ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are tangible items that:

a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
b) are expected to be used during more than one period.
Property, plant and equipment include animal related to recreational activities and
bearer plant. A bearer plant is a living plant that:
a) is used in the production or supply of agricultural produce;
b) is expected to bear produce for more than one period; and
c) has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.

Initial Recognition
Items of property, plant, and equipment should be recognized as assets when it is
probable that:
a) the future economic benefits associated with the asset flow to the enterprise; and
b) the cost of the asset can be measured reliably.

INITIAL MEASUREMENT
An item or property, plant and equipment that qualifies for recognition as an asset shall
be measured at its cost.

Components of Cost
Purchase price, including import duties and nonrefundable purchase taxes and any
directly attributable costs of bringing the asset to working conditions for its intended use.
Any trade discounts and rebates are deducted in arriving at the purchase price.

Directly Attributable Costs

1) Cost of testing whether the asset is functioning properly, before deducting the net
proceeds from selling any items produced while bringing the asset to that
location and condition;
PPE – Proceeds before intended use (Amendments to IAS 16) amends the
standard to prohibit deducting from the cost of an item of PPE any proceeds
from selling items produced while bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
management. Instead, an entity recognizes the proceeds from selling such items,
and cost of producing those items, in profit or loss.
2) Cost of site preparation;
3) Professional fees of architects and engineers;
4) Estimated cost of dismantling and removing the asset and restoring the site, to
the extent that it is recognized as a provision (this is popularly known as “asset
retirement obligation” and this obligation is incurred in the act of acquiring a
long-term operating asset to restore costs in the future when the asset is retired);
5) Installation and assembly cost
6) Initial delivery and handling cost;
 7) Cost of employee benefits arising directly from the construction or acquisition of
the item or property, plant and equipment.

Cost of Machinery When Purchased

1) Nonrefundable sales tax;
2) Cost of water device to keep machine cool;
3) Cost of adjustment to machinery for operational efficiency and to increase
capacity;
4) Construction of base (cost of safety rail and platform surrounding machine);
5) Purchase price;
6) Insurance while in transit;
7) Freight, handling, storage and other cost related to the acquisition;
8) Installation cost, including site preparation and assembling;
9) Cost of testing and trial run, and other cost necessary in preparing the machinery
for use;
10)Fees paid to consultants for advice on acquisition of the machinery;
11)Unloading charge;
12)Initial estimate of cost of dismantling and removing the machinery and restoring
the site on which it is located.

Old and New Installation Cost:

a) The machinery is moved to new location – the undepreciated old installation cost
is expensed. New installation cost is charged to the NEW asset.
b) The machinery is removed and retired – the undepreciated old installation cost is
expensed. New installation cost is charged to the NEW asset. In addition, the
removal cost is also charged to expense.

Royalty Payment on Machines

Royalty payment on machines purchased should be accounted as follows:
a) If based on units produced – included as part of manufacturing overhead
b) If based on units produced and sold – reported as selling expense.

Costs Chargeable to Land

1) Purchase price;
2) Survey cost;
3) Cost to register the land and other cost of transferring the title in the name of the
buyer;
4) Legal fees and other expenditures for establishing clean title;
5) Commission cost paid to brokers or agents;
6) Cost of clearing unwanted old structures, less proceeds from salvage excluding
demolition cost;
7) Liabilities on the land assumed by the buyer (e.g., mortgages, encumbrances
and interest on such mortgages assumed by the buyer.);
8) Unpaid real property taxes on the land up to the date of acquisition assumed by
the buyer;
9) Payments to tenants to convince them to vacate the premises;
 10)Cost to relocate or reconstruct property of others occupying the lands so as to
obtain ownership;
11)Option cost of land acquired. If the land is not acquired, the cost of option is
treated as expense;
Option price
The price to be paid by an investor for an option contract, based upon the
security of the underlying asset and the time left until option expires.
Earnest Money Deposit
Down payment made by a purchaser of real estate as evidence of good faith; a
deposit or partial payment. Earnest money therefore is capitalizable cost of the
asset acquired.
12)Cost of permanent improvement such as draining cost, cost of filling the land,
cost of grading and leveling.

Special Notes:
1) Land improvements
a) Not subject to depreciation
Examples: cost of surveying, clearing grading and leveling, subdividing.
Treatment: capitalizable cost of the land
b) Depreciable
Examples: fences, water systems, drainage systems, side-walks and
pavements, landscaping.
Treatment:
1. Part of blueprint of the building – building
2. Not part of the blueprint – land improvement
2) Special assessment – this is capitalizable cost of the land.
3) Real property tax – this should be expensed when incurred. However, unpaid
real property taxes accruing as of the date of acquisition assumed by the buyer,
should be capitalized.

Land Account
Statement of financial position classification
Items Accounting Treatment
1. Land used as a plant site Property, plant and equipment
2. Land held for a currently Investment property
undetermined use
3. Land held for long-term capital Investment property
appreciation
4. Land held as a site for a building Investment property
being constructed or developed for
future use as investment property
5. Land leased out under operating lease Investment property
6. Land leased out under finance lease Not reported in the books of the company
7. Land held definitely as a future plant Property, plant and equipment
site
8. Land held for the sale in the ordinary Inventory
 course of business
9. Land held for sale under PFRS 5 Classified as noncurrent asset held for
sale, presented as current asset.
10. Land related to agricultural activity Investment property or property, plant
and equipment

Building
Statement of financial position classification
Items Accounting Treatment
1. Building used as a plant site Property, plant and equipment
2. Building being constructed or Investment property
developed for future use as
investment property
3. Building owned by the company and Investment property
leased out under operating lease
4. Building owned by the company and Not reported in the books of the company
leased out under finance lease
5. Building held for sale in the ordinary Inventory
course of business
6. Building held for sale under PFRS 5 Classified as noncurrent asset held for
sale, presented as current asset

Costs Chargeable to Building when Purchased

1) Purchase price;
2) Legal fees and other expenses incurred in connection with the purchase;
3) Liabilities on the building assumed by the buyer including unpaid real property
taxes on the building up to the date of acquisition assumed by the buyer;
4) Renovation and remodeling cost on the building to make it suitable for its
intended use;
5) Payments to tenants to convince them to vacate the premises.

Cost of Building when Constructed

1) Construction cost (materials, labor employed and overhead incurred during the
construction);
2) Building permit and licenses;
3) Architect fee;
4) Fees paid for supervision;
5) Excavation cost;
6) Expenditures for service equipment and fixtures made a permanent part of the
structure;
7) Expenditures incurred during the construction period such as interest on
construction loans (i.e., borrowing cost) and insurance;
8) Cost of security fences while construction and other temporary buildings to house
constructions materials and tools;
9) Cost of demolishing old building, less proceeds from salvage.
 As provided by PIC Q&A No. 2012-02, “demolition costs of the old building can
be considered as part of costs of site preparation and therefore, may be
capitalized. Although there is no clear guidance as to what account (i.e., land or
new building) such demolition costs 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.

