LEARNING LOG
INTERMEDIATE ACCOUNTING 1
Prepared by:
Jhuryne Alipoyo
BSAC-ACA 1
TABLE OF CONTENTS
THE ACCOUNTING PROCESS
CASH AND CASH EQUIVALENTS
BANK RECONCILIATION
PROOF OF CASH
ACCOUNTS RECEIVABLE
NOTES RECEIVABLE
RECEIVABLES – ADDITIONAL CONCEPTS
INVESTMENTS
INVESTMENT IN DEBT SECURITIES
FINANCIAL INVESTMENTS
INVESTMENT IN ASSOCIATES
INVENTORIES
INVENTORY ESTIMATION
AGRICULTURE
PROPERTY, PLANT AND EQUIPMENT PART 1
PROPERTY, PLANT AND EQUIPMENT PART 2
DEPLETION OF MINERAL RESOURCES
THE ACCOUNTING PROCESS
CASH AND CASH EQUIVALENTS
Related standard: PFRS 9 Financial Instruments
-presented as current assets
CASH – “money”, coins and currencies, and other instruments (ex. Checks) acceptable by the bank
for deposit and immediate credit.
RECOGNITION
No specific standard, the only guidance is found in PAS 1 which provides that “an entity
shall classify an asset as current when it is cash or a cash equivalent unless it is restricted from
being exchanged or used to settle a liability for at least twelve months after the end of the
reporting period.”
SHOULD BE UNRESTRICTED FOR USE, IF RESTRICTED, NOT CONSIDERED AS CASH
MEASUREMENT
Local Currency
Foreign Currency
Financial Institution
COMPOSITION
- at FACE VALUE
- at FACE VALUE but translated, current exchange rate at reporting period
-NRV or recoverable value
Compensating Balance- minimum amount that must be maintained in an entity’d bank account
-if legally restricted, excluded from cash and cash equiv.
-if legally unrestricted, included in cash
-disclosed in the notes
Bank Overdraft – over withdrawal, not allowed in the Philippines
GENERAL RULE (SILENT) – not CASH but current liability
EXCEPTIONS: Offset to cash
1. Maintains 2 or more accounts in the same bank
2. Bank overdraft is immaterial
ACCOUNTING FOR PETTY CASH FUND
Petty Cash Fund- the money set aside to defray relatively small amount of cash
disbursements. May be accounted for using the following methods: (a) Imprest System and (b)
Fluctuating System.
PRO FORMA JOURNAL ENTRIES (IMPREST SYSTEM)
a. Establishment
b. Payment of expense
c. Replenishment
d. AE for unreplenished fund
e. Increase in the fund
f. Decrease in the fund
Petty Cash Fund
xx
Cash in bank
Memo entry only
Expenses
xx
Cash in bank
Expenses
xx
Petty Cash Fund
Petty Cash Fund
xx
Cash in bank
Cash in bank
xx
Petty Cash Fund
xx
xx
xx
xx
xx
FRAUDULENT ACTIVITIES IN CASH
1. Lapping- misappropriating a collection from one customer and concealing this defalcation when
collection is made from another customer.
2. Kiting – a transfer of cash from one bank to another; usually employed at the end of the month.
This usually occurs when a check is drawn against a first bank and depositing the same check in a
second bank to cover the shortage in the latter bank.
3. Window dressing – a practice of opening the books of accounts beyond the close of the
accounting period for the purpose of showing a better financial position and performance; usually
perpetuated as follows:
a. By recording as of the last day of the accounting period collections made subsequent to the
close of the period.
b. By recording as of the last day of the accounting period payments of accounts made subsequent
to the close of the period.
ACCOUNTING FOR CASH SHORTAGE AND OVERAGE
A. Upon discovery
B. Upon investigation (cashier
is accountable)
C. Upon investigation (cannot
trace anymore)
Cash Shortage
Cash short/over
xx
Cash on hand
xx
Due from cashier
xx
Cash short/over
xx
Loss from shortage xx
Cash short/over xx
Cash Overage
Cash on hand
xx
Cash short/over
xx
Cash short/over xx
Due to cashier
xx
Cash short/over xx
Other income
xx
CASH EQUIVALENTS – “short-term, highly liquid investments that are readily convertible into
cash and so near their maturity that they present insignificant risk of changes in value because of
changes in interest rates.” (PAS 7, Paragraph 6)
RECOGNITION
Only debt instruments acquired within 3 months or less before maturity can qualify as
cash equivalents.
*Equity securities cannot qualify as cash equivalents because they do not have maturity date
except redeemable preference shares (with mandatory exemption) that are acquired 3 months
before their redemption date can qualify as cash equivalents.
