MODULE 1 – Property Plant and Equipment (Part 1)

1.1. Recognition, Derecognition and Measurement

1.1.1. Definition, Nature and Classes

Did you know that the house where you live is a property, and even the land where your house is still,
even your own computer, may it be laptop or desktop, your bags, shoes, books, pens, and even the
clothes you wear, they are properties.

However, in accounting, properties are defined differently as it must go along the business parlance and
is governed by the PAS 16 Property, Plant and Equipment. Just how does accounting defines property,
plant and equipment?

In accounting, we define property, plant and equipment as 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.

Now, from the very definition of property, plant and equipment, we characterize an item of property,
plant and equipment if the following characteristics are met:

1. That is a tangible asset. This only means that the asset must have physical substance.

2. That is held for use in production or supply of goods or services, for rental to others, or for
administrative purposes. This only means that the asset must be used for business purposes.

3. That is expected to be used during more than one period. This only means that the asset
must be usable for more than one reporting period or simply means more than one year of
usage.

1.1.2 Recognition of Criteria

Now, after defining what it means by property, plant and equipment, let’s imagine that we are in a
business. How do we recognize property, plant and equipment?

We shall recognize an item of property, plant and equipment when, and only when:

1. It is probable that the asset will provide future economic benefits on the advantage of the
company.

2. The cost of that item of property, plant and equipment can be measured with reliability.

Examples of property, plant and equipment:

1. Land
2. Building
3. Machinery and equipment
4. Furniture and other fixtures
5. Automobiles and other vehicles

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 1.1.3 Initial Measurement
Now, after we define and recognize property, plant and equipment, the next is on how we measure an
item of property, plant and equipment for our business? At this point, we’ll consider the initial and
subsequent measurement for accounting purposes.

We shall initially measure an item of property, plant and equipment at cost. Meaning, all the costs that
we incurred necessarily to bring an item of property, plant and equipment for its intended usage.

The next question is, what are the cost that we have to consider for property, plant and equipment?

The cost of an item of property, plant and equipment shall mean the following:

1. The purchase cost or price of the asset, plus any import duties and nonrefundable purchase
taxes, and less any trade discounts and rebates. This shall mean the net purchase or
acquisition cost of the asset.

2. Directly attributable costs incurred in bringing the asset to it intended usage.

Example:
a. Freight or transportation cost and handling costs;
b. Site preparation, installation and testing costs; and
c. Professional fees and cost of employee benefits arising directly form the construction or
acquisition of an item of property, plant and equipment

3. Initial estimate of cost of dismantling and removing the item and restoring the site on which
it is located, this must be required by contract.

Costs other than those mentioned, shall not qualify as part of the cost of an item of property, plant and
equipment.

Therefore, we compute the cost of an item of property, plant and equipment as follows:

Net purchase cost xxx

Add: Directly attributable costs xxx
Add: Cost of dismantling and removing (required by contract) xxx
Total cost of the asset xxx

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 1.1.4 Modes of Acquiring Property, Plant and Equipment

Item of property, plant and equipment in can be acquired thru different modes of acquisition.
I. On Cash Basis

When we acquire PPE on cash basis, the cost of the asset at the moment of purchase is the cash
price equivalent or the amount of cash required to acquire the asset. The total cost of the asset shall
be the cash paid to purchase the asset plus any directly attributable costs incurred computed as
follows:
Purchase price of the asset xxx
Add: Directly attributable costs xxx
Total cost of the asset xxx

Illustration: Acquisition on cash basis

HIGH SPEED Company acquired a machine from a machine developer for P1,200,000 cash. The
company incurred non-refundable purchase taxes of P200,000. The company also incurred
P20,000 for transportation and handling, and P60,000 for site preparation, installation and
testing.
Requirement:
1. The required journal entries to record the acquisition of machine.
2. Compute the total cost of the machine after acquisition.

Requirement 1:
Machine (P1,200,000 + P200,000) P1,400,000
Cash P1,400,000
To record the acquisition of the machine

Machine (directly attributable costs) 80,000

Cash P 80,000
To record the directly attributable costs.

