DEFINITION

Property, plant and equipment are

"tangible assets which are held by an entity
for use in production or supply of goods and
services, for rentals to others, or for
administrative purposes, and are expected to be
used during more than one period".
EXAMPLES OF PPE
RECOGNITION OF PPE
An item of property, plant and equipment shall be
recognized as an asset when:

a. It is probable that future economic benefits

associated with the asset will flow to the entity.

b. The cost of the asset can be measured reliably.

Measurement at
recognition
An item of property, plant
and equipment that
qualifies for recognition as
an asset shall be measured
initially at cost.
Cost is the amount of cash
or cash equivalent paid and
the fair value of the other
consideration given to
acquire an asset at the time
of acquisition or
construction.
Measurement after
recognition
An entity shall choose either
the cost model or the
revaluation model as the
policy to an entire class of
ppe
Cost model= C-AD-AIL
Revaluation model= RCA
Revalued carrying amount is
the fair value at the date of
revaluation less any
subsequent AD and
subsequent AIL.
ELEMENTS OF COST
a. Purchase price (including import duties and
nonrefundable purchase 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
management.

c. Initial estimate of the cost of dismantling and

removing the item and restoring the site on which it is
located, the obligation for which an entity incurs.
Exercise
1. Purchase price (excluding import duties and nonrefundable
purchase taxes, after deducting trade discounts and rebates.)
2.Purchase price (including import duties and nonrefundable
purchase taxes, after adding trade discounts and rebates.)
3.Purchase price (including import duties and refundable purchase
taxes, after deducting trade discounts and rebates.)
4.Cost not directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the
manner intended by management.
5. Initial estimate of the cost of dismantling and removing the item
and restoring the site on which it is located, the obligation for which
an entity incurs.
6. Initial estimate of the cost of dismantling and removing the item
and restoring the site on which it is not located, the obligation for
which an entity does not incur.
Directly attributable costs
a. Costs of employee benefits arising directly from the
construction or acquisition of the item of property,
plant and equipment.
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
e. Professional Fees
f. Costs of testing whether the asset is functioning
properly after deducting the net proceeds from selling
any items produced while bringing the asset to that
location and condition, such as samples produced
when testing equipment.
Exercise
1. Costs of operating a new facility.
2. Costs of relocating or reorganizing part or all of an
entity's operations.
3. Professional fees
4. Costs of employee benefits not arising directly from
the construction or acquisition of the item of ppe.
5. Initial operating losses
6. Installation and assembly cost
7. Cost of site preparation
8. Administration and other general overhead costs
 Acquisition of property
1. Cash basis 6. Exchange
2. On account subject to cash 7. Donation
discount
3. Installment basis 8. Government Grant
4. Issuance of share capital 9. Construction
5. Issuance of bonds payable
Acquisition on CASH BASIS
Cash paid + directly attributable costs

REMEMBER!!
When several assets are acquired
at a "basket price" or "lump sum price", it
is necessary to apportion the single price
of the assets acquired on the basis of
relative fair value.
Illustration # 1 (Cash Basis)
Land and building are acquired at a single cost of
5,000,000. At the time of acquisition, the land has a
fair value of 500,000 and the building of 3,500,000.
What is the allocated cost for land and building?
Acquisition on ACCOUNT
Invoice price - discount, regardless of
whether the discount is taken or not.

REMEMBER!!
Cash discounts are generally considered as
reduction of cost and not as income.
 Illustration #2 ( On Account)
The equipment is purchased for 300,000, 2/10, n/30.
Required:
Prepare the Gross method and Net method journal
entries
a. To record the acquisition
b. To record the payment within the discount period.
c. To record the payment beyond the discount period.
Acquisition on
INSTALLMENT BASIS
Cash price
The excess of the
installment price over the
cash price is treated as an
interest to be amortized
over the credit period
REMEMBER!!
When there is no
available cash price, the
asset is recorded at an
amount equal to present
value of all payments
using an implied interest
rate.
 Illustration #3 (Installment Basis)
A machinery is purchased at an installment price of
350,000. The terms are 50,000 down and the balance
payable in three equal annual installments.
The cash price of the machinery is 290,000. A
promissory note issued for the installment balance of
300,000.
Required: Prepare journal entries
a. To record the acquisition of the machinery
b. To record the first installment payment
c. To amortize the discount on note payable
Acquisition by ISSUING A SHARE
CAPITAL
The property shall be measured at an
amount equal to the ff. in th order of
priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Par value or stated valir of the shsre
capital
Illustration #4 (Issuance of Share
Capital)
A piece of land is acquired by issuing 20,000 shares
with par value of P50. At the time of acquisition, the
fair value of the land is 1,600,000 and the share is
quoted at P90 per share.
Acquisition by ISSUING
BONDS PAYABLE
The asset acquired by issuing bonds
payable is measured in the ff. order:

a. Fair value of bonds payable

b. Fair value of assets received
c. Face amounts of bonds payable
Illustration #6 (Issuance of bonds
payable)
A building is acquired by issuing bonds payable with
face amount of 6,000,000.
At the time of acquisition, the fair value of the
building is 7,000,000 and the quoted price of the
bonds is 6,800,000.
DERECOGNITION
-means that the cost of the ppe together with
the related accumulated depreciation shall be
removed from the account.