Acquisition of land and old building Treatment of the demolition cost

and the:
1. Old building is to be demolished so Part of the cost of the new building
as to male room for the
construction of the new building
during the same period.
2. Old building is to be demolished Part of the cost of the land or included
but the construction of the new in the building using a clearing
building is to be made next account.
accounting period.
Special Notes:
1) Insurance
a) Taken during construction – part of the cost of the building
b) Not taken and there is a claim for damages – claims for damages shall be
treated as expense
2) Building fixtures (e.g., shelves, cabinet and partitions)
a) Immovable – part of the cost of the building
b) Movable – charged to furniture and fixtures and depreciated over their
useful life.
3) Savings or loss on construction – not recognized as an addition or deduction
to the cost of the self-constructed asset. If there are savings on construction, the
company will eventually benefit through reduced depreciation expense,
conversely if there is loss on construction, the company will eventually incur
additional expense through increased depreciation expense.
Acquisition of Land and a Building (PIC Q&A No. 2012-02)
The cost of the property acquired should be allocated to the land and the building at
date of acquisition based on their relative fair values. The specific intention of the
acquiring entity to demolish rather than use a building does not affect its fair value that
will be used in the cost allocation.
Scenario Treatment of the Treatment of Net
purchase price other common demolition
costs on the cost
acquisition
1. Old building is unusable Purchase price is Charge to the New building
AND likely to be allocated entirely land
demolished right away to the land. In
(i.e., the fair value of the other words, the
building is insignificant) cost of old building
is included as part
 of cost of land.
2. Old building is usable in
the meantime and the
old building will be
classified as:
a. PPE Allocate the Allocate to the New building
purchase price to land and
the land and building based
building based on on the relative
the relative fair fair values.
values.
b. Inventories The land and Added to the Added to the
building will be cost of the cost of the
classified as one inventories inventories
item under
inventories.
c. Investment property:
i. @ cost model The land and Allocate to the New building
building will be land and as investment
classified as two building based property
separate items on the relative
under Investment fair values.
Property at their
allocated cost
determined using
the relative fair
value
ii. @ fair value The land and Added to the New building
model building will be cost of the as investment
classified as one investment property
item under property
Investment
Property
3. Old build is usable but Allocate the Allocate to the New building
likely to be demolished purchase price to land and old
right away the land and old building using
building using relative fair
relative fair values values
(allocated cost of (allocated cost
the building is of the building is
charged to loss) charged to loss)

Common cost on the acquisition includes but not limited to the following:
1. Payment to broker and other real estate agents in order to acquire the properties;
2. Unpaid real property taxes as of the date of acquisition;
3. Liabilities such as mortgage including unpaid interest assumed by the buyer;
4. Option cost of the properties acquired;
5. Payment to tenants to vacate the premises; and
6. Escrow fees on the properties acquired.

Illustration: Old Building will not be Demolished

On March 1, 2021, Abe Tayde Co. acquired land and building by paying P8,000,000
and assuming a mortgage of P1,000,000. The building will be used by Abe Tayde Co.
as its head office.

Draining cost and filling the land 35,000

Cost of option of the acquired properties 20,000
Escrow fees on the properties acquired 11,000
Broker’s fees on the properties acquired 10,000
Cost of relocating and reconstructing the property
belonging to others in order to acquire the property 23,000
Registration fees and transfer of title 13,000
Legal fees for contract to purchase land 11,000
Cost of windows broken by vandals 22,000
Cost of grading and levelling the land 8,000
Title insurance 15,000
New fence surrounding the property 40,000

Required:
Determine how to account the above costs under each of the following cases:
CASE NO. 1: Assume that on the date of acquisition, the land and building have fair
values of P9,000,000 and P3,000,000, respectively.
CASE NO. 2: assume that on the date of acquisition, the old building has a minimal fair
value.

SOLUTION:
CASE NO. 1

Land Old Building

Purchase price 6,750,000 2,250,000
Draining cost and filing the land 35,000 -
Cost of option of the acquired properties 15,000 5,000
Escrow fees on the properties acquired 8,250 2,750
Broker’s fee on the properties acquired 7,500 2,500
Cost of relocating and reconstructing the
property belonging to others in order to
acquire the properties 17,250 5,750
Registration fees and transfer of title 13,000 -
Legal fees for contract to purchase land 11,000 -
Cost of grading and levelling the land 8,000 -
Title insurance 15,000 -
Adjusted Balance 6,880,000 2,266,000
Notes:
 The total cost (P8M + P1M) and common cost is allocated based on the relative fair
values of the properties (i.e., 9M/12M for the land and 3M/12M for the old building).
 The new fence surrounding the property is charged to land improvement.
 Cost of windows broken by vandals is charged to expense.

CASE NO. 2

Land Old Building

Purchase price 9,000,000 -
Draining cost and filing the land 35,000 -
Cost of option of the acquired properties 20,000 -
Escrow fees on the properties acquired 11,000 -
Broker’s fee on the properties acquired 10,000 -
Cost of relocating and reconstructing the
property belonging to others in order to
acquire the properties 23,000 -
Registration fees and transfer of title 13,000 -
Legal fees for contract to purchase land 11,000 -
Cost of grading and levelling 8,000 -
Title insurance 15,000 -
Adjusted balances 9,146,000 -
Notes:
 the common costs just like cost of option, escrow fees and broker’s fees etc. is
allowed to the land only.
 The new fence surrounding the property is charged to land improvement.
 Cost of windows broken by vandals is charged to expense.

Illustration: Old Building will be Demolished

On March 1, 2021, Rosemarie Reyes Co. acquired land and building by paying
P6,000,000 and assuming a mortgage of P1,000,000. The old building will be
demolished for the construction of a new building.

Special assessment 4,600

Cost of option of the land not acquired 7,000
Cost of grading and levelling the land 8,000
Cost of relocating and reconstructing the property belonging to
others in order to acquire the properties 23,000
Registration fees and transfer of title 13,000
Title insurance 15,000
Liability insurance taken during construction 12,000
Legal fee for title investigation 25,000
Materials used in construction 600,000
Labor paid for the construction 300,000
Other overhead cost incurred as a result of construction 220,000
Safety fence around construction site 35,000
Driveway, parking bay and safety lighting 19,000
Saving on construction 27,000
Cost of changes during construction to make new building
more energy efficient 50,000

Require:
Determine how to account the above costs under each of the following cases:
CASE NO. 1: Assume that on the date of acquisition, the building is usable but likely to
be demolished right away and the land and building have fair values of P3,500,000 and
P5,000,000, respectively.
CASE NO. 2: Assume that on the date of acquisition, the old building is unusable and
has minimal fair value.

