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Property, Plant and Equipment
I N I T I A L
R E C O G N I T I O N
Noel A. Bergonia, CPA, MBA
1
Property, Plant and Equipment
rental to others
held for use in
the production
or supply of
goods or
services
administrative
purposes
are
tangible
items
These are expected to be used during
more than one period.
Noel A. Bergonia, CPA, MBA
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Property, Plant and Equipment
property ordinarily not
subject to depreciation or
depletion
property subject to
depletion
property subject to
depreciation or
amortization
Noel A. Bergonia, CPA, MBA
3
Recognition
Property, plant and
equipment shall be
recognized as an
asset if, and only if:
it is probable that
future economic
benefits associated
with the item
the cost of the item
can be measured
reliably.
Noel A. Bergonia, CPA, MBA
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Initial Measurement
Purchase price, including import
duties and non-refundable purchase
taxes, after deducting trade discounts
and rebates.
COST
the initial estimate of the costs of
dismantling and removing the item and
restoring the site on which it is located
Any costs directly attributable to bringing the
asset to the location and condition necessary for
it to be capable of operating in the manner
intended by management.
Noel A. Bergonia, CPA, MBA
5
Directly attributable cost may include…
❖costs of employee benefits (as defined in IAS 19) arising directly from the construction
or acquisition of the item of property, plant and equipment
❖costs of site preparation
❖initial delivery and handling costs
❖installation and assembly costs
❖costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location and
condition (such as samples produced when testing equipment)
❖professional fees
Noel A. Bergonia, CPA, MBA
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✓Fences
✓Water system
✓Sidewalks and
driveways
✓Parking lots
✓Landscaping costs that
are not permanent
Buildings
✓Brokers’ fees and
commissions, legal fees,
title
✓Surveying fees
✓Local government special
assessment taxes
✓Liens, mortgages or
encumbrances on the
property assumed
✓Costs of clearing, grading,
filling or leveling
✓Permanent landscaping
costs
Land Improvements
Land
Examples of Directly Attributable Costs
✓Brokers’ fees and
commissions
✓Legal fees and title
✓Reconditioning costs,
alterations and
improvement costs
✓Building permit fees for
renovation or
construction
✓Architect’s fees
✓Interest costs on
borrowing used in selfconstructed buildings
Noel A. Bergonia, CPA, MBA
Source: Practical Accounting 1 by N. S. Robles
7
Source: Practical Accounting 1 by N. S. Robles
✓Taxes and duties on
purchase
✓Freight, unloading and
delivery charges
✓Insurance while in
transit
✓Installation charges
✓Costs of trial runs
Natural Resources
Machinery and Equipment
Examples of Directly Attributable Costs
✓Payment for rights to
explore and extract
natural resources
✓Exploration and
development costs
✓Present value of
estimated future
restoration costs
Noel A. Bergonia, CPA, MBA
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Not part of the cost…
❖Cost of opening a new facility
❖Cost of introducing a new product or service (including cost of advertising and
promotional activities)
❖Cost of conducting business in a new location or with a new class of customers
(including cost of staff training)
❖Administration and other general overhead costs.
Noel A. Bergonia, CPA, MBA
9
Acquisition and Related Cost of
Property, Plant and Equipment
Assets purchased for cash
Assets purchased at lumpsum price
Assets purchased under a
deferred payment
arrangement
Assets purchased in
exchange of shares
Asset Acquired in Exchange
for Non-cash Assets
Assets acquired by
donation of shareholders
Assets acquired through
government grants
Right-of-use assets acquired
through lease
Assets acquired through
self-construction
Noel A. Bergonia, CPA, MBA
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Assets purchased for cash
❖The cost of an item of property, plant and equipment is the cash price
equivalent at the recognition date.
❖The purchase price of a PPE, including import duties and
non-refundable purchase taxes, after deducting trade discounts and
rebates.
Example: Assume that Park Seo-joon Inc., a VAT registered entity,
purchased a machine with an invoice price of P150,000 (inclusive of VAT).
The entry to record the purchase is:
Machinery (P150,000 ÷ 1.12)
Input tax
Cash
133,928.57
16,071.43
150,000
Noel A. Bergonia, CPA, MBA
11
Assets purchased at lump-sum price
❖Allocate the purchase price based on the relative fair value of each component.
❖Frequently, insurance appraisals, property tax assessments, and other appraisals can be
used.
Example: Park Min-young company purchases land and building together for a total price
of P1,700,000. The most recent property tax assessment from the local government
indicated that the building’s assessed value was P1,200,000 and the land’s assessed value
was P300,000. The total purchase price of the components would be allocated as follows:
Building
Land
Assessed value
P1,200,000
300,000
P1,500,000
Building
Land
Cash
Computation of Allocation
P1,700,000 x (P1,200,000 ÷ P1,500,000)
P1,700,000 x (P300,000 ÷ P1,500,000)
1,360,000
340,000
Allocated Value
P1,360,000
340,000
P1,700,000
1,700,000
Noel A. Bergonia, CPA, MBA
12
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Philippine Interpretations Committee (PIC)
Interpretation Q&A 2012 – 02
❖Demolition costs are costs incurred in the demolition (or the physical tearing down) of the
old building to give way for the construction of the replacement building.
❖Demolition costs of the old building can be considered as part of costs of site preparation
and, therefore, may be capitalized.
❖It is preferable to capitalize the demolition costs as part of the cost of the new building since
the demolition of the old building is a direct result of the decision to construct the new
building.
❖Payment to tenants for the sake of demolition will be treated the same way with the
demolition costs.
❖Any amount from the sale of salvaged materials shall be
deducted from the cost.
❖The carrying amount of the old building is recognized as a
loss.
Noel A. Bergonia, CPA, MBA
13
Assets purchased under a deferred
payment arrangement
❖Companies frequently purchase fixed assets on a deferred payment arrangement,
using notes, mortgages, or loans.
❖To properly reflect cost, companies account for assets purchased on a deferred
payment arrangement at:
➢ fair value of the asset, or
➢ the present value of the consideration exchanged between the contracting parties at the date
of the transaction.
❖ The difference between the cash price equivalent and the total payment is recognized as
interest over the period of credit unless such interest is capitalized in accordance with IAS 23.
Noel A. Bergonia, CPA, MBA
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EXAMPLES: Assets purchased under a
deferred payment arrangement
❖Example 1: Suppose a machine is acquired by Lee Tae-hwan Inc. on September 1, 2020
for P150,000 and signs a two-year note requiring the payment of P150,000 plus interest of
10% per annum. The interest rate is realistic. The transaction recorded as follows:
Machinery
Notes Payable
150,000
150,000
❖Example 2: On January 2, 2020, the Lee Tae-hwan Inc. purchased an industrial equipment.
In payment, the company signed a noninterest-bearing note requiring P250,000 to be
paid on December 31, 2022 (two years later). If the company had borrowed cash to buy
the equipment, the bank would have required an interest rate of 10%. The equipment has
no available fair value at the date of purchase. The entry to record the transaction is
Equipment (P250,000 x 0.8264)
Discount on Notes Payable
Notes Payable
206,600
43,400
250,000
Noel A. Bergonia, CPA, MBA
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EXAMPLES: Assets purchased under a
deferred payment arrangement
❖Example 3: On January 2, 2020, the Lee Tae-hwan Inc. purchased an industrial equipment.
In payment, the company signed a noninterest-bearing note requiring P250,000 to be
paid on December 31, 2022 (two years later). The equipment has a fair value of P199,300
at the date of purchase. The entry to record the transaction is
Equipment
Discount on Notes Payable
Notes Payable
199,300
50,700
250,000
We can determine the interest rate that is implicit in the agreement as follows:
P199,300 (present value) = P250,000 (face amount) × PV factor
P199,300 ÷ P250,000 = 0.7972
The PV factor of .7972 when check with the PV table for single payment at 2 years will give us
an implicit rate of interest 12%.
Noel A. Bergonia, CPA, MBA
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Assets purchased in exchange of shares
❖The entity shall measure the goods or services received, and the corresponding
increase in equity, directly, at the fair value of the goods or services received,
unless that fair value cannot be estimated reliably (IFRS 2 par. 10)
❖ If the fair value of the asset is not clearly determinable and the trading of the
stock is active, the market price of the stock issued is a fair indication of the
cost of the property acquired.
Noel A. Bergonia, CPA, MBA
17
EXAMPLE: Assets purchased in exchange
of shares
❖Example 1: Kang Ki-young Co. decides to purchase some adjacent land for
expansion of its business operation. Instead of paying cash for the land, the
company issues to Yumyeoun Group 5,000 ordinary shares (par value P100)
that have a fair value of P120 per share. The fair value of the land is said to be
P900,000. The entry to record the transaction is
Land
Ordinary share capital (5,000 x P100)
Ordinary share premium
900,000
500,000
400,000
Noel A. Bergonia, CPA, MBA
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EXAMPLE: Assets purchased in exchange
of shares
❖Example 2: Kang Ki-young Co. decides to purchase some adjacent land for
expansion of its business operation. Instead of paying cash for the land, the
company issues to Yumyeoun Group 5,000 ordinary shares (par value P100)
that have a fair value of P120 per share. The fair value of the land is not clearly
determinable. The entry to record the transaction is
Land (5,000 x P120)
Ordinary share capital (5,000 x P100)
Ordinary share premium
600,000
500,000
100,000
Noel A. Bergonia, CPA, MBA
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Assets acquired by donation of shareholders
❖In this case, the asset shall be recorded at the fair value on the date of donation.
Example 1: A shareholder of What’s Wrong with Secretary Kim Company donated a
land with a value of P1,000,000. The company should record the transaction as:
Land
Donated capital
1,000,000
1,000,000
Example 2: A shareholder of What’s Wrong with Secretary Kim Company donated a
land with a value of P1,000,000. The company paid P15,000 transfer fee for the title.
The company should record the transaction as:
Land
Donated capital
Cash
1,000,000
985,000
15,000
Noel A. Bergonia, CPA, MBA
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Assets acquired by non-governmental unit
❖If the asset is received from a non-governmental unit other than a shareholder, a
revenue or gain is recognized at an amount equal to the fair value of the donated
asset.
