring the site on
i. Cost of survey such as lighting service equipment and which it is located,
j. Cost of clearing, grading installations, fixtures made a for which the entity
demolishing unwanted partitions and repairs permanent part of the has a present
old building, less structure obligation
proceeds from salvage i. Cost of temporary g. Fee paid to
k. Payments to tenants to safety fence around consultants for
induce them to vacate construction site and advice on the
the premises cost of subsequent acquisition of
l. Cost of permanent thereof. However, the machinery
improvements, cost of construction of h. Cost of safety rail
grading, leveling, and permanent fence and platform
landfill after the completion surrounding machine
m. Cost of option to buy the of the building is i. Cost of water device
acquired land. If the land recognized as land to help machine cool
is not acquired, the cost improvement j. Irrecoverable
of option is expensed j. Safety inspection fees purchase tax
outright
 Classification of Land in the Statement of Financial Position
1. Land used as plant site - property, plant and equipment
2. Land held for currently undetermined used - investment property
3. Land held definitely as future plant site-owner occupied (PPE)
4. Land held for long-term capital appreciation-investment property
5. Land held for current sale by a real estate developer-inventory

Accounting Treatment for Land Improvements

 
If the cost is not subject to depreciation-charged to land account
Example: cost of surveying cost of clearing
cost of grading, leveling and landfill other cost of permanent improvement
cost of subdividing
 
If the cost is depreciable-charged to land improvements
Example: fences water systems drainage
systems sidewalks pavements
cost of trees, shrubs and other landscaping

Treatment of Other Expenditures Incurred During the Construction of Building

  
If part of blueprint-capitalize as cost of building (e.g. sidewalks, parking lots, pavements and driveways )
 
 If incurred not in connection with the construction of building-charged to land improvements

  If installed during construction- capitalize as cost of building(e.g. ventilating system, lighting system and elevator)
*otherwise charged to building improvements and depreciated over their useful life or life of the building
whichever is lower
  
If immovable or attached to building and removal will destroy the building-capitalize
 
If movable-charged to furniture and fixture and depreciated over its useful life

Capital Expenditure Revenue Expenditure

expenditure that benefits both current and future expenditure that benefits only the current period
periods reported as outright expense
reported as an asset

Subsequent cost incurred for PPE shall be recognized as an asset if it:

  
Extends the life of the asset
 
 Increase the capacity of the asset and quality of output
 
Improve the efficiency and safety of the asset
Note: If the subsequent cost merely maintains the existing level of performance, the cost should be expensed when incurred.
Other Subsequent Expenditures

Expenditures Treatment


Additions – represents major expenditures for new Capitalized as cost of asset
assets

Improvements or Betterments – modifications or Normally capitalized
alterations which increase the service life or the Accumulated depreciation of the old part are
capacity of the asset derecognized
Note: improvement that do not involve
replacement of parts are simply added to the
cost of existing asset


Replacements – involve substitution Capitalized when there is major replacement

new asset is not better than the old Expensed if it is minor replacement
asset when acquired


Extraordinary repairs Usually capitalized

Ordinary repairs Expensed outright

Rearrangement cost Capitalized if it increases the future service
potential of the asset and expensed if it
merely maintains the existing level of
performance of the asset
 U
DEPRECIATION
CHAPTER

BLUE NOTES
20 L S

Depreciation is the allocation of the cost of assets to periods in which the assets are used.
Methods of Depreciation
A. Straight-Line
This method spreads the cost of the fixed asset evenly over its useful life.

B. Declining-Balance
An accelerated method of depreciation, it results in higher depreciation expense in the earlier years of
ownership. Don’t deduct salvage value when figuring the depreciable base for the declining balance method
Illustration
Suppose a business has an asset with $1,000 original cost, $100 salvage value, and 5 years of useful life. First,
the straight-line depreciation rate would be 1/5, i.e. 20% per year. Under the double-declining-balance method,
double that rate, i.e. 40% depreciation rate would be used. The table below illustrates this:
Depreciation Depreciation Accumulated Book value at
rate expense depreciation end of year
original cost $1,000.00
40% 400.00 400.00 600.00
40% 240.00 640.00 360.00
40% 144.00 784.00 216.00
40% 86.40 870.40 129.60
129.60 - 100.00 29.60 900.00 scrap value 100.00

C. Sum-of-the-Years’ Digits
Compute depreciation expense by adding all years of the fixed asset’s expected useful life and factoring in
which year you are currently in, as compared to the total number of years.