SOLUTION:
CASE NO. 1
Land Old building New building
Purchase price 6,125,000 875,000 -
Special assessments 4,600 - -
Cost of grading and levelling the land 8,000 - -
Cost of relocating and reconstructing
the property belonging to others in
order to acquire the properties 20,125 2,875 -
Registration fees and transfer of title 13,000 - -
Title of insurance 15,000 - -
Liability insurance taken during
construction - - 12,000
Legal fees for title investigation 25,000 - -
Materials used in construction - - 600,000
Labor paid for the construction - - 300,000
Other overhead cost incurred as
result of construction - - 220,000
Safety fence around construction site - - 35,000
Cost of changes during construction
to make new building more energy
efficient - - 50,000
Adjusted balances 6,210,725 877,875 1,217,000
Notes:
 The entire P877,875 allocated cost of the old building is charged to loss.
 The total cost (P6M + 1M) and common cost is allocated based on the relative fair
values of the properties (i.e., 3.5M/4M for the land and .5M/4M for the old building).
 The cost of relocating and reconstructing the property belonging to others in order to
acquire the properties allocated to the land and building.
 The driveway, parking bay and safety lighting is charged to land improvement.
 Cost of option of the land not acquired is charged to expense.
 Savings on construction is ignored in the computation.
CASE NO. 2
 Land Old Building New Building
Purchase price 7,000,000 - -
Special assessments 4,600 - -
Cost of option of the land not acquired - - -
Cost of grading and leveling the land 8,000 - -
Cost of relocating and reconstructing the
property belonging to others in order to
acquire the properties 23,000 - -
Registration fees and transfer of title 13,000 - -
Title insurance 15,000 - -
Liability insurance taken during
construction - - 12,000
Legal fee for title investigation 25,000 - -
Materials used in construction - - 600,000
Labor paid for the construction - - 300,000
Other overhead cost incurred as result
of construction - - 220,000
Safety fence around construction sit - - 35,000
Driveway, parking bay and safety
lighting - - -
Savings on construction - - -
Cost of changes during construction to
make new building more energy efficient - - 50,000
Adjusted balances 7,088,600 - 1,217,000
Notes:
 The cost of relocating and reconstructing the property belonging to others in order to
acquire the properties is allocated to the land only.
 The driveway, parking bay and safety lighting is charged to land improvement.
 Cost of option of the land not acquire is charged to expense.
 Savings on construction is ignored in the computation.

The entity acquired the property in the current reporting period, with the intention of
demolishing the old building and replacing it with a new building. The entity will not
use the old building prior to its demolition. The new building will be used as:
PPE Inventory Investment
Property
Cost of new Construction cost Allocated carrying Construction cost
building plus demolition cost value of the old plus demolition cost
building plus
construction cost
and demolition cost
Carrying value of Charged to loss on Capitalized as Charged to loss on
the old building retirement inventory retirement

Illustration: New building will be used as PPE

On January 2, of the current year, Kylie Corporation purchased a parcel of land with an
old building for P4,000,000. The appraised values of the land and building are
P3,000,00 and P2,000,000, respectively. The building is estimated to have a remaining
useful life of 5 years. On April 1 of the current year, the company began demolishing the
old building to make room for a new one. The construction ended on December 31 of
the current year. The following additional costs are incurred:

Cost of survey P40,000

Demolition cost 100,000
Construction cost of the new building 2,000,000
Building permit fees 120,000

Assume that the new building is to be used as property, plant and equipment.

Required:
Determine the following:
1) Cost of the land and old building as property, plant and equipment at initial
recognition.
2) Loss on retirement of old building to be recorded in the profit or loss.
3) Cost of the new building.

SOLUTION:
Requirement No. 1
Appraised value Ratio Allocation
Land 3,000,000 3/5 2,400,000
Old building 2,000,000 2/5 1,600,000
Total 5,000,000 5/5 4,000,000

Purchase price allocated to land 2,400,000

Cost of survey 40,000
Total cost of the land 2,440,000

Cost allocated to building 1,600,000

Requirement No. 2
Cost of old building 1,600,000
Less: Accumulated depreciation (1.6M/5 x 3/12) 80,000
Carrying value of old bldg. = Loss on retirement 1,520,000

Requirement No. 3
Demolition cost 100,000
Construction cost of the new building 2,000,000
Building permit fees 120,000
Total cost of the new building 2,220,000

Illustration: New Building will be held as investment Property

On January 2, of the current year, Jeff Corporation purchased a parcel of land with an
old building for P4,000,000. The appraised values of the land and building are
P3,000,00 and P2,000,000, respectively. The building is estimated to have a remaining
useful life of 5 years. On April 1 of the current year, the company began demolishing the
old building to make room for a new one. The construction ended on December 31 of
the current year. The following additional costs are incurred:

Cost of survey P40,000

Demolition cost 100,000
Construction cost of the new building 2,000,000
Building permit fees 120,000

Assume that the new building is to be held as investment property.

Required:
Determine the following:
1) Cost of the land and old building as investment property at initial recognition.
2) Loss on retirement of old building to be recorded in the profit or loss.
3) Cost of the new investment property.

SOLUTION:
Requirement No. 1

Appraised value Ratio Allocation

Land 3,000,000 3/5 2,400,000
Old building 2,000,000 2/5 1,600,000
Total 5,000,000 5/5 4,000,000

Purchase price allocated to land 2,400,000

Cost of survey 40,000
Total cost of the land 2,440,000

Cost allocated to building 1,600,000

Requirement No. 2
Cost of old building 1,600,000
Less: Accumulated depreciation (1.6M/5 x 3/12) 80,000
Carrying value of old bldg. = Loss on retirement 1,520,000

Requirement No. 3
Demolition cost 100,000
Construction cost of the new building 2,000,000
Building permit fees 120,000
Total cost of the new building 2,220,000
Note: The same treatment will apply if the new building is to be accounted as PPE or
Investment Property.

Illustration: New Building will be Held as Inventory

On January 2, of the current year, Manny Corporation purchased a parcel of land with
an old building for P4,000,000. The appraised values of the land and building are
P3,000,00 and P2,000,000, respectively. The building is estimated to have a remaining
useful life of 5 years. On April 1 of the current year, the company began demolishing the
old building to make room for a new one. The construction ended on December 31 of
the current year. The following additional costs are incurred:

Cost of survey P40,000

Demolition cost 100,000
Construction cost of the new building 2,000,000
Building permit fees 120,000

Assume that the new building will be classified as inventory.

Required:
Determine the following:
1) Cost of the land and old building as property, plant and equipment at initial
recognition.
2) Loss on retirement of old building to be recorded in the profit or loss.
3) Cost of the inventory.

SOLUTION:
Requirement No. 1

Appraised value Ratio Allocation

Land 3,000,000 3/5 2,400,000
Old building 2,000,000 2/5 1,600,000
Total 5,000,000 5/5 4,000,000

Purchase price allocated to land 2,400,000

Cost of survey 40,000
Total cost of the land 2,440,000

Cost allocated to building 1,600,000

Requirement No. 2
Zero, the carrying value of the old building is inventoriable.

