CHAPTER 23

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are tangible assets that are keld for use in
production or supply of goods or services, for real to others, or for
administrative purposes, and are expected to be used during more than one period.
The major characteristics of property, plant and equipment are:
• The property, plant and equipment are tangible assets, meaning with
physical substance.
• The property, plant and equipment are used in business, meaning used
in production or supply of goods or services, for rental purposes and for
administrative purposes.The property, plant and equipment are expected to be used
over a period of more than one year.
pag less than - expanse na 8 ya
Examples of property, plant and equipment
• Land
• Land improvements
• Building
• Machinery
• Ship
• Aircraft
• Motor vehicle
• Furniture and fixtures
і.
Office equipment
• Patterns, molds and dies
• Tools
1. Bearer plants
Recognition of property, plant and equipment
• It is probable that future economic benefits associated with the
asset will flow to the entity.
• The cost of the asset can be measured reliably.
Spare parts and servicing equipment
Most spare parts and servicing equipment are usually carried as inventory and
recognized as an expense when consumed.
However, major spare parts and stand-by equipment qualify as property, plant and
equipment when the entity expects to use them during more than one period.

Measurement at recognition
An item of property, plant and eased initial gualife or An emition as an asset
shall be measured initially at cost.
Cost is the amount of cash or cash guide paid and the foin cat of the other
consideration, gruen to acquire an asset at the time of acquisition or
construction.
Elements of cost
a. Purchase price, including import duty and nonrefundable purchase tax, after
deducting trade discount and rebate
aluays on nat amount
b. Cost directly attributable to bringing the asset to the location and condition
necessary for the intended use.Initial estimate of the cost of dismantling and
removing the asset and restoring the site on which it is located and for which an
entity has a present obligation as required by low or contract.
Directly attributable costs
Examples of directly attributable costs that qualify for recognition or
capitalization include:
• Cost of employee benefit arising directly from the acquisition of
property, plant and equipment
• Cost of site preparation - ocation of tenco PPE C.
Initial delivery and handling cost
 • Installation and assembly cost
• Professional fee
• Cost of testing whether the asset is functioning properly Proceeds
from samples
PAS 16 has been amended such that proceeds from selling samples produced and the
cost of such samples when testin whether the asset is functioning properly shall be
included in the determination of net income or loss.
The proceeds are no longer deducted form the cost of are accounted for as
inventory.
are ety, plant and equipment. If not yet sold, the samples

Costs not qualifying for recognition

Costs that are expensed rather than recognized as element of cost of property,
plant and equipment are:
2. Cost of opening a new facility
• Cost of introducing a new product or service, including cost of
advertising and promotion
• Cost of conducting business in a new location or with a new class of
customer, including cost of staff training
• Administration and other general overhead cost
• Cost incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is operated at less than
full capacity
• Initial operating loss -> lugi danil bago (nindi pa na vutilize navg
• Cost of relocating or reorganizing part or all of an entity's
operations
Measurement after recognition
Atter initial recognition, an entity shall choose either the cost model or the
revaluation model as the accounting policy for property, plant and equipment.
The entity shall apply such accounting policy to an entire class of property, plant
and equipment.
→ culorequent
The cost model means that property, plant and equipment are carried at cost less
any accumulated depreciation and any accumulated impairment loss.
revolcaten
siplis
fair valve
l impormant loss
The revaluation model means that property, plant and equipment are carried at
revalued carrying amount.
The revalued carrying amount is the fair value at the date of revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment loss.

Acquisition of property
There are many ways of acquiring a property and each presents a costing problem for
accounting purposes, namely:
1. Cash basis
2. On account subject to cash discount
3. Installment basis
4. Issuance of share, capital
5. Issuance of bonds payable
6. Exchange
7. Donation
8. Government grant
9. Construction
Acquisition on a cash basis
The cost of an item of property, plant and equipment is the cash price equivalent
at the recognition date.
The cost of asset acquired on a cash basis simply includes the cash paid plus
directly attributable costs such as freight, installation cost and other cost
necessary in bringing the asset to the location and condition for the intended use.
Moreover, when several assets are acquired at a "basket price" or "lump sum
price" , it is necessary to apportion the single price to the assets acquired on
the basis of relative fair value.
- appraivovalee
For example, land and building are acquired at a single cost of P5,500,000. At the
time of acquisition, the land has a fair value of P1,000,000 and the building
P4,000,000.
Land
Building
Fair value
Fraction
1,000,000
×20/6
1/51100%
4,000,000
× 20°% 4/5
5,000,000
Allocated cost
1,100,000
4,400,000
5,500,000

