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IVLE Lecture Note on
Plant, Property and Equipment

Overview

Background Property, plant and equipment are assets used in the operation of business and often
constitute the largest single asset category of a firm. For accounting purposes, these
so called plant assets or tangible assets are grouped into three sub classifications:
(Dyckman, T., Dukes, R., Davis, C., 1998).
Assets subject to depreciation, e.g., buildings, equipment, etc.
Assets subject to depletion, e.g., mineral deposits, timber tracts, etc.
Land, which is not subject to depreciation or depletion.

Purpose The purpose of this section Plant, Property and Equipment is to illustrate how the
acquisition and disposal of fixed assets may be recorded in the books of the
company.

Nature of
Property, Plant
& Equipment
The term plant, property and equipment is used to describe long lived assets that meet the
following criteria: (Pefianco, E., Mercado, R., 1983)
1. they must possess physical existence;
2. they must be more or less permanent in nature;
3. they must not be held for sale;
4. they must be intended for use in operations; and
5. must undergo depreciation (except land)

In this unit This unit contains the following topics:
Topics See Page
Kinds of Expenditures 2 of G
Purchase of Land 3 of G
Purchase of Property, Furniture or Equipment 4 of G
Cash Purchase of Property, Plant & Equipment 5 of G
Credit Purchase of Property, Plant & Equipment 6 of G
Returns & Allowances on Plant Assets Acquired 8 of G
Partial Payments on Plant Assets Acquired 10 of G
Full Payment of Outstanding Liability 11 of G
Recording Incidental Charges 13 of G
Recording Sale of Property and Equipment 14 of G

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Kinds of Expenditures

Overview Expenditures related to the acquisition and use of operational assets is either
capital expenditures or revenue expenditures. The charge to an expense
account is based on the assumption that the benefits from the expenditure will
be used up in the current period, and the cost should therefore be deducted
from the revenue of the period in determining the net income.

Capital
Expenditure
Expenditures for the purchase or expansion of plant assets are called capital
expenditures and are recorded as asset accounts.

Revenue
Expenditure
Expenditures for ordinary repairs, maintenance, fuel and other items necessary
to the ownership and use of plant and equipment are called revenue
expenditures and are recorded by debiting expense accounts.

Exceptions to
the rule
There are items on the other hand that businesses purchase which will benefit
several accounting periods but whose amounts are relatively low, e.g.,
wastebaskets, pencil sharpeners, etc. These are not capitalized in order not to
be burdened by the yearly computation of the assets depreciation. Thus, for
reasons of convenience and economy, expenditures that are not material in
peso amount are treated in accounting records as expenses of the current
period. In short, any material expenditure that will benefit only the current
period or that is not material in amount is treated as revenue expenditure.

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Purchase of Land

Overview Acquiring a piece of land which will be used as a site where an office building
or a factory may be constructed will be recorded in the books of the buyer as
Land not to be subjected to depletion, i.e., the gradual decrease in the value
of land due to mining or oil extraction purposes.

Terms of
Payment
Purchase of land will cause an increase in assets and the corresponding credit
varies depending on the terms under which the purchase was made. The
purchase may be on
cash basis,
on credit terms,
on credit terms with down payment, or
by signing a mortgage contract for the plant assets.
Land is unique. Its cost is not depreciated/expensed overtime because its
usefulness does not decrease like that of other assets.
Land xxxx
Cash or Mortgage Payable xxxx
Purchased land to be used in the business operation

Land
Improvements
Improvements to real estate such as driveways, fences, parking lots, etc. have
limited life and are therefore subject to depreciation. For this reason, they
should be recorded in separate account called Land Improvements

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Purchase of Property, Furniture or Equipment

Overview Every business organization would need different types of fixed assets to
function efficiently and effectively. In this part, we shall be dealing on how to
record acquisition of different properties of the firm, e.g., land, equipment,
furniture and fixtures. We would also show how to record the eventual sale of
this used plant assets.

