Property Plant and Equipment
1. PPE – are (a) tangible assets, (b) used in business, and (c) long-term in nature
2. The elements of COST of PPE:
 Purchase cost
 Direct costs
 Present value of decommissioning and restoration costs
3. The cost of an item of PPE is the cash price equivalent at the recognition date.
4. If there are 2 or more PPE bought in a lump-sum price, the allocation basis used are their
relative fair values.
5. If an old building is demolished to make way for the construction of a new building, the costs of
demolition are included as cost of the new building.
6. Savings on self-construction are not recognized.
7. The cost of option on properties not acquired are expensed.
8. Cost of uninsured hazards or claims for uninsured accidents during construction are
recognized as expense.
9. PPE acquired in an exchange with commercial substance is measured at the
(a) Fair value of asset given up plus any cash payment – on the part of the payor
(b) Fair value of asset given up minus any cash received – on the part of the recipient
10. PPE acquired in an exchange without commercial substance is measured at the
(a) Carrying amount of the asset given plus/minus any cash payment/received.
11. Trade-ins are accounted for similar to exchanges with commercial substance
Illustration 1: Acquisition on cash basis
Roel Co. acquired factory equipment overseas on cash basis for P100,000. Additional costs incurred
include the following:
Commissions paid to brokers on the purchase
Import duties
Non-refundable purchase taxes
Freight cost of transferring the equipment to Roel Co.'s premises
5,000
25,000
10,000
1,000
Cost of assembling and installing the equipment
Cost of testing the equipment
Administration and other general overhead costs
Advertisement and promotion costs of the new product to be produced by the equipment
Samples generated from testing the equipment were sold (net proceeds from sample)
2,000
1,500
4,200
3,800
500
Requirement: Compute for the initial cost of the equipment.
Illustration 2: Acquisition on account
Pau Co. acquired an equipment for P112,000 on account with a credit term of 2/15, n/30. Any discount is
computed based on the purchase price. The purchase price is inclusive of 12% value added tax (VAT). Pau
Co. is VAT-registered and any input VAT paid is refundable through deduction from the monthly output
VAT remitted to the BIR. Additional costs incurred include P10,000 cost of training staff who will be
operating the equipment and P15,000 cost of relocating the equipment to a new location after it was installed
in the location originally intended by management.
Requirement: Compute for the initial cost of the equipment.
Illustration 3: Deferred settlement – with cash price equivalent
On January 1, 2020, Fajardo Co. purchased furniture with an installment price of P130,000 and a cash price
equivalent of P100,000 by paying P10,000 down payment and issuing a one-year noninterest-bearing note
of P120,000 payable in equal semi-annual installments on July 1 and December 31, 2020.
Requirement: Compute for the initial cost of the equipment.
Illustration 4: Deferred settlement – without cash price equivalent
On January 1 2020, Cassie Co. purchased fixtures with an installment price of P130,000 by paying P10,000
down payment and issuing a three-year noninterest bearing note of P120,000 payable in three equal annual
installments starting December 31, 2020. The prevailing rate for the note as of January 1, 2020 is 12%.
The PV of an ordinary annuity of P1 at 12% for 3 periods is 2.401.
Requirement: Compute for the initial cost of the equipment.
Illustration 5: Deferred settlement – without cash price equivalent
On January 1, 2020, Mira Co. acquired a building for P950,000, including P5,000 non-refundable purchase
taxes. The purchase agreement provided for payment to be made in full on December 31, 2020. Legal fees
of P2,000 were incurred in acquiring the building and paid on January 1, 2020. An appropriate discount
rate is 10%. The present value of P1 at 10% for 1 period is 0.909.
Requirement: Compute for the initial cost of the building.
Illustration 6: Lump-sum acquisition
On April 1, 2020, Jude Co. purchased a land and a building by paying P10,000,000 and assuming a
mortgage of P2,000,000. The land and a building have fair values of P5,000,000 and P10,000,000,
respectively. The building will be used by Jude Co. as its new office.
Additional costs relating to the purchase include the following:
Legal cost of conveying and registering title to land
8,000
Payment to tenants to vacate premises
9,000
Option paid on the land and building
6,000
Option paid on similar land and building not acquired
3,000
Broker’s fee on the land and building
15,000
Unpaid real estate taxes prior to April 1, 2020 assumed by
Jude Co. – assessed on land
30,000
Real estate taxes after April 1, 2020
20,000
Repairs and renovation costs before the building is occupied
40,000
Repair costs after the building is occupied
50,000
Requirement: Compute for the allocated costs for land and building.
Illustration 7: Lump-sum acquisition
On April 1, 2020, Fly Co. purchased land and building for a lump-sum price of P12,000,000. The existing
building will be demolished and a new building will be constructed.
Additional costs relating to the purchase include the following:
Title guarantee
Option paid for the land and old building acquires
Payments to tenants to vacant premises
Cost of razing the old building
Proceeds from sale of salvaged materials
Fair value of materials salvaged from the old building and used in the new building
Construction cost of new building (completed)
20,000
6,000
12,000
60,000
15,000
30,000
8,500,000
Requirement: Compute for the allocated costs for Land, Old Building and New Building assuming:
Scenario 1: The land and old building have fair values of P5,000,000 and P10,000,000, respectively.