Requirement 2:
Purchase price of the machine (at net purchase price) P1,400,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,480,000

II. On Credit or Account Basis

When we acquire PPE on credit basis, the cost of the asset at the moment of purchase is the invoice
price less any cash discounts whether taken or not taken. This shall mean the net invoice price. The
total cost of the asset shall be the net invoice price to purchase the asset plus any directly attributable
costs incurred computed as follows:
Net invoice price xxx
Add: Directly attributable costs xxx
Total cost of the asset xxx

The accounting for acquisition of assets on credit or account basis may be done through either:
1. Gross Method
2. Net Method
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Illustration: Acquisition on credit basis
HIGH SPEED Company acquired a machine from a machine developer for P1,200,000 on credit. The
term of credit is 2/10, n/30. The company also incurred P20,000 for transportation and handling, and
P60,000 for site preparation, installation and testing.

Requirement:
Under both gross method and net method:
1. The required journal entries to record the acquisition of machine.
2. The required journal entries to record the payment within the discount period.
3. The required journal entries to record the payment beyond the discount period.
4. Compute the total cost of the machine after acquisition.

Gross Method:
Requirement 1:
Machine P1,200,000
Accounts payable P1,200,000
To record the acquisition of the machine.

Machine (directly attributable costs) 80,000

Cash P 80,000
To record the directly attributable costs.

Requirement 2:
Accounts payable P1,200,000
Cash (P1,200,000 – P24,000) P1,176,000
Machine (P1,200,000 x 2%) 24,000
To record the payment of accounts payable.

Requirement 3:
Accounts payable P1,200,000
Purchase discount lost 24,000
Cash P1,200,000
Machine (P1,200,000 x 2%) 24,000
To record the payment of accounts payable.

Requirement 4:
Purchase price of the machinery (at net invoice price) P1,176,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machinery P1,256,000

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 Net Method:
Requirement 1:

Machine P1,176,000
Accounts payable P1,176,000
To record the acquisition of the machine.

Machine (directly attributable costs) 80,000

Cash P 80,000
To record the directly attributable costs.

Requirement 2:
Accounts payable P1,176,000
Cash (P1,200,000 – P24,000) P1,176,000
To record the payment of accounts payable.

Requirement 3:
Accounts payable P1,176,000
Purchase discount lost 24,000
Cash P1,200,000
To record the payment of accounts payable.

Requirement 4:
Purchase price of the machine (at net invoice price) P1,176,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,256,000

Regardless of the method to be used, the amount of cost of the asset shall still be at net amount,
meaning less any cash discount. If the problem is silent, use the gross method.

III. On Installment Basis

When we acquire PPE on instalment basis, we must consider first whether or not there is an
available cash price equivalent for the asset. For that purpose, the following shall be observed:
If there is a cash price equivalent:
a. The cost of the asset at the moment of purchase shall be the cash price equivalent.
b. The excess of the instalment price over the cash price equivalent shall be treated as an implied
interest or discount to be amortized over the credit period using installment balance method.

Illustration: Acquisition on installment basis, with cash price equivalent

HIGH SPEED Company acquired a machine from a machine developer for P1,200,000 on installment.
The term of credit is P300,000 down payment and the P900,000 on three equal annual payments
through issuance of a promissory note. The company also incurred P20,000 for transportation and
handling, and P60,000 for site preparation, installation and testing. At the date of acquisition, the
cash price equivalent of the machine is P1,050,000.
Requirement:
1. The required journal entries to record the acquisition of machine.
2. The required journal entries to record the annual payments.
3. Compute the total cost of the machine after acquisition.

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Requirement 1:
Machine P 1,050,000
Discount on notes payable 150,000
Cash P 300,000
Notes payable 900,000
To record the acquisition of the machine.

Machine (directly attributable costs) 80,000

Cash P 80,000
To record the directly attributable costs.

Requirement 2:
First installment payment:
Notes payable P 300,000
Cash P 300,000
To record the first annual installment payment.

