PAS 20 - Government Grants • The entity will comply with the

conditions attaching to the

"assistance by government in the form
grant.
of transfer of resources to an entity in
return for part or future compliance • The grant will be received.
with certain conditions relating to the
EXAMPLE – Conditional Grant
operating activities of the entity".
• On April, 20x1, the Philippine
EXAMPLE – Unconditional Grant
Government gave Pfizer
• On April, 20x1, the Philippine Pharmaceutical P1,000,000 to
Government gave Pfizer develop a vaccine for covid-19.
Pharmaceutical P1,000,000 to
• The grant will be receivable
develop a vaccine for covid-19.
once the vaccine is available.
• There was no condition
• The vaccine was available on
attached to the grant.
April 20x2.
Prepare journal entries.
Prepare journal entries.
• Since no condition was attached
Journal entries:
the grant will be recognized as
an income when receivable or April 20x1
upon receipt. The journal entry
Cash/AR 1,000,000
would be:
Deferred income - grant
Cash/AR 1,000,000
1,000,000
Income from gov’t grant
Journal entries:
1,000,000
April 20x2
Deferred income - grant 1,000,000
Recognition Principle
Income from gov’t grant
Government grant, including
1,000,000
nonmonetary grant at fair value, shall
be recognized when there is
reasonable assurance that:
Grant related to an expense/income 20x3 20M 20/80 250,000
• These are grants that is given as 20x4 15M 15/80 187,500
a subsidy to a private entity.
20x5 20M 20/80 250,000
• The grant is recognized as an
Total 80M 1,000,000
income as the entity continue
to provide services to the
public.
Journal entries:
EXAMPLE – Related to income
Jan. 20x1
• On January 1, 20x1, MRT
Cash 1,000,000
received a P1,000,000 grant to
operate for the next 5 years. Deferred income – grant
1,000,000
• This will prevent them MRT to
increase its fare for 5 years. Dec. 20x1
• Its operating cost for the next 5 Deferred income – grant 125,000
years are as follows:
Income from grant
• Year Cost 125,000
• 20x1 10M Dec. 20x2
• 20x2 15M Deferred income – grant 187,500
• 20x3 20M Income from grant
187,500
• 20x4 15M
Dec. 20x3
• 20x5 20M
Deferred income – grant 250,000
Determine the grant to be recognized
each year. Income from grant
250,000
Year Cost ratio Grant
Dec. 20x4
20x1 10M 10/80 125,000
Deferred income – grant 187,500
20x2 15M 15/80 187,500
 Income from grant Prepare journal entries.
187,500
Analysis:
Dec. 20x5
• The grant shall be recognized as
Deferred income – grant 250,000 a deferred income.
Income from grant • The grant shall be recognized as
250,000 income systematically over the
useful life of the asset.
Journal entries:
Grant related to asset
Jan. 1, 20x1
• Given to an entity for
purchasing, constructing or Cash 10M
otherwise acquire long-term
Deferred income – grant
asset.
10M
• May be recognize as a deferred
to record the receipt of grant
income or a reduction of asset.
Building 50M
EXAMPLE – Related to asset, deferred
income Cash 50M
• On January 1, 20x1, X Co. to record the acquisition of building
received a P10M grant to
Dec. 31, 20x1
acquire a building and operate
as a public school. The building Depreciation expense (50M/20)
cost 50M. 2.5M
• Useful life is 20 years with zero Accumulated depreciation
salvage value. Straight-line 2.5M
method is used.
to record the depreciation of the
• X Co. recognized the grant as building
deferred income.
Dec. 31, 20x1
Deferred income (10M/20) 0.5M
Income from grant 0.5M
to record the grant income based on to record the grant as a reduction of
useful life of the asset. asset
Dec. 31, 20x1
EXAMPLE – Related to asset, reduction Depreciation expense (40M/20)
of cost 2M
• On January 1, 20x1, X Co. Accumulated depreciation
received a P10M grant to 2M
acquire a building and operate
to record the depreciation of the
as a public school. The building
asset
cost 50M.
NOTE:
• Useful life is 20 years with zero