COMPOSITION
1. Acquisition date – bought 3 months or less
2. Maturity Date (3 months or less)
3. LIST (automatic cash equiv.)
• Time Deposit
• Money Market Placement/Instrument
• Treasury Bills – maturity 3 months
*TREASURY NOTES- less than a year but more than 3 months
*TREASURY BONDS- more than a year
-will classify as cash equiv. if criteria are met
SAMPLE PROBLEM
BANK RECONCILIATION
Bank Reconciliation- a statement which brings into agreement the cash balance per book and
cash balance per bank.
-prepared monthly because the bank provides the depositor with the bank statement at the end
of every month.
*Bank statement – the source of document for bank reconciliation; the exact copy of the
depositor’s ledger in the records of the bank.
FORMS OF BANK RECONCILIATION
1. Adjusted Balance Method- the book balance and bank balance are brought to a correct cash
balance that must appear on the balance sheet.
*Book to bank method- the book balance is reconciled with the bank balance
*Bank to book method- the bank balance is reconciled with the book balance
➢ The three methods are not independent but interrelated.
SOLUTION GUIDE FOR BANK RECONCILIATION:
Unadjusted balance per book/ ledger
xxx
Add: Credit Memos
xxx
Less: Debit Memos
(xxx)
+/- Errors
xxx
(xxx)
Adjusted Balance
xxx
Unadjusted balance per book/ ledger
Add: Credit Memos
Less: Debit Memos
+/- Errors
Adjusted Balance
SAMPLE PROBLEM:
The cash records of Company X show the following for the month of January.
xxx
xxx
(xxx)
xxx
(xxx)
xxx
The following data are gathered in connection with the credit memo and debit memo appearing
on the bank statement:
a. The credit memo of P15,000 on January 26 represents proceeds of note collected by the bank
in favor of the company.
b. The returned check of P5,000 represents check of customer deposited previously but returned
by the bank because of NSF.
SOLUTION:
PROOF OF CASH
Proof of Cash – an expanded reconciliation that includes proof or receipts and
disbursements.
SAMPLE PROBLEM:
SOLUTION:
ACCOUNTS RECEIVABLE
Receivables – are assets that represent contractual rights to receive cash or other asset from
another entity.
EXAMPLES OF RECEIVABLES:
a. Accounts Receivable – receivables by oral or informal promises to pay; not supported by formal
promissory notes.
b. Notes Receivable – receivables supported by promissory notes
c. Loans Receivable – receivables arising from loans extended by lending institutions
d. Advances – receivables arising from advances to officers and employees, advances to suppliers,
and advances to affiliates
e. Accrued Income – receivables arising from income earned but not yet collected
f. Deposits – receivables from reimbursable deposits paid to cover potential damages or losses,
deposits for guarantee of performance or payment, and deposits for returnable items
g. Claims Receivable – receivables from insurance companies for casualties sustained, defendants
under suit, government agencies for refundable taxes and other remittances, etc.
TRADE AND NON-TRADE RECEIVABLES
a. Trade Receivables – receivables arising from the sale of goods or services in the ordinary course
of business.
-classified as current asset when capitalized within the normal operating cycle
b. Non-trade Receivables – receivables from other sources
-classified as current asset only when expected to be realized within one year.
SAMPLE PROBLEM
SOLUTIONS:
INITIAL MEASUREMENT
-initially recognized at fair value plus transaction cost
TRANSACTIONS AFFECTING ACCOUNTS RECEIVABLE
GROSS VS NET METHOD
SUBSEQUENT MEASUREMENT
-measured at NRV
NRV COMPUTATION
Gross Accounts Receivable
Less: Expected sales returns
Expected sales discounts
Expected freight out
Expected bad debts
Net Carrying Amount of Accounts Receivable
xx
xx
xx
xx
xx
xx
TERM OF SALE CONTRACT AND ACCOUNTING FOR FREIGHT CHARGES
Shipping Terms
Liable to Pay Freight
Who Actually Paid the Freight
FOB Shipping Point, Freight Prepaid
Buyer
Seller
FOB Shipping Point, Freight Collect
Buyer
Buyer
FOB Destination, Freight Prepaid
Seller
Seller
FOB Destination, Freight Collect
Seller
Buyer
ACCOUNTING FOR CASH DISCOUNT
1. PFRS 15
2. Traditional GAAP
a. Gross Method
b. Net Method
ACCOUNTING FOR BAD DEBTS
a. Direct Write-off Method – bad debts expense is directly written-off when deemed worthless.
b. Allowance Method – bad debts are estimated and recorded even if there are no actual
collectibility issues.