Interest expense P 75,000

Discount on notes payable P 75,000
To record the amortization of discount.

Second installment payment:

Notes payable P 300,000
Cash P 300,000
To record the second annual installment payment.

Interest expense P 50,000

Discount on notes payable P 50,000
To record the amortization of discount.

Third installment payment:

Notes payable P 300,000
Cash P 300,000
To record the third annual installment payment.

Interest expense P 25,000

Discount on notes payable P 25,000
To record the amortization of discount.

The amortization is computed as follows:

Year Balance Fractions Discount Interest/Amortization
First P 900,000 9/18 X P 150,000 = P 75,000
Second 600,000 6/18 X P 150,000 = 50,000
Third 300,000 3/18 X P 150,000 = 25,000
Total P1,800,000 P 150,000

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Requirement 3:
Purchase price of the machine (at cash price equivalent) P1,050,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,130,000

If there is no cash price equivalent:

a. If there is no cash price available at the moment of purchase, the present value of all future
cash payments discounted using an implied interest rate shall be used. This is actually equal
to the discounted value of the gross installment price.
b. The excess of the installment price over the discounted value of all future cash flows shall
be treated as an implied interest or discount to be amortized over the credit period using
effective interest method.

Illustration: Acquisition on installment basis, no cash price equivalent

HIGH SPEED Company acquired a machine from a machine developer for P1,200,000 on installment.
The term of credit is P300,000 down payment and the P900,000 on three equal annual payments
through issuance of a promissory note. The company also incurred P20,000 for transportation and
handling, and P60,000 for site preparation, installation and testing. At the date of acquisition, the
machine has no cash price equivalent available. However, the implied interest for the same
promissory notes in the market is at 12%. The present value factors is 2.40.

Requirement:
1. The required journal entries to record the acquisition of machine.
2. The required journal entries to record the annual payments.
3. Compute the total cost of the machine after acquisition.

Solution:
Annual installment payments P 300,000
Multiplied by: Present value factor x 2.40
Present value of the notes payable P 720,000

Total installment payments (P300,000 x 3 year) P 900,000

Present value of the notes payable 720,000
Discount on notes payable P 180,000

Down payment P 300,000

Add: Present value of the notes payable 720,000
Purchase price of the machine P1,020,000

Requirement 1:
Machine P1,020,000
Discount on notes payable 180,000
Cash P 300,000
Notes payable 900,000
To record the acquisition of the machine.

Machine P 80,000
Cash P 80,000
To record the directly attributable costs.

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Requirement 2:
First installment payment:
Notes payable P 300,000
Cash P 300,000
To record the first annual installment payment.

Interest expense P 75,000

Discount on notes payable P 75,000
To record the amortization of discount.

Second installment payment:

Notes payable P 300,000
Cash P 300,000
To record the second annual installment payment.

Interest expense P 50,000

Discount on notes payable P 50,000
To record the amortization of discount.

Third installment payment:

Notes payable P 300,000
Cash P 300,000
To record the third annual installment payment.

Interest expense P 25,000

Discount on notes payable P 25,000
To record the amortization of discount..

The amortization is computed as follows:

Year Installment At 12% Interest Principal payment Balance
P 720,000
First P 300,000 P 86,400 P 213,600 506,400
Second 300,000 60,768 239,232 267,168
Third 300,000 32,832 267,168 0

Requirement 3:

Purchase price of the machine (at computed amount) P1,020,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,100,000

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IV. Issuance of Share Capital