Requirement No. 3
Cost of new building as part of inventory:
Carrying value of the old building 1,520,000
Demolition cost 100,000
Construction cost of the new building 2,000,000
Building permit fees 120,000
Total cost of the new building 3,740,000

The carrying value of old building is computed as follows:

Cost of building 1,600,000
Less: Accumulated depreciation (1.6M/5x3/12) 80,000
Carrying value of old bldg. 1,520,000

The entity acquired the property in a prior reporting period and used it as owner-
occupied property. In the current reporting period, the entity decides to demolish the
old building and replace it with a new building. New building will be used as:
PPE Inventory Investment
Property
Cost of the new Construction cost Construction cost Construction cost
building plus demolition cost plus demolition cost plus demolition cost
Carrying value of Re-compute the related depreciation charges on the building to
the old building at depreciate the remaining carrying value of the building over the
the time it makes remainder of its life (or the remaining period before it is
the decision to demolished). Hence, the old building will have a nil value at the
demolish the old date of the planned demolition.
building at a
specific date in the
future
If for some reason Charged to loss on retirement
there is a remaining
carrying value of
the old building at
the time of
demolition

Illustration:
On January 2, 2019, Andray Corporation purchased a parcel of land with an old building
for P4,500,000. The company appropriately computed the cost of the land and building
at P3,000,000 and P1,500,000, respectively. The building is estimated to have a
remaining useful life of 5 years. On January 1, 2020, the company decided that it will
demolish the old building to make room for a new one starting on January 1, 2021. The
construction of the new building started on January 5, 2021 and ended on December
31, 2021. The following costs are incurred during the construction period:

Demolition cost 100,000

Construction cost of the new building 2,000,000
Building permit fees 120,000
Case No. 1: assume that the new building is to be used as property, plant and
equipment.
Case No. 2: assume that the new building is to be used as investment property.
Case No. 3: Assume that the new building is to be held for sale in the ordinary course
of business.

Required:
Determine the following:
1) Depreciation expense in 2019
2) Depreciation expense in 2020
3) Cost of the new asset constructed as of December 31, 2021.

SOLUTION: Note that the answers for the three cases would be the same.
Requirement No. 1
Cost of the old building 1,500,000
Divided by: Useful life 5
Depreciation expense in 2019 300,000

Requirement No. 2
Cost of the old building 1,500,000
Less: Accumulated depreciation, Jan. 1, 2020 300,000
Depreciation expense in 2020 1,200,000

The remaining period before the old building will be demolished is one year. Therefore,
depreciation in 2020 shall be equal to the book value so that at the beginning of the
construction period, the building will have a nil value.

Requirement No. 3
Construction cost of the new building 2,000,000
Demolition cost 100,000
Building permit fees 120,000
Cost of the new building 2,220,000

The new building shall be treated either as PPE (for case no. 1), investment property
(for case no. 2) or inventory (for case no. 3)

Illustration: Old Building is to be Demolished

On January, Jimmy Corporation purchased a parcel of land as a factory site for
P3,200,000. And old building on the property was demolished right away and
construction begun on a new warehouse that was completed April 30 of the same year.
Costs incurred (and cash inflows for the last two items sold) on the entire project are
listed below:

Cost of demolishing old building 280,000

Architect’s fees 317,000
Legal fees – title investigation 41,000
Construction cost 9,500,000
Interest on specific borrowings 140,000
Landfill for building site 193,000
Clearing of trees from building site 96,000
Insurance on building for one year beginning April 30 150,000
Temporary buildings used for construction activities 290,000
Land survey 40,000
Excavation of basement 132,000
Salvage material from demolition sold 18,000
Timber (after clearing of trees) sold 33,000
Cost of paving parking lot adjoining building 100,000
Cost of shrubs, trees, and other landscaping 130,000
Special assessment for street project 21,000
Building permit fees 171,000
Savings on construction 25,000

Required: Determine the cost of the following:

1) Land
2) New building
3) Land improvement

SOLUTION:
Requirement No. 1: Land
Purchase price 3,200,000
Legal fees – title investigation 41,000
Landfill for building site 193,000
Clearing of tress from building site 96,000
Timber (after clearing of tress) sold (33,000)
Land survey 40,000
Special assessment for street project 21,000
Total 3,558,000

Requirement No. 2: Building

Cost of demolishing old building 280,000
Architect’s fees 317,000
Construction costs 9,500,000
Interest on specific borrowings 140,000
Temporary buildings used for construction activities 290,000
Excavation for basement 132,000
Salvage materials from demolition sold (18,000)
Building permit fees 171,000
Total 10,812,000

Requirement No. 3: Land Improvement

Cost of paving parking lot adjoining building 100,000
Cost of shrubs, trees, and other landscaping 130,000
Total land improvement 230,000

Other Items and Their Treatment

1) Patterns and dies Accounting Treatment
a) Used for regular products of the PPE – depreciated over their useful life
company
b) Used for specially ordered Included as part of the cost of the special
products product
2) Containers Accounting Treatment
a) Returnable (big in units or great PPE or other noncurrent assets
bulk)
b) Returnable (small and involve Other noncurrent assets
small amounts)
c) Not returnable Expensed outright

ACQUISITION OF PROPERTY

Acquisition on Cash Basis

If the asset was acquired on a cash basis, the amount to be capitalized is equal to the
cash price or cash equivalents paid at the acquisition date plus incidental costs such as
freight, installation cost and other cost necessary in bringing the asset to working
condition for its intended use.

Illustration: Acquisition on cash basis – One type of PPE

On April 15 of the current year, Larry Co. purchased for P500,000 cash a delivery truck.
At the time of acquisition, Larry also paid P10,000 as a commission.

Required: Compute for the cost that should be assigned to the delivery truck and
prepare the journal entry to record the acquisition.

SOLUTION:
Cash price P500,000
Add: Commission 10,000
Cost of delivery truck P510,000

Journal entry:
Delivery truck 510,000
Cash 510,000

Illustration: Acquisition on Cash Basis – Basket Price

The Japeth Corporation acquired land, buildings, and equipment from a bankrupt
company at a lump-sum price of P1,800,000. At the time of acquisition, Japeth also paid
P120,000 to have the assets appraised. The appraisal disclosed the following values:
Land 1,200,000
Building 800,000
Equipment 400,000

Required: Compute for the cost to be assigned to land, building and equipment and
prepare the journal entry.

SOLUTION:
The cost assigned to the land, buildings, and equipment, respectively should be:

Appraised Values Fraction Allocated Cost

Land 1,200,000 12/24 960,000
Buildings 800,000 8/24 640,000
Equipment 400,000 4/24 320,000
Total 2,400,000 1,920,000

The appraiser’s fee of P120,000 is capitalized and allocated to land, building and
equipment. The journal entry should be:

Land 960,000
Buildings 640,000
Equipment 320,000
Cash (1.8M + 120K) 1,920,000

Acquisition on Account
If a PPE was acquired, the cost is equal to the invoice price less discount whether taken
or not. Two methods may be used in recording:
a. Gross method – on the acquisition date, the PPE is recorded at invoice price
before deducting the cash discount. On the payment date, the cash discount is
deducted from the invoice price by a credit to the PPE.
b. Net method – on the acquisition date, the PPE is recorded at invoice price net of
cash discount. This is preferable approach since PAS 16 required recording of
the PPE at the cash price equivalent at the recognition date.

Pro-forma Journal Entries:

Gross method:
Acquisition date Property, plant and equipment XX
A/P – nontrade (at gross amount) XX
Payment within the Accounts payable – nontrade XX
discount period Cash XX
Property, plant and equipment XX
Payment beyond the Accounts payable – nontrade XX
discount period Purchase discount lost XX
Cash XX
Property, plant and equipment XX
Net method:
Acquisition date Property, plant and equipment XX
A/P – nontrade (at net amount) XX
Payment within the Accounts payable – nontrade XX
discount period Cash XX
Payment beyond the Accounts payable – nontrade XX
discount period Purchase discount lost XX
Cash XX

Note: Purchase discount lost is treated as other operating expense.

