Chapter 25 – Property, Plant and Equipment
Initial measurement
PPE are tangible assets that are
PPE shall be measured at COST.
•
held for use in production or supply of
goods or services,
•
for rental to others, or (Except Land
and Building)
•
for administrative purposes, and
•
are expected to be used during more
than one period.
Elements of cost:
•
1. VAT company cannot capitalize
tax; thus, it is not included in the
cost.
2. Non-VAT company can capitalize
tax and add it to the Cost
Examples of PPE
•
Land
•
Land
improvements
•
Building
•
Machinery
•
Ship
•
Aircraft
•
•
•
•
•
•
Motor vehicle
Furniture and
Fixtures
Office
equipment
Patterns, molds
and dies
Tools
Bearer plants
Spare parts and servicing equipment
•
•
Carried as Inventory and expensed
when consumed.
Major spare parts and stand-by
equipment qualify as PPE when
expected to be used for more than
one period.
Recognition
•
Probable that future economic
benefits will flow to the entity
•
Cost of asset can be reliably measured
Purchase price + import duties +
nonrefundable purchase taxes (after
deducting trade discounts and
rebates)
•
•
Cost directly attributable to bringing
the asset to its location and intended
condition
Initial estimate of the cost of
dismantling and removing the item
Directly attributable costs
•
Employee benefits
acquisition of PPE
directly
from
•
Site preparation
•
Initial delivery and handling cost
•
Installation and assembly cost
•
Professional fees
•
Costs of testing whether the asset is
properly functioning
Costs expensed & not included in PPE cost
CASH BASIS
•
Opening a new facility (Opening
Ceremony)
•
Cash price equivalent
recognition date.
•
Introducing a new product or service,
including costs of ads and promo
•
Cash paid plus directly attributable
costs
•
Conducting business in a new
location, or with new customers, and
staff training (Training = Expense)
•
Administrative and other general
overhead costs
•
Costs incurred to enable the item to
be on full capacity
•
Initial operating losses
•
Relocating or reorganizing
Subsequent measurement
•
Cost Model
•
•
Revaluation
FV at the revaluation date – Subsequent
Accum. Dep. – Subs. Accum. Impairment Loss
ACQUISITION OF PPE
the
Freight, installation cost,
other necessary costs in
bringing the asset to its
intended
location
and
condition
Basket price – use FV to apportion
the price using the fraction of FVs
(Like purchasing land or building,
amount cannot be specified what part
is the building and land; thus using FV)
ON ACCOUNT
•
Cost is equal to the invoice price
minus the discount, regardless of
whether the discount was taken or
not.
•
Discount not taken is charged to PDlost, presented as other expenses
•
Cash
discounts
are
generally
considered as reduction of cost and
not income.
Cost = Acquired Cost – Accum. Dep.- Accum.
Impairment Loss
•
at
BY INSTALLMENT
•
CASH BASIS
•
Cost is the Cash price equivalent
•
ON ACCOUNT SUBJECT TO CASH
DISCOUNT
•
Installment price – Cash price equiv.
= Interest
•
INSTALLMENT BASIS
•
•
ISSUANCE OF SHARE CAPITAL
Interest to be amortized over the
credit period
•
ISSUANCE OF BONDS PAYABLE
•
•
EXCHANGE
If no cash price equivalent, use PV of
all payments using an implied interest
rate
•
DONATION
•
•
GOVERNMENT GRANT
EIM (Effective Interest Method) is
used in amortizing the discount on NP
as interest expense.
•
CONSTRUCTION
b)
BY ISSUANCE OF SHARE CAPITAL
•
•
When shares are issued for
consideration other than actual cash,
the proceeds shall be measured at the
FV of the consideration received.
When property is acquired through
share issuance, the property shall be
measured equal to the following in
the order of priority:
•
FV of property received
•
FV of the share capital
•
Par value or stated value of
the share capital
BY EXCHANGE – COMMERCIAL SUBSTANCE
•
Cost of property is equal to the
following:
a)
FV of the asset given plus any cash
payment – on the part of the payor;
b)
FV of asset given minus any cash
received – on the part of the
recipient.
BY EXCHANGE
SUBSTANCE
When an entity acquires an asset by
issuing bonds payable, PFRS 9,
provides that the entity shall measure
the financial liability at FV plus direct
TC.
•
Assets acquired by issuing bonds
payable is measured in the following
order:
a.
FV of bonds payable
b.
FV of asset received
c.
