THE

CPA
BOARD EXAMS
OUTLINES
by theMahatma

#3

FINANCIAL ACCOUNTING AND REPORTING

PROPERTY,
PLANT &
EQUIPMENT
Supplementary discussions based on lectures by Tom Siy, CPA,
Christian Aris Valix, CPA and Dean Archimedes Ibay, CPA (CPAR)

CAPITALIZABLE COSTS

Generally, capitalizable costs to PPE includes the purchase price,

import duties and nonrefundable taxes while excluding trade
discounts, rebates and purchase discounts (whether taken or not)
Certain special items and to which PPE item they should be
capitalized (or expensed) are as follows:
o Option payments made for the acquired land, machine or
building are capitalized to the respective accounts. Such
payments are made to bind the seller to not sell the property
until the lapse of the option contract. If the property is not
acquired, the option payment is expensed
o Training costs for employees who will use certain machineries
are always expensed
o Testing costs for new machines are always capitalized, which
includes allowances and accommodation costs for the
technicians
o Survey costs are always capitalized to land, even though they
were made with the intent of constructing a building
o Value-added taxes are not considered in the purchase price
o Insurance policy payments to secure new machinery in transit
or any potential mishaps during construction are capitalized
to respective accounts. Injury claims during construction
thats not covered by insurance are expensed
A new interpretation has been released that prescribes new
treatment to net demolition costs and the fair value of the
demolished building. They are as follows:
o If the building is demolished without the intent of building a
new one, net demolition costs are capitalized to land
o If there is intention to build, they are capitalized to the new
building
o If land is part of inventory (such as that of real estate
businesses) or considered an investment property, the costs
are capitalized to it
o The fair value of the demolished building is expensed, except
if the land is part of inventory where it is capitalized to land

BORROWING COSTS

Interest expense is capitalized for assets that take a substantial

amount of time to be used or sold. However, inventory produced on
a repetitive basis that do take a substantial time to be produced is
not qualified for interest capitalization
Borrowing costs may be classified as specific (debt is for financing
the construction of the asset) or general (other debts outstanding
during the construction). All interest from specific debts are
capitalized, while only a portion is capitalized from general debts
Computation of capitalizable borrowing costs follows the following
formula:
Weighted average expenditures, one year
DEDUCT: Specific debt face value
Amount related to general borrowings
MULTIPLY: Capitalization rate
Capitalized interest from general debt
Actual interest from specific debt
Total capitalizable interest

XX
XX
XX
x%
XX
XX
XX

The total capitalized interest is deducted from the total nominal

interest from both general and specific debts for the interest
expense for the period
On January 2,
2019, Pineapple Co. began construction of a new office building.
It was completed June 30, 2020. Expenditures on the project were
as follows:
January 3, 2019
Php 2,500,000
March 31
3,000,000
June 30
4,000,000
October 31
3,000,000
January 31, 2020
1,500,000
March 30
2,500,000
May 31
3,000,000
On January 2019, the company acquired a construction loan for
Php 5,000,000 at 10% interest, outstanding for all of 2019 and
2020. Other outstanding loans include a Php 25,000,000 loan at
ILLUSTRATION (CPAR PRE-WEEK ITEM)

8%, and a mortgage of Php 15,000,000 on a building at 6%.

Determine the capitalizable interest and the interest expense for
2019
STEP 1: Since specific to the construction, the interest from the

specific debt is capitalized entirely. Thus, Php 5,000,000 10% =

Php 500,000
STEP 2: Determine the weighted average expenditures for 2019,
covering only those expenses for that year. Thus, [(Php 2,500,000
12/12) + (Php 3,000,000 9/12) + + (Php 3,000,000
2/12)] = Php 7,250,000
STEP 3: Following the formula, deduct Php 7,250,000 with the
face value of the specific debt to obtain Php 2,250,000
STEP 4: Compute for the capitalization rate by dividing the total
nominal interest from all general borrowings over the face value of
all general borrowings. Thus: Php 2,900,000 Php 40,000,000 =
7.25%. The capitalized interest from general borrowings should be
Php 163,125
STEP 5: Add the actual specific interest with that of general
borrowings to obtain total capitalized interest for 2019 of Php
663,125
STEP 6: Following the formula, the interest expense for the period
should be Php 2,736,875 (Php 3,400,000 Php 663,125)
Using the same example, compute for the capitalizable interest
and interest expense for 2020
STEP 1: Since the construction was finished halfway through the

second year, and the debts were outstanding throughout the year,
the amount of interest to be capitalized from the specific debt is
for the half-year only. Thus, Php 5,000,000 10% 6/12 = Php
250,000
STEP 2: The weighted average expenditures of 2020 shall be
composed of the total actual expenses of the past year (not
averaged), the capitalized interest of 2019, and the weighted
average expenses of 2020. Thus, [(Php 13,163,125 6/6) + (Php
1,500,000 5/6) + + (Php 3,600,000 1/6)] = Php
16,163,125