Illustration: Acquisition on Account

On January 1 of the current year, Junmar Company acquired a machine with an invoice
price of P300,000 subject to a cash discount. The terms are 2/10, n/30. Junmar paid
freight and insurance during shipment of P8,000 and testing and installation cost of
P12,000. On the same date, Junmar also incurred cost of P5,000 in removing the old
machine prior to the installation of the new one. On January 8, Junmar paid the
account.

Required:
1) Compute for the cost of the machinery.
2) Under gross method, prepare all the necessary entries during the year
assuming the company paid the account on
a. January 8 b. January 30
3) Under net method, prepare all the necessary entries during the year assuming
the company paid the account on
a. January 8 b. January 30

SOLUTION:
Requirement No. 1
The cost that should be assigned to the machine should be:

Machine at invoice price P300,000

Less: cash discount (2% x P300,000) 6,000
Cash price equivalent P294,000
Add: Freight and insurance cost 8,000
Testing and installation cost 12,000
Cost of Machinery P314,000

Requirement No. 2
Gross Method: Journal entries

Jan. 1 Machine (300K + 8K + 12K) 320,000

Accounts payable – nontrade 300,000
Cash (8K + 12K) 20,000
Jan. 1 Loss on retirement of machine 5,000
 Cash 5,000
Jan. 8 Accounts payable 300,000
Machinery (300K x 2%) 6,000
Cash 294,000
(If payment is made on January 8)
Jan. Accounts payable 300,000
30 Purchase discount lost 6,000
Cash 300,000
Machinery (300K x 2%) 6,000
(If payment is made on January 30)

Requirement No. 3
Net Method: Journal entries
Jan. 1 Machine (300K + 8K + 12K) 314,000
Accounts payable – nontrade 294,000
[300Kx97%] 20,000
Cash (8K + 12K)
Jan. 1 Loss on retirement of machine 5,000
Cash 5,000
Jan. 8 Accounts payable 294,000
Machinery (300K x 2%) 294,000
(If payment is made on January 8)
Jan. Accounts payable 294,000
30 Purchase discount lost 6,000
Cash 300,000
(If payment is made on January 30)

Acquisition on Deferred Settlement Terms

If PPE acquisition wherein payment is deferred beyond normal credit terms, the cost of
the asset is equal to the:
1) If there is available cash price – cash price or cash equivalent paid at the
acquisition date. The difference between the cash price equivalent and the total
payment is recognized as interest expense over the period of credit unless such
interest is recognized in the carrying amount of the item in accordance with PAS
23.
2) No available cash price – present value of all payment using an imputed interest
rate.

Illustration: Acquisition on Deferred Settlement Terms

On January 1, 2021, Ranidel Company purchased a machine for P3,000,000 in
exchange for a note. The prevailing note of interest of type is 10%. The new machine
was damaged during its installation and the repair cost amounted to P30,000.

Case No. 1: Assume that the machine has an available cash price of P319,016. The
note is bearing interest at 12% rate while the prevailing rate of interest of a note of this
type is 10%. (The PV of the note using the prevailing interest rate for four years is also
P319,016).

Case No. 2: Assume instead that the machine has no available cash price and that the
note is a noninterest bearing requiring four equal annual payments of P75,000. The first
payment was made on December 31, 2021, and the others are due annually on
December 31.

Case No. 3: Assume instead that the machine has no available cash price and that the
note is a noninterest bearing and the note will be paid on December 31, 2024.

Required: Using the different scenarios above, determine the cost of the machine and
prepare the journal entries for 2021.

SOLUTION:
CASE NO. 1
The cost that should be assigned to the machine should be equal to its cash price
equivalent of P319,016.

The journal entry should be:

12/01/21 Machinery 319,016
Premium on notes payable 19,016
Notes payable 300,000
12/31/21 Interest expense 36,000
Cash 36,000
12/31/21 Premium on notes payable 4,098
Interest expense 4,098

Amortization table:
Date Interest paid Interest expense Premium Present Value
Amortization
01/01/21 319,016
12/31/21 36,000 31,902 4,098 314,918
12/31/22 36,000 31,492 4,508 310,410
12/31/23 36,000 31,041 4,959 305,451
12/31/24 36,000 30,545 5,451 300,000

CASE NO. 2
Annual payment of principal 75,000
Multiply: Present value of ordinary annuity @ 10% 3.1699
Cost of Machinery 237,743

The journal entry should be:

12/01/21 Machinery 237,743
Discount on notes payable 62,257
Notes payable 300,000
 12/31/21 Interest expense 75,000
Cash 75,000
12/31/21 Premium on notes payable 23,774
Interest expense 23,774

Amortization table:
Date Interest paid Interest expense Premium Present Value
Amortization
01/01/21 237,743
12/31/21 75,000 23,774 51,226 186,517
12/31/22 75,000 18,652 56,348 130,168
12/31/23 75,000 13,017 61,983 68,185
12/31/24 75,000 6,819 68,185 -

CASE NO. 3
One-time payment of principal 300,000
Multiply: Present value of 1 at 10% .6830
Cost of Machinery 204,900

The journal entry should be:

12/01/21 Machinery 204,900
Discount on notes payable 95,100
Notes payable 300,000
12/31/21 Interest expense 20,490
Cash 20,490

Date Interest expense Present value

01/01/21 204,900
12/31/21 20,490 225,390
12/31/22 22,539 247,929
12/31/23 24,793 272,722
12/31/24 27,278 300,000

Issuance of Shares of Stock

The cost of the PPE when issuing shares of stock is recorded in the following order:
1) Fair market value of the property Received (gain on exchange is credited to
Share Premium while loss is debited to Share Discount)
2) Fair market value of the capital stock Issued (gain on exchange is credited to
Share Premium while loss is debited to Share Discount)
3) Par value of the shares Issued (no gain or loss)

Illustration: Issuance of Shares

Chot Co. acquired a tract of land with an existing building in exchange for 20,000
ordinary shares of P10 par value with a market price of 20 per share on the date of
acquisition. The last property tax bill indicated assessed value of P200,000 for the land
and P120,000 for the building. However, the land has a fair value of P550,000 and the
building has no determinable fair value. Shortly after acquisition, the building was razed
at a cost of P9,000 in anticipation of a new building construction.

Required: Determine the cost to be assigned to land.

SOLUTION:
The cost that should be assigned to the land should be:
Land (@ its FV) P550,000
Add: Cost of razing the old building 9,000
Cost of land P559,000

The journal entry should be:

Land 559,000
Ordinary shares (P10 x 20,000) 200,000
Share premium in excess over par 350,000
Cash 9,000

However, if the fair value of the land is not available, then the cost that should be
assigned to the land should be the fair value of the ordinary shares issued. The cost
shall be computed using the fair value of ordinary shares as follows:

Number of ordinary shares 20,000

Multiply by: Fair value of the ordinary shares P 20
Fair value of shares 400,000
Add: cost of razing the old building 9,000
Total cost of land 409,000

The journal entry should be:

Land 409,000
Ordinary shares (P10 x 20,000) 200,000
Share premium in excess over par 200,000
Cash 9,000

Issuance of Bonds Payable

According to paragraph 23 of PAS 16, “the cost of an item of property, plant and
equipment is the cash price equivalent at the recognition date.”