Example 1: Busan Company, a non-governmental organization, donated a land to
Seoul Corp. with a value of P1,000,000. The company should record the transaction
as:
Land
Income from donation
1,000,000
1,000,000
Noel A. Bergonia, CPA, MBA
21
Assets acquired through government grants
❖Governments (refer to as government, government agencies and similar
bodies whether local, national or international) will at times create
programs that provide direct assistance to businesses.
❖Government grants, including non-monetary grants, are recorded at fair
value at the date of grant.
❖However, it shall not be recognized until there is reasonable assurance
that:
➢ the entity will comply with the conditions attaching to them
➢ the grants will be received
Noel A. Bergonia, CPA, MBA
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Assets acquired through government grants
❖Receipt of a grant does not of itself provide conclusive evidence that the
conditions attaching to the grant have been or will be fulfilled.
❖Government grants shall be recognized in profit or loss on a systematic
basis over the periods in which the entity recognizes as expenses the
related costs for which the grants are intended to compensate. (IAS 20
par. 12)
Noel A. Bergonia, CPA, MBA
23
Assets acquired through government grants
Example 1. The Local Government of Pangasinan gives Dolnam Hospital Inc. a
large tract of land. The condition attached to this government grant is to construct
a hospital facility on the site to provide employment opportunity to its residents.
The fair value of the land at the date of grant is determined to be at P3,300,000.
The entry to record the transaction is:
Land
Unearned income from government grants
3,300,000
3,300,000
On the other hand, if the condition of constructing a hospital facility was met,
then the entry to record the income is:
Unearned income from government grants
Income from government grants
3,300,000
3,300,000
Noel A. Bergonia, CPA, MBA
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Assets acquired through government grants
Example 2. The Local Government of Pangasinan gives Dolnam Hospital Inc. a
large tract of land. There is no condition attached to the land. The fair value of the
land at the date of grant is determined to be at P3,300,000. The entry to record
the transaction is:
Land
3,300,000
Income from government grants
3,300,000
Noel A. Bergonia, CPA, MBA
25
Right-of-use assets acquired through lease
❖Lease is a contract, or part of a contract, that conveys the right to use an
asset (the underlying asset) for a period of time in exchange for
consideration.
❖The lessee is an entity that obtains the right to use an underlying asset
for a period of time in exchange for consideration.
❖The lessee is to record the right-of-use asset (which can be classified
under IAS 16) and a related liability.
❖At the commencement date of the lease, a lessee shall measure the
right-of-use asset at cost (IFRS 16 par. 23)
Noel A. Bergonia, CPA, MBA
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Right-of-use assets acquired through lease
❖The cost of the right-of-use asset shall comprise:
➢ the amount of the initial measurement of the lease liability.
➢ any lease payments made at or before the commencement date, less
any lease incentives received
➢ any initial direct costs incurred by the lessee
➢ an estimate of costs to be incurred by the lessee in dismantling and
removing the underlying asset, restoring the site on which it is located
or restoring the underlying asset to the condition required by the
terms and conditions of the lease, unless those costs are incurred to
produce inventories.
Noel A. Bergonia, CPA, MBA
27
Right-of-use assets acquired through lease
Example: Example: On January 1, 2020,
Master Kim Inc. leased two automobiles for
executive use. The lease requires Master
Kim to make five annual payments of
P260,000 beginning January 1, 2020. At the
end of the lease term, December 31, 2024,
Master Kim guarantees that the residual
value of the automobiles will total P200,000.
The property reverts to the lessor at the end
of the lease term. The estimated useful life
of the automobiles is 6 years and Master
Kim uses straight-line method for all its
assets. Master Kim’ incremental borrowing
rate is 10%. The interest rate implicit in the
lease which is known to Master Kim Inc. is
9%.
Right-of-use automobiles
Lease liability
Cash
1,232,302
972,302
260,000
Noel A. Bergonia, CPA, MBA
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Bearer Plants
❖These are living plant that are
➢ used in the production or supply of agricultural produce
➢ expected to bear produce for more than one period
➢ has a remote likelihood of being sold as agricultural produce, except
for incidental scrap sales.
Noel A. Bergonia, CPA, MBA
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Property, Plant and Equipment
A C Q U I R E D I N E X C H A N G E
N O N - C A S H A S S E T S
F O R
Noel A. Bergonia, CPA, MBA
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Asset Acquired in Exchange for
Non-cash Assets
❖When assets are acquired though exchange with other nonmonetary assets or a combination of monetary and non-monetary
assets, the asset acquired should be valued at the fair value of
either the assets given up or the fair value of the assets
received.
❖If an entity is able to measure reliably the fair value of either the
asset received or the asset given up, then the fair value of the
asset given up is used to measure the cost of the asset received
unless the fair value of the asset received is more clearly evident
(IAS 16 par. 26).
Noel A. Bergonia, CPA, MBA
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Asset Acquired in Exchange for
Non-cash Assets
❖The cost could not be recorded at fair value if
(a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received, nor the asset given
up is reliably measurable.
❖If the acquired item is not measured at fair value, its cost is measured at
the carrying amount of the asset given up.
❖An entity determines whether an exchange transaction has commercial
substance by considering the extent to which its future cash flows are
expected to change as a result of the transaction.
Noel A. Bergonia, CPA, MBA
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Asset Acquired in Exchange for
Non-cash Assets
❖An exchange transaction has commercial substance if:
a. the configuration (risk, timing and amount) of the cash flows of
the asset received differs from the configuration of the cash flows
of the asset transferred; or
b. the entity-specific value of the portion of the entity’s operations
affected by the transaction changes as a result of the exchange; and
c. the difference in (a) or (b) is significant relative to the fair value of
the assets exchanged.
Noel A. Bergonia, CPA, MBA
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With Commercial Substance
❖Fair value is the basis for measuring an asset acquired in a nonmonetary
exchange if the transaction has commercial substance.
❖Fair value of asset given up = Fair value of the asset + Cash paid or – Cash
received
❖Companies should recognize immediately any gains or losses on the
exchange.
❖The gain or loss on exchange can be computed by deducting the book
value from the fair value of the asset.
❖Book value asset given up > Fair value of asset given up = Loss
❖Book value asset given up < Fair value of asset given up = Gain
Noel A. Bergonia, CPA, MBA
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With Commercial Substance
Example: Ji Sung Co. is to exchange
its machine use in operations to an
equipment of Lee Se-young Corp.
The exchange has a commercial
substance.
Noel A. Bergonia, CPA, MBA
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Without Commercial Substance
❖If a transaction does not meet the criteria for commercial substance, then it
will be treated without commercial substance.
❖The asset is measured at the carrying amount of the asset given up.
❖Carrying value of the asset given up = Carrying value of the asset + Cash
paid – Cash received
❖There will no gain or loss to be recorded for transactions without
commercial substance.
Noel A. Bergonia, CPA, MBA
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Without Commercial Substance
Example: Ji Sung Co. is to exchange
its machine use in operations to an
equipment of Lee Se-young Corp.
The exchange lacks commercial
substance.
Cost
Accumulated Depreciation
Fair value
Ji Sung Co.
P2,400,000
750,000
1,380,000
Lee Se-young Corp.
P2,400,000
1,125,000
1,500,000
Noel A. Bergonia, CPA, MBA
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EXAMPLE
Cup Co. and Noodles Co. had an exchange of
productive assets. Cup exchanged a piece of
equipment for Noodle’s equipment. The
following information is available:
Cup Co. Noodles Co.
Cost of asset exchanged
P900,000
P800,000
Accumulated depreciation
540,000
320,000
Fair value of asset exchanged 400,000
350,000
Required:
Prepare the journal entries to record exchange
in both books if:
a. the exchange lacks commercial substance
a. the exchange lacks commercial substance
Cup Co.
Equipment- new
360,000
Accumulated depreciation
540,000
Equipment- old
900,000
Noodles Co.
Equipment- new
480,000
Accumulated depreciation
320,000
Equipment- old
800,000
b. the exchange has a commercial substance,
and Cup will receive P50,000 from Noodles.
Noel A. Bergonia, CPA, MBA
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EXAMPLE
b. the exchange has a commercial substance, and Cup will
receive P50,000 from Noodles.
Cup Co.
Cup Co. and Noodles Co. had an exchange of
productive assets. Cup exchanged a piece of
equipment for Noodle’s equipment. The
following information is available:
Equipment- new (P400,000 – P50,000)
Cash
Cup Co. Noodles Co.
Cost of asset exchanged
P900,000
P800,000
Accumulated depreciation
540,000
320,000
Fair value of asset exchanged 400,000
350,000
350,000
50,000
Accumulated depreciation
540,000
Equipment- old
900,000
Gain on exchange
40,000
Noodles Co.
Required:
Prepare the journal entries to record exchange
in both books if:
Equipment- new (P350,000 + P50,000)
400,000
Accumulated depreciation
320,000
a. the exchange lacks commercial substance
Loss on exchange
130,000
b. the exchange has a commercial substance,
and Cup will receive P50,000 from Noodles.
Equipment- old
800,000
Cash
50,000
Noel A. Bergonia, CPA, MBA
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Property, Plant and Equipment
A C Q U I R E D T H R O U G H
S E L F - C O N S T R U C T I O N
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Assets acquired through self-construction
❖The cost of a self constructed asset includes all costs of materials,
labor and overhead directly associated with the construction as
well as interest cost on borrowings actually incurred during the
construction period.
❖Profit on self-construction is not allowed to be recognized in the
accounts.
Noel A. Bergonia, CPA, MBA
41
Allocation of Overhead
❖Overhead is the costs incurred during the manufacturing process,
not including the costs of direct labor and direct materials.
❖Allocation of manufacturing overhead may be equivalent to
➢ its fair share, using the same basis of allocation for manufactured
inventory
➢ the incremental amount of indirect manufacturing overhead.
Noel A. Bergonia, CPA, MBA
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Example 1: Allocation of Overhead
The Doctor John Manufacturing Company is
producing machineries. In 2020, it created a
machine that is to be used in its operations. Below
are the data related to the cost of the other
produced machines and the machine to be used in
the operation:
Direct Materials
Direct Labor
Factory overhead
Direct labor hours
Inventories
Machinery for use
P4,000,000
P150,000
4,200,000
120,000
P5,000,000
15,000
200
Assuming that the factory overhead is allocated to
inventories at 115% of direct labor cost and the
excess will be for the machinery, how much is the
cost of the machinery?