Nature of
depreciable
assets
All assets except land decline in usefulness as they age. These depreciable
assets are of useful to the company for only a limited number of years.
Depreciation, as the term is used in accounting, is the allocation of the cost of
a plant asset to expense in the periods in which services are received from the
asset. This is being done for the basic purpose of achieving the matching
principle, i.e., to offset the revenue of an accounting period with the cost of
goods and services being consumed in the effort to generate that revenue

Rule on
acquisition
When property, furniture or equipment is acquired, the purchase may be made
on cash basis, on credit terms with down payment, or by issuing a promissory
note. If the purchase is made under credit terms, the said purchase must be
recorded net of cash discount, if the seller is giving such discount.

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Cash Purchase of Property, Plant & Equipment

Overview Plant assets may be acquired under different purchase terms. In the case of
cash purchase, assets are acquired and fully paid on the date of acquisition.

Effect of cash
purchase
When property, furniture or equipment is acquired by cash purchase, there is
an increase in the asset property and equipment and a decrease in the asset
cash.

Illustration For example, Labrador Trading purchased one IBM computer for P40,000,
cash basis. The entry to record the transaction is:

Office Equipment
Cash
Purchased one IBM computer.
40,000
40,000

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Credit Purchase of Property, Plant & Equipment

Overview A purchase on credit terms of any type of plant assets will either require a
down payment or purely on account basis. At the same time, the seller may or
may not give a cash discount.

Purely credit
without cash
discount
Assuming the purchase made was purely on account basis without any
discounts, this will cause an increase in asset and increase in liability.
Office equipment
Accounts Payable
Purchased IBM computer on account.
40,000


40,000

With
downpayment
without cash
discount
Credit purchase with down payment but without any discounts given will be
recorded by using the following entry:
Office equipment
Accounts Payable
Cash
Purchased IBM computer. Terms: with 50%
down, balance on account.
40,000
20,000
20,000

Credit
purchase with
cash discount
When a credit purchase is with a cash discount, the property acquired must be
recorded net of cash discount.
To illustrate, Labrador Trading purchased a cash register from Omron
Marketing for P30,000. Terms: 2/10, n/30. The entry to record the transaction
is:
Store Equipment
Accounts Payable
Purchased cash register. Terms: 2/10, n/30
29,400
29,400

COMPUTATION: Since there was a cash discount given by the seller,
the applicable amount should be deducted from the liability to be
recorded.
Invoice Price P 30,000
Less: 2% cash discount(30,000*2%) 600
Accounts Payable to be recorded P 29,400
=======
Continued on next page
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Credit Purchase of Property, Plant & Equipment, Continued

Downpayment
and Cash
discount
Recording net of cash discount will also be applied under credit purchase with
down payment and cash discount.
To illustrate, Labrador Trading purchased a cash register from OMRON
Marketing for P30,000. Terms: P10,000 down payment; balance, 2/10, n/30.
The entry to record the transaction is:

Store Equipment
Cash
Accounts payable
Purchased cash register. Terms: with down;
balance, 2/10, n/30.
29,600


10,000
19,600

COMPUTATION: Since the down payment is not to be subjected to the
cash discount, only the liability portion must be recorded at an amount net
of cash discount.

Invoice Price
Less: Down payment
Accounts Payable should be
Less: Cash discount (20,000x2%)
Accounts Payable to be recorded
Add: Down payment
Cost of Store Equipment to be recorded

P 30,000
10,000
20,000
400
19,600
10,000
P 29,600
=======

Reminder It is important to note that the computation started with invoice price, thus,
trade discounts will be treated in the same way it was used in the purchase of
merchandise.

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Returns and Allowances on Plant Assets Acquired

Overview When property, furniture or equipment purchased turns out to be defective,
damaged, or of the wrong specification, the buyer either returns the asset
bought or bargains for a reduction in the acquisition cost of such asset. When
asset bought is returned, there is a decrease in asset and a decrease in liability,
if the asset was originally acquired on credit terms. And the said reduction
must also be recorded net of cash discount if there was a cash discount given
in the term of purchase since returns and allowances are normally treated as
part of the amount subjected to the cash discount. But when property is
purchased on cash basis, allowance granted will be made by way of cash
refunds. This will cause an increase in asset cash and a decrease in asset
property.