If an asset has original cost of $1000, a useful life of 5 years and a salvage value of $100, compute its
depreciation schedule.
1. Determine years' digits. Since the asset has useful life of 5 years, the years' digits are: 5, 4, 3, 2, and 1.
2. calculate the sum of the digits: 5+4+3+2+1=15
The sum of the digits can also be determined by using the formula (n2+n)/2 where n is equal to
the useful life of the asset in years. The example would be shown as (52+5)/2=15
Depreciation rates are as follows:
5/15 for the 1st year
 4/15 for the 2nd year
3/15 for the 3rd year
2/15 for the 4th year
1/15 for the 5th year

Total
Depreciation Depreciation Accumulated Book value at
depreciable
rate expense depreciation end of year
cost
$1,000 (original
cost)
300 (900 x
900 5/15 300 700
5/15)
240 (900 x
900 4/15 540 460
4/15)
180 (900 x
900 3/15 720 280
3/15)
120 (900 x
900 2/15 840 160
2/15)
900 1/15 60 (900 x 1/15) 900 100 (scrap value)

D. Units-of-Production

The total estimated number of units the fixed asset will produce over its expected useful life

Illustration
Suppose, an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units.
Depreciation per unit = ($70,000−10,000) / 6,000 = $10
Units of Depreciation Depreciation Accumulated Book value at
production cost per unit expense depreciation end of year
$70,000 (original cost)
1,000 10 10,000 10,000 60,000
1,100 10 11,000 21,000 49,000
1,200 10 12,000 33,000 37,000
1,300 10 13,000 46,000 24,000
1,400 10 14,000 60,000 10,000 (scrap value)
E. Group Depreciation Method
Group depreciation method is used for depreciating multiple-asset accounts using straight-line-depreciation
method. Assets must be similar in nature and have approximately the same useful lives.

F. Composite Depreciation Method

The composite method is applied to a collection of assets that are not similar, and have different service lives.
For example, computers and printers are not similar, but both are part of the office equipment. Depreciation
on all assets is determined by using the straight-line-depreciation method.
Illustration
Historical Salvage Depreciable Depreciation
Asset Life
cost value cost per year
Computers $5,500 $500 $5,000 5 $1,000
Printers $1,000 $100 $ 900 3 $ 300
Total $ 6,500 $600 $5,900 4.5 $1,300

Composite life equals the total depreciable cost divided by the total depreciation per year. $5,900 / $1,300 =
4.5 years.
Composite depreciation rate equals depreciation per year divided by total historical cost. $1,300 / $6,500 =
0.20 = 20%
Depreciation expense equals the composite depreciation rate times the balance in the asset account (historical
cost). (0.20 * $6,500) $1,300
 U
DEPLETION
CHAPTER

BLUE NOTES
21 S
L

Exploration for and evaluation of mineral resources is defined as the search for mineral resources after the entity has
obtained legal right to explore in a specific area as well as the determination of the technical feasibility and commercial
viability of extracting the mineral resources. (PFRS 6)

Measurement
Initial measurement - exploration and evaluation assets are measured initially at cost.
Subsequent measurement – either cost or revaluation model.

Classification
Exploration and evaluation asset is classified either as tangible asset or an intangible asset.

Wasting assets are material objects of the economic value and utility to man produced by nature.

Main features:
  
The wasting assets are physically consumed.
 
The wasting assets are irreplaceable.

Cost of wasting asset

Acquisition cost Price paid to obtain the property containing the natural resource. If there is a
residual land value after the extraction of the natural resource, the portion of the
acquisition cost applicable to the land may be included in the natural resource
account or may be set up in a separate account and the remaining cost should be
charge to natural resource account.

Exploration cost Expenditure incurred before the technical feasibility and commercial viability of
extracting a mineral resource are demonstrated.

Development cost Cost incurred to exploit or extract the natural resource that has been ocated through
successful exploration.

Estimated restoration cost Cost to be incurred in order to bring the property to its original condition.

Depletion method
The depletable amount of the wasting asset is divided by the units estimated to be extracted to obtain a depletion rate
per unit. The depletion rate per unit is then multiplied by the units extracted during the year to arrive at the depletion
for the period.

Revision of depletion rate

The procedure is to revise the depletion rate on a prospective basis, that is, by dividing the remaining depletable cost
of wasting asset by the revised estimate of the productive output.
Depreciation of mining property
Generally, the depreciation of equipment used in mining operations is based on the life of the equipment or the life of
the wasting asset, whichever is shorter.
If the life of the equipment is the shorter the straight line method of depreciation is normally used.
But if the life of the wasting asset is shorter, the output method of depreciation is frequently used.