Noel A. Bergonia, CPA, MBA
43
Example 2: Allocation of Overhead
The Doctor John Manufacturing Company is
producing machineries. In 2020, it created a
machine that is to be used in its operations. Below
are the data related to the cost of the other
produced machines and the machine to be used in
the operation:
Direct Materials
Direct Labor
Factory overhead
Direct labor hours
Inventories
Machinery for use
P4,000,000
P150,000
4,200,000
120,000
P5,000,000
15,000
Direct Materials
Direct Labor
Factory overhead
P5,000,000 x 15,000/15,200
P5,000,000 x 200/15,200
Total cost
Inventories Machinery for use
P4,000,000
P150,000
4,200,000
120,000
4,934,211
P13,134,211
65,789
P335,789
200
Assuming that the factory overhead is allocated
using the direct labor hours, how much is the cost
of the machinery?
Noel A. Bergonia, CPA, MBA
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Interest Capitalization
❖Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds.
❖A qualifying asset is an asset that necessarily takes a substantial period
of time to get ready for its intended use or sale.
❖An entity shall capitalize borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset as part
of the cost of that asset.
❖There are two types of borrowings to finance the qualifying assets:
➢ specific borrowings
➢ general borrowings
Noel A. Bergonia, CPA, MBA
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Interest Capitalization
❖An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying
asset on the commencement date.
❖The commencement date for capitalization is the date when the entity first meets all
of the following conditions:
➢ it incurs expenditures for the asset
➢ it incurs borrowing costs
➢ it undertakes activities that are necessary to prepare the asset for its intended use
or sale
❖An entity shall suspend capitalization of borrowing costs during extended periods in
which it suspends active development of a qualifying asset.
❖An entity shall cease capitalizing borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
Noel A. Bergonia, CPA, MBA
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Interest Capitalization
Charge to
expense
Charge to
expense
Borrowed
funds
Completion
date
Commencement
date
Payment of the
borrowed funds
Capitalization
period
Noel A. Bergonia, CPA, MBA
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Specific Borrowings
❖Entities borrows money specifically for the construction of the qualifying
asset.
❖To the extent that an entity borrows funds specifically for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of borrowing
costs eligible for capitalization as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the temporary
investment of those borrowings.
Borrowing cost eligible for capitalization XX
Interest earned for temporary investment (XX)
Capitalizable interest
XX
Noel A. Bergonia, CPA, MBA
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Example: Specific Borrowings
Samgyupsal Inc. is constructing its building to be used as a site for its operations.
The entity does not have enough funds and has borrowed P4,000,000, 12% loan
from a financing company. Some amount of the loan, while waiting for the time it
will be spent, was temporarily invested to a treasury bills and earned P10,000
interest. The construction of the building starts on April 1, 2020 and was
completed on December 31, 2020. The expenditures related to the materials,
labors and overhead totaled to P5,100,000. The capitalizable interest related to
the building is:
Actual interest cost (P4,000,000 x 12% x 9/12)
Interest earned
Capitalizable interest
P360,000
(10,000)
P350,000
The total cost of the constructed building is P5,450,000 (P5,100,000 + P350,000).
Noel A. Bergonia, CPA, MBA
49
General Borrowings
❖To the extent that an entity borrows funds generally and uses them for the
purpose of obtaining a qualifying asset, the entity shall determine the
amount of borrowing costs eligible for capitalization by applying a
capitalization rate to the expenditures on that asset.
❖The capitalization rate shall be the weighted average of the borrowing costs
applicable to all borrowings of the entity that are outstanding during the
period.
❖An entity shall exclude from this calculation borrowing costs applicable to
specific borrowings.
❖ The amount of borrowing costs that an entity capitalizes during a period
shall not exceed the actual amount of borrowing costs it incurred during
that period.
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50
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Example: General
Borrowings
Average interest = P990,000 x 9.18% = 90,882
Noel A. Bergonia, CPA, MBA
51
Specific Borrowing and General Borrowing
❖When the entity uses both specific borrowing and general borrowings, the
expenditures shall be first covered by the specific borrowings and the
excess will only be attributed to general borrowings.
❖If the specific borrowing is already enough to cover the expenditure for the
construction, then there is no need to include the interest cost related to the
general borrowing.
❖The manner of computing the capitalizable interest will be the same with
the example for specific borrowings.
❖For the general borrowings, deduct the specific borrowings from the WAAE.
Noel A. Bergonia, CPA, MBA
52
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Example:
Specific Borrowing
and General
Borrowing
Noel A. Bergonia, CPA, MBA
53
Example:
Specific Borrowing
and General
Borrowing
Average interest cost of the general borrowing is
= P975,000 x 9.42%
= P91,845
building
building
Noel A. Bergonia, CPA, MBA
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Property, Plant and Equipment
C H A N G E
I N
E X P E N D I T U R E S
A C C O U N T I N G E S T I M AT E S
A N D
A F T E R I N I T I A L R E C O G N I T I O N
Noel A. Bergonia, CPA, MBA
55
Rationale for the change in Accounting
Estimates
❖The use of reasonable estimates is an essential part of the
preparation of financial statements and does not undermine their
reliability (IAS 8 par. 32).
❖An estimate may need revision if changes occur in the circumstances
on which the estimate was based or as a result of new information or
more experience (IAS 8 par. 34).
❖By its nature, the revision of an estimate does not relate to prior
periods and is not the correction of an error.
Noel A. Bergonia, CPA, MBA
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Treatment of Change in Accounting
Estimates
❖The effect of a change in an accounting estimate shall be
recognized prospectively by including it in profit or loss in:
✓ the period of the change, if the change affects that period only; or
✓ the period of the change and future periods, if the change affects
both.
❖ No adjustments should be made amounts reported in prior
periods.
Noel A. Bergonia, CPA, MBA
57
CHANGES IN SALVAGE VALUE, USEFUL
LIFE AND DEPRECIATION METHOD
❖ The residual value and the useful life of an asset shall be reviewed
at least at each financial year-end and, if expectations differ from
previous estimates, the change(s) shall be accounted for as a
change in an accounting estimate (IAS 16 par. 51)
❖Changes in Salvage Value, useful life and depreciation method are
considered as change in accounting estimates.
❖No adjustments should be made to depreciation amounts reported
in prior periods.
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Example 1
On January 1, 2020, the Myeong-dong
Manufacturing
Company
purchased
a
machine for P250,000. At the time of
purchase, the company estimated that the
useful life of the machine is five years and a
salvage value of P50,000. On January 1, 2022,
the company revised its estimates on which
the useful life should have been eight years.
The company uses straight-line method to
depreciate all assets and the company uses
calendar period.
Prior to the revision (2020 and 2021), the
depreciation expense is P40,000 per year
[(P250,000-P50,000) ÷ 5] or P80,000 for the two
years.
Cost
Accumulated depreciation for 2020 and 2021
(P40,000 x 2)
Book value on January 1, 2022
Less: Salvage value
Revised depreciable base
Estimated remaining useful life (8 - 2)
Revised depreciation expense per year
P250,000
( 80,000)
P170,000
50,000
P120,000
6
P 20,000
How much is the revised depreciation expense
for 2022?
Noel A. Bergonia, CPA, MBA
59
Example 2
On January 1, 2020, the Namsan Seoul
Company purchased a machine for P250,000.
At the time of purchase, the company
estimated that the useful life of the machine is
four years and a salvage value of P50,000. On
January 1, 2022, the company revised its
estimates on which the remaining useful life
will be four years and the salvage value to
P22,000. The company uses straight-line
method to depreciate all assets and the
company uses calendar period.
❖ Prior to the revision (2020 and 2021), the
depreciation expense is P50,000 per year
[(P250,000-P50,000) ÷ 4] or P100,000 for the two
years.
❖ The remaining book value at the end of 2021 is
P150,000.
Cost
Accumulated depreciation for 2020 and 2021
(P50,000 x 2)
Book value on January 1, 2022
Less: Salvage value
Revised depreciable base
Estimated remaining useful life
Revised depreciation expense
P250,000
(100,000)
P150,000
22,000
P128,000
÷
4
P32,000
How much is the revised depreciation expense
for 2022?
Noel A. Bergonia, CPA, MBA
60
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Example 3
On January 1, 2020, the Busan Company
purchased a machine for P250,000. At the time
of purchase, the company estimated that the
useful life of the machine is four years and a
salvage value of P50,000. The company uses
straight-line method to depreciate the machine.
On January 1, 2022, the company revised its
estimates on which the remaining useful life will
be three years, the salvage value to P22,000 and
the depreciation method be sum-of-the-year’s
digit method. The company uses calendar
period.
How much is the revised depreciation expense
for 2022?
Cost
Accumulated depreciation for 2020 and 2021
(P50,000 x 2)
Book value on January 1, 2022
Less: Salvage value
Revised depreciable base
SYD=
= 6
Year
2022
2023
2024
P250,000
(100,000)
P150,000
22,000
P128,000
3 (3 + 1)
2
Computation
P128,000 x 3/6
P128,000 x 2/6
P128,000 x 1/6
Depreciation
Expense
P64,000
42,667
21,333
Noel A. Bergonia, CPA, MBA
61
EXPENDITURES AFTER INTIAL RECOGNITION
❖An entity does not recognise in the carrying amount of an item of
property, plant and equipment the costs of the day-to-day servicing of
the item (IAS 16 par. 12).
❖Costs of day-to-day servicing are primarily the costs of labor and
consumables and may include the cost of small parts.
❖Entities capitalize expenditures that are expected to produce benefits
beyond the current fiscal year.
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EXPENDITURES AFTER INITIAL RECOGNITION
❖Expenditures associated to assets can increase future benefits when:
✓they extend the useful life of the asset;
✓they increase the operating efficiency and capacity of the asset
resulting in either an increase in the quantity of goods or services
produced or a decrease in future operating costs; or
✓they increase the quality of the goods or services produced by the
asset.
Noel A. Bergonia, CPA, MBA
63
Example 4
On January 1, 2020, the Bukchon Hanok
Village Inc. has a carrying value of one of its
equipment (which has a salvage value of
P10,000) amounting to P100,000, annual
depreciation of P45,000 and a remaining
useful life of two years. On the same date, the
company spend P50,000 to maintain the
operations of the equipment.