When we acquire PPE through issuance of share capital, we must consider first the hierarchy of the
proper valuation of the asset acquired. For that purpose, we will observe the following:
1. The fair value of the consideration received shall be used as the amount to be debited to
the asset account. Meaning, the fair value of the asset received and is the most preferred
measurement.
The share capital issued shall be credited at par value, and any excess of the fair value of
the asset over the par value of the share capital issued shall be credited to share premium
account.
2. If the fair value of the asset is not available, the fair value of the share capital issued shall
be used as the amount to be debited to the asset account.
The share capital issued shall be credited at par value, and any excess of the fair value of
the asset over the par value of the share capital issued shall be credited to share premium
account.
3. If neither the fair values are available, the par value of the shares issued shall be used as
the amount to be debited to the asset account.
The share capital shall also be credited at par value. There will be no share premium to be
recognized in this case.
4. Cost incurred that is necessary for the acquisition of the asset such as freight or shipment,
handling costs, testing costs are treated as directly attributable costs to be part of the total
costs of the asset.
5. Cost incurred that is necessary for the issuance of the shares are not treated as directly
attributable costs but are treated as a deduction from the share premium arising from the
issuance of shares. Should there be no share premium arising from the issuance of shares
or when the par value of the shares issued will be used, the same shall be treated as a
reduction against share premium–control account.

Illustration: Acquisition by issuance of share capital

HIGH SPEED Company acquired a machine from a machine developer. The fair value of the machine
is P1,200,000. The acquisition is through issuance of 100,000 ordinary shares with fair value of
P15.00 per share and par value of P10.00 per share. The company also incurred P20,000 for
transportation and handling, and P60,000 for site preparation, installation and testing.
Requirement:
1. Journal entries to record the acquisition of machine using the fair value of the machine.
2. Journal entries to record the acquisition of machine using the fair value of the shares.
3. Journal entries to record the acquisition of machine using the par value of the shares.

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Requirement 1:
Machine P1,200,000
Ordinary share capital (100,000 x P10.00) P1,000,000
Share premium–ordinary shares 200,000
To record the acquisition of the machine.

Machine 80,000
Cash P 80,000
To record the directly attributable costs.

Fair value of the machine P1,200,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,280,000

Requirement 2:
Machine (100,000 x P15.00) P1,500,000
Ordinary share capital (100,000 x P10.00) P1,000,000
Share premium–ordinary shares 500,000
To record the acquisition of the machine.

Machine 80,000
Cash P 80,000
To record the directly attributable costs.

Fair value of the ordinary shares P1,500,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,580,000

Requirement 3:
Machine P1,000,000
Ordinary share capital (100,000 x P10.00) P1,000,000
To record the acquisition of the machine.

Machine 80,000
Cash P 80,000
To record the directly attributable costs.

Par value of the ordinary shares P1,000,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,080,000

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V. Issuance of Bonds Payable
When we acquire PPE through issuance of bonds payable, we must consider first the hierarchy of
the proper valuation of the asset acquired. For that purpose, we will observe the following:
1. The fair value of the liability issued shall be used as the amount to be debited to the asset
account. Meaning, the fair value of the bonds payable and is the most preferred measurement.
The bonds payable shall be credited at face value, and any difference between the fair value of
the bonds payable and the face value of the bonds payable shall either be credited to premium
on bonds payable or debited to discount on bonds payable.
It is a premium if the fair value of the bonds payable is greater than its face value.
It is a discount if the fair value of the bonds payable is less than its face value.
2. If the fair value of the bonds payable is not available, the fair value of the asset received shall
be used as the amount to be debited to the asset account.
The bonds payable shall be credited at face value, and any difference between the fair value of
the asset received and the face value of the bonds payable shall either be credited to premium
on bonds payable or debited to discount on bonds payable.
3. If neither the fair values are available, the face value of the bonds payable shall be used as the
amount to be debited to the asset account.
The bonds payable shall also be credited at face value. There will be no premium or discount to
be recognized in this case.
4. Cost incurred that is necessary for the acquisition of the asset such as freight or shipment,
handling costs, testing costs are treated as directly attributable costs to be part of the total
costs of the asset.

Illustration: Acquisition by issuance of bonds payable

HIGH SPEED Company acquired a machine from a machine developer. The fair value of the machine
is P1,200,000. The acquisition is through issuance of 1,000 bonds with fair value of P850,000 and
face/par value of P1,000,000. The company also incurred P20,000 for transportation and handling,
and P60,000 for site preparation, installation and testing.