Illustration Assume that on July 1, Labrador Trading purchased store shelves and cabinets
from Mansion Inc. for P40,000 less 5. Terms: P10,000 down; balance; 2/10,
n/30. The entry to record the transaction is:

Jul. 1 Store Furniture and Fixture
Cash
Accounts Payable
Purchased cabinet and shelves.
Terms: 10,000 down, balance 2/10, n/30.
37,440
10,000
27,440

COMPUTATION:
List Price
Less: Trade Discount (40,000 x 5%)
Invoice Price
Less: Down payment
Accounts Payable should be
Less: Cash discount (28,000 x 2%)
Accounts Payable to be recorded
Add: Down payment
Cost of Furniture and Fixture to be recorded
P 40,000
2,000
38,000
10,000
28,000
560
27,440
10,000
P 37,440
========

Continued on next page
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Returns and Allowances on Plant Assets Acquired,
Continued

Illustration,
cont
If one of the shelves is subsequently returned by Labrador to Mansion, Inc.
because of some defects, there will be a decrease in liability and also a
decrease in the asset.
Assume that on July 3, Labrador returned one of the cabinets worth P5,000
due to some major defects. The entry to record the transaction is:

July 3 Accounts Payable
Store Furniture and Fixture
Returned one cabinet.
4,900
4,900


COMPUTATION:
Since the original purchase was recorded net of cash discount,
subsequent returns made by the buyer will also be recorded at an amount
net of cash discount.

Amount of returned asset
Less: Applicable cash discount(5,000 x 2%)
Decrease in the liability of the buyer
P5,000
100
P4,900
=====

Defective items It is not uncommon for a seller to replace defective items sold with a new
unit. When this happens, no entry need be made of the return.

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Partial Payments on Plant Assets Acquired

Overview The buyer has the option to make a partial payment of his account to decrease
the amount of his liability prior to his full payment. Partial payment will
reduce liability and asset, cash.

Illustration Assume that on July 5, Labrador Trading made a partial payment of P10,000.
The entry to record the transaction is:

July 5 Accounts Payable
Cash
Made a partial payment.
10,000
10,000

Note: Partial payments, unlike returns, are not recorded net of cash
discount since it will not affect computation of the discount account on
the date payment is made. Partial payments on the other hand will reduce
existing liability of the buyer.

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Full Payment of Outstanding Liability

Overview The buyer can pay his outstanding account within or after the discount period.
If full settlement is made within the discount period, the entry will only reflect
a decrease in liability and cash

Illustration Assume on July 11, Labrador Trading settled his account with Mansion, Inc.
in full. The entry to record this transaction is:

July 11 Accounts Payable
Cash
Full payment of account.
12,540
12,540

COMPUTATION:
Accounts Payable initially recorded
Less: Return of one table
Partial Payment
Account to be paid

P 4,900
10,000

P 27,440

14,900
P 12,540
=======

Reminder It is important to note that the acquisition of property was recorded net of cash
discount on the date asset was bought. Therefore, if the buyer pays his
liability within the discount period, the accounts payable reflected on his
books would be the amount that must be actually paid with the cash discount
already deducted. The cash discount reduces the cost of the property acquired
and not to be recorded in a separate account title such as purchase discount (as
in the case of merchandise)

Continued on next page
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Full Payment of Outstanding Liability, Continued

Illustration Assume that instead of paying on July 11, Labrador paid his account in full
with Mansion, Inc. on July 20. The entry to record the transaction is:

July 20 Accounts Payable
Discount Lost
Cash
Paid account in full.
12,540
460


13,000


COMPUTATION:


Accounts Payable initially recorded
Less: Return of one table
Partial Payment
Accounts Payable balance in the books of the buyer
Add: Discount lost due to paying after discount period
Original amount of Accounts Payable P28,000
Less: Actual amount of return 5,000
Basis for computing cash discount 23,000
Cash discount percentage x 2%
Cash to be paid by the buyer
P 27,440
4,900
10,000
P 12,540




460
P 13,000
=========

Reminder The Discount Lost account is to be included in the Finance Cost category
in the functional income statement since this expense was incurred due to the
failure of the company to take advantage of the discount given to them by the
seller.