Depreciation expense is still P45,000.
How much is the revised depreciation expense?
Noel A. Bergonia, CPA, MBA
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Example 5
On January 1, 2020, the Nami Island Corp. the
carrying value of one of its equipment (which
has a salvage value of P10,000) is P100,000
and a remaining useful life of two years. On the
same date, the company spend P50,000
related to the equipment which increase the
remaining useful life of the asset to four years.
Carrying value, Jan. 1, 2020
Additional expenditure
Salvage value
Revised depreciable base
Remaining useful life
Revised depreciation expense
P100,000
50,000
( 10,000)
P140,000
4
P35,000
How much is the revised depreciation expense?
Noel A. Bergonia, CPA, MBA
65
EXPENDITURES AFTER INITIAL RECOGNITION
❖Parts of some items of property, plant and equipment may require replacement at
regular intervals.
❖An entity recognizes in the carrying amount of an item of property, plant and
equipment the cost of replacing part of such an item when that cost is incurred if
the recognition criteria are met.
❖If the criteria are met, the entity shall derecognize the carrying amount of the
replaced part regardless of whether the replaced part had been depreciated
separately.
❖If it is not practicable for an entity to determine the carrying amount of the
replaced part, it may use the cost of the replacement as an indication of what the
cost of the replaced part was at the time it was acquired or constructed (IAS 16
par. 70)
❖The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal
proceeds, if any, and the carrying amount of the item.
Noel A. Bergonia, CPA, MBA
66
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Example 6
On January 1, 2021, the factory machine of
Cheongsando Island Corp. experienced an
engine failure. The asset was purchased on
January 1, 2017 with a cost of P364,000 and
have a useful life of 7 years. The engine was
replaced with a similar item that cost the
company P50,000. The replaced part has an
original cost of P42,000.
January 1, 2021
Accumulated depreciation
24,000
Loss on disposal of machine parts
18,000
Machine
42,000
P42,000 x 4/7 = 24,000
Machine
50,000
Cash
50,000
December 31, 2021
Depreciation expense
62,667
Accumulated Depreciation
62,667
Revised cost
(P364,000 - P42,000 + 50,000)
372,000
Accumulated depreciation
(P364,000 x 4/7= P208,000 - P24,000) (184,000)
Revised carrying value
188,000
Divided by: remaining useful life
3
Revised depreciation expense
62,667
Prepare the entries in 2021.
Noel A. Bergonia, CPA, MBA
67
Example 7
On January 1, 2021, the factory machine of
Joseon Corp. experienced an engine failure.
The asset was purchased on January 1, 2017
with a cost of P364,000 and have a useful life of
7 years. The engine was replaced with a similar
item that cost the company P49,000. The cost
of the replaced part is not separately
identifiable.
Prepare the entries in 2021.
January 1, 2021
Accumulated depreciation
28,000
Loss on disposal of machine parts
21,000
Machine
49,000
P49,000 x 4/7 = 28,000
Machine
49,000
Cash
49,000
December 31, 2021
Depreciation expense
61,333
Accumulated Depreciation
Revised cost
(P364,000 - P49,000 + 49,000)
Accumulated depreciation
(P364,000 x 4/7= P208,000 - P28,000)
Revised carrying value
Divided by: remaining useful life
Revised depreciation expense
61,333
364,000
(180,000)
184,000
3
61,333
Noel A. Bergonia, CPA, MBA
68
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Property, Plant and Equipment
D E P L E T I O N
Noel A. Bergonia, CPA, MBA
69
Mining Life Cycle
Prospecting
Exploration
Evaluation
Closure and
restoration
Development
Production
Noel A. Bergonia, CPA, MBA
70
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Exploration for and Evaluation of
Mineral Resources
❖Exploration for and evaluation of mineral resources means the
search for mineral resources, including minerals, oil, natural gas
and similar non-regenerative resources after the entity has
obtained legal rights to explore in a specific area, as well as the
determination of the technical feasibility and commercial viability
of extracting the mineral resource (IFRS 6 Appendix A).
Noel A. Bergonia, CPA, MBA
71
Exploration and evaluation expenditures
❖These are expenditures incurred by an entity in connection with the
exploration for and evaluation of mineral resources before the
technical feasibility and commercial viability of extracting a mineral
resource are demonstrable.
❖Expenditures related to the development of mineral resources shall
not be recognized as exploration and evaluation assets (IFRS 6 par.
10)
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Recognition of exploration and
evaluation assets
❖Exploration and evaluation expenditures recognized an asset in
accordance with the entity’s accounting policy.
Noel A. Bergonia, CPA, MBA
73
Measurement of exploration and
evaluation assets
❖Initial recognition:
✓ Exploration and evaluation assets shall be measured at cost.
❖Subsequent recognition:
✓ After recognition, an entity shall apply either the cost model or the
revaluation model to the exploration and evaluation assets.
Noel A. Bergonia, CPA, MBA
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Elements of cost of exploration and
evaluation assets (IFRS 6 par. 9)
The following are examples of expenditures that might be included in
the initial measurement of exploration and evaluation assets (the list is
not exhaustive):
❖acquisition of rights to explore
❖topographical, geological, geochemical and geophysical studies
❖exploratory drilling
❖trenching
❖sampling
❖activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource
Noel A. Bergonia, CPA, MBA
75
Classification of exploration and
evaluation assets (IFRS 6 par. 15 & 16)
❖An entity shall classify exploration and evaluation assets as tangible
or intangible according to the nature of the assets acquired and
apply the classification consistently.
❖Some exploration and evaluation assets are treated as intangible
(e.g., drilling rights), whereas others are tangible (e.g., vehicles and
drilling rigs).
Noel A. Bergonia, CPA, MBA
https://www.equipmentjournal.com/wp-content/uploads/2018/11/SandvikMining.jpg
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Wasting Assets
❖These are assets that are from natural resources.
❖They are only replace by an act of nature.
Noel A. Bergonia, CPA, MBA
77
Categories of Cost of Wasting Assets
❖Purchase price including directly attributable cost.
❖Exploration cost- are expenditures incurred before technical
feasibility and commercial viability of the mineral resources are
demonstrated.
❖Development cost- are costs incurred to exploit or extract the natural
resources that has been located through successful exploration.
✓ For all the transportation and heavy equipment needed to extract
the resource and get it ready to market, they are capitalized and
depreciate separately.
✓ The drilling costs, tunnels, shafts and wells are capitalized as part of
the natural resource.
❖ Restoration cost (at its present value)
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Depletion
❖It is a systematic allocation of depletion base of the natural
resource over the period the natural resource is extracted.
❖It is normally computed using output method.
Noel A. Bergonia, CPA, MBA
79
Depletion
Purchase price
Exploration cost, to the extent capitalized
Development cost
Present value of restoration cost
Residual value
Total Depletable Cost
Depletion rate per unit =
XX
XX
XX
XX
(XX)
XX
Total depletable cost
Total estimated recoverable units
Depletion charge = depletion rate per unit x actual units of production
Noel A. Bergonia, CPA, MBA
Source: Intermediate Accounting 2 (2019) by Robles and Empleo
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Depletion
If additional expenditures are incurred or estimates are revised, the
new depletion rate is calculated using:
Depletion rate per unit =
Carrying value (including additional capitalizable cost) - residual value
Remaining units at the beginning of the year
❖ Depletion charge is considered as an inventoriable cost or
product cost.
Cost of Goods Sold
(for sold units)
Depletion charge
Inventory
(for unsold units)
Noel A. Bergonia, CPA, MBA
Source: Intermediate Accounting 2 (2019) by Robles and Empleo
81
Depreciation of Assets Used in Mining
Activities
❖Assets used in mining activities shall be depreciated using the
shorter between the useful life of the asset and the expected
mining period.
❖If expected mining period is shorter than the useful life of the
assets, the depreciation method is computed based on the unit of
output method.
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Depreciation during Shutdown
❖ In case of shutdown, output method cannot be used.
❖ Depreciation in the year of shutdown is based on the remaining
life of the equipment following the straight-line method.
❖ The remaining carrying amount of the equipment is divided by
the remaining life of the equipment to arrive at the depreciation in
the year of the shutdown.
❖ Upon resumption, a new depreciation rate per unit is computed
by dividing the remaining carrying amount by the remaining
revised estimate of deposits.
Noel A. Bergonia, CPA, MBA
83
Example 1
In 2020, Cooky Mining Company purchased property with
natural resources for P12,400,000. The property was relatively
close to a large city and had an expected residual value of
P1,800,000.
The following information relates to the use of the property:
▪ In 2020, Cooky spent P800,000 in development costs.
▪ In 2021 and 2023, P600,000 and P1,600,000, respectively,
were spent for additional developments on the mine.
▪ The tonnage mined and estimated remaining tons for years
2020-2024 are as follows:
Year
Tons Extracted
2020
2021
2022
2023
2024
0
1,500,000
1,800,000
1,700,000
900,000
Estimated Tons
Remaining
5,000,000
3,500,000
2,000,000
900,000
0
Compute the depletion for the years 2020 – 2024.
2020: No depletion.
2021:
Purchase price
Development cost, 2020
Development cost, 2021
Total cost
Residual value
Depletable cost
Divided by: Est. Tons 1/1/2021
Depletion per unit, 2021
Multiply by: Units extracted
Total depletion, 2021
12,400,000
800,000
600,000
13,800,000
(1,800,000)
12,000,000
5,000,000
2.40
1,500,000
3,600,000
Noel A. Bergonia, CPA, MBA
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Example 1
2022:
In 2020, Cooky Mining Company purchased property with
natural resources for P12,400,000. The property was relatively
close to a large city and had an expected residual value of
P1,800,000.
The following information relates to the use of the property:
▪ In 2020, Cooky spent P800,000 in development costs.
▪ In 2021 and 2023, P600,000 and P1,600,000, respectively,
were spent for additional developments on the mine.
▪ The tonnage mined and estimated remaining tons for years
2020-2024 are as follows:
Year
Tons Extracted
2020
2021
2022
2023
2024
0
1,500,000
1,800,000
1,700,000
900,000
Estimated Tons
Remaining
5,000,000
3,500,000
2,000,000
900,000
0
Compute the depletion for the years 2020 – 2024.