Scenario 2: The old building is unusable and has an insignificant fair value.
Illustration 8: Cost of self-constructed asset
Nest Co. purchased a lot for P2,000,000. Immediately after the purchase, Nest started construction of a new
building on the lot. Nest Co. incurred the following additional costs:
Legal cost of conveying land
Special assessment
Survey costs
10,000
5,000
15,000
Materials, labor and overhead costs
Cash discounts on materials purchase not taken
Clerical and other expenses related to construction
Excavation costs
Architectural fees and building permit
Supervision by management on construction
Insurance premiums paid for workers
Payment for claim for injuries not covered by insurance
Savings on construction
Cost of changes to plans and specifications due to inefficiencies
Paving of streets and sidewalks (not included in blueprint)
Income earned on a vacant space rented as parking lot during construction - income
5,500,000
30,000
14,000
100,000
60,000
12,000
130,000
45,000
200,000
140,000
10,000
9,000
Requirement: Compute for the allocated costs for Land, Land Improvement and New Building.
Illustration 9: Cost of Equipment – with decommissioning cost
Gab Co. acquired an oil rig for P100,000,000. Installation and other necessary costs in bringing the
equipment to its intended condition for use totaled P20,000,000. A law requires Gab Co. to dismantle the
equipment and restore the installation site after 20 years. The estimated decommissioning and restoration
costs are P10,000,000. The imputed rate of interest is 12%. Present value of P1 for 10 periods (1+i)raise to
–n
Requirement: Compute for the initial cost of the equipment.
Purchase price
100M
Installation cost
20M
PV of decommission 1,036,668
10M x 0.1036668
121036668
Illustration 10: Acquisition through Exchange
Martha Co. exchanged equipment with Marco Co. Pertinent data are shown below:
Equipment
Accumulated depreciation
Carrying amount
Fair Value
Martha Co.
1,000,000
200,000
800,000
950,000
Marco Co.
2,000,000
800,000
1,200,000
1,100,000
Cash paid by Martha Co. to Marco Co.
150,000
Requirement: Compute for the following:
1. Assuming exchange has commercial substance
a. Cost of asset received by Martha Co. 950k + 150k = 1100,000
b. Gain or loss on exchange to be reported by Martha Co.
Equipment – new
1,100,000
Accumulated dep.
200,000
Equipment-old
1,000,0000
Cash
150,000
Gain on exchange
150,000
c. Cost of asset received by Marco Co. 1.1M – 150k = 950000
d. Gain or loss on exchange to be reported by Marco Co.
Equipment – new
950K
Accum depreciation
800k
Cash
150k
Loss on exchange
100k
Equipment –old
2M
2. Assuming exchange has no commercial substance
a. Cost of asset received by Martha Co. 800k + 150k = 950k
b. Gain or loss on exchange to be reported by Martha Co. 0
c. Cost of asset received by Marco Co. = 1.2M-150k = 1050k
d. Gain or loss on exchange to be reported by Marco Co. 0
Illustration 11: Trade in
The cost of PPE acquired in a trade-in is measured using the following order of priority:
a. Fair value of asset given up plus cash payment
b. Fair value of asset received/Cash price without trade-in/Trade-in value of asset given plus cash
payment
Rob Co. traded in an old machine for a new model. Pertinent data are as follows:
Old equipment:
Cost
50,000
Accumulated depreciation
20,000
Average published retail value 6,000
New equipment:
List price
Cash price without trade in
Cash price with trade in
95,000
70,000
55,000
Requirement: Compute for the following:
1. Cost of new machine 70,000-55,000=15,000+55,000 = 70,000
2. Gain or loss on trade in
Illustration 12: Acquisition through issuance of own equity instrument
When assets are acquired by issuing an entity’s own equity instruments, the assets acquired are measured
using the following order of priority:
a. Fair value of asset received
b. Fair value of the share capital
c. Par value or stated value of the share capital
Rolan Co. acquired land with fair value of P1,000,000 by issuing 10,000 shares with par value of P10 per
share and quoted price of P90 per share. How much is the cost of the land acquired? Assuming that the fair
value of the land is indeterminable, the entry to record the acquisition of land would be?
Land 1M
Share capital 10,000 x P10 100K
Share premium
900k
Illustration 13: Acquisition through issuance of bonds payable
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
On January 1, 2020, HP Co. acquired land with fair value of P950,000 by issuing a 3-year, 10%, P1,000,000
bonds. Principal is due on January 1, 2023 but interest is due at each year-end. The prevailing market rate
of interest for a similar instrument on January 1, 2020 is 12%. The present value of the future cash flows
from the bonds discounted at 12% is P951,963.
Requirement: Compute for the following:
1. Cost of the land acquired
951963
2. Entry to record the transaction
Land 951,963
Discount on bonds payable
48037
Bonds payable
950,000