ESTIMATING DOUBTFUL ACCOUNTS
a. Percentage of net credit sales – bad debts is computed by:
BAD DEBTS EXPENSE = NET CREDIT SALES X PERCENTAGE OF EXPECTED UNCOLLECTIBLE
ACCOUNTS
b. Percentage of receivables – compute first the ending balance of allowance for bad debts by:
END. BAL. OF ALLOWANCE = ACCOUNTS RECEIVABLE X PERCENTAGE OF EXPECTED
UNCOLLECTIBLE ACCOUNTS
-bad debts expense is computed as the “squeeze amount” in the allowance for bad debts t-accounts
c. Aging of receivables – uses more than one percentage; the balance of accounts receivable is split
based on their age bracket (age is how long the receivable has been outstanding)
NOTES RECEIVABLE
AMORTIZATION TABLE for LUMP SUM aash flows
Date
Interest Income
a= c x EIR
Unearned Interest
b= prev. bal - a
Present Value
c= prev bal + a
AMORTIZATION TABLE for INSTALLMENT cash flows
Date
Collections
(a)
Interest Income
b = d x EIR
Amortization
c= a + b
Present Value
d = prev bal - c
RECEIVABLES – ADDITIONAL CONCEPTS
DERECOGNITION OF RECEIVABLES
a. the contractual rights to the cash flows from the financial asset expire (when the cash flows
are collected, cancelled or become uncollectible because of loss events)
b. the financial asset is transferred and the transfer qualifies for derecognition
TRANSFER
a. transfers the contractual rights to receive the cash flows of the financial asset
b. retains contractual rights to receive the cash flows of the financial asset but assumes
obligation to remit the collections to a recipient in an arrangement that meets certain conditions
RECEIVABLE FINANCING
Description
Examples
Receivables as Security
Selling of Receivables
Receivables serve as mere
Receivables are sold or
collateral for the entity’s
transferred to other entities
borrowing of funds
• Pledge of receivables
• Discounting of
• Assignment
of
receivables
Receivables
• Factoring of
receivables
RECEIVABLES AS SECURITY
1. Pledge- borrowing of funds from a financial institution with general receivables as collateral
2. Assignment – Specific-assigned receivable amounts are specifically identified. Unassigned
receivables are unaffected.
*Non-notification Basis – the assignor/borrower notifies the debtors whose receivables
have been assigned, payments are remitted directly to the lender/assignee
*Notification Basis – the assignor/borrower does not notify the debtors; debtors will
continue to pay to the assignor/borrower
The amount to be received from the assignment is computed as follows:
Total Amount of Assigned Receivables
Multiply: Percentage to be Lent
Gross proceeds from the assignment
Less: Service Charge
Advance interest’
xx
xx
xx
xx
xx
Net proceeds from the assignment
xx
SELLING OF RECEIVABLES
1. Factoring – receivables are sold; usually done on a notification basis and on either with or
without recourse basis
➢ As to liability.
* With Recourse- the factor assumes the risk of uncollectibility and absorbs any credit
losses; outright sale of receivable both in form and substance
*Without Recourse- the transferor guarantees payment to the factor; the transferor is
liable for the guaranteed amount
*same problem with the problem below
➢ As to frequency or occurrence:
*Casual Factoring- irregular factoring of receivables
*Regular Factoring Agreement- all receivables are regularly factored
Net proceeds from factoring are computed as follows:
Balance of factored accounts receivable
Less: Factor’s holdback (% x bal. of factored accounts receivable)
xx
xx
Factoring charge or commission
Financing Charge
Net proceeds from factored accounts receivable
xx
xx
xx
2. Discounting – the holder endorses a note to a bank in exchange for the maturity value less
discount.
STEPS IN COMPUTING THE NET PROCEEDS FROM DISCOUNTING OF NOTES RECEIVABLE
1. Total Interest = Principal x Stated Rate x Time
2. Maturity Value = Principal + Total Interest
3. Discount = Maturity Value x Discount rate x Discount period
4. Net Proceeds = Maturity Value – Discount
ACCOUNTING FOR THE DISCOUNTING OF NOTES RECEIVABLE
DISCOUNTED WITHOUT RECOURSE
Definition
Entity is not liable in case the maker did
not pay the bank or other party who
discounted the note.
DISCOUNTED WITH RECOURSE
Entity is still liable
1. Conditional Sale – the sale will be
fully effective upon the full payment of
the maker.