Total Cost
Accumulated depletion, 1/1/2022
Carrying value, 1/1/2022
Residual value
Revised depletable cost
Divided by: Est. Tons 1/1/2022
Depletion per unit, 2022
Multiply by: Units extracted
Total depletion, 2022
13,800,000
(3,600,000)
10,200,000
(1,800,000)
8,400,000
3,800,000
2.21
1,800,000
3,978,000
2023:
Total Cost (P13,800,000 + P1,600,000) 15,400,000
Accumulated depletion, 1/1/2023
(7,578,000)
Carrying value, 1/1/2023
7,822,000
Residual value
(1,800,000)
Revised depletable cost
6,022,000
Divided by: Est. Tons 1/1/2023
2,600,000
Depletion per unit, 2023
2.32
Multiply by: Units extracted
1,700,000
Total depletion, 2023
3,944,000
Noel A. Bergonia, CPA, MBA
85
Example 1
In 2020, Cooky Mining Company purchased property with
natural resources for P12,400,000. The property was relatively
close to a large city and had an expected residual value of
P1,800,000.
The following information relates to the use of the property:
▪ In 2020, Cooky spent P800,000 in development costs.
▪ In 2021 and 2023, P600,000 and P1,600,000, respectively,
were spent for additional developments on the mine.
▪ The tonnage mined and estimated remaining tons for years
2020-2024 are as follows:
Year
Tons Extracted
2020
2021
2022
2023
2024
0
1,500,000
1,800,000
1,700,000
900,000
Estimated Tons
Remaining
5,000,000
3,500,000
2,000,000
900,000
0
2024:
Total cost
Accumulated depletion, 1/1/2024
Carrying value, 1/1/2024
Residual value
Revised depletable cost
15,400,000
(11,522,000)
3,878,000
(1,800,000)
2,078,000
Compute the depletion for the years 2020 – 2024.
Noel A. Bergonia, CPA, MBA
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Example 2
On October 1, 2020, Tata Company, a calendar-year
company, purchased the right to a mine. The total purchase
price was P24,600,000. The restoration cost to be paid after
the mining period will be P2,000,000. The discount rate of
the restoration cost is 10%. Estimated reserve were 3,600,000
tons. The company expected to extract and sell 50,000 tons
per month.
Purchase price
PV of restoration
(2,000,000 x .56)
Total cost
Divided by: Est. Tons
Depletion per unit
1,120,000
25,720,000
3,600,000
7.14
Estimated mining period (3,600,000 ÷ 50,000 = 72 months ÷ 12) = 6 years
On the same date, the company purchased a new equipment
to be used in the mine for P5,000,000. The estimated useful
life of 8 years and has a residual value of P300,000. This
equipment would be of no use after all the resources is
removed from the mining site.
2020:
Determine the depletion and depreciation for 2020 and 2021.
2021:
(use 2 decimal places for the PV factor)
24,600,000
Depletion= P7.14 x (50,000 x 3)
= P1,071,000
Depletion= P7.14 x (50,000 x 12)
= P4,284,000
Noel A. Bergonia, CPA, MBA
87
Example 2
On October 1, 2020, Tata Company, a calendar-year
company, purchased the right to a mine. The total purchase
price was P24,600,000. The restoration cost to be paid after
the mining period will be P2,000,000. The discount rate of
the restoration cost is 10%. Estimated reserve were 3,600,000
tons. The company expected to extract and sell 50,000 tons
per month.
On the same date, the company purchased a new equipment
to be used in the mine for P5,000,000. The estimated useful
life of 8 years and has a residual value of P300,000. This
equipment would be of no use after all the resources is
removed from the mining site.
Determine the depletion and depreciation for 2020 and 2021.
(use 2 decimal places for the PV factor)
Useful life= 8 years
Estimated mining period (3,600,000 ÷ 50,000 = 72 months ÷ 12) = 6 years
Cost
Residual value
Depreciable cost
Divided by: Est. Tons
Depreciation per unit
5,000,000
(300,000)
4,700,000
3,600,000
1.31
2020:
Depreciation expense
= P1.31 x (50,000 x 3)
= P196,500
2021:
Depreciation expense
= P1.31 x (50,000 x 12)
= P786,000
Noel A. Bergonia, CPA, MBA
88
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Example 3
Chimmy Mining constructed a building costing P9,750,000
on a mine property. The building has an estimated useful life
of fifteen years with no residual value. After all resources were
removed, the building will be of no use and will be
demolished by the entity. The estimated recoverable output
from the mine is 1,500,000 tons.
During the first two years, the company extracted 125,000
tons per year. Changes in the surrounding environment
forced the entity to shutdown for the succeeding two years.
Thus, there were no extraction during the third and fourth
year. In the fifth year, the company resume extractions and
produced 150,000 tons. With improvements in the
production process, the company will extract 200,000 tons
per year.
Determine the depreciation expense from the first to fifth year.
Useful life= 15 years
Mining period (1,500,000 ÷ 125,000) = 12 years
Depreciable cost
Divided by: Est. recoverable outputs
Depreciation per unit
9,750,000
1,500,000
6.50
Year 1
Depreciation per ton
Tons extracted
Depreciation expense
6.50
125,000
812,500
Cost
Less: Accumulated depreciation
Carrying value, 12/31/Y1
9,750,000
812,500
8,937,500
Year 2
Depreciation per ton
Tons extracted
Depreciation expense
6.50
125,000
812,500
Cost
Less: Accumulated depreciation
Carrying value, 12/31/Y2
9,750,000
1,625,000
8,125,000
Noel A. Bergonia, CPA, MBA
89
Example 3
Chimmy Mining constructed a building costing P9,750,000
on a mine property. The building has an estimated useful life
of fifteen years with no residual value. After all resources were
removed, the building will be of no use and will be
demolished by the entity. The estimated recoverable output
from the mine is 1,500,000 tons.
During the first two years, the company extracted 125,000
tons per year. Changes in the surrounding environment
forced the entity to shutdown for the succeeding two years.
Thus, there were no extraction during the third and fourth
year. In the fifth year, the company resume extractions and
produced 150,000 tons. With improvements in the
production process, the company will extract 200,000 tons
per year for the remaining years.
Determine the depreciation expense from the first to fifth year.
Shutdown Periods
Year 3
Carrying value, 1/1/Y3
Divided by: remaining useful life
Depreciation expense
8,125,000
13
625,000
Cost
Less: Accumulated depreciation
Carrying value, 12/31/Y3
9,750,000
2,250,000
7,500,000
Year 4
Depreciation expense = P625,000
Cost
Less: Accumulated depreciation
Carrying value, 12/31/Y4
Resume Operations
Year 5
Remaining est. tons = 200,000 x 8 years = 1,600,000 tons
Revised depreciation rate = P6,875,000 ÷ 1,600,000
= P4.30 per ton
Depreciation expense
Noel A. Bergonia, CPA, MBA
9,750,000
2,875,000
6,875,000
= 150,000 tons x P4.30
= P645,000
90
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Example 4
Depletion rate per ton =
8,000,000 + 800,000 - 400,000
2,800,000
= P3
On July 1, 2020, Koya Mining Company purchased a coal
mine for P8,000,000. The estimated capacity of the mine was
2,800,000 tons. During 2020, the company mines 40,000 tons
of coal per month and sells 36,000 tons of coal per month.
The selling price is P120 per ton and the production costs
(excluding depletion and depreciation) are P16 per ton. At
the end of the mine’s life, it is expected that the present value
of restoration today is P800,000 after which it can be sold for
P400,000.
The company also purchased temporary housing for the
miners at a cost of P600,000. The housing has an expected
life of 10 years, but it is expected to be sold at P40,000 at the
end of the mine’s life.
How much is the cost of ending inventory and cost of goods
sold for 2020?
600,000 - 40,000
2,800,000
= P0.20
Depreciation per ton =
4,000 units x 6 months
Multiply by: production cost per unit
(16 + 3 + 0.20)
Ending Inventory, 12/31/2020
36,000 units x 6 months
Multiply by: production cost per unit
Cost of goods sold for 2020
24,000
19.20
460,800
216,000
19.20
4,147,200
Noel A. Bergonia, CPA, MBA
91
Property, Plant and Equipment
M E A S U R E M E N T
A F T E R
I N I T I A L
R E C O G N I T I O N
Noel A. Bergonia, CPA, MBA
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Measurement after Initial Recognition
▪ An entity shall choose either the cost model or the revaluation
model as its accounting policy and shall apply that policy to an entire
class of property, plant and equipment. (IAS 16 par. 29)
Noel A. Bergonia, CPA, MBA
93
Classes of Property, Plant and Equipment
▪ A class of property, plant and equipment is a grouping of assets of
a similar nature and use in an entity’s operations.
▪ The following are examples of separate classes:
✓Land
✓Land and buildings
✓Machinery
✓Ships
✓Aircraft
✓Motor vehicles
✓Furniture and fixtures
✓Office equipment
✓Bearer plants
Noel A. Bergonia, CPA, MBA
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Cost Model
▪ After recognition as an asset, an item of property, plant and
equipment shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses. (IAS 16 par.
30)
Noel A. Bergonia, CPA, MBA
95
Revaluation Model
▪ After recognition as an asset, an item of property, plant and
equipment whose fair value can be measured reliably shall be carried
at a revalued amount being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses (IAS 16 par. 31).
▪ If an item of property, plant and equipment is revalued, the entire
class of property, plant and equipment to which that asset belongs
shall be revalued (IAS 16 par. 36).
Noel A. Bergonia, CPA, MBA
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Frequency of Revaluation (IAS 16. par 34)
▪ The frequency of revaluations depends upon the changes in fair
values of the items of property, plant and equipment being revalued.
▪ Some items of property, plant and equipment experience significant
and volatile changes in fair value, thus necessitating annual
revaluation.
▪ Such frequent revaluations are unnecessary for items of property,
plant and equipment with only insignificant changes in fair value.
Instead, it may be necessary to revalue the item only every three or
five years.