Face amount of
payable
bonds
•
Cost of an item of PPE acquired in
exchange for a non- monetary asset
or a combination of monetary and
non-monetary asset is measured at
FV.
Exchange is recognized at carrying
amount
under
the
following
circumstances:
a) Exchange transaction lacks
commercial substance
NO
COMMERCIAL
PPE measured at the Carrying amount
of the asset given (No gain/loss
recognized)
•
Any cash involved is added to the
carrying amount on the part of the
payor and deducted from CA on the
part of the recipient.
EXCHANGE - BY TRADE IN
•
is a form of exchange
•
property is acquired by exchanging
another property as part payment and
the balance in cash or any other form
as agreed.
•
Trade in usually involves a significant
amount of cash, thus transaction has
commercial substance.
•
New asset is recorded at the ff order
of priority:
BY EXCHANGE
•
–
•
BY ISSUANCE OF BONDS PAYABLE
•
FV of asset given or the FV of
the asset received is not
reliably measured
•
FV of asset given plus cash
payment
•
Trade in value of asset given
plus cash payment ( in effect,
this is the FV of the asset
received )
*if not, allocation may be done on the basis of
DL cost or DL hours.
DONATION
•
•
•
•
•
•
Contributions
received
from
shareholders shall be recorded at the
FV with the credit going to the
donated capital
Expenses incurred in connection with
the donation like registration fees &
legal fees are charged to the donated
capital account
directly attributable costs incurred
subsequently such as installation and
testing cost to bring donated asset to
its intended location or condition shall
be capitalized
Non-shareholders sometimes give
gifts or grants of funds or other assets
that are restricted for PPE additions.
Capital gifts or grants are generally
subsidies recognized as income
when capital gifts and grants are not
subsidies, the offsetting credit is a
liability account until the initial
restrictions are met, then it is
transferred to income
•
•
Actual Cost of Construction <
Purchase Price from Outside parties,
difference is savings.
•
Saving is realized in future periods by
reason of lower depreciation.
•
Any internal profit is eliminated for
the cost of self constructed asset.
•
if opposite of 1st bullet above, the
constructed asset is recorded at
actual cost, no loss is recognized.
•
If cost is overly excessive excess shall
be treated as a loss chargeable
against management (PAS 16)
CONSTRUCTION
OPERATIONS
–
INTERVENING
•
Example – Construction site used as
paid parking.
•
Income and expenses incurred are
recognized in P&L
DERECOGNITION
•
Cost of PPE and the related
Accumulated depreciation shall be
removed from the accounts.
•
PAS 16 provides that the carrying
amount of a PPE shall be
derecognized on disposal or when no
future
economic
benefits
are
expected from the use or disposal.
2. Direct cost of labor
•
Gain or loss from derecognition of PPE
shall be part of P&L
3. Indirect cost and incremental
overhead
specifically
traceable* to the construction
•
G/L is the difference between Net
disposal proceeds vs. CA of the item.
CONSTRUCTION
•
CONSTRUCTION – SAVINGS OR LOSS
The cost of self constructed asset is
determined using the same principles
as for an acquired asset.
The cost of self constructed PPE shall
include:
1. Direct cost of materials
FULLY DEPRECIATED PROPERTY
•
•
OPTIONAL DISCLOSURES
When CA is equal to Zero or the CA is
equal to residual value
Asset and AD accounts are closed and
the residual value is set up in another
account
•
Fully depreciated asset may still be
used and not removed from the
accounts
•
Entities are encouraged to disclose
the Fully depreciated assets
PPE – HELD FOR SALE
•
If asset is available for immediate sale
in the present condition within one
year from the date of classification as
held for sale
•
Excluded from PPE but presented
separately as Non-current asset.
•
PFRS 5 provides that an entity shall
measure
a
Non-current
asset
classified as held for sale at the lower
of CA or FV less cost to dispose.
•
Writedown
is
Impairment loss.
•
PFRS 5 – Non Current Asset held for
sale shall NOT be depreciated.
considered
as
IDLE OR ABANDONED PROPERTY
•
CA would be recovered through
continuing use
•
temporary idle activity does not
preclude depreciating the asset as
future benefits are consumed not only
through usage but also through wear
and tear and obsolescence.
a) CA of temporarily idle PPE
b)
Gross CA of any fully depreciated PPE
still in use
c)
CA of PPE retired from active use and
classified as held for sale
d)
When Cost Model is used, the FV of
PPE when this is materially different
from the CA.