Acquisition on account
When an asset is acquired on account subject to a cash discount, the cost of the
asset is equal to the invoice price (minus the discount, regardless of whether the
discount is taken
or not.
If the discount is not taken, the same is charged to purchase discount lost account
which is shown as other expense.
The reason is that a reasonably wise management would take advantage of all
discounts.
Cash discounts are generally considered as reduction of cost and not as income.
Illustration
An equipment is purchased for P100,000, 2 / 10, n / 30. The purchase may be
recorded using either the gross method or net, method.
1. To record the acquisition at gross amount: gross methodl
Equipment
100,000
Accounts payable
2. To record the payment within the discount period:
100,000
100,000
Accounts payable
Cash
Equipment (2% × 100,000)
3. To record the payment beyond the discount period:
100,000
2,000
98,000
2,000
Accounts payable
Purchase discount lost
Cash
Equipment
100,000
2,000
Acquisition on installment basis
When payment for item of property, plant and equipment is deferred beyond normal
credit terms, the cost is the cash price equivalent.
If an asset is offered at a cash price and at an installment price and is purchased
at the installment price, the asset shall be recorded at the cash price.
The excess of the installment price over the cash price is treated as an interest
expense to be amortized over the credit period.
Illustration
A machinery is purchased at an installment price of P350,000
The terms are P50,000 down and the balance payable in three equal annual
installments.
The cash price of the machinery is P290,000. A promissory note is issued for the
installment balance of P 300,000.
1. To record the acquisition of the machinery:
Machinery
intorast <- Discount on note payable - orcas
290,000
carce
60,000
Note payable
Cash
300,000
50,000
2. To record the first installment payment:
Note payable
Cash
100,000
100,000
3. To amortize the discount on note payable:
Interest expense
30,000
Discount on note payable
Note payable
First year
Second year
Third year
300,000
200,000
100,000
Fraction
3 / 6
2 / 6
1/6
600,000
30,000
Interest expense
30,000
20,000
10,000
60,000
The fractions are developed from the note payable outstanding each year and then
multiplied by the discount of P60,000 to arrive at the annual interest expense.

No available cash price

If an asset is acquired by installment and there is no available cach price pa
asent i recorded at an amount equal to present value of all payments using an
implied interest rate.
Illustration
On January 1, 2024, a machinery is acquired at an installment price of P700,000.
The terms are P100,000 down and the balance payable in three equal annual
installments of P200,000 every
December 31.
Anote is issued for the balance of P600,000. There is no available cash price for
the machinery. However, the implied interest rate for this type of note is 10%
Using the implied interest rate of 10%, the present value of an ordinary annuity of
1 is 2.487 for three periods.
Down payment
4 し.
year
Present value of note payable (200,000 x 2.487)
Total cost of machinery
100,000
497,400
597,400
Note payable
Present value of note payable
Implied interest
一7一
(itr)is
1+%
2 ÷ years=
-1=9。
600,000
497,400
102,600
Amotive Mothod
Journal entries
2024
..) changht lino
2) outstanding balance method
Jan. 1. To record the acquisition? Effecteluterest Mothod
597,400
Machinery
Discount on note payable
102,600
Cash
100,000
600,000
Note payable
Dec. 31 To record the first installment payment:
200,000
Note payable
200,000
Cash
31 To amortize the discount on note payable:
49,740
Interest expense
Discount on note payable
49,740

Amortization of discount on note payable

The effective interest method is used in amortizing the discount on note payable as
interest expense.
Year
Payment Interest Principal Present value
1/1/2024
497,400
12/31/2024
200,000 x10/49,740
150,260
347,140
12/31/2025
200,000 гр
2024
134,714
165,286
181,854
12/31/2026
200,000
18,146
181,854
10,2,600
The annual payment is equal to P200,000 computed by dividing the note of 600,000 by
3 years.
The annual interest expense is equal to the present value of the note multiplied by
10%.
Thus, for 2024, P497,400 times 10% equals P 49,740, and so on.
The principal payment is equal to the annual payment minus the applicable interest
expense.
Thus, for 2024, P200,000 minus P49,740 equals P150,260, and
so on.
The present value is equal to the preceding present value minus the principal
payment.
Thus, for 2024, P497,400 minus P150,260 equals P347,140, and so on.
Statement classification and presentation
If a statement of financial position is prepared on December 31, 2024, the note
payable is classified as partly current and partly noncurrent.
Current liability:
Note payable
Discount on note payable
Carrying amount
200,000
34,714)
165,286
Noncurrent liability
Note payable
Discount on note payable
Carrying amount
200,000
( 18,146)
181,854