2. Secured Borrowing- the note
receivable merely serves as a security
Pro-forma Journal Entries
Cash
Loss on discounting
Notes Receivable
Interest Income
Gain on discounting
xx
xx
xx
xx
xx
If conditional sale,
Cash
xx
Loss on discounting
xx
Notes rec.-discounted
xx
Interest Income
xx
Gain on discounting
xx
If secured borrowing,
Cash
Interest Expense
Loan Payable
Interest Income
xx
xx
CREDIT CARD TRANSACTIONS
A seller records a sale to a customer using credit card as a receivable from the customer’s credit
card company rather from the customer.
DISCOUNTING OF OWN NOTE
-the bank deducted in advance the interest on the loan
xx
xx
INVESTMENTS
SUBSEQUENT MEASUREMENT:
a. Amortized Cost- gains or losses on FAs measured at AC are recognized in P/L. Fair value changes
are not recognized.
b. FVOCI
*FVOCI-mandatory – gains and losses on FA that are mandatorily measured at FVOCI are
recognized in other comprehensive income until derecognized or reclassified.
*FVOCI -election- measured at FVOCI, however, when financial asset is derecognized, the
cumulative gain or loss previously recognized in OCI is not subsequently measured to P/L but may
be transferred to retained earnings
c. FVPL – gains and losses on financial assets measured at FVPL are recognized in profit or loss
SAMPLE PROBLEM:
SOLUTION:
INVESTMENT IN DEBT SECURITIES
Considerations when accounting for investment in bonds:
1. .Discount or Premium
2. Recognition of Interest Income
3. Acquired Interest- bonds are acquired or purchased between interest payment dates
Purchased accrued interest does not affect the cost but increases cash outlay and the
acquisition
4. Adjustment to effective interest rate due to transaction costs
• Trial and error approach:
(Future cash flows x PV Factor @ x% of PRINCIPAL)+ (Future cash flows x PV Factor @ x% of
INTEREST RECEIVABLE)= PV or Initial Carrying Amount (already given)
5. Sale of bonds prior to maturity
• Gains/Losses in Profit or Loss= Net disposal Proceeds- Carrying Amount
PURCHASE PRICE
PURCHASE PRICE = Present Value of Future Cash Flows of the Bonds discounted at a specified
effective interest rate
If bonds are purchased in between interest dates, the total purchase price/total cash outlay
includes purchased accrued interest:
Total Purchase price= Purchase cost (date of acquisition)- Purchased Accrued Interest
DETERMINING CURRENT AND NON-CURRENT PORTIONS
Current Portion- the amortization in the immediately following year. Portion of the next year’s
collection applied to the principal.
Non-current Portion- the present value in the immediately following year.
Current + Non-current portion= Carrying amount as of that date
FINANCIAL INVESTMENTS
RECLASSIFICATION
TYPE OF RECLASSIFICATION
Amortized Cost to FVPL
INITIAL RECOGNITION
Fair Value
FVPL to Amortized Cost
Fair Value -> New Gross CA
Amortized Cost to FVOCI
(Mandatory)
FVOICI (Mandatory) to
Amortized Cost
Fair Value
Fair Value -> adjusted for
cumulative bal. of gain or loss
previously recognized in OCI
FVPL to FVOCI (mandatory)
Continues to be measured at
Fair Value
FVOCI (mandatory) to FVPL
Continues to be measured at
Fair Value
ACCOUNTING
Fair Value – Carrying Amount
to P/L
Fair Value – Carrying Amount
to Amortized Cost as
discount/premium
Fair Value – Carrying Amount
to OCI
Cumulative gains/losses
previously recognized:
• Derecognized as an
adjustment to the
measurement of the
FA on reclassification
date
• The derecognition of
cumulative
gains/losses -> not
affect P/L
Update CA of the FVPL on
reclassification date.
Adjustments recognized ->
P/L
Sub. FV Changes -> OCI
Cum. Bal. of gain/loss prev.
recognized in OCI ->
transferred in P/L, as
reclassification adjustment
EXCEPTION
Only debt instruments can be reclassified
•
•
Equity instruments cannot be reclassified because they do not qualify under the SPPI test
FA cannot be reclassified into or out of the “designated at FVPL” and “FVOCI-election” –
classifications are available only on initial recognition and are irrevocable
IMPAIRMENT ON RECLASSIFICATION DATE
Impairment reqs in in PFRS 9 for receivables also applicable to investments in FA.
Only debt-type financial assets @ amortized cost/FVOCI(man)are applicable to the
impairment requirements.