Illustrative Problem
1. Revision of depletion rate
A wasting asset entity has acquired the right to use a property to explore a natural resource. The acquisition cost is
3,000,000, the related exploration costs amount to 2,000,000, and development costs incurred in erecting wells and
drilling the deposit are 5,000,000.
Total costs of the wasting asset therefore amount to 10,000,000.
It is estimated that the resource deposit is approximately 1,000,000 units. The depletion rate per unit is computed as
follows:
Depletion rate per unit =10,000,000/1,000,000 units
= 10
If 250,000 units are extracted in the first year of operations, then depletion for the year is 2,500,000, computed by
multiplying the production of 250,000 units by the rate of 10.
Depletion 2,500,000
Accumulated depletion 2,500,000
In the income statement, the depletion is classified as part of the cost of production or cost of sales.
If a statement of financial position is prepared at the end of the first year, the wasting asset would be shown as a
separate line item as follows:
Resource deposit, at cost 10,000,000
Accumulated depletion (2,500,000)
Carrying amount 7,500,000
Assume that, additional development costs of 3,750,000 are incurred in the second year, and recoverable deposits are
estimated to be 1,250,000 units at the beginning of the second year.
The depletion rate per unit for the second year is computed as follows:
Original cost of wasting asset 10,000,000
Additional development costs in second year 3,750,000
Total 13,750,000
Accumulated depletion (2,500,000)
Remaining depletable amount 11,250,000
Depletion rate per unit (11,250,000/ 1,250,000units) = 9
If 300,000 units are extracted in the second year, the entry to record the depletion for the period is:
Depletion 2,700,000
Accumulated depletion 2,700,000
(300,000 unit * 9)
 U
CHAPTER

REVALUATION

BLUE NOTES
24 S
L

Revaluation
Consists of:
  preparation of a detailed listing of the items of property, plant, and equipment at appraisal date,


  
detailed inspection of each unit of property,
  
pricing the property items ordinarily at fair value of replacement cost,
  
determination of accumulated depreciation,
 
calculation of the depreciated replacement cost

Revaluation Model
  Property, plant, and equipment are carried at revalued amount.

 
Revalued amount :
FV at the date of acquisition
Less: Subsequent accumulated depreciation
Subsequent accumulated impairment loss
 
Revaluation should be done in the entire class of PPE to which the asset to be revalued belongs.

Frequency of Revaluation
  When a fair value of a revalued asset differs materially from its carrying amount a further revaluation is necessary.

  If there are significant and volatile movements in the fair value of the asset, annual revaluation is necessary.

 
If there are insignificant movements in the fair value, a revaluation every 3-5 years may be sufficient.

Basis of Revaluation

FAIR VALUE DEPRECIATED REPLACEMENT COST

  
Usually equal to market value. Shall be used when fair value is

not available.
  
Determined by appraisal normally undertaken by Sound Value of the asset.

professional qualified valuers.
 

Definition Of Terms
A. Revalued amount
  
Fair Value or Depreciated Replacement Cost of the item of PPE.
B. Revaluation Surplus
  
Difference between the Revalued Amount and the Book Value of the PPE.
 
 Also known as revaluation increment.
C. Appreciation or revaluation increase
  
Excess of revalued amount over the historical cost
 
Appreciation minus the corresponding accumulated depreciation equals the net appreciation or revaluation surplus.
Approaches In Recording The Revaluation
  The Accumulated Depreciation is:

Restated proportionately with the change
 in the gross carrying amount of the asset so that the carrying amount equals the
 revalued amount after revaluation.
o Eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset.
Revaluation Surplus
  Component of Other Comprehensive Income (OCI)

  
May be transferred to Retained Earnings when the surplus is realized.
  
Realization of Revaluation Surplus:
  
The whole surplus may be realized on the retirement or disposal of the asset.

If the revalued asset is being depreciated, part of the surplus is being realized as the asset is used. The
revaluation surplus is allocated or realized over the remaining life of the asset in order to get the piecemeal
realization.
Reversal of a Revaluation Increase/Decrease
A. Reversal of Revaluation Increase
  
Any decrease in the carrying amount of the asset as a result of revaluation shall be recognized as expense.
  
A revaluation decrease shall be charged directly against:
  
Any revaluation surplus to the extent that the decrease is a reversal of a previous revaluation, and
 
 The balance is charged to expense.
 B. Reversal of Revaluation Decrease
 
 Any increase in the carrying amount of the asset as a result of revaluation shall be credited to revaluation surplus.

A revaluation increase shall
 be recognized as income to the extent that it reverses a revaluation decrease previously
recognized as expense.