Noel A. Bergonia, CPA, MBA
97
Accounting Procedures for Revaluation
At the date of the revaluation, the asset is treated in one of the
following ways:
➢Proportional method. The gross carrying amount is adjusted in a
manner that is consistent with the revaluation of the carrying amount
of the asset.
➢Elimination method. The accumulated depreciation is eliminated
against the gross carrying amount of the asset.
Noel A. Bergonia, CPA, MBA
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Accounting Procedures for Revaluation
(IAS 16 par. 39)
▪ If an asset’s carrying amount is increased as a result of a revaluation,
the increase shall be recognized in other comprehensive income and
accumulated in equity under the heading of revaluation surplus.
▪ However, the increase shall be recognized in profit or loss to the
extent that it reverses a revaluation decrease of the same asset
previously recognized in profit or loss.
Noel A. Bergonia, CPA, MBA
99
Accounting Procedures for Revaluation
(IAS 16 par. 40)
▪ If an asset’s carrying amount is decreased as a result of a revaluation,
the decrease shall be recognized in profit or loss.
▪ However, the decrease shall be recognized in other comprehensive
income to the extent of any credit balance existing in the revaluation
surplus in respect of that asset.
▪ The decrease recognized in other comprehensive income reduces
the amount accumulated in equity under the heading of revaluation
surplus.
Noel A. Bergonia, CPA, MBA
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Transfer of Revaluation Surplus to Retained
Earnings (IAS 16 par. 41)
▪ The revaluation surplus included in equity in respect of an item of
property, plant and equipment may be transferred directly to retained
earnings when the asset is derecognized.
▪ However, some of the surplus may be transferred as the asset is used
by an entity.
➢ The amount of the surplus transferred would be the difference
between depreciation based on the revalued carrying amount of
the asset and depreciation based on the asset’s original cost.
▪ Transfers from revaluation surplus to retained earnings are not made
through profit or loss.
Noel A. Bergonia, CPA, MBA
101
Example 1
Carrying value
Cost
Revalued amount
3,000,000
Increase
4,500,000
1,500,000
(1,800,000)
( 600,000)
(1,200,000)
On December 31, 2018, Ice Cream Corp. has an only Accum. Dep.
2,700,000
900,000
1,800,000
item of machine with cost of P3,000,000 and Carrying value
accumulated depreciation of P1,200,000 was revalued
December 31, 2018
to a market value of P2,700,000 and a remaining
Machine
1,500,000
useful life of six years. The company adopts the policy
Accumulated
depreciation
600,000
of reporting this items of property, plant and
Revaluation surplus
900,000
equipment at revalued amount less subsequent
accumulated
depreciation
and
subsequent
December 31, 2019
impairment losses.
Depreciation expense
The company restated its accumulated depreciation
proportionately with the change in the gross carrying
amount of the asset and transfer a portion of the
revaluation surplus as the asset is being used by the
entity. On January 1, 2021, a second revaluation
indicates that the equipment had a fair value of
P1,500,000.
Prepare the journal entries from 2018 to 2021.
450,000
Accumulated depreciation
450,000
2,700,000 ÷ 6 = 450,000
Revaluation surplus
Retained earnings
150,000
150,000
900,000 ÷ 6 = 150,000
Noel A. Bergonia, CPA, MBA
102
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Example 1
December 31, 2019
Cost
4,500,000
Accum. Dep.
(1,800,000 + 450,000) (2,250,000)
CV, 12/31/2019
2,250,000
On December 31, 2018, Ice Cream Corp. has an only
item of machine with cost of P3,000,000 and
accumulated depreciation of P1,200,000 was revalued
Revaluation surplus = P900,000 – P150,000 = P750,000
to a market value of P2,700,000 and a remaining
useful life of six years. The company adopts the policy December 31, 2020
of reporting this items of property, plant and
Depreciation expense
450,000
equipment at revalued amount less subsequent
Accumulated depreciation
450,000
accumulated
depreciation
and
subsequent
impairment losses.
Revaluation surplus
150,000
The company restated its accumulated depreciation
proportionately with the change in the gross carrying
amount of the asset and transfer a portion of the
revaluation surplus as the asset is being used by the
entity. On January 1, 2021, a second revaluation
indicates that the equipment had a fair value of
P1,500,000.
Prepare the journal entries from 2018 to 2021.
Retained earnings
150,000
Cost
4,500,000
Accum. Dep.
(2,250,000 + 450,000) (2,700,000)
CV, 12/31/2020
1,800,000
Revaluation surplus = P750,000 – P150,000 = P600,000
Noel A. Bergonia, CPA, MBA
103
Example 1
January 1, 2021
Carrying value
Cost
On December 31, 2018, Ice Cream Corp. has an only
(2,700,000)
item of machine with cost of P3,000,000 and Accum. Dep.
1,800,000
accumulated depreciation of P1,200,000 was revalued Carrying value
to a market value of P2,700,000 and a remaining Accumulated depreciation
useful life of six years. The company adopts the policy Revaluation surplus
of reporting this items of property, plant and
Machine
equipment at revalued amount less subsequent
accumulated
depreciation
and
subsequent December 31, 2021
impairment losses.
Depreciation expense
The company restated its accumulated depreciation
proportionately with the change in the gross carrying
amount of the asset and transfer a portion of the
revaluation surplus as the asset is being used by the
entity. On January 1, 2021, a second revaluation
indicates that the equipment had a fair value of
P1,500,000.
Prepare the journal entries from 2018 to 2021.
Decrease
Increase
Revalued amount
3,750,000
750,000
(2,250,000)
( 450,000)
1,500,000
300,000
4,500,000
450,000
300,000
750,000
375,000
Accumulated depreciation
375,000
1,500,000 ÷ 4 = 375,000
Revaluation surplus
75,000
Retained earnings
75,000
600,000 – 300,000 = 300,000 ÷ 4 = 75,000
CV 12/31/2021 = P3,750,000 – P2,625,000 = P1,125,000
Revaluation surplus = P300,000 – P75,000 = P225,000
Noel A. Bergonia, CPA, MBA
104
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Example 2
On January 1, 2020, Salad Corp. purchased a factory January 1, 2020
equipment for P5,400,000 having an original useful
Factory equipment
life of 10 years. The equipment belongs to a class
Cash
carried by Salad using the revaluation model. Any
resulting revaluation surplus is transferred to retained December 31, 2020
earnings at the time of disposal. The corporation
Depreciation expense
records the proportionate relationship between the
Accumulated depreciation
asset account and accumulated depreciation.
5,400,000 ÷ 10 = 540,000
The results of the revaluation is as follows:
Date of Revaluation
December 31, 2021
Revalued amount
P4,680,000
5,400,000
5,400,000
540,000
540,000
CV 12/31/2020 = P5,400,000 – P540,000 = P4,680,000
December 31, 2021
Depreciation expense
540,000
Accumulated depreciation
Prepare the entries to record from January 1, 2020 to
December 31, 2023.
540,000
CV 12/31/2021 = P5,400,000 – P1,080,000 = P4,320,000
105
Example 2
December 31, 2021
Carrying value
Revalued amount
Increase
5,850,000
450,000
5,400,000
On January 1, 2020, Salad Corp. purchased a factory Cost
(1,170,000)
( 90,000)
(1,080,000)
equipment for P5,400,000 having an original useful Accum. Dep.
life of 10 years. The equipment belongs to a class Carrying value
4,680,000
360,000
4,320,000
carried by Salad using the revaluation model. Any
Factory equipment
450,000
resulting revaluation surplus is transferred to retained
Accumulated
depreciation
90,000
earnings at the time of disposal. The corporation
Revaluation surplus
360,000
records the proportionate relationship between the
asset account and accumulated depreciation.
December 31, 2022
The results of the revaluation is as follows:
Date of Revaluation
December 31, 2021
Revalued amount
P4,680,000
Depreciation expense
585,000
Accumulated depreciation
585,000
4,680,000 ÷ 8 = 585,000
CV 12/31/2022 = P5,850,000 – P1,755,000 = P4,095,000
December 31, 2023
Prepare the entries to record from January 1, 2020 to
December 31, 2023.
Depreciation expense
Accumulated depreciation
585,000
585,000
CV 12/31/2023 = P5,850,000 – P2,340,000 = P3,510,000
106
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Example 3
On December 31, 2020, Mango Graham Corp. has an
only item of machine with cost of P3,000,000 and
accumulated depreciation of P1,200,000 was revalued
to a market value of P2,700,000 and a remaining
useful life of six years. The company adopts the policy
of reporting this items of property, plant and
equipment at revalued amount less subsequent
accumulated
depreciation
and
subsequent
impairment losses. The accumulated depreciation is
eliminated against the gross carrying amount of the
asset. The surplus is transferred to retained earnings
as the asset is being used by the entity.
On December 31, 2022, the company revalued the
asset to P1,600,000.
December 31, 2020
Accumulated depreciation
1,200,000
Machine
300,000
Revaluation surplus
900,000
December 31, 2021
Depreciation expense
450,000
Accumulated depreciation
450,000
2,700,000 ÷ 6 = 450,000
Revaluation surplus
150,000
Retained earnings
150,000
900,000 ÷ 6 = 150,000
CV 12/31/2021 = P2,700,000 – P450,000 = P2,250,000
Prepare the entry to record on December 31, 2020 to
2022.
Revaluation surplus 12/31/2021
= P900,000 – P150,000 = P750,000
107
Example 3
On December 31, 2020, Mango Graham Corp. has an
only item of machine with cost of P3,000,000 and
accumulated depreciation of P1,200,000 was revalued
to a market value of P2,700,000 and a remaining
useful life of six years. The company adopts the policy
of reporting this items of property, plant and
equipment at revalued amount less subsequent
accumulated
depreciation
and
subsequent
impairment losses. The accumulated depreciation is
eliminated against the gross carrying amount of the
asset. The surplus is transferred to retained earnings
as the asset is being used by the entity.
On December 31, 2022, the company revalued the
asset to P1,600,000.
December 31, 2022
Depreciation expense
450,000
Accumulated depreciation
Revaluation surplus
450,000
150,000
Retained earnings
Carrying value
150,000
Revalued amount
2,700,000
Cost
Accum. Dep.
Carrying value
(
1,600,000
1,600,000
Accumulated depreciation
900,000
Revaluation surplus
200,000
Machine
1,100,000
( 900,000)
900,000)
1,800,000
Decrease
Increase
200,000
1,100,000
Prepare the entry to record on December 31, 2020 to
2022.