STEP 3: Deduct Php 16,163,125 from the full face value of the

specific debt to obtain Php 11,163,125

STEP 4: The capitalization rate to be used remains to be 7.25%,
but since the project was finished halfway through the year, it will
be reduced to 3.625% (7.25% 6/12). The capitalized interest
from general borrowing should be Php 404,663
STEP 5: Add the two capitalizable interests for Php 654,663
STEP 6: The interest expense for 2020 should be Php 2,745,337
(Php 3,400,000 Php 654,663)

GOVERNMENT GRANTS

Grants from the government may be relating to property or incomegeneration efforts, each to be accounted for in a distinct way
If the government grants funding to acquire depreciable property
for the entity, it may be accounted by (a) recording a deferred
income account, or (b) reducing the cost of the property by the
amount of the grant
If recorded as a deferred income (liability), income is recognized
on a straight-line basis just as the property is depreciated. No such
income is recognized when the grant is accounted as costreduction. The reduced cost of the asset shall be used for
depreciation
If the grant is for other purposes other than above (including
acquisition of non-depreciable assets), income is recorded when
relevant expenses have been incurred, as per the matching
principle. When the expenses are already incurred when the grant
is receivable, the entire grant is recorded income outright
Conditions are usually attached to the grants. If the conditions are
not satisfied, the grants become repayable
If the grant is for a depreciable asset recorded as deferred income,

the amount already recorded as income through straight-line

amortization is recorded as a loss. If recorded as a reduction to
cost, the amount of grant is added back to the cost of the asset.
This addition is depreciated up to the date when the grant is made
repayable

DEPRECIATION OF CASH GENERATING UNITS

A cash generating unit is a group of dissimilar long-lived assets

used as a single unit, usually composed of land, building and
machinery. They are depreciated using the composite method,
which a variant of the straight-line method
The total costs of the assets belonging to the cash generating unit
is multiplied with a given composite rate to derive the annual
depreciation. The accumulated depreciation pertains to no
particular PPE in the unit, which means that if one of the properties
is sold, there would be no gain or loss recognized. Accumulated
depreciation would be debited/credited with the difference of the
selling price and cost
If a new asset is included in the cash generating unit, the same
composite rate is used for the groups depreciation

DEPRECIATION OF PROPERTY USED IN EXTRACTING OPERATIONS

The depreciation of property such as buildings used in mining and

similar operations follows the following rules:
o If the property has future uses after the operations are
finished, it is depreciated with its useful life
o If the property has no future use, the lives of the asset and the
wasting asset (mineral resource) are considered. If the life of
the asset is shorter, the asset is depreciated with its useful
life. If the life of wasting asset is shorter, it is depreciated

through the production method just like in depletion

Mina Mining Co.
built necessary structures and sheds on its mining site for Php
12,000,000, having estimated useful lives of 15 years and no
residual value. The company also bought a machine with no
expected future uses worth Php 1,800,000 (useful life = 12
years). This machine, however, is expected to be useful
halfway through the operations. Mining operations are
expected to last for 11 years. A total of 150,000 tons of
minerals are expected to be recovered, with 15,000 tons to
be extracted annually. However, only 7,500 tons will be
recovered on the last year. Determine the depreciation
charges for the building and the machine for years 1, 7 and
11
Since the life of the mining operations is shorter for both
assets, they shall be depreciated using the production
method. Each asset shall have their own depreciation
rate to be multiplied against the current production for
their depreciation charge. Thus, the rate for the building
is 80 (Php 12,000,000 150,000 tons) and for the
machine, 12 (Php 1,800,000 150,000 tons)
The production for year 1 is 15,000 tons. Thus the
depreciation charges are Php 1,200,000 and Php
180,000 for the building and machine, respectively
It is stated that the machine will be useable for half the
duration of the operations. Also, 7,500 tons will be
recovered on the last year of operations. Despite being
halfway through the 11-year operation, the depreciation
of the machine will use 7,500 tons as basis. Thus, it has
a depreciation charge of Php 90,000 for year 7
On year 11, the building will use 7,500 as basis for
depreciation. Thus, its charge is Php 600,000
ILLUSTRATION (CPAR PRE-WEEK ITEM)