Issuance of share capital

If shares are issued for consideration other than actual cash, the proceeds shall
be measured at the fair value of the consideration received.
Accordingly, where a property is acquired through the issuance of share capital,
the property shall be measured at an amount equal to the following in the order of
priority:
a. Fair value of the property received b.
Fair value of the share capital
c. Par value or stated value of the share capital Illustration mind priante
→ creditea
at par lame
A piece of land is acquired by issuing 20,000 shares with par value of P50. At the
time of acquisition, the fair value of the land is P 1,600,000 and the share is
quoted at P90 per share. god priority
and priovito
Journal entry to record the acquisition
a. The fair value of the land is used
Land
1,600,00p
Share capital (20,000 x P50)
Share premium
b: The fair value of the share capital is used:
1,800,000
1,000,000
600,000
Land (20,000 x 90)
Share capital
Share premium
c. The par value of the share capital is used:
1,000,000
1,000,000
800,000
Land
1,000,000
Share capital
The measurement of the land using the fair value of the land is preferable:

Issuance of bonds payable

When an entity equires an asset by issuing bonds payable
PFRS 9, paragraph 5.1.1, provides that the entity shall measure the financial
liability at fair value plus transaction cost direstly attributable to the issue of
the financial liability.
Accordingly, the asset acquired by issuing bonds payable is measured in the
following order:
a. Fair value of bonds payable
b
Fair value of asset received
c. Face amount of bonds payable
Illustration
A building is acquired by issuing bonds payable with face amount of P5,000,000. -
ard priority
At the time of acquisition, the fair value of the building is P6,000,000 and the
quoted price of the bonds is P5,800,000.
Journal entry
poriority
a. The fair value of the bonds payable is used.
Building
Bonds payable - alass ercait at
5,800,000
Premium ón bonds payable
face amou
gorivi to be amortire
b. The fair value of the building is used.
5,000,000
800,000
Itercit
Building
Bonds payable
Premium on bonds payable
6,000,000
5,000,000
1,000,000
3. The face amount of the bonds payable is used.
Building
Bonds payable
5,000,000
5,000,000
The measurement of the building using the fair value of bonds payable is
preférable.

Exchange
pAS 16, paragraph 24, provides that the cost of an item of property, plant and
equipment acquired in exchange for a nonmonetary asset or a combination of monetary
and nonmonetary asset is measured at fair value.
However, the exchange is recognized at carrying amount under the following
circumstances:
no asser na pinog papali.
• The exchange transaction lacks commercial substance.
• The fair value of the asset given or the fair value of the asset
received is not reliably measurable. I no fair valve
Definition of commercial substance
Commercial substance is a new notion and is defined as the event • or transaction
causing the cash flows of the entity to change significantly by reason of the
exchange.
Stated differently, an exchange transaction has commercial substance when the cash
flows of the asset received differ significantly from the cash flows of the asset
transferred.
In assessing whether commercial substance has occurred, the entity shall consider
if the amount, timing and risk of the cash flows from the new asset are different
from the cash flows of the old asset.
Moreover, the entity-specific value of the entity's operations affected by the
transaction changes as a result of the exchange.
Entity-specific value is the present value of the cash flows expected to arise from
the continuing use of an asset and from the disposal at the end of useful life or
expected to be incurred when settling a liability.

Exchange - with commercial substance

Thethe he o 8 Bhe property 1 egue to the folowercial
• Fair value of asset given plus any cash payment - on the part of the
payor.
• Fair value of asset given minus any cash received - on the part of
the recipient.
Aye and Bee exchanged equipment.
Aye
Bee
Equipment
Accumulated depreciation
1,600.000
2,000,000
1,350,000
700,000
Carrying amount
650,000
600,000
800,000
Fair value
Cash paid by Aye to Bee
200,000
200,000
The cash payment of P200,000 made by Aye to
Bee is the
difference in fair value, P800,000 minus P600,000
Books of Aye (Payor), ven
ひ OC、
しく
Equipment-new
TV asid
cout
amowit
F
cas h pad
800,000
600,000 4 200
,000
Accumulated depreciation
900,000
Loss on exchange
100,000
Equipment-old
1,600,000
Cash
200,000
Fair value of asset given
600,000
Cash payment
200,000
Cost of new asset
800,000
Fair value of asset given
600,000
Carrying amount
700,000)
Loss on exchange
100,000)
Books of Bee (Recipient)
Equipment-new
600,000
Cash
200,000
Accumulated depreciation
1,350,000
Equipment-old
2,000,000
Gain on exchange
150,000
Fair value of asset given
800,000
Cash received
200,000)
Cost of new asset
600,000
Fair value of asset given
800,000
Carrying amount
650,000
Gain on exchange
150,000