108
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Property, Plant and Equipment
I M PA I R M E N T
Noel A. Bergonia, CPA, MBA
109
Objectives of IAS 36
▪ The objective of this Standard is to prescribe the procedures that an
entity applies to ensure that its assets are carried at no more than
their recoverable amount.
Noel A. Bergonia, CPA, MBA
110
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Identifying an asset that may be impaired
▪ An asset is impaired when its carrying amount exceeds its
recoverable amount (IAS 36 par. 8).
▪ An entity shall assess at the end of each reporting period whether
there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of
the asset (IAS 36 par. 9).
▪ In assessing whether there is any indication that an asset may be
impaired, an entity shall consider, as a minimum, the following
indications:
➢ External source
➢ Internal source
Noel A. Bergonia, CPA, MBA
111
External Source of Information
▪ There are observable indications that the asset’s value has declined
during the period significantly more than would be expected as a
result of the passage of time or normal use.
▪ Significant changes with an adverse effect on the entity have taken
place during the period, or will take place in the near future, in the
technological, market, economic or legal environment in which the
entity operates or in the market to which an asset is dedicated.
▪ Market interest rates or other market rates of return on investments
have increased during the period.
▪ The carrying amount of the net assets of the entity is more than its
market capitalization.
Noel A. Bergonia, CPA, MBA
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Internal Source of Information
▪ Evidence is available of obsolescence or physical damage of an asset.
▪ Significant changes with an adverse effect on the entity have taken
place during the period or are expected to take place in the near
future, in the extent to which, or manner in which, an asset is used or
is expected to be used.
▪ Evidence is available from internal reporting that indicates that the
economic performance of an asset is, or will be, worse than expected.
Noel A. Bergonia, CPA, MBA
113
Measuring Recoverable Amount
▪ Recoverable amount is the higher of an asset’s fair value less costs of
disposal and its value in use.
▪ Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date.
▪ Costs of disposal are incremental costs directly attributable to the
disposal of an asset or cash-generating unit, excluding finance costs
and income tax expense.
▪ Value in use is the present value of the future cash flows expected to
be derived from an asset or cash-generating unit.
Noel A. Bergonia, CPA, MBA
114
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Measuring Recoverable Amount
▪ It is not always necessary to determine both an asset’s fair value less
costs of disposal and its value in use.
▪ If either of these amounts exceeds the asset’s carrying amount, the
asset is not impaired, and it is not necessary to estimate the other
amount (IAS 36 par. 19).
▪ Recoverable amount is determined for an individual asset, unless the
asset does not generate cash inflows that are largely independent of
those from other assets or groups of assets (IAS 36 par. 22).
Noel A. Bergonia, CPA, MBA
115
Fair Value Less Cost of Disposal
▪ It may be possible to measure fair value less costs of disposal, even if
there is not a quoted price in an active market for an identical asset.
▪ Examples of cost of disposal are legal costs, stamp duty and similar
transaction taxes, costs of removing the asset, and direct incremental
costs to bring an asset into condition for its sale.
▪ Termination benefits and costs associated with reducing or
reorganizing a business following the disposal of an asset are not
direct incremental costs to dispose of the asset.
Noel A. Bergonia, CPA, MBA
116
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Value in Use
The following elements shall be reflected in the calculation of an asset’s
value in use:
▪an estimate of the future cash flows the entity expects to derive from
the asset
▪expectations about possible variations in the amount or timing of
those future cash flows
▪the time value of money, represented by the current market risk-free
rate of interest
▪the price for bearing the uncertainty inherent in the asset
▪other factors, such as illiquidity, that market participants would
reflect in pricing the future cash flows the entity expects to derive
from the asset.
Noel A. Bergonia, CPA, MBA
117
Value in Use
▪ Estimating the value in use of an asset involves the following steps:
➢ estimating the future cash inflows and outflows to be derived from
continuing use of the asset and from its ultimate disposal; and
➢ applying the appropriate discount rate to those future cash flows.
▪ The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s)
current market assessments of:
➢ the time value of money; and
➢ the risks specific to the asset for which the future cash flow
estimates have not been adjusted.
Noel A. Bergonia, CPA, MBA
118
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Value in Use
▪ Estimates of future cash flows shall include:
➢ projections of cash inflows from the continuing use of the asset;
➢ projections of cash outflows that are necessarily incurred to
generate the cash inflows from continuing use of the asset
(including cash outflows to prepare the asset for use) and can be
directly attributed, or allocated on a reasonable and consistent
basis, to the asset; and
➢ net cash flows, if any, to be received (or paid) for the disposal of
the asset at the end of its useful life.
Noel A. Bergonia, CPA, MBA
119
Recognizing & Measuring an Impairment Loss
▪ An impairment loss is the amount by which the carrying amount of an
asset exceeds its recoverable amount.
▪ An impairment loss shall be recognized immediately in profit or loss,
unless the asset is carried at revalued amount in accordance with
another Standard (for example, in accordance with the revaluation
model in IAS 16).
▪ Any impairment loss of a revalued asset shall be treated as a revaluation
decrease in accordance with that other Standard.
▪ After the recognition of an impairment loss, the depreciation charge for
the asset shall be adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value (if any), on a systematic
basis over its remaining useful life.
Noel A. Bergonia, CPA, MBA
120
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Example 1
Presented below are information related to a
machine owned by Cooky Corp. on December 31,
2020:
▪ Cost- P6,750,000
▪ Accumulated Depreciation- P1,125,000
▪ Fair value less cost to sell- P2,400,000
Cooky Corp. will continue to use the asset for its
remaining useful life of 5 years and has a residual
value of P375,000.
Expected cash inflows from the use of asset is
P1,125,000 after incurring production cost including
maintenance of P525,000. The pre-tax discount rate is
10%.
How much is the impairment loss to be recognized?
What is the revised depreciation expense after the
impairment?
Recoverable Amount
FV less cost to sell = P2,400,000
PV of expected net cash flows
(P1,125,000 - P525,000) x 3.7908
PV of residual value (P375,000 x .6209)
Value in use
2,274,480
232,838
2,507,318
Carrying value (6,750,000 - 1,125,000)
Recoverable amount
Impairment loss
Impairment loss
Recoverable
amount
5,625,000
2,507,318
3,117,683
3,117,683
Accumulated depreciation
3,117,683
December 31, 2021
Depreciation expense
426,464
Accumulated depreciation
426,464
2,507,318 – 375,000 = 2,132,318 ÷ 5 =426,464
Noel A. Bergonia, CPA, MBA
121
Example 2
January 2020
Equipment
1,000,000
Cash
1,000,000
In January 2020, Chimmy Corp. purchased an
equipment costing P1,000,000. The equipment has
December 31, 2020
an estimated residual value of P100,000 and an
estimated useful life of eight years. The asset is Depreciation expense
112,500
depreciated using straight-line basis. On December
Accumulated depreciation
112,500
31, 2022, it became apparent that the equipment
(1,000,000
–
100,000)
÷
8
=
112,500
suffered permanent impairment in value. It was
determined that the equipment’s recoverable value CV 12/31/2020 = 1,000,000 – 112,500 = 887,500
was P400,000 with a remaining life of two years and a
December 31, 2021
residual value of P40,000.
Prepare the journal entries from 2020 to 2023.
Depreciation expense
Accumulated depreciation
112,500
112,500
CV 12/31/2021 = 1,000,000 – 225,000 = 775,000
Noel A. Bergonia, CPA, MBA
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Example 2
December 31, 2022
Depreciation expense
Accumulated depreciation
In January 2020, Chimmy Corp. purchased an
equipment costing P1,000,000. The equipment has
an estimated residual value of P100,000 and an Impairment loss
Accumulated depreciation
estimated useful life of eight years. The asset is
depreciated using straight-line basis. On December
CV 12/31/2022
31, 2022, it became apparent that the equipment
(1,000,000 – 337,500)
suffered permanent impairment in value. It was
Recoverable amount
determined that the equipment’s recoverable value
Impairment loss
was P400,000 with a remaining life of two years and a
December 31, 2023
residual value of P40,000.
Prepare the journal entries from 2020 to 2023.
Depreciation expense
112,500
112,500
262,500
262,500
P662,500
400,000
P262,500
180,000
Accumulated depreciation
180,000
(P400,000 – P40,000) ÷ 2 = P180,000
CV 12/31/2023 = 1,000,000 – P780,000 = P220,000
Noel A. Bergonia, CPA, MBA
123
Example 3
January 1, 2020
Machine
600,000
Cash
On January 1, 2020, Tata Company acquired a factory
machine at a cost of P600,000. The machine is being
depreciated using the straight-line method over its
projected useful life of 10 years. On December 31,
2021, a determination was made that the asset’s
recoverable amount was P384,000. On December 31,
2022, the recoverable amount was determined to be
444,000 and management believes that the
impairment loss previously recognized should be
reversed.
Prepare the entry to record until December 31, 2022.
600,000
December 31, 2020
Depreciation expense
60,000
60,000
Accumulated depreciation
600,000 ÷ 10 =60,000
CV 12/31/2020= P600,000 – P60,000 = P540,000
December 31, 2021
Depreciation expense
60,000
60,000
Accumulated depreciation
Impairment loss
96,000
Accumulated depreciation
CV 12/31/2021 (600,000 – 120,000)
Recoverable amount
Impairment loss
96,000
P480,000
384,000
P 96,000
Noel A. Bergonia, CPA, MBA
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Example 3
December 31, 2022
Depreciation expense
On January 1, 2020, Tata Company acquired a
factory machine at a cost of P600,000. The
machine is being depreciated using the straightline method over its projected useful life of 10
years. On December 31, 2021, a determination
was made that the asset’s recoverable amount was
P384,000. On December 31, 2022, the
recoverable amount was determined to be
444,000 and management believes that the
impairment loss previously recognized should be
reversed.
384,000 ÷ 8 =48,000
Machine
192,857
Accumulated depreciation
84,857
Recovery of impairment
84,000
Revaluation surplus
24,000
CV 12/31/2022 (384,000 – 48,000)
Recoverable amount
Increase
Limit on recovery
Previous impairment
P96,000
Impairment already recovered
(60,000 – 48,000)
(12,000)
Limit for recovery
Revaluation surplus
Carrying value
420,000
444,000
24,000
48,000
Accumulated depreciation
Prepare the entry to record until December 31,
2022.