REMEMBER!!
Gains shall not be included in revenue
but treated as other income.

Net disposal - Carrying amount =

Gain/loss
LAND AND
BUILDING
LAND ACCOUNT
Used as plant site PPE

Held for a currently Investment Property

undetermined use
Held definitely as a PPE
future plant site
Held for long-term Investment Property
capital apppreciation
Held for current sale Inventory
Exercise (Land account)
Held definitely as a future
plant site

Used as a plant site

Held for current sale

Held for long-term capital

appreciation
Held for a currently
undetermined use
 Costs chargeable to land
a. Purchase price
b. Legal fees and other expenditures for
establishing clean title
c. Broker or agent commission
d. Escrow fees
e. Fees for registration and transfer of title
f. Cost of relocation ore reconstruction of property
belonging to others in order to acquire possession.
g. Mortgages, encumbrances and interest on such
mortgages assumed by buyer
h. Unpaid taxes up to date of acquisition assumed by
buyer
i. Cost of survey
j. Payments to tenants to induce them to vacate the land
in order to prepare the land for the intended us but not to
make room for the constructiom of new building.
k. Cost of permanent improvements such as cost of
clearing, cost of grading, leveling and landfill.
l. Cost of option to buy the acquired land.

If the land is not acquired, the cost of option is

expensed outright.
Land Improvements
The treatment of land improvements depends on
whether the improvements are subject to
depreciation or not.
If land improvements are additions to cost not
subject to depreciation, these are charged to the
land account.
If land improvements are depreciable, these are
charged to a special account "land improvements"
Special assessments
- are taxes paid by the landowner as a
contribution to the cost of public
improvements. Special assessments are
treated as part of the cost of the land.

Special assessments are capitalized as cost of

land because public improvements increase
definitely the value of the land.
Real property taxes
-are treated as outright expense.

However, if unpaid real property taxes are

assumed by the buyer in acquiring land,
the taxes are capitalized but only up to
date of acquisition.
BUILDING ACCOUNT
Costs of building when constructed
a. Materials used, labor employed and overhead
incurred during the construction.
b. Building permit or license
c. Architect fee
d. Superintendent fee
e. Cost of excavation
f. Cost of temporary buildings used as construction
offices and tools.or materials shed.
g. Expenditures incurred during the construction
period such as interest on construction loans and
insurance.
h. Expenditures for service equipment and
fixtures made a permanent part of the structure.
i. Cost of temporary safety fence around
construction site and cost of subsequent remival
thereof.
However, the construction of a permanent
fence after the completion of the building is
recognized as land improvement.
j. Safety inspection fee
PIC Interpretation on land and
building
1. Land and an old building are purchased at a
single cost:

a. If the old building is usable, the single cost is

allocated to land and building based on relative
fair value.
b. If the old building is unusable, the single cost
is allocated to land only.
2. The old building is demolished immediately to make
room for construction of a new building:
a. Any allocated carrying amount of the usable old
building is recignized as a loss if the new building is
accounted for as ppe or investment property.
b. Any allocated carrying amount of the usable old
building is capitalized as cost of the new building if
the new building is accounted for as inventory.
c. The demolition cost minus salvage value is
capitalized as cost of the new building whether the
new building is accounted for as ppe, investment
property or inventory.
d. The net demolition cost is capitalized as cost of the
land if the old building is demolished to prepare the
land for the intended use but not to make room for the
construction of new building.
3. A building is acquired and used in a prior period
but demolished in the current period to make
room for construction of a new building:
a. The carrying amount of the old building is
recognized as a loss, whether the new building is
ppe, investment property or inventory.
b. The net demolition cost is capitalized as cost of
the new building whether the new building is
accounted for as ppe, investment property or
inventory.
c. If the old building is subject to a contract of
lease, any payments to induce them to vacate the
old building shall be charged to the cost of the new
building.
Exercise (Land)
Mariscal Company purchased for 3,000,000 a tract of
land as a factoy site. An existing building on the
property was razed to pave the way for the
construction of a new factory building.
Cost of razing old building 200,000

Title insurance and legal fees to 100,000

purcahse land

Architect fee 900,000

New building construction cost 7,000,000

What is the cost of land and building?