Exchange - no commercial substance (no gain or loss)

If the exchange transaction lacks commercial substance, the acquired item of
property, plant and equipment is measured at the carrying amount of the asset
given.
No gain or loss is recognized when the exchange lacks commercial substance.
Of course, any cash involved is added to the carrying amount on the part of the
payor and deducted from carrying amount on the part of the recipient.
Illustration
Equipment
Accumulated depreciation
Carrying amount
Fair value
Cash paid by Yee to Zee
Yee
800,000
380,000
420,000
450,000
-50,000
Zee
1,000,000
400,000
600,000
500,000
50,000
The cash flows of the asset received do not differ from the cash flows of asset
transferred.
Books of Yee (Payor)
Jourval ontry
Equipment - new
Accumulated depreciation
Equipment - old
Cash
Carrying amount of Yee
Cash payment
Cost of new asset
Books of Zee (Recipient)
Journal
ontr
Equipment - new
Accumulated depreciation
Cash
Equipment - old
Carrying amount of Zee
Cash received
Cost of new asset
470,000 (420,000
380,000
+ 50, 000)
800,000
50,000
420,000
50,000
470,000
550,000
400,000
50,000
1,000,000
600,000
50,000)
550,000
Trade in
Trade in is a form of exchange. Trade in involves a nondealer acquiring the asset
from a dealer.
A property is acquired by exchanging another property as part payment and the
balance payable in cash or any other form of payment in accordance with agreed
terms.
Trade in usually involves a significant amount of cash and therefore, the
transaction has commercial substance.
As an exchange with commercial substance, the new asset is recorded at the
following in the order of priority:
a. Fair value of asset given plus cash payment
b. Trade in value of asset given plus cash payment in the absence of the fair value
of the asset given
Actually, the trade in value plus the cash payment is in effect the list price of
the new asset received.
Illustration
An entity traded an old equipment with a dealer for newer model.
Old equipment:
Cost
Accumulated depreciation
Carrying amount
Fair value
Trade in value
1,400,000
1,000,000
400,000
350,000
500,000
New equipment:
List price
Trade in value of old equipment
Cash payment
2,000,000
( 500,000)
1,500,000
The trade in value of the old equipment is the part payment accepted by the dealer.

Fair value approach

The new asset is recorded at the fair value of the asset given plus cash payment.
Fair value of asset given
Cash payment
Cost of new asset
Fair value of asset given
Carrying amount
350,000
1,500,000
1,850,000
350,000
400,000)
50,000)
Loss on exchange
Equipment - new
Tomal ontry
Accumulated depreciation
Loss on exchange
1,850,000
1,000,000
50,000
Equipment - old
Cash
1,400,000
1,500,000
Trade in value approach
If the fair value of asset given is not clearly determinable, the new asset is
recorded at the trade in value of the asset given plus cash payment.
Joumal
on the
Equipment - new
2,000,000
'Accumulated depreciation
1,000,000
1,400,000
Equipment - old
1,500,000
Cash
100,000
Gain on exchange
500,000
Trade in value of asset given
, 1,500,000
Cash payment
Cost of new asset equal to the list price
2,000,000
500,000
Trade in value of asset given
400,000)
Carrying amount
100,000
Gain on exchange
Care should be exercised in determining the fair value of the new asset received.
The list price is often bloated to permit the seller to increase the trade in value
for a used asset. The cash price of the new asset is believed to be the fair value.

Donation
At present, IFRS does not address donation or contribution.
However, IFRS explicitly addresses government grant.
In this regard, reference is made to local GAAP in relation to accounting for
donation.
Philippine GAAP provides that contributions received from shareholders shall be
recorded at the fair value and credited to donated capital.
Expenses incurred in connection with the donation, like payment of registration
fees and legal fees shall be charged against the donated capital account.
The reason is that such expenses do not increase or enhance the value of the asset.
However, directly attributable costs incurred subsequently, such as installation
and testing cost necessary to bring the donated asset to the location and condition
for the intended use shall be capitalized.
Philippine GAAP further provides that entities sometimes receive from
nonshareholders grant of cash or other asset restricted for property, plant and
equipment addition.
Grant from nonshareholders shall be recorded at fair value when received or
receivable.
Grant from nonshareholders is generally subsidy and therefore recognized as income.
In the rare case when the grant is not subsidy, the offsetting credit is a
liability account until the initial restrictions are met.
When the initial restrictions are met, the liability is recognized as income.