Requirement:
1. Journal entries to record the acquisition of machine using the fair value of the bonds.
2. Journal entries to record the acquisition of machine using the fair value of the machine.
3. Journal entries to record the acquisition of machine using the face value of the bonds.

Requirement 1:
Machine P 850,000
Discount on bonds payable 150,000
Bonds payable P1,000,000
To record the acquisition of the machine.

Machine 80,000
Cash P 80,000
To record the directly attributable costs.

Fair value of the bonds payable P 850,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P 930,000

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Requirement 2:
Machine P1,200,000
Bonds payable P1,000,000
Premium on bonds payable 200,000
To record the acquisition of the machine.

Machine 80,000
Cash P 80,000
To record the directly attributable costs.

Fair value of the machine P1,200,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,280,000

Requirement 3:
Machine P1,000,000
Bonds payable P1,000,000
To record the acquisition of the machine.

Machine 80,000
Cash P 80,000
To record the directly attributable costs.

Face/par value of the bonds payable P1,000,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,080,000

VI. Through Exchange Transactions

Exchange transactions are also way of acquiring assets. It is done by exchanging our asset with
another’s asset. The assets involved may be similar or dissimilar in nature.

When we account for exchange transactions, it actually depends whether or not it has commercial
substance. A commercial substance means that there is a significant difference between the benefits
that can be derived from the new asset received from exchange. Therefore, exchange can either be
with commercial substance or lacks commercial substance.

An exchange transaction has a commercial substance if the expected cash flows from the new asset
received differ significantly from the old asset transferred. Otherwise, an exchange transaction lacks
commercial substance if the expected cash flows will not differ from either of the assets subject of
exchange.

With Commercial Substance–No Cash Involved

The following shall be observed:
1. The cost of the new asset at the moment of exchange shall be measured at the fair value of
the old asset transferred. This is the most preferable.
The difference between the fair value and the carrying value of the old asset transferred shall
be treated as gains or losses from exchange to be reported in profit or loss statement.

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 2. If the fair value of the old asset transferred is not available, the fair value of the new asset
received may be used as the cost of the new asset received at the moment of exchange.
The difference between the fair value of the new asset received and the carrying value of the
old asset transferred shall be treated as gains or losses from exchange to be reported in profit
or loss statement.
3. If both fair values are not available, the carrying value of the old asset transferred may be used
as the cost of the new asset received moment of exchange.
There will be no gains or losses shall be recognized in this case.
4. Any directly attributable costs incurred in acquiring the new asset through exchange shall be
treated as part of the total costs of the new asset.

Illustration: Acquisition by Exchange - with commercial substance, no cash involved

HIGH SPEED Company exchanged its second-hand delivery truck with second-hand machine of LOW
SPEED Company. The exchange is said to have commercial substance. The following pertains to the
exchange:
HIGH SPEED LOW SPEED
Fair values P 990,000 P 800,000
Original cost 1,200,000 1,500,000
Accumulated depreciation 600,000 750,000
Carrying/book value 600,000 750,000

The HIGH SPEED Company also incurred P20,000 for transportation and handling, and P60,000 for site
preparation, installation and testing of the machine.

Requirement:
The required journal entries to record the exchange on the books of HIGH SPEED Company.

Solution:
If the fair value of the old asset transferred is used:
Machine P 990,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
Gain on asset exchange 330,000
To record the acquisition of the machine.

Transportation and handling cost P 20,000

Site preparation, installation and testing cost 60,000
Cash P 80,000
To record the directly attributable costs.

Fair value of the old asset P 990,000

Carrying/book value of the old asset 600,000
Gain on exchange P 330,000

Fair value of the asset P 990,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,070,000

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Solution Cont.:
If the fair value of the new asset received is used:
Machine P 800,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
Gain on asset exchange 200,000
To record the acquisition of the machine.

Machine 80,000
Cash P 80,000
To record the directly attributable costs.