Expected credit losses on Reclassification date
 FA previously measure @ FVPL are reclassified to AC/FVOCI(man)
 No application for impairment when FA is reclassified to FVPL
Commencement
Retention
Cessation
FVPL to FVOCI
FVOCI to AC
FVOCI to FVPL
FVPL to AC
AC to FVOCI
AC to FVPL
DIVIDENDS
DATE OF DECLARATION – the BOD formally announces the distribution of dividends
DIVIDEND ON
SHARE SPLIT
When the investee calls in issued shares and replaces them with new shares, normally for a larger
number of shares but with a corresponding reduction in par value.
•
Split up- old shares are replaced with a larger number of new shares but with a
•
corresponding decrease in par value
Split down (reverse share split)- old shares are replaced with smaller number of shares but
with a corresponding increase in par value.
Accounting for share split
Investment measured @ Fair Value
Investment measured @ cost
Change in fair value- unrealized gain/loss P/L/FVOCI
Memo entry only
DETACHABLE WARRANTS
 Entity acquires 2 instruments
1. Bonds- debt instrument, measured @ AC
2. Warrants- equity instrument, measured @ FV
 Upon expiration, CA of share warrants is written off as loss
RISKS OF FINANCIAL INSTRUMENTS
1. Credit risk- risk that one party to a financial instrument will cause a financial loss for the other
party by failing to discharge an obligation. (“Cannot collect”)
2. Liquidity risk- risk that an entity will encounter difficulty in meeting obligations associated with
financial liabilities that are settled by delivering cash or another financial asset. (“Cannot pay”)
3. Market risk- risk that the fair value or future cash flows of a financial instrument will fluctuate
(Currency, Interest rate, other price)
INVESTMENTS IN ASSOCIATES
OTHER EVIDENCES OF SIGNIFICANT INFLUENCE
01 Representation in the BOD
02 Participation in policymaking process
03 Material transaction between the investor & investee
04 Interchange of managerial personnel
05 Provision of essential technical information
VOTING RIGHTS
For significant influence to exist, the investments should provide the investor voting
rights.
•
These are usually obtained from holding ordinary shares, since preference shares
are not accounted for.
ACCOUNTING FOR INVESTMENT IN ASSOCIATE
EQUITY METHOD
o
o
Investment initially recognized at cost
Investment are Subsequently Adjusted for the investors share in the investee's Change In
Equity (profit or loss, dividends, and other comprehensive income).
o
It provides more informative reporting of the investor's interest in the associate.
COST FORMULAS
SAMPLE PROBLEM:
SOLUTION:
INVENTORY ESTIMATION
APPLICATIONS:
1. AVERAGE COST METHOD
Cost Ratio Computation:
2. FIFO COST METHOD
Cost Ratio Computation:
FORMULAS:
*Departmental Transfer In – transfer from other branches to yours
*Departmental Transfer Out – transfer from your branch to other branches
*Net Mark-Up = Markups – Markup Cancellation
*Net Markdown = Markdown – Markdown cancellation
*Abnormal Losses – usually arise from theft or casualty
SAMPLE PROBLEM:
KRISHA Company, a listed company, is currently preparing its semi-annual report
for the six-month period ended June 30, 2023 for filing to Securities and Exchange
Commission. Since the physical count will be costly and disruptive of its operations, the
company decided to engage your services as an accountant to estimate the amount of its
ending inventory in one of its departments by using the retail inventory method. The
following primary information was provided to you:
Cost
Beginning Inventory
Gross purchases
Purchase returns
Purchase allowances
Purchase discounts
Freight In
P2,760,000
8,740,000
1,035,000
230,000
190,440
335,800
Retail
P3,565,000
12,190,000
1,380,000
Additional data were also provided as follows:
a. Markups amounted to P1,242,000, while markup cancellations amounted to P207,000.
b. Markdowns amounted to P1,035,000, while markdown cancellations amounted to
P138,000.
c. Goods costing P2,070,000 and with a total retail price of P2,760,000 were transferred
to other branches while goods with total retail price of P3,680,000 and total cost of
P2,875,000 were transferred from other branches.
d. Inventory with total cost of P86,250 were lost due to usual and ordinary circumstances.
Related lost revenue from these lost goods totaled P115,000.
e. Due to unusual circumstances, goods with total selling price of P1,495,000 were lost.