MACHINERY
Cost of machinery
a. Purchase price
b. Freight handling, storage and other cost
related to the acquisition
c. Insurance while in transit
d. Installation cost, including site
prepaeation and assembling
e. Cost of testing and trial run, and other
cost necessary in preparing the machinery
for its intended use.
f. Initial estimate of cost of dismantling and
removing the machinery and restoring the
site on which it is located, and for which the
entity has a present obligation.
g. Fee paid to consultants for advice on the
acquisition of the machinery.
h. Cost of safety rail and platform
surrounding machine.
i. Cost of water device to keep machine
cool.
IMPROVEMENTS OR BETTERMENTS
- are modifications or alternations which
increase the service life or the capacity of the
asset.
Improvements may represent replacement of
an asset or part therof with one of a better or
superior quailty. Such expenditures are
normally capitalized.
REPLACEMENTS
Replacement also involve substitution but the
new asset is not better than the old asset
when acquired.
The basic difference between an
improvement and replacement is
that an improvement is a
substitution of a better or
superior quality whereas a
replacement is a substitution of an
equal or lesser quality.
REPAIRS
-are those expenditures used to restore assets
to good operating condition upon their
breakdown or replacement of broken parts.

EXTRAORDINARY REPAIRS
are capitalized

ORDINARY REPAIRS are

normally charged to
expense when incurred
REPAIR AND MAINTENANCE
Repair is different from maintenance in that
repair restores the asset in good operating
condition while maintenance keeps the asset
in good condition.

Repair = Restorative/Curative
Maintenance= Preventive
REARRANGEMENT COST
- is the relocation or reinstallation of an
asset which proves to be less efficient in the
original location.
The rearrangement normally increases the future
service potential of the asset and therefore the
rearrangement cost should be capitalized.
However, if the rearrangement
merely maintains the existing
level of performance of the asset,
the rearrangement cost should be
expensed immediately.
Illustration (Machinery)
Papasa Ako Company installed a new equipment at
the production facility and incurred the following
costs:
Cost of equipment per supplier's invoice 3,000,000

Cost of site preparation 400,000

Consultants used for advice on the 750,000
acquisition
Initial delivery and handling cost 200,000
Interest charges paid to supplier for 100,000
deferred credit
Estimated dismantling cost to be incurred 200,000
as required by contract
Operating losses before commercial 350,000
production
What total amount should be capitalized as cost of the
equipment?
DEPRECIATION
DEPRECIATION
" the systematic allocation of the
depreciable amount of an asset over the
useful life. "

The portion that is allocated to

expense in a particular period is
referred to by three different terms:
depreciation, depletion or
amortization.
FACTORS OF DEPRECIATION
Depreciable amount or depreciable cost is the cost of
an asset or other amount substituted for cost, less its
residual value.
Residual value is the estimated amount that an entity
would currently obtain from disposal of an asset,
after deducting the estimated cost of disposal, if the
asset were already of the age and condition except at
the end of the useful life.
Useful life is either the period over which an asset is
expected to be available for use by the entity, or the
number of production or similar units expected to be
obtained from the asset by the entity.
 METHODS OF DEPRECIATION
Straight line method

Cost- residual value = Annual depreciation

Useful life in years
Illustration (Depreciation)
On January 1, 2016 Maganda Company bought
machinery under a contact that required a down
payment of 100,000, plus 24 monthly payments of
50,000 each, for total cash payments of 1,300,000.
The cash price of the machinery was 1,100,000
The machinery has a useful life of 10 years and
residual value of 50,000. The entity used straight
line depreciation.
What amount should be reported as depreciation
for 2016?
Composite method- assets that are
dissimilar in nature or assets that have
different physical characteristics and
vary widely in useful life, are grouped
and treated as a single unit.

Group method- all assets that are similar

in nature and in estimated useful life, are
grouped and treated as a single unit.
Sum of years' digits method

SYD = Life x Life + 1

2
Illustration (Depreciation)
On April 1, 2016, QE Company purchased ew
machinery for 3,300,000. The machinery has an
estimated useful life of five years with residual
value of 300,000. Depreciation is computed by
the sum of the years' digits method.
What is the depreciation for 2016?
What is the depreciation for 2017?
Working hours method- a depreciation
rate/hr is computed by dividing the
depreciable amount by the estimated
useful life in terms of service hours

Declining balance method- a fixed or uniform

rate is multiplied by the declining carrying
amount of the asset in order to arrive at the
annual depreciation.
Double declining method- came to its name
because the straight line rate is doubled.
GOOD LUCK AND GOD
BLESS FUTURE QE
PASSERS!!!

CLAIM IT!!!