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Recording Incidental Charges

Overview The purchase of property, furniture, or equipment may involve additional
expenditures for freight, insurance while asset is in transit, brokerage fees,
handling, storage, customs duties, test runs, installation costs, etc. These
expenditures are usually paid by the buyer and are necessary in order to put
the property in a place and condition ready for use. These expenditures
become part of the cost of acquiring the property, furniture or equipment. In
short, incidental charges are capitalized, i.e., debited to the asset account and
not to an expense account

Illustration Assume that on July 20, 20X1, Labrador Trading bought a delivery van from
Toyota, Inc., Japan for P950,000. Terms: P300,000 down payment; balance,
2/10, n/30. F.O.B. shipping point, collect P3,000. The entries to record the
transaction are:

July 20 Delivery Equipment
Cash
Accounts Payable
Purchased delivery van. Terms: with
down, balance, 2/10, n/30

937,000
300,000
637,000
July 20 Delivery Equipment
Cash
Freight cost of the van purchased.
3,000
3,000

Assume further that Labrador Trading paid for the following incidental
charges for the delivery van bought.
Customs duties
Insurance while in transit
P 20,000
15,000

The entry to record this is:
July 20 Delivery Equipment
Cash
Taxes and insurance paid for the van.
35,000
35,000

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Recording Sale of Property and Equipment

Overview Although property and equipment are not originally intended for sale, these
assets may eventually be sold when they become worn out or obsolete. The
proceeds of the sale will be used to replace old units with new units.
Disposal of property and equipment could be for an amount just sufficient to
recover the book value of the asset at the date of sale or for an amount, which
results in either a gain on the sale or a loss on the sale. A comparison is
made between the selling price and the net book value of the asset sold. Net
book value is the difference between the acquisition cost of the asset and any
depreciation accumulated to date.

Illustration Assume that on July 25, Labrador Trading sold its old typewriter being used
in the office. The said asset was acquired at P20,000 with an accumulated
depreciation to date amounting to P12,000.
Case 1: Assume that the typewriter was sold at P8,000. The entry to record
the transaction is:

July 25 Cash
Accumulated depreciation-Office Equipment
Office Equipment
Sold old typewriter.
8,000
12,000


20,000

COMPUTATION:
Acquisition cost
Less: Accumulated depreciation
Net Book value
Resale price
No gain or loss
P 20,000
12,000
8,000
8,000
-
=======


Continued on next page
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Recording Sale of Property and Equipment, Continued

Illustration,
cont
Case 2: Assume that the typewriter was sold at P10,000. The entry to record
the transaction is:

Cash
Accumulated depreciation-Office Equipment
Office Equipment
Gain on sale of Office Equipment
Sold old typewriter.
10,000
12,000


20,000
2,000

COMPUTATION:
Resale Price
Less: Net Book Value
Acquisition Cost
Less: Accumulated Depreciation
Gain on sale of office equipment


20,000
12,000

10,000


8,000
P 2,000
=======

Case 3: Assume that the typewriter was sold at P7,000. The entry to
record the transaction is:
Cash
Accumulated Depreciation-Office Equipment
Loss on sale of Office Equipment
Office Equipment
Sold old typewriter
7,000
12,000
1,000



20,000

COMPUTATION:
Resale Price
Less: Net Book Value
Acquisition Cost
Less: Accumulated Depreciation
Loss on sale of office equipment


20,000
12,000

7,000


8,000
(P 1,000)
========

Reminder Any gain on the sale of property and equipment is classified as other income
because it is an income from a source which is not from the ordinary course of
business operations. Any loss on the sale is classified as other expense in the
functional income statement.