Construction
The cost of self-constructed asset is determined using the same principles as for
an acquired asset.
The cost of self-constructed property, plant and equipment shall
include:
1. Direct cost of materials
2.
Direct cost of labor /
3. Indirect cost and incremental overhead specifically identifiable or traceable to
the construction.
If the incremental overhead is not specifically identifiable, allocation of
overhead may be done on the basis of direct labor cost or direct labor hours.
Illustration of overhead allocation
An asset is constructed and the following costs are incurred:
Materials (normal without construction, P1,000,000)
1,300,000
Labor
(normal without construction, P
800,000)
1,000,000
Manufacturing overhead
900,000
3,200,000
incremontal = increase
Constructed asset
300,000
Materials
Labor
Manufacturing overhead
200,000
180,000
680,000
Finished goods
1,000,000
800,000
720,000
2,520,000
Total
1,300,000
1,000,000
900,000
3,200,000
The overhead is allocated to the constructed asset and finished goods on the basis
of direct labor cost.
Direct labor
200,000
Constructed asset
Finished goods
800,000
Fraction
2 / 10
8/10
Overhead
180,000
720,000
900,000
1,000,000

Saving or loss on construction

Where the actual cost of construction is less than the price at which the
constructed asset can be purchased from outside parties, the difference is not
income but saving.
The saving is realized in future periods by reason of lower depreciation charges on
the asset.
Any internal profit is eliminated in arriving at the cost of self-constructed
asset.
Where the actual cost of construction is more than the price at which the asset can
be pürchased from outside parties, still the constructed asset shall be recorded at
actual cost.
The reason is that there is no assurance that the asset if purchased is the same as
that constructed.
However, if there is a clear evidence that the actual cost is materially excessive
due to construction inefficiency or failure due to temporary, idle capacity or
industrial dispute, it is believed that the excess shall be treated as loss
chargeable against management.
Future periods shall not be burdened with management inefficiency or error.
The abnormal amount of wasted material, labor or overhead incurred in the
production of self-constructed asset is not included in the cost of the asset.
Intervening operations
Some operations occur in connection with the construction or development of an item
of property, plant and equipment but are not necessary to bring the asset to the
location and condition for the intended use.
These operations may occur before or during the construction or development
activities.
For example, income may be earned through using a building site as a car park until
construction starts.
Because incidental operations are not necessary to bring an assel 1o the
locatiopend co in for the piteded ase, tre incone
the determination of net income or loss.

Derecognition
Derecognition means that the cost of the property, plant and equipment together
with the related accumulated depreciation shall be removed from the accounts.
The carrying
amount of the property, plant and equipment
shall be derecognized on disposal or when no future economic benefits are expected
from the use or disposal.
The gain or loss from the derecognition of the property, plant and equipment shall
be included in the determination of net income or loss.
The gain or loss arising from the derecognition of the property, plant and
equipment shall be determined as the difference between the net disposal proceeds
and the carrying amount of the property, plant and equipment.
Fully depreciated property
A property is said to be fully depreciated when the carrying amount is equal to
zero, or the carrying amount is equal to the residual value.
In such a case, the asset account and the related accumulated depreciation account
are closed and the residual value is set up in a separate account.
However, it is not uncommon for an entity to continue to use an asset after it has
been fully depreciated.
The cost of fully depreciated asset remaining in service and the related
accumulated depreciation ordinarily shall not be removed from the accounts.
However, entities are encouraged but not required to • disclose fully, depreciated
property.

Property classified as held for sale

An item of prophy, plat ayd equipment in dasted an the present condition within one
year from the date of
classification as held for sale.
Asset classified as held for sale shall be excluded from property, plant and
equipment but presented separately as current asset.
An entity shall measure a noncurrent asset classified as held for sale at the lower
between carrying amount and fair value less cost of disposal.
The writedown to fair value less cost of disposal is treated as an impairment loss.
Moreover, a noncurrent asset classified as held for sale shall not be depreciated.
Idle or abandoned property
Temporary idle activity or abandonment does not preclude depreciating the asset as
future benefits are consumed not only through usage but also through wear and tear
and obsolescence.
Noncurrent asset to be abandoned includes an item of property, plant and equipment
that is to be used until the end of the economic life.
Optional disclosures
• The carrying amount of temporarily idle property, plant and
equipment
• The gross carrying amount of any fully depreciated property, plant
and equipment still in use
• The carrying amount of property, plant and equipment retired from
active use and classified as held for sale
• The fair value of property, plant and equipment under the cost model
when materially different from the carrying amount.