CHAPTER

BLUE NOTES
16 S
L
Property, Plant and Equipment are tangible assets that are held for use in production or supply of goods or services, for
rental to others, or for administrative purposes, and are expected to be used during more than one period.

Requisites:
a. Tangible, meaning with physical substance
b. Used in business
c. Expected to be used for more than one year. Hence they are classified as noncurrent assets.

Measurement
A. Initial Measurement = at Cost*
B. Subsequent Measurement
Either:
Cost Model = Cost less accumulated depreciation and accumulated impairment losses
Revaluation Model = Fair value at the revaluation date less any subsequent accumulated depreciation
and subsequent accumulated impairment loss.

Cost* Includes Cost* Excludes

 Purchase price including import duties and
nonrefundable purchase taxes after deducting
trade discounts and rebate.
 Cost directly attributable to bringing the asset to
the location and condition necessary for it to be
capable of operating in the manner intended by
the management.
 Cost of employee benefits arising directly
from the construction or acquisition of the
item of property, plant and equipment
 Cost of site preparation
 Initial delivery and handling cost
 Installation and assembly cost
 Professional fees
 Costs of testing whether the asset is
functioning properly less net proceeds from
selling any items produced while bringing the
asset to that location and condition.
 Initial estimate of costs of dismantling and
removing the item and restoring the site on which
it is located
 Cost of opening new facility
 Costs of introducing a new product or service, like
advertising and promotions
 Costs of conducting business in a new location or
with a new class of customer, including costs of
staff training
 Administrative and other general overhead costs
 Costs incurred while an item capable of operating
in the manner intended by the management has
yet to be brought into use or is operated at less
than full capacity
 Initial operating losses
 Costs of relocating or reorganizing part or all of an
entity’s operations

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60 USL Blue Notes Chapter 16 – Property, Plant and Equipment

Measurement of Cost*
A. Acquisition on a Cash Basis Cost = Cash Price

B. Acquisition on Account Cost = Purchase Price less Cash discount whether taken or not

C. Acquisition on Installment Basis Cost = Cash Price Equivalent

D. Issuance of Share Capital Cost = (in order of priority)

1. fair value of the property, plant and equipment received
2. fair value of the equity instrument issued
3. par or stated value of the equity instrument issued

E. Issuance of Bonds Payable Cost = (in order of priority)

1. Fair value of the bonds
2. Fair value of the asset
3. Face value of the bonds

F. Exchange
Either:
With Commercial Substance Without Commercial Substance

1. No cash is involved, cost of the asset
acquired shall be measured in the
following order of priority:
a. Fair value of property given
b. Fair value of property received
c. Book value of the property given
a. On part of the payor – cost of asset
given plus cash payment
b. On part of the recipient – cost of asset
given minus cash received
Note: No gain or loss shall be recognized.

2. If cash is involved, the cost of the asset

acquired shall be measured in the
following:
a. On part of the payor - Fair value of
property given plus cash payment.
b. On part of the recipient - Fair value
of property given minus cash
received

G. Trade-in Cost = (in order of Priority)

1. Fair value of the asset given plus cash payment
2. Trade-in value of the asset given plus cash payment ( in effect,
this is the fair value of the asset received)

H. Donation Cost = Fair Value of the Property

Note: Expenses relating to the donation shall be charged against donated capital account.
Directly attributable costs incurred, such as installation and testing cost to bring the
donated asset to the location and condition for its intended use shall be capitalized.

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Chapter 16 – Property, Plant and Equipment USL Blue Notes 61

I. Construction Cost = Direct Materials

Direct Labor
Incremental overhead specifically identifiable or traceable to the
construction
Note: Savings from the construction shall not be recognized in the financial statements.
Cash flows from activities occurring before or during construction that are not necessary
in bringing the asset to condition for use shall not be included in determining the cost of
the asset.

The carrying amount of property, plant and equipment shall be derecognized upon:
a. Disposal
b. Or when no future economic benefits are expected from its use or disposal
Note:Gain or loss on derecognition shall be recognized in P/L.

Fully depreciated property shall not be removed from accounts.