Related records showed that these had total cost of P1,150,000.
f. Data about the revenues are the following:
Gross sales
P10,580,000
Sales discounts
264,500
Sales allowances
161,000
Sales returns
483,000
Employee discounts
345,000
Requirement:
Determine the estimated cost of inventory as of June 30, 2023 and cost of goods sold for
the six-month ending June 30, 2023 under each of the following independent retail
inventory methods:
1. Average method
2. FIFO cost method
SOLUTIONS:
1. AVERAGE METHOD
2. FIFO COST METHOD
AGRICULTURE
SCOPE OF PAS 41
Inclusions
PAS 41, applies to the following when they relate to agricultural activity
1. Biological assets except bearer plants
2. Agricultural produce at the point of harvest
3. Unconditional government grants related to biological assets
Exclusions
1. Land related to agricultural activity
2. Bearer plants except agri-produce of bearer plants
3. Government grants related to bearer plants
4. Intangible assets related to agricultural activity
DEFINITION OF TERMS
1. Biological Assets- are living animals and living plants
Classifications:
As to consumption
a. Consumable Bio Assets- those that are to be harvested as agricultural produce or sold
as biological assets
b. Bearer bio assets- those that are held to bear produce. Only the agricultural produce is
harvested while the biological asset remains.
As to maturity
a. Mature biological assets – those that have attained harvestable specifications (for
consumable bio assets) or are able to sustain regular harvests (for bearer bio assets)
b. Immature bio assets – those that DO NOT attained harvestable specifications or are able
to sustain regular harvests
2. AGRICULTURAL PRODUCE – the harvested produce of the entity’s bio assets; not yet processed
(PROCESSED are treated as INVENTORIES)
3. AGRICULTURE – the management of an entity of the biological transformation and harvest of
biological assets for sale or for conversion into agri produce or into additional bio assets
Features of Agriculture
a. Capability to change – living animals and plants are capable of biological transformation
i. Asset changes through:
• Growth – an increase in quantity or improvement in quality of an animal or plant
• Degeneration – a decrease in quantity or deterioration in quality of animal or plant
• Procreation – creation of additional living animal or plant
ii. Production of agri produce such as latex, tea leaf, wool and milk
b. Management of change – the agri activity must be “managed” to facilitate bio transformation
by enhancing or at least stabilizing conditions necessary for the process to take place.
c. Measurement of change
SAMPLE PROBLEM
REQUIREMENTS:
Compute for the:
a. Biological Assets
b. PPE
c. Agri Produce
d. Inventory
SOLUTION:
change in FVLCS during the period
price change
physical change
REQUIREMENTS:
a. Total gain or loss from the
b. Change in FVLCS due to
c. Change in FVLCS due to
PROPERTY, PLANT AND EQUIPMENT PART 1
c. Land and/or building classified as investment property under PAS 40 Investment Property
d. Property held for sale in the ordinary course of business
e. Assets classified as held for sale under PFRS 5
f. Biological assets related to agricultural activity, other than bearer plants
g. Intangible assets
h. Minor spare parts and short-lived stand-by equipment
RECOGNITION
1. It is probable that future economic benefits associated with the item will flow to the entity; and
2) The cost of the item can be measured reliably
INITIAL MEASUREMENT
a. Purchase price, including import duties and nonrefundable taxes, after deducting trade discounts
and rebates.
b. Cost directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by the manager.
c. Initial estimate in dismantling and removing the item and restoring the site on which it is located,
the obligation for which an entity incurs.
Directly attributable cost
a. Cost of employee benefits arising directly from the acquisition of the PPE.
b. Cost of site preparation.
c. Initial delivery and handling cost.
d. Installation and assembly cost
e. Professional fees
f. Cost of testing whether the asset is functioning properly.
Measurement after recognition
After initial recognition, the entity shall choose either the cost model or revaluation model as the
accounting policy for PPE. It shall be applied to an entire class.
Cost Model
PPE are carried at cost less any accumulated depreciation and any accumulated impairment loss.
Revaluation model
PPE are carried at revalued carrying amount (Fair Value at the date of revaluation less
subsequent accumulated depreciation and the subsequent impairment loss).
COSTS EXPENSED OUTRIGHT
• Costs of opening a new facility
• Costs of introducing a new product or service
• Costs of conducting business in a new location or with a new class of customers (including
costs of staff training)
• Administration and other general overhead costs
CESSATION OF CAPITALIZATION OF COSTS
The PPE is in the location and condition necessary for it to be capable of operating in the manner
intended by management
Acquisition of Property
There are many ways of acquiring a property and each presents a costing problem for accounting
purposes, namely:
1. Cash Basis
2. On account subject to cash discount
3. installment basis
4. issuance of share capital
5. Issuance of bonds payable
6. Exchange
7. Donation
8. Government grant
9. Construction
Acquisition on Cash Basis
The cost of the PPE is the cash price equivalent at the recognition date. The cost simply includes
the cash basis paid plus the cost directly attributable cost such as freight, installation cost and
other cost necessary necessary in bringing up the asset to the location and the condition for the
intended use. Moreover, when several assets are acquired at a “lump sum price”, it is necessary to
apportion the single price to the assets acquired on the basis of relative fair value,
Example:
Land and Building are acquired at a single cost of Php 5,500,000. At the time of the acquisition the
land has a fair value of Php 1,000,000 and the building PHP 4,000,000
Acquisition on Account
When an asset is acquired on account subject to a cash discount, the cost of the asset is equal to
the invoice price minus the discount, regardless of whether the discount is taken or not. If the
discount is not taken, the same is charged to purchase discount lost account.