According to paragraph B5.1.2A of PFRS 9, “the fair value of a financial instrument at

initial recognition is normally the transaction price (i.e., the fair value of the
consideration given or received). However, if part of the consideration given or
received is for something other than the financial instrument, an entity shall measure
the fair value of the financial instrument.”

As can be gleaned from the above-mentioned provision of the PFRSs, it is therefore

right to conclude that the asset must be recorded in the following order of priority:
1. Fair value of the bonds payable Issued
 2. Fair value of the property Received
3. Face value of the bonds payable Issued

Illustration:
On January 1, Year 1, Marcus Co. acquired a machinery with fair value of P1,900,000
by issuing 4-year, 12% P2,000,000 bonds. Principal is due on December 31, Year 3 but
the interest is due annually at the end of the year. The prevailing market rate of interest
for a similar instrument on January 1, Year 1 is 14%. The present value of the future
cash flows from the bonds discounted at 10% is P2,126,776.

Required: Provide the journal entry to record the acquisition of the machinery.

SOLUTION:
Machinery 2,126,776
Premium on bonds payable 126,776
Bonds payable 2,000,000

Exchange Transaction
One or more items of property, plant and equipment may be acquired in exchange for a
non-monetary asset or assets, or a combination of monetary and non-monetary assets.
The cost of such an item of property, plant and equipment is measured at fair value
unless
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.
Exchange with Commercial Substance
No cash is involved Cash is involved
Record the asset at: Record the asset at:
1. Fair market value of the property Payor: fair value of the asset given plus
given cash payment (in effect, this is the fair
value of the asset received)
2. Fair market value of the property Recipient of cash: fair value of the asset
received given minus cash payment (in effect, this
is the fair value of the asset received)
3. Cost or book value of the property
given.
Gain or loss is fully recognized

Illustration: Exchange with Commercial Substance

Tenorio Company and Jason Company exchanged equipment. The following data are
available on exchange:
Tenorio Jason
Equipment (cost) 500,000 300,000
Accumulated depreciation 300,000 50,000
Fair value of equipment 180,000 220,000
Cash paid by Tenorio to Jason 40,000 40,000
The configuration of the cash flows of the equipment is determined to be significantly
different.

Required:
1) How much should Tenorio record the asset
2) How much is the gain or loss on exchange of Tenorio?
3) Prepare the journal entry to record transaction in the books of Tenorio.
4) How much should Jason record the asset?
5) How much is the gain or loss on exchange of Jason?
6) Prepare the journal entry to record transaction in the books of Jason.

SOLUTION:
Requirement No. 1
Fair value of the asset given 180,000
Add: cash payment 40,000
Cost the new equipment 220,000

Requirement No. 2
Fair value of the asset given 180,000
Less: Book value of the equipment
Cost 500,000
Less: Accumulated depreciation 300,000 200,000
Loss on exchange (20,000)

Requirement No. 3
Equipment – new 220,000
Accumulated depreciation 300,000
Loss on exchange 20,000
Equipment 500,0000
Cash 40,000

Requirement No. 4
Fair value of the asset given 220,000
Less: Cash received 40,000
Cost of the new equipment 180,000

Requirement No. 5
Fair value of the asset given 220,000
Less: Book value of the equipment
Cost 300,000
Less: Accumulated depreciation 50,000 250,000
Loss on exchange (30,000)

Requirement No. 6
Equipment – new 180,000
Accumulated depreciation 50,000
Loss on exchange 30,000
Cash 40,000
Equipment 300,000
Exchange with No Commercial Substance
The cost of PPE acquired through an exchange with no commercial substance (with or
without cash involve) is measured at the carrying amount of the asset given up.
Accordingly, no gain or loss is recognized. In other words, the following rules should be
observed:
1. Payor – book value of the asset given up plus cash paid (if any).
2. Recipient – book value of the asset given up minus cash received (if any).

Illustration: Exchange without commercial substance

Gary Company and David Company exchanged equipment. The following data are
available on exchange:
Tenorio Jason
Equipment (cost) 500,000 300,000
Accumulated depreciation 300,000 50,000
Fair value of equipment 180,000 220,000
Cash paid by Gary to David 40,000 40,000

The configuration of the cash flows of the equipment is determined to be insignificant.

Required:
1) How much should Gary record the asset
2) How much is the gain or loss on exchange of Gary?
3) Prepare the journal entry to record transaction in the books of Gary.
4) How much should David record the asset?
5) How much is the gain or loss on exchange of David?
6) Prepare the journal entry to record transaction in the books of David.

SOLUTION:
Requirement No. 1
Book value of the asset given:
Book 500,000
Less: Accu. Dep. 300,000 200,000
Add: Cash payment 50,000
Cost of the new equipment 250,000

Requirement No. 2
No gain or loss on exchange of Gary is recognized because the transaction lacks
commercial substance.

Requirement No. 3
Equipment – mew 250,000
Accumulated depreciation 300,000
 Equipment – old 500,000
Cash 50,000

Requirement No. 4
Book value of the asset given:
Book 300,000
Less: Accu. Dep. 50,000 250,000
Add: Cash payment 50,000
Cost of the new equipment 200,000

Requirement No. 5
No gain or loss on exchange of Gary is recognized because the transaction lacks
commercial substance.

Requirement No. 6
Equipment – mew 200,000
Accumulated depreciation 50,000
Cash 50,000
Equipment – old 300,000

Trade-In
When an asset is acquired through trade-in, the new asset is recorded in the following
order of priority:
1) Fair value of the asset given plus cash payment. Gain or loss on trade-in is
computed as follows:

Fair value of the asset given XX

Less: Book value of the asset given XX
Gain or loss (fully recognized) XX

2) Trade in value of the asset given plus cash payment (in effect, this is the fair
value of the asset received). The gain or loss on trade-in is computed as follows:

Trade in value of the asset given XX

Less: Book value of the asset given XX
Gain or loss (fully recognized) XX

Computation of the trade-in value of the old asset:

Cash price without trade-in (or list price) XX
Less: Cash price with trade in XX
Trade-in value or allowance XX

Illustration: Trade-in
On January 1 of the current year, Hadadi Company traded in an old machine for a
newer model. Data relative to the old and new machines follow:
Old Machine:
Original cost 1,000,000
Accumulated depreciation, Jan. 1 800,000
Average published retail value 270,000
New Machine:
List price 1,200,000
Cash price without trade in 950,000
Cash price with trade in 800,000

Required:
1) How much should Hadadi record the asset?
2) How much is the gain or loss on trade in?
3) Prepare the journal entry to record the transaction.

SOLUTION:
The cost that should be assigned to machine of Hadadi should be P950,000, the cash
price of the new machine without trade-in.