Illustration
Problem 25-1 (2019)/ Problem 23-1 (2020)
Requirement: Prepare Journal Entries to record the transactions for the current year.
Erica Company had the following property acquisitions during the current year:
1. Acquired a tract of land in exchange for 50,000 ordinary shares with P100 par value and
market price of P120 per share on the date of acquisition.
The Last property tax bill indicated assessed value of P4,500,000 for the land.
*Note follow the order to get the value of land*
1. FV of property received; not 1, because assessed value isn’t fair value.
2. FV of the share capital; use 2, because fair value of the share issued is the market price.
3. Par value or stated value of the share capital
Journal Entry
Land (50,000 x 120)
6,000,000
Share Capital (50,000 x 100)
5,000,000
Share Premium
1,000,000
2. 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.
Journal Entry
Land
1,000,000
Donated Capital
Donated Capital
Cash
1,000,000
50,000
50,000
3. Purchased for P5,500,000, including appraiser fee of P100,000 a warehouse building and
the land on which it is located.
The Land had an appraised value of P2,000,000 and original cost of P1,400,00. The building
has an appraised value of P3,000,000 and original cost of P2,500,000
*Note*
Bought by basket price, thus the amount should be allocated accordingly, by using the fair
value (appraised value)
Land (2/5 x 5,500,000)
Building (3/5 x 5,500,000)
Cash
2,200,000
3,300,000
5,500,000
4. Purchased an office building and the land on which it is located for P7,500,000 cash and
assumed an existing P2,500,000 mortgage.
For realty tax purposes, the property is assessed at P9,600,000, 60% of which is allocated to
building.
Land (40% x 10,000,000)
4,000,000
Building (60% x 10,000,000)
6,000,000
Cash
7,500,000
Mortgage Payable
2,500,000
Problem 25-2
Required: Prepare journal entries for 2019 and 2020
Credulous Company purchased equipment on January 1, 2019 under the following terms:
a. P200,000 down payment
b. Five annual payments of 100,000, the first installment note to be paid on
December 31, 2019.
The same equipment was available at a cash price of P580,000.
Journal Entries
2019
Jan 1
Equipment
580,000
Discount on note payable
120,000
Cash
200,000
Note payable
500,000
Dec 31 Notes payable
100,000
Cash
100,000
Interest Expense
40,000*
Discount on Note payable
40,000
2020
Dec 31 Notes payable
100,000
Cash
100,000
Interest Expense
32,000*
Discount on Notes Payable
32,000
Amortization Table
Notes Payable
500,000
400,000
300,000
200,000
100,000
1,500,000
Fraction
5/15
4/15
3/15
2/15
1/15
15/15
Amortization
40,000*
32,000*
24,000
16,000
8,000
120,000
Problem 25-4
Anson Company had the following machinery during the year:
Required: Prepare journal entries to record the machinery acquisitions and related interest.
1. Acquired a machine with an invoice price of P3,000,000 subject to a cash discount of 10%
which was not taken.
The Entity incurred cost od P50,000 in removing the old machine prior to installation of the
new one. Machine supplies were acquired at a cost of P150,000.
*Notes*
1. You can net the machinery P2,700,000
2. Spare parts are not PPE but Inventory
Journal Entries - Gross
Net
Acquisition
Machinery
Accounts Payable
3,000,000
3,000,000
Machinery
2,700,000
Accounts Payable
2,700,000
Payment
Accounts Payable
3,000,000
Purchase discount lost (3Mx10%) 300,000
Cash
Machinery
3,000,000
Cash
Purchase Discount lost
Cash
300,000
Loss on retirement of old Machine 50,000
Spare parts inventory
Accounts Payable
150,000
200,000
Same Entry
2,700,000
300,000
3,000,000
2. During the early part of current year, 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.
*Notes*
1. Because it is only 1-year use interest expense not discount; Discount is used when the
note payable takes years.
Journal Entries
Acquisition
Machinery
Interest Expense
Cash
Notes payable
4,700,000
800,000
500,000
5,000,000
Payment
Notes Payable
Cash
5,000,000
5,000,000
3. At the beginning of current year, 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 at the end of current year.
The implicit rate of interest for this note at date of issuance was l0%. The present value of
an ordinary annuity of I 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.