Method of Recording
a. Gross Method
b. Net Method
Example problem: An equipment is purchased for 100,000, 2/10, n/30.
Gross Method
1. To record acquisition
Equipment 100,000
Accounts payable 100,000
2. To record the payment w/in the discount period:
Accounts Payable
100,000
Cash
98,000
Equipment
2,000
3. To record the payment beyond the discount period
:Accounts Payable
100,000
Purchase discount lost
2,000
Cash
100,000
Equipment
2,000
Net Method
1. Acquisition
Equipment
Accounts Payable
2. Payment with in discount period
Accounts Payable
Cash
3. Payment beyond discount period
Accounts payable
Purchase discount lost
Cash
98,000
98,000
98,000
2,000
98,000
98,000
100,000
Acquisition on installment basis
If an asset is offered at cash price and at an installment price is purchased at the installment price,
the asset shall be recorded at cash price. The excess of the installment price over the cash price is
treated as an interest to be amortized over the credit period. If an asset is acquired by installment
with no available cash price, the asset is recorded at an amount equal to present value of all
payments using an implied interest rate.
Amortization of Discount on note payable
The effective interest method is used in amortizing the discount on note payable as interest
expense.
Issuance of Share Capital
If shares are issued then it shall be measured at the fair value of the consideration received.
When a property is acquired through the issuance of share capital, the property shall be
measured at an amount equal to the following in the order of priority
a. Fair value of the property received
b. Fair Value of the share capital
c. Par value of the share capital
Issuance of bonds payable
The entity shall measure the financial liability at fair value plus transaction cost that are directly
attributable to the issue of the financial liability.
Accordingly, the asset acquired by issuing the bonds payable is measured in the following order:
a. Fair Value of the bonds payable
b. Fair Value of the asset received
c. Face amount of the bonds payable.
Exchange
The cost of an item of PPE acquired in exchange for a non-monetary asset or a combination of
monetary and non-monetary assets is measured at fair value.
However, the exchange is recognized at carrying amount under the following
circumstances:
a. The exchange transaction lacks commercial substance.
b. The fair value of the asset given or the fair value of the asset received is no reliably
measurable.
The exchange transaction has a commercial substance when the cash flows of the asset
received differ significantly from the cash flows of the asset transferred.
Exchange with commercial substance
If a property in an exchange, the cost of the property is equal to the following:
a. Fair Value of asset given plus any cash payment- on the part of the payor.
b. Fair Value of asset given minus any cash received- on the part of the recipient.
Exchange- no commercial substance
If the exchange transaction lacks commercial substance, the acquired item of PPE is measured at
the carrying amount of the asset given. No gain or loss is recognized when the exchange lacks
commercial substance.
Trade In
Trade in is a form of exchange. A property is acquired by exchanging another property as part of
payment and the balance payablein cash or any other form of payment in accordance with
agreed terms. It involves a non dealer acquiring the asset from a dealer.
Asset is recorded at the ff in the order of priority :
a. Fair Value of asset given plus cash payment.- Asset is recorded at the fair value of the asset
given plus cash payment
b. Trade in value of asset given plus cash payment (in effect, this is the fair value of the asset
received)- If the fair value of asset is not clearly determinable , the new asset is recorded at the
trade in value of the asset given plus the cash payment .
Donation
Contributions received from shareholders shall be recorded at fair value with the credit going to
donated capital.
Expenses incurred in connection with the donation shall be charged to the donated
capital account. Capital gift or grants shall be recorded at fair value. This is generally subsidies
therefore recorded as income. In the rare case when capital gifts or grants are not subsidies, the
offsetting credit is a liability account until the initial restrictions are met. When the initial
restrictions are met, the liability is transferred as income.
Construction
The cost of a self-constructed asset is determinable using the same principles as for an acquired
asset.
The cost of self-constructed property, plant and equipment shall include:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental overhead specifically identifiable or traceable to the construction.