The gain or loss on trade-in is computed as follows:

Cash price without trade in 950,000

Less: Cash price with trade in 800,000
Trade in value 150,000
Less: Book value of the equipment
Cost 1,000,000
Less: Accu. Dep. 800,000 200,000
Loss on exchange (50,000)

The journal entry should be:

Machinery – new 950,000
Accumulated depreciation 800,000
Loss on exchange 50,000
Machinery – old 1,000,000
Cash 800,000

Donation
When an item of property, plant and equipment is received through donation, the asset
is recorded at the fair value when received or receivable considering the source of
donated asset:
1) Shareholder – the fair value should be credited to share premium or donated
capital. Incurrence or payment of direct expenses like payment for transfer of title
to the corporation, real estate taxes in arrears and transfer taxes shall be
deducted from donated capital.
2) Non-shareholder – either credit to subsidies (if not restrictions imposed) or
liability account until restrictions are met. If the restrictions have already been
lifted or met, then the liability shall then be transferred to income, or less
 desirably, to donated capital. Incurrence or payment of direct expenses like
payment for transfer of title to the corporation, real estate taxes in arrears and
transfer taxes shall be added to the cost of the assets received.

Illustration: PPE received through donation

A land is received from the corporation’s president as an inducement to locate a plant in
the city. No payment was required but the corporation paid P80,000 for legal expenses
for land transfer. The land is fairly valued at P900,000.

Required: Prepare the journal entry to record the above transaction.

SOLUTION:
The journal entry should be:
Land 900,000
Donated capital 900,000

Donated capital 80,000

Cash 80,000

SUBSEQUENT EXPENDITURES
Types Definition Treatment
1. Revenue Cost that provides benefit only for the Expense
expenditure current accounting period.
2. Capital Cost that provides benefit over more Asset (capitalized)
expenditure than one accounting period.

Recognition of Subsequent Cost

Subsequent cost incurred for PPE shall be recognized as an asset when:
a. It is probable that future economic benefits associated with the subsequent cost
will flow to the entity.
b. The subsequent cost can be measured reliably.

Future Economic Benefit

In general, a subsequent cost on an item of PPE will benefit future period when the
expenditure will result into:
a. Bigger – the cost makes the asset bigger, such as an addition to a building;
b. Better – the cost makes the asset better, such as an improvement that makes an
asset perform more efficiently and improves quality of output; and
c. Longer – the cost makes the asset last longer, extends the useful life. Useful life
may be in terms of number of years or capacity.

SUBSEQUENT MEASUREMENT
After initial recognition, an entity may choose to measure the property, plant and
equipment using either:
a. Cost model or
b. Revaluation model
Cost Model
Subsequent to initial recognition, the asset is carried at cost less any accumulated
depreciation and accumulated impairment loss.
Revaluation Model
Subsequent to initial recognition, the asset is carried at a revalued amount, bringing its
fair value at the date of revaluation less subsequent depreciation, provided that fair
value can be measured reliably.

Depreciation
- Is the systematic allocation of the depreciable amount of an asset over its useful
life.

Depreciation Period
Depreciation of an asset begins when it is available for use (not when it is first used).

Kinds of Depreciation
1) Physical Depreciation. This kind of depreciation is related to the asset’s normal
wear and tear and deterioration over a period of time. It may be caused by:
a. Passage of time due to nonuse;
b. Action of elements such as winds, sunshine, rain or dust;
c. Wear and tear due to infrequent use;
d. Accidents such as fire, flood, earthquake and other natural disaster;
e. Diseases for animals and wooden buildings.
2) Functional or economic depreciation. This kind of depreciation arises from
obsolescence or inadequacy of the asset to perform efficiently.

Summary of Formulas for the Computation of Depreciation Expense and Book

Value
Depreciation Book Value
Straight Line
Annual depreciation = Cost minus Cost less accumulated depreciation.
residual value divided by life in years; or
Accumulated depreciation: (Cost minus
Depreciation rate x Depreciable amount residual divided by life in years) x Age of
Where depreciation rate = 1/useful life the asset.
Working Hours Method
Depreciation rate/hour = Depreciable Cost less accumulated depreciation.
amount divided by estimated life in terms
of service hours Accumulated depreciation: (Cost minus
residual value divided by Life in terms of
Annual Depreciation = Depreciation service hours) x total working hours used
rate/hr x actual hours worked this year
Output Method
Depreciation rate/unit = depreciable Cost less accumulated depreciation.
amount divided by estimated life in terms
of units of output Accumulated depreciation: (Cost minus
residual value divided by life in terms of
Annual depreciation = Depreciation units of output) x total units produced.
rate/unit x yearly output
Sum of Year’s Digits
SYD = Life x (Life + 1) Cost less accumulated depreciation.
2
Accumulated depreciation = (add all the
Annual Depreciation = Depreciable fractions used x depreciable cost)
amount x a series of fractions (SYD is the
denominator)

Notes:
i. The fractions should be used in
full for one year.
ii. If the life of the asset is, say 2
½ years, the procedure is to
multiply the life by 2 in order to
get the life of the asset in half
year.
Declining Balance Method
Depreciation expense = Rate x Cost less accumulated depreciation
diminishing book value (initially at cost,
subsequently, book value at the Accumulated depreciation (add all
beginning of each period) depreciation expenses)
Or
Or if book value is already lower than First year BV=Cost x (100% minus
residual value at the end of the period, (Depreciation rate x number of months
the Depreciation is computed as follows: used during the first year divided 12)
Maximum depreciation = Beg. Book
value less residual value Subsequent BV = Beg BV x (100% minus
100% Declining rate Depreciation rate)
n Residual value
Rate=1−
√ Cost
Double declining rate
Or if book value is already lower than
residual value at the end of the period,
DDB Rate = 200%/useful life the BV is equal to the Residual value.

150% declining rate

Rate = 150%/useful life
Inventory Method
Depreciation expense = balance of the Book value = value of the asset at the
asset minus the value at the end of the end of the year
year
Retirement Method
No depreciation expense is recorded until Book Value = total cost minus cost of
the asset is retired. asset retired
 Depreciation expense when there is a
retirement = Original cost of the asset
retired minus salvage proceeds
Replacement Method
No depreciation expense is recorded until Book value = (total assets replaced minus
the asset is retired and replaced. asset retired) x replacement cost

Depreciation expense when there is a

retirement = replacement cost of the
asset retired minus salvage proceeds

If asset retired is not replaced:

Depreciation expense when there is a
retirement = Original cost of the asset
retired minus salvage proceeds.

For the composite and group method

Annual depreciation = Composite rate x total cost
Composite rate = TADe / TC
= Total Annual Depreciation / Total cost
Composite Life = TDC / TADe
= Total Depreciable Cost / Total Annual Depreciation
Book Value = Total cost minus total depreciation

Notes:
1. Depreciation is reported in a single accumulated depreciation.
2. The composite or group rate is multiplied by the total cost of the assets in the group
to get the periodic depreciation.
3. When asset in the group is retired, no gain or loss is recognized. The journal entry
would be:
Cash (if any) XX
Accum. Depreciation (balancing figure) XX
Asset (cost) XX
4. When an asset is retired and replaced by a similar asset, the replacement is
recorded by:
Asset XX
Cash XX
5. Subsequent depreciation expense after a retirement is computed by multiplying the
composite or group rate to the total balance (cost) of the remaining asset account.