*Notes*
1. Ordinary annuity is used when payment is used in the end of the period. (Use
this)
2. Annuity in Advance is used when payment is at the beginning of the period.
Journal Entries
Acquisition
Machinery (500,000 x 3.17)
Discount on note payable
Note payable
1,585,000
415,000
2,000,000
Payment – End of the Year
Note Payable
Cash
500,000
500,000
Interest Expense (1,585,000 x 10%)
158,500
Discount on note payable
158,500
4. At the beginning of current year, the entity acquired a machine by issuing a four-year,
noninterest-bearing note for P2,000,000.
The entity has an implicit 10% interest for the type of note. The present value of 1 at 10% for
4 years is 0.68.
*Note*
1. Lumpsum payment so use present value of 1
Journal Entries
Acquisition
Machinery (2,000,000 x .68)
Discount on note payable
Note payable
1,360,000
640,000
2,000,000
Interest
Interest Expense (10% x 1,360,000)
Discount on note Payable
136,000
136,000
Problem 25-6
Required: Journal Entries to record the transactions.
Cherish Company provided the following transactions:
1. Exchanged a car from inventory for a computer to be used as a long-term asset.
Carrying amount of the car
300,000
Listed selling price of the car
450,000
Fair value of the computer
430,000
Cash difference paid by Cherish Company
50,000
Journal Entries
Computer
Inventory (car)
430,000
300,000
Cash
50,000
Gain on Exchange
80,000
2. Exchanged an old packaging machine which cost P240,000 and was 50% depreciated, for
new machine and paid a cash difference of P30,000.
The fair value of the old packaging machine is determined to be P110,000 and the list price
of the new machine is P 150,000.
Journal Entries
Machinery-new (110,000+30,000)
140,000
Accumulated Depreciation
120,000
Loss on Exchange (Note 1)
10,000
Machinery-old
Cash
240,000
30,000
Note 1
Fair value of asset given
110,000
Less: Carrying Amount (240,000 – 120,000)
120,000
Loss on Exchange
( 10,000)
3. Exchanged an old equipment costing P3,000,000 with accumulated depreciation of
P1,800,000 and fair value of P1, 000, 000 for another used equipment with fair value of
P1,200, 000. The exchange is nonmonetary.
Journal Entries
Equipment-new
Loss on exchange
Accumulated depreciation
Equipment-old
1,000,000
200,000
1,800,000
3,000,000
Problem 25-9
Required: Prepare journal entry to record the exchange transaction.
Mellow Company acquired a delivery truck, making payment of P2,680,000, the payment being
analyzed as follows:
Price of truck
Charge for extra equipment
2,500, 000
50,000
Value added tax
300,000
Insurance for one year
120,000
Motor vehicle registration
Total
10,000
2,980,000
Less: Trade in value allowed on old truck
Cash paid
300,000
2,680,000
The old truck cost P1,500,000 and has a carrying amount of P200,000, and fair value of P50,000. The
value added tax is refundable or recoverable.
Journal Entries
Delivery Equipment-New (Note 1)
2,300,000
Accumulated Depreciation
1,300,000
Loss on exchange (FV 50,000 – CA 200,000)
150,000
Input tax
300,000
Insurance
120,000
Taxes and Licenses
10,000
Delivery Equipment – Old
1,500,000
Cash
2,680,000
Note 1
Fair Value of asset given
50,000
Cash Paid
2,680,000
Total
2,730,000
Less:
VAT
300,000
Insurance
120,000
Registration Fee
10,000
Cost of New asset
430,000
2,300,000
Problem 25-11
Acrophobia Company summarized manufacturing and construction activities for 2019 as follows:
Finished goods
Machinery
Materials
3,000,000
500,000
Direct labor
4,000,000
1,000,000
Overhead for the prior year was 75% of the direct labor cost. Overhead in 2019 related to both
product manufacture and construction activities amounted to P3,600,000.
Required:
a. Calculate the cost of the machinery, assuming that manufacturing activities are to be
charged with overhead at the rate experienced in the prior year.
Materials
Direct Labor
500,000
1,000,000
Overhead (Note 1)
600,000
Cost of Machinery
2,100,000
Note 1
Overhead
3,600,000
Overhead to Finished Goods
3,000,000
Charged to Machinery
600,000
b. Calculate the cost of the machinery if manufacturing and construction activities are to be
charged with overhead at the same rate.
Materials
Direct Labor
Overhead (1/5 x 3.6M)
Cost of Machinery
500,000
1,000,000
720,000
2,220,000
Direct Labor
Finished Goods (4/5)
4,000,000
Machinery (1/5)
1,000,000
5,000,000