Fair value of the new asset P 800,000

Carrying/book value of the old asset 600,000
Gain on exchange P 200,000

Fair value of the asset P 800,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P 880,000

If the carrying value of the old asset transferred is used:

Machine P 600,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
To record the acquisition of the machine.

Machine 80,000
Cash P 80,000
To record the directly attributable costs.

Carrying value of the asset P 600,000

Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P 680,000

With Commercial Substance–With Cash Involved

On the part of the payor (who paid the cash):
The cost of the new asset received shall be the fair value of the old asset transferred plus the cash
payment. The difference between the fair value and the carrying value of the old asset transferred
shall be treated as gains or losses from exchange to be reported in profit or loss statement.
On the part of the payee/recipient (who received the cash):
The cost of the new asset received shall be the fair value of the old asset transferred less the cash
received. The difference between the fair value and the carrying value of the old asset transferred
shall be treated as gains or losses from exchange to be reported in profit or loss statement.

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Illustration: Acquisition by Exchange - with commercial substance, with cash involved
HIGH SPEED Company exchanged its second-hand delivery truck with second-hand machine of LOW
SPEED Company. The exchange is said to have commercial substance. The following pertains to the
exchange:
HIGH SPEED LOW SPEED
Fair values P 690,000 P 800,000
Original cost 1,200,000 1,500,000
Accumulated depreciation 600,000 750,000
Carrying/book value 600,000 750,000
Cash paid by HIGH SPEED to LOW SPEED 110,000

Requirement:
1. Journal entries to record the exchange on the books of HIGH SPEED Company.
2. Journal entries to record the exchange on the books of LOW SPEED Company.

Requirement 1:
Machine P 800,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
Cash 110,000
Gain on asset exchange 90,000
To record the acquisition of the machine.

Fair value of the old asset P 690,000

Carrying/book value of the old asset 600,000
Gain on exchange P 90,000

Fair value of the asset P 690,000

Add: Cash paid 110,000
Add: Directly attributable costs 0
Total cost of the machine P 800,000

Requirement 2:
Delivery truck P 690,000
Cash 110,000
Accumulated depreciation–machine 750,000
Machine P1,500,000
Gain on asset exchange 50,000
To record the acquisition of the delivery truck.

Fair value of the old asset P 800,000

Carrying/book value of the old asset 750,000
Gain on exchange P 50,000

Fair value of the asset P 800,000

Less: Cash received 110,000
Add: Directly attributable costs 0
Total cost of the machine P 690,000

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 Without Commercial Substance
If the exchange lacks commercial substance, the cost of the new asset received at the moment of
exchange will be the carrying value of the old asset transferred. There will be no gains or losses shall
be recognized in this case.
Illustration: Acquisition by Exchange - without commercial substance, w/ cash involved
HIGH SPEED Company exchanged its second-hand delivery truck with second-hand machine of LOW
SPEED Company. The exchange is said to have no commercial substance. The following pertains to the
exchange:
HIGH SPEED LOW SPEED
Original cost P1,200,000 P1,500,000
Accumulated depreciation 600,000 750,000
Carrying/book value 600,000 750,000
Cash paid by HIGH SPEED to LOW SPEED 150,000

Requirement:
1. Journal entries to record the exchange on the books of HIGH SPEED Company.
2. Journal entries to record the exchange on the books of LOW SPEED Company.

Requirement 1:
Machine P 750,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
Cash 150,000
To record the acquisition of the machine.

Carrying value of the asset P 600,000

Add: Cash paid 150,000
Add: Directly attributable costs 0
Total cost of the machine P 750,000

Requirement 2:
LOW SPEED Company (recipient of cash):

Delivery truck P 600,000

Cash 150,000
Accumulated depreciation–machine 750,000
Machine P1,500,000
To record the acquisition of the delivery truck.