If incremental overhead is not specifically identifiable, allocation of overhead may be done
on the basis of direct labor cost or direct labor hours.
Derecognition
PAS 16 prescribes that 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. The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be included in profit or loss when the item is derecognized. The gain or loss from
the derecognition is calculated as the net disposal proceeds (usually income from sale of item) less
the carrying amount of the item
.Depreciation
Depreciation is defined as the systematic allocation of the depreciable amount of an asset over
itsuseful life.
The items of property, plant and equipment are usually depreciated in order to maintain matching
principle – as they are in operation for more than 1 year, they assist in producing the revenues in
more than 1 year and therefore, their cost shall be spread among those years in order to match
the revenue they help to produce.
When dealing with the depreciation please do have 3 basic things in mind:
a. Depreciable amount: Depreciable amount is simply HOW MUCH you are going to depreciate.It
is the cost of an asset, or other amount substituted for cost, less its residual value.
b. Depreciation period: Depreciation period is simply HOW LONG you are going to depreciateand
it is basically asset’s useful life.
c. Useful life is the period over which an asset is expected to be available for use by an entity; or
the number of production or similar units expected to be obtained from the asset by an entity.
Factors that shall be considered when establishing item’s useful life:
1. expected usage of the item,
2. expected physical wear and tear,
3. technical or commercial obsolescence of the item, and
4. legal or other limits on the use of the asset.
5. Useful life and asset’s residual value (input to depreciable amount) shall be reviewed at least at
the end of each financial year.
Impairment
Reviewing the carrying amount of assets, determining their recoverable amount and impairment
loss, recognizing and reversing impairment loss and more. PAS 16 states that compensation from
third parties for items of property, plant and equipment that were impaired, lost or given up shall
be included in profit or loss when the compensation becomes receivable. For example, claim for
compensation of damage on insured property from insurance company is recognized to profit or
loss when insurance company accepts claim, closes the case and agrees to compensate .
Property held for sale
If the asset is available for immediate sale in the present condition with in one year from the date
of classification, such asset shall be excluded from PPE but presented separately in the current
asset.PFRS 5 , paragraph 15, further provides that an entity shall measure a noncurrent asset
classified as held for sale at the lower carrying amount of fair value less cost of disposal. The writedown to fair value less cost of disposal is treated as an impairment loss. PFRS 5 , para
PROPERTY, PLANT AND EQUIPMENT PART 2
SAMPLE PROBLEMS:
DEPLETION OF MINERAL RESOURCES
Changes in estimates- estimates of recoverable reserves from the natural resources and any
residual value are reviewed at least at each year's end. Any revisions are accounted for as
changes in accounting estimates and treated prospectively under PAS 8.
SAMPLE PROBLEM:
In 20x1, ABC Co. acquired land for a total cost of 10M to be used to quarry marble, limestone, and
construction aggregates. Expenditures incurred in the exploration for and evaluation or mineral
resources before the technical feasibility and commercial viability of extracting a mineral resource
are demonstrable and totaled 5M. Intangible development costs of drilling, tunnels, shafts, and
wells before the actual production totaled 5M. ABC Co. estimated total recoverable reserves of
100M units. Furthermore, ABC Co. expects to sell the land for 1.2M after the resource is depleted.
However, no buyer will pay for this price unless the mine is drained, filled, and leveled -a process
that costs 200k. It is ABC's policy to capitalize all exploration costs. Actual units quarried in 20x1
through 20x4 totaled 30M units. On January 1, 20x5, ABC Co. estimated that the remaining
recoverable reserves are only 25M units and after the reserves are exhausted, the land will be sold
for 800k. The costs of disposals are estimated at 300K. Actual units quarried in 20x5 totaled 6M.
REQUIREMENTS:
a. Depletion charge in 20x5.
b. Carrying Amount of the wasting asset as of December 31, 20x5.
*Trust Fund Doctrine
*Wasting Asset Doctrine
FORMULA IN MAXIMUM AMOUNT OF DIVIDEND COMPUTATION:
Unrestricted Retained Earnings
xxx
Add: Accumulated Depletion
xxx
Total
xxx
Less: Depletion in ending inv.
xxx
Capital Liquidated
xxx
Maximum amount of dividend
(xxx)
xxx
SAMPLE:
ACCOUNTING FOR DECOMMISSIONING AND RESTORATION COST
-Decommissioning and restoration cost are capitalized only if the entity has incurred a present
obligation for such costs. Present obligation arises from either legal obligation or constructive
obligation.
-Initially measured at Fair Value