Illustration: Composite or Group

A schedule of machinery owned by Di Nga Co. is presented below:
Estimated Total Cost Estimated Salvage Value Life in Years
Machine C 380,000 20,000 12
Machine P 430,000 30,000 10
 Machine A 225,000 15,000 6
Di Nga computes depreciation by the composite method.

Required:
1) Compute the composite rate of depreciation (in percent) for these assets.
2) Compute the composite life (in years) for these assets is
3) Prepare the journal entry assuming that machine A was retired after 6 years and
sold for P10,000.
4) Compute the depreciation in the 7th year.

SOLUTION:
The first step is to compute the annual depreciation for each machine as follows:

Machine Total Cost Salvage Depreciabl Life in Annual

Value e Amount Years Depreciation
C 380,000 20,000 360,000 12 30,000
P 430,000 30,000 400,000 10 40,000
A 225,000 15,000 210,000 6 35,000
Total 1,035,000 65,000 970,000 105,000

Requirement No. 1
Composite rate = Annual depreciation
Total Cost

= 105,000
1,035,000

= 10.14%

Requirement No. 2
Composite life = Depreciable cost / Annual Depreciation
= 970,000 / 105,000
= 9.2 years

Note: Composing life provides information as to the average useful life of the asset of a
group of assets with different cost, residual value and useful life.

Requirement No. 3
Cash 10,000
Accumulated depreciation 215,000
Machine A 225,000

Requirement No. 4
Depreciation = remaining cost x composite rate
= 810,000 x 0.1014
= 82,134
Illustration: Different Methods of Depreciation
The equipment of Kelly Co. has the following data:
Cost 1,100,000
Salvage value 100,000
Useful life 4 years
20,000 units
10,000 hours
Date acquired January 1, 2021

Required:
Prepare the depreciation table for 2 years under the following methods:
1) Straight-line method.
2) Working hours method (Kelly Co. used 3,000 and 3,500 working hours for the
product it manufactured for the years 2021 and 2022 respectively)
3) Units of output method (Kelly Co. manufactured 2,000 and 2,500 units of the
product for the years 2021 and 2022 respectively)
4) Sum of the year’s digits
5) Sum of the year’s digits assuming that the date of acquisition was on April 1,
2021 instead January 1, 2021.
6) Double declining balance method
7) Double declining balance method assuming that the date of acquisition was on
April 1, 2021 instead of January 1, 2021.
8) 150% declining balance method

SOLUTION:
Requirement No. 1: Straight-Line Method
Cost 1,100,000
Less: Salvage value 100,000
Depreciable amount 1,000,000
Divided by: Useful life 4
Annual depreciation 250,000

Date Annual Accumulated Book Value

Depreciation Depreciation
01/01/21 1,100,000
12/31/21 250,000 250,000 850,000
12/31/22 250,000 500,000 600,000

Requirement No. 2: Working Hours Method

Depreciation rate = (1,100,000 – 100,000) / 10,000 hrs = 100/hr

Date Annual Accumulated Book Value

Depreciation Depreciation
1/1/21 1,100,000
12/31/21 (100 x 3,000) 300,000 300,000 800,000
 12/31/22 (100 x 3,500) 350,000 650,000 450,000
Requirement No. 3: Units of Output Method
Depreciation per unit = (1,100,000 – 100,000) / 20,000 units = 50/unit

Date Annual Accumulated Book Value

Depreciation Depreciation
1/1/21 1,100,000
12/31/21 (50 x 2,000) 100,000 100,000 1,000,000
12/31/22 (50 x 2,500) 125,000 225,000 875,000

Requirement No. 4: Sum of the Year’s Digits

Sum-of-years = 4 x [(4 + 1) / 2] = 10 years

Date Annual Accumulated Book Value

Depreciation Depreciation
1/1/21 1,100,000
12/31/21 (4/10 x 1M) 400,000 400,000 700,000
12/31/22 (3/10 x 1M) 300,000 700,000 400,000

Requirement No. 5: Sum of the year’s digits acquired on April 1, 2021

Date Annual Accumulated Book Value
Depreciation Depreciation
1/1/21 1,100,000
12/31/21 300,000 300,000 800,000
12/31/22 325,000 625,000 475,000

Since the fraction should be used for one year, the depreciation for 2022 is computed
as follows:
1/1/2022 – 3/31/2022 (4/10 x 1M x 3/12) 100,000
4/1/2022 – 12/31/2022 (3/10 x 1M x 9/12) 225,000
Total Depreciation Expense 325,000

Requirement No. 6: Double Declining Balance Method

Double declining balance rate = 200% / 4 = 50%

Date Annual Accumulated Book Value

Depreciation Depreciation
01/01/21 1,100,000
12/31/21 550,000 550,000 550,000
12/31/22 275,000 825,000 275,000
12/31/23 137,500 962,500 137,500
37,500 1,000,000 100,000

Depreciation is computed as follows:

2021: (50% x 1.1M)
2022: (50% x 550K)
2023: (50% x 275K)
2024: 37,500. If book value is lower than the residual value for any given period, the
procedure is to recompute the depreciation for that period by using the following
formula:

Maximum depreciation = Beginning book value minus residual value

Thus, the depreciation expense in 2024 = 137,500 minus 100,000
= 37,500

Requirement No. 7: Double Declining Balance Method Acquired on April 1, 2021

Double declining balance rate = 200% / 4 = 50%

Date Annual Accumulated Book Value

Depreciation Depreciation
04/01/21 1,100,000
12/31/21 412,500 412,500 687,500
12/31/22 343,750 756,250 343,750
12/31/23 171,875 928,125 171,875
12/31/24 71,875 1,000,000 100,000

Requirement No. 8: 150% Declining Balance Method

150% declining balance rate = 150% / 4 = 37.5%

Date Annual Accumulated Book Value

Depreciation Depreciation
04/01/21 1,100,000
12/31/21 412,500 412,500 687,500
12/31/22 257,813 670,313 429,687
12/31/23 161,133 831,446 268,554
12/31/24 168,554 1,000,000 100,000

Depreciation Based on Revenue

A depreciation method that is based on revenue that is generated by an activity that
includes the use of an asset is not appropriate.

Change in Estimate
Change in estimated useful life, salvage values and change in the depreciation method
are treated as change in accounting estimate treated currently and prospectively.

Fully Depreciated PPE Still in Use

Fully depreciated PPE still in use need to be removed in the statement of financial
position and should be disclosed in the notes. In addition, the PPE should no longer be
depreciated. However, if the PPE is fully depreciated because the useful life used
exceeds the economic life as a result of the company’s failure to review the useful life
every year, this is an error under PAS 8 and should be accounted retrospectively.
Derecognition
The carrying amount of an item of property, plant and equipment shall be derecognized:
a) On disposal; or
b) When no future economic benefits are expected from its use or disposal.

Fixed Asset Turnover

Fixed asset turnover is a ratio that uses financial statement data to roughly indicate how
efficient a company utilized its property, plant and equipment to generate sales. Fixed
asset turnover is computed as sales divided by average property, plant and equipment
(net).