Shortcut for revaluation surplus
CV without impairment
(600,000 - [60,000 x 3])
Recoverable amount
Revaluation surplus
48,000
P336,000
444,000
P108,000
Revalued amount
84,000
P24,000
Increase
Cost
600,000
792,857
192,857
Accum. Dep.
(264,000)
(384,857)
( 84,857)
336,000
Carrying value
444,000
108,000
Noel A. Bergonia, CPA, MBA
125
Example 4
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being
depreciated using straight-line method over its
projected useful life of 10 years. On December 31,
2019, the asset’s fair value was P1,687,500.
Accordingly, an entry was made on that date to
recognize the revaluation surplus. It is the
company’s policy to transfer a portion of
revaluation surplus to retained earnings every
period.
An impairment was detected on December 31,
2021 and the recoverable amount of the asset was
determined to be P1,010,625. On December 31,
2022, the fair value of the asset was determined to
be P1,095,000.
Prepare the entries from 2019 to 2022.
January 1, 2019
Delivery Truck
1,500,000
Cash
1,500,000
December 31, 2019
Depreciation expense
150,000
150,000
Accumulated depreciation
P1,500,000 ÷ 10 = P150,000
Carrying value
Revalued amount
1,500,000
Cost
Increase
375,000
(150,000)
(187,500)
( 37,500)
1,350,000
1,687,500
337,500
Accum. Dep.
Carrying value
1,875,000
Delivery truck
Accumulated depreciation
Revaluation surplus
375,000
37,500
337,500
Noel A. Bergonia, CPA, MBA
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Example 4
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being
depreciated using straight-line method over its
projected useful life of 10 years. On December 31,
2019, the asset’s fair value was P1,687,500.
Accordingly, an entry was made on that date to
recognize the revaluation surplus. It is the
company’s policy to transfer a portion of
revaluation surplus to retained earnings every
period.
An impairment was detected on December 31,
2021 and the recoverable amount of the asset was
determined to be P1,010,625. On December 31,
2022, the fair value of the asset was determined to
be P1,095,000.
Prepare the entries from 2019 to 2022.
Noel A. Bergonia, CPA, MBA
December 31, 2020
Depreciation expense
187,500
187,500
Accumulated depreciation
P1,687,500 ÷ 9 = P187,500
Revaluation surplus
37,500
Retained earnings
37,500
P337,500 ÷ 9 = P37,500
CV 12/31/2020 = P1,875,000 – P375,000 = P1,500,000
Revaluation surplus 12/31/2020
= P337,500 – P37,500 = P300,000
December 31, 2021
Depreciation expense
187,500
187,500
Accumulated depreciation
Revaluation surplus
37,500
Retained earnings
37,500
CV 12/31/2021 = P1,875,000 – P562,500 = P1,312,500
Revaluation surplus 12/31/2021
= P337,500 – P75,000 = P262,500
127
Example 4
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being
depreciated using straight-line method over its
projected useful life of 10 years. On December 31,
2019, the asset’s fair value was P1,687,500.
Accordingly, an entry was made on that date to
recognize the revaluation surplus. It is the
company’s policy to transfer a portion of
revaluation surplus to retained earnings every
period.
An impairment was detected on December 31,
2021 and the recoverable amount of the asset was
determined to be P1,010,625. On December 31,
2022, the fair value of the asset was determined to
be P1,095,000.
Prepare the entries from 2019 to 2022.
Noel A. Bergonia, CPA, MBA
December 31, 2021
Accumulated depreciation
129,375
Revaluation surplus
262,500
Impairment loss
39,375
Delivery Truck
431,250
CV 12/31/2021
P1,312,500
Recoverable amount
1,010,625
Decrease
P 301,875
Remaining balance of reval. surplus
262,500
Impairment loss
P 39,375
Carrying value
Revalued amount
1,875,000
Cost
1,443,750
Decrease
Increase
431,250
Accum. Dep.
(562,500)
(433,125)
( 129,375)
Carrying value
1,312,500
1,010,625
301,875
December 31, 2022
Depreciation expense
Accumulated depreciation
144,375
144,375
1,010,625 ÷ 7 = 144,375
CV 12/31/2022 = P1,443,750 – P577,500 = P866,250
128
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Example 4
December 31, 2022
Delivery Truck
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being
depreciated using straight-line method over its
projected useful life of 10 years. On December 31,
2019, the asset’s fair value was P1,687,500.
Accordingly, an entry was made on that date to
recognize the revaluation surplus. It is the
company’s policy to transfer a portion of
revaluation surplus to retained earnings every
period.
An impairment was detected on December 31,
2021 and the recoverable amount of the asset was
determined to be P1,010,625. On December 31,
2022, the fair value of the asset was determined to
be P1,095,000.
381,250
Accumulated depreciation
152,500
33,750
Recovery of impairment
Revaluation surplus
195,000
CV 12/31/2022
P 866,250
Recoverable amount
1,095,000
Increase
P 228,750
Limit for impairment reversal
Previous impairment
P39,375
Recovered
(150,000 - 144,375)
5,625
Limit for impairment reversal
(33,750)
Revaluation surplus
P 195,000
Carrying value
1,443,750
Cost
Accum. Dep.
Carrying value
Revalued amount
1,825,000
Increase
381,250
(577,500)
(730,000)
( 152,500)
866,250
1,095,000
228,750
Shortcut for the revaluation surplus
CV w/o impairment
(1,500,000 -[150,000 x 4])
900,000
Recoverable amount
1,095,000
Revaluation surplus
195,000
Prepare the entries from 2019 to 2022.
Noel A. Bergonia, CPA, MBA
129
Property, Plant and Equipment
D E R E C O G N I T I O N
Noel A. Bergonia, CPA, MBA
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Derecognition
▪ The carrying amount of an item of property, plant and equipment
shall be derecognized:
❖on disposal; or
❖when no future economic benefits are expected from its use or
disposal. (IAS 16 par. 67)
▪ The gain or loss arising from the derecognition of an item of
property, plant and equipment shall be determined as the difference
between the net disposal proceeds, if any, and the carrying amount
of the item.
Noel A. Bergonia, CPA, MBA
131
Derecognition
▪ Mode of derecognition:
➢
➢
➢
➢
Sale
Exchange
Involuntary conversion
Abandonment
▪ If the property, plant and equipment is not yet fully depreciated,
depreciation must be taken up until the date of derecognition.
Noel A. Bergonia, CPA, MBA
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Sale of Property, Plant and Equipment
▪ When selling property, plant, and equipment for monetary consideration (cash or a
receivable), the seller recognizes a gain or loss for the difference between the
consideration received and the book value of the asset sold.
Selling price (consideration received)
Less: Carrying value at the date of disposal
Gain or Loss on sale
XX
XX
XX
Noel A. Bergonia, CPA, MBA
133
Example 1
As of December 31, 2020, the
equipment of Porkchop Inc., originally
purchased on January 1, 2016, has a
cost of P100,000 and accumulated
depreciation of P60,000. It is the
company’s policy to depreciate assets
using straight-line method.
Selling price
55,000
Carrying value, 1/1/21
(100,000 - 60,000)
(40,000)
Gain on sale
15,000
Cash
55,000
Accumulated depreciation
60,000
Equipment
On January 1, 2021, the company sold
it at P55,000.
Gain on sale of equipment
100,000
15,000
Prepare the entry to record the sale.
Noel A. Bergonia, CPA, MBA
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Example 2
As of December 31, 2020, the
equipment of Menudo Inc., originally
purchased on January 1, 2016, has a
cost of P100,000 and accumulated
depreciation of P60,000. It is the
company’s policy to depreciate assets
using straight-line method.
On May 31, 2021, the company sold it
at P55,000.
Selling price
55,000
Carrying value, 5/1/21
5/31/21
(100,000 - 65,000*)
(35,000)
Gain on sale
20,000
*60,000 ÷ 5 = P12,000 x 5/12 = P5,000
60,000 + 5,000 = 65,000
Cash
55,000
Accumulated depreciation
60,000
Depreciation expense
5,000
Equipment
Gain on sale of equipment
100,000
20,000
Prepare the entry to record the sale.
Noel A. Bergonia, CPA, MBA
135
Involuntary Conversion
▪ An involuntary conversion occurs when your property is destroyed,
stolen, condemned, or disposed of under the threat of condemnation
and you receive other property or money in payment, such as
insurance or a condemnation award.
▪ Gain or loss arises from the difference of the amount received and the
carrying value of the property
Noel A. Bergonia, CPA, MBA
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Example 3
Steak Co. has a delivery truck which
has an original cost of P250,000. This
truck is insured in Pork Insurance
Company. Tragically on February 1,
2021 when its carrying value is
P150,000, it was totaled in an
accident. After the evaluation, the
insurance company paid Steak Co.
P155,000.
Cash
155,000
Accumulated depreciation
100,000
Delivery truck
250,000
Gain on disposal
5,000
What is the entry to record the
transaction?
Noel A. Bergonia, CPA, MBA
137
Abandonment
▪ If the asset has no use already or when it is fully utilized, the company
may abandon it.
▪ If the asset has still a carrying value at the time of abandonment, it will
be charged to loss.
Noel A. Bergonia, CPA, MBA
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Example 4
On February 1, 2021, Burger Inc.
decided to abandon its factory
equipment with zero carrying value on
its accounting record. The original cost
of this equipment purchased 8 years
ago is P150,000.
Prepare the
transaction.
entry
to
record
Accumulated depreciation
150,000
Factory Equipment
150,000
the
Noel A. Bergonia, CPA, MBA
139
Example 5
On January 1, 2021, Shanghai Inc.
decided to abandon its faulty factory
equipment with P20,000 carrying
value on its accounting record. The
original cost of this equipment
purchased 8 years ago is P150,000.
Prepare the
transaction.
entry
to
record
Accumulated depreciation
Loss on disposal
Factory Equipment
130,000
20,000
150,000
the
Noel A. Bergonia, CPA, MBA
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Noel A. Bergonia, CPA, MBA
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71