Carrying value of the asset P 750,000

Less: Cash received 150,000
Add: Directly attributable costs 0
Total cost of the machine P 600,000

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Illustration: Acquisition by Exchange - without commercial substance, no cash involved
HIGH SPEED Company exchanged its second-hand delivery truck with second-hand machine of LOW
SPEED Company. The exchange is said to have no commercial substance. The following pertains to the
exchange:

HIGH SPEED LOW SPEED

Original cost P1,200,000 P1,500,000
Accumulated depreciation 600,000 750,000
Carrying/book value 600,000 750,000
Cash paid by HIGH SPEED to LOW SPEED 150,000

Requirement:
1. Journal entries to record the exchange on the books of HIGH SPEED Company.
2. Journal entries to record the exchange on the books of LOW SPEED Company.

Requirement 1:
Machine P 600,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
To record the acquisition of the machine.

Carrying value of the asset P 600,000

Total cost of the machine P 600,000

Requirement 2:
Delivery truck P 750,000
Accumulated depreciation–machine 750,000
Machine P1,500,000
To record the acquisition of the delivery truck.

Carrying value of the asset P 750,000

Total cost of the machine P 750,000

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VII. Trade-in Transactions

Trade-in happens when we buy a new asset and exchange our asset (similar asset) as part of the
purchase price of the new asset. It typically occurs when the seller of the asset allows us, due to
short of cash at the moment of sale, to exchange a similar asset as cover up of the cash shortage.
A trade-in transaction is an example of an exchange with commercial substance. It has commercial
substance since in a trade-in transaction a significant amount of cash is involved. Therefore, it is not
a trade-in transaction if the exchange involves an amount of cash that is lower in amount than the
value of the asset to be traded.
Trade in transaction can be accounted either under of the following methods:
1. Fair value method
2. Trade-in value method

Fair Value Method:

Under this method the cost of the new asset at the moment of purchase shall be the fair value of
the old asset traded in plus the cash payment. The difference between the fair value and the
carrying value of the old asset traded in shall be treated as gains or losses from exchange to be
reported in profit or loss statement.
Trade-in Value Method:
Under this method the cost of the new asset at the moment of purchase shall be the trade-in value
of the old asset traded in plus the cash payment. In effect, it is the list price for the new asset that
shall be used.
Therefore, trade-in value is computed as the difference of the new asset’s list price and the cash
payment. The difference between the trade-in value and the carrying value of the old asset traded
in shall be treated as gains or losses from exchange to be reported in profit or loss statement.

Illustration: Acquisition by Trade-in Exchange with commercial substance,

HIGH SPEED Company acquired a new machine for the business costing P3,500,000. During the
transaction, the company found out that it was short with cash having only P2,500,000 and had
agreed with the dealer to allow him to give an old machine in lieu of the amount of cash short.
The following pertains to the old machine:
Original cost P2,600,000
Accumulated depreciation 1,950,000
Fair value 800,000
The HIGH SPEED Company also incurred P20,000 for transportation and handling, and P60,000 for
site preparation, installation and testing of the machine.
Requirement:
1. The required journal entries to record the transaction under fair value method.
2. The required journal entries to record the transaction under trade-in value method.

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Requirement 1:
Machine–new P3,300,000
Accumulated depreciation–old machine 1,950,000
Cash 2,500,000
Machine–old 2,600,000
Gain on asset exchange 150,000
To record the acquisition of the new machine.

Machine-new 80,000
Cash P 80,000
To record the directly attributable costs.

Fair value of the old asset P 800,000

Carrying/book value of the old asset (P2,600,000 – P1,950,000) 650,000
Gain on exchange P 150,000

Fair value of the asset P 800,000

Add: Cash paid 2,500,000
Total P3,300,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P3,380,000

Requirement 2:
Machine–new P3,500,000
Accumulated depreciation–old machine 1,950,000
Cash 2,500,000
Machine–old 2,600,000
Gain on asset exchange 350,000
To record the acquisition of the new machine.

Machine-new 80,000
Cash P 80,000
To record the directly attributable costs.