Property Classified as Held for Sale

 an item of property, plant and equipment is classified as “held for sale” if the asset is available for immediate
sale in its present condition within one year from the date of classification as held for sale.
 an entity shall measure a noncurrent asset classified as held for sale at the lower of its carrying amount or fair
value less cost to sell. Any writedown is charged to impairment loss.
 no depreciation shall be recognized anymore.
 reflected in the statement of financial position separately as current asset
Note: an entity shall not classify as held for sale a noncurrent asset that is to be abandoned.

Illustrative Problems

1. Raynum Corporation had the following transactions regarding its property plant and equipment:
a. Issued P5 par 200, 000 ordinary shares out of its 400, 000 authorized sharesin exchange for 4, 000, 000
cash and land with a fair market value of 2, 500, 000. On the same date, the shares of Raynum Corporation
are selling at P26.
b. Incurred the following expenses for the construction of building:
Direct Materials 1, 000, 000
Site Labor Cost 2, 500, 000
Incremental Costs Incurred 250, 000
Interest imputed from financing the construction 400, 000
Wasted Materials (300, 000 normal) 800, 000
Total Costs Incurred 4, 950, 000

Building could have been purchased from outside parties at 5, 250, 000

c. Purchased machinery for 250, 000 cash.

d. Purchased truck #1 for 500, 000 3/10, n/30. The discount was not availed.
e. Purchased truck #2 at an installment price of 600, 000 by issuing notes. The installment will be payable in 3
equal installment. The cash price equivalent of the purchase is 450, 000.
f. Issued 8% 1, 000 bonds of 1, 000par to finance the purchase of equipment. The bonds are selling in the
market at 98. The equipment’s fair value at that time was 900, 000.
g. An investment in equity security valued at the market for 700, 000 and costing 800, 000 was exchanged for
an equipment with a fair value of 750, 000. Additional cash payment was made by Raynum for 30, 000.

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62 USL Blue Notes Chapter 16 – Property, Plant and Equipment

h. Raynum entity traded an old equipment with a dealer of a new model. The following data are available:
Old equipment:
Cost 1, 000, 000
Accumulated depreciation 750, 000
Book Value 250, 000
Fair Value 300, 000
Trade-in Value 400, 000

New equipment:
List Price 2, 000, 000
Trade-in value of old equipment (400, 000)
Cash Payment 1, 600, 000

The following journal entries shall be made in the books of Raynum Corporation regarding its transaction involving
property, plant and equipment:

ACCOUNT TITLE Debit Credit

a. Cash 4, 000, 000
Land 2, 500, 000
Share Capital – ordinary shares 1, 000, 000
Share Premium – ordinary shares 5, 500, 000

b. Building 4, 650, 000

Abnormal wastes 300, 000
Cash 4, 950, 000

c. Machinery 250, 000

Cash 250, 000

d. Truck No. 1 485, 000

Accounts Payable 485, 000

Accounts Payable 98, 000

Purchase Discount Lost 2, 000
Cash 100, 000

e. Truck No. 2 450, 000

Discount on Notes Payable 150, 000
Notes Payable 600, 000

f. Equipment 980, 000

Discount on Bonds Payable 20, 000
Bonds Payable 1, 000, 000

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Chapter 16 – Property, Plant and Equipment USL Blue Notes 63

g. Equipment 730, 000

Loss on Exchange 100, 000
Investment in Equity Security 800, 000
Cash 30, 000

h. Equipment – new 1, 900, 000

Accumulated Depreciation 750, 000
Equipment – old 1, 000, 000
Cash 1, 600, 000
Gain on exchange 50, 000

Note:
 The discount on the notes and bonds shall be amortized through the credit term using simple amortization method since no effective
interest rate is given.
 In journal entry (g), fair value of the asset given is determinable and therefore shall be used in measuring the value of the asset
received.
 Using journal entry (g), in case the transaction lacks commercial substance, the value of the asset received shall be the cost of asset
given plus the cash payment.
 In journal entry (h), fair value approach is used since the fair value of the asset given is determinable. However, if the fair value is not
determinable, then trade-in value approach shall be used. Under trade-in value approach, the list price of the asset acquired shall be
the cost measurement of the asset to be recorded.

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