List price or total price of the new asset P3,500,000

Less: Cash paid 2,500,000
Trade-in value of the old asset P1,000,000
Carrying/book value of the old asset (P2,600,000 – P1,950,000) 650,000
Gain on exchange P 350,000

Trade-in value of the asset P1,000,000

Add: Cash paid 2,500,000
Total P3,500,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P3,580,000

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VIII. Through Donations
When we acquire PPE through donations, IFRS or IAS does not address the accounting for donations
at its broadest scope. However, Philippine GAAP provides that donations or contributions in any
form from shareholders shall be recognized at the fair value of the donated items with a
simultaneous recognition of the amount to a donated capital account, a component of the share
premium–control account.
Cost incurred that is necessary for the acquisition of the asset such as freight or shipment, handling
costs, testing costs are treated as directly attributable costs to be part of the total costs of the asset.
However, cost incurred that is necessary for the donations from shareholders such as registration
and other legal fees incurred necessary to took effect the donation shall be charged (as a deduction)
against donated capital account for purposes of financial statement presentation.

Illustration: Acquisition by way of Donations

HIGH SPEED Company acquired a new machine through the donations of its shareholders. The
machine is fairly valued at P1,200,000 at the time of donation. The company incurred P20,000
legal and other registration fees to complete the donation. Also, the company incurred P80,000
for the installation and testing of the machine.

Requirement:
The journal entries to record the donation transaction.

Solution:
Machine P1,200,000
Donated capital P1,200,000
To record the receipt of machine through donation.

Machine P 80,000
Cash P 80,000
To record the directly attributable costs.

Donated capital P 20,000

Cash P 20,000
To record the cost incurred on the donation

Fair value of the asset P1,200,000

Add: Directly attributable costs (installation and testing cost only) 80,000
Total cost of the machine P1,280,000

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IX. Through Self-Construction
When we acquire PPE through self-construction, the cost of the newly constructed asset shall
include the following:
1. Cost of direct materials used in the construction
2. Cost of direct labor incurred and paid to direct laborers
3. Other construction overheads incurred necessary for the construction such as those
construction supplies and salaries and wages not categorized as direct (indirect but
necessary or traceable to the construction of the asset), and other construction utilities such
as water bills, electricity bills, depreciation of the construction equipment, etc.

Illustration: Self-construction
HIGH SPEED Company constructed a new building during 2019. The construction was a project for
business expansion purposes. The following costs were incurred for the year:
Cost of construction traceable materials P1,500,000
Cost of labor to construction personnel 2,200,000
Cost of supplies needed during construction 600,000
Salary paid to construction supervisor 200,000
Salary paid to janitors of administrative buildings 100,000
Utilities incurred during construction 300,000
Utilities incurred in the administrative buildings 500,000
Depreciation of the construction machine and equipment 600,000
Depreciation of the administrative buildings 800,000

Requirement:
Compute the cost of the new building acquired through self-construction.

Solution:
Cost of construction traceable materials (direct material cost) P1,500,000
Add: Cost of labor to construction personnel (direct labor cost) 2,200,000
Add: Construction overhead costs
Cost of supplies needed during construction P 600,000
Salary paid to construction supervisor 200,000
Utilities incurred during construction 300,000
Depreciation of the construction machine and equipment 600,000 1,700,000
Total cost of the new building P5,400,000

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 1.1.5 Subsequent Measurement

After the initial measurement, we shall subsequently measure an item of property, plant and
equipment either under of the following:
1. Cost model – which means that the initial measurement of property, plant and equipment at cost
less any accumulated depreciation and any accumulated impairment losses.

Initial cost xxx

Less: Accumulated depreciation xxx
Less: Accumulated impairment losses xxx
Carrying value xxx

2. Revaluation model – which means that the property, plant and equipment are carried at a revalued
amount, being the fair value at revaluation date, less any accumulated depreciation and any
subsequent accumulated impairment losses subsequent from the revaluation date.

Revalued amount xxx

Less: Accumulated depreciation, subsequent from the revaluation date xxx
Less: Accumulated impairment losses, subsequent from the revaluation date xxx
Carrying value xxx

Subsequent measurement, Depreciation, Revaluation model & Impairment will be discussed in PPE Part 3.

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