salvage value. Straight-line • No need to recognized grant
method is used. income
• X Co. recognized the grant as
reduction of cost.
COMPARISON
Prepare journal entries.
Assuming the same problem:
Analysis:
• The revenue for 20x1 was 10M.
• The grant shall be netted
Compare the two approaches.
against the cost of the asset.
COMPARISON – Asset
Journal entries:
Deferred Reduction
Jan. 1, 20x1
Cost of building 50M 50M
Building 50M
Grant (10M)
Cash 50M
Accum. Dep’n (2.5M) (2M)
to record the acquisition of building
Carrying amount 47.5M 38M
Cash 10M
Building 10M
COMPARISON – Deferred income EXAMPLE - Repayment of grant
Deferred Reduction Using the previous problem:
Deferred income 10M - • Assume that the grant become
repayable in January 1, 20x2.
Recognized income 0.5M -
Prepare the journal entries
Carrying amount 9.5M -
Journal entry: Deferred grant
COMPARISON – Net income
Jan. 1, 20x2
Deferred Reduction
Deferred grant (10M – 0.5M) 9.5M
Revenue 10M 10M
Loss on repayment of grant 0.5M
Depreciation expense (2.5M) (2M)
Cash 10M
Grant income 0.5M -
Journal entry: Reduction of Cost
Net income 8M 8M
Jan. 1, 20x2
Building 10M
Repayment of grant
Cash 10M
• A government grant that
becomes repayable because Loss on repayment of grant 0.5M
conditions of receipt have not
Accumulated depreciation
been met shall be accounted
0.5M
for as a change in accounting
estimate.
• It shall be charged against the
deferred income account.
• If the grant was netted to an
asset, it shall be recorded as an
increase in asset.
• Any difference shall be
recognized in P/L.
PAS 23 - Borrowing Cost
“Interest expense that are allowed to
be capitalized”
Qualifying Asset
Qualifying assets include:
• Manufacturing plants
• Power generation facilities
• Intangible assets
• Investment properties
Not qualifying assets include:
• Assets at fair value
• Inventories
• Assets that are ready for the
intended use or sale when
acquired.
Commencement of Capitalization
• When the entity incurs
expenditures for the asset.
• When the entity incurs
borrowing cost.
• When the entity undertakes
activities that are necessary to
prepare the asset for the
intended use or sale.
Recognition of Borrowing Costs
SPECIFIC BORROWINGS
• Borrowings incurred to
specifically finance the
construction of the qualifying
asset.
SPECIFIC BORROWINGS
• The capitalizable borrowing
cost is equal to the actual
borrowing cost incurred during
the construction period
• Minus any investment income
from the temporary investment
of the specific borrowing.
SPECIFIC BORROWINGS – EXAMPLE
• On January 1, X Co. took a loan
of P10,000,000 specifically to
finance the construction of a
building costing P20,000,000.
• Interest rate is 12%.
• The unused loan was reinvested
and produced P20,000
investment income.
SPECIFIC BORROWINGS – EXAMPLE
• The building was completed in
December 31.
Prepare journal entries:
Journal entries: • Borrowings that are specifically
incurred to finance the
Cash 10M
qualifying asset.
Loans payable 10M
• Borrowing cost shall be
to record the acquisition of loan computed as follows:

Building 20M GENERAL BORROWINGS

Cash 20M 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝑐𝑜𝑠𝑡=𝐴𝑣𝑒. 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑥
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
to record the completion of building
The borrowing cost shall not exceed
Building (10M x 12%) 1.2M
the actual interest.
Interest payable 1.2M
• Capitalization rate is equal to
to record the borrowing cost the average interest rate.

Cash/AR (Inv. Income) 20K • Investment income from

borrowings are not deducted.
Building 20K
GENERAL BORROWINGS – EXAMPLE
to record the income from specific
borrowings On January 1, X Co. will construct a
building at a cost of P20M. X Co. had
the following loans:
• 12%, P10M Loans payable
• 10%, P20M Loans payable
The following expenditure is as follows:
January 1 – P10M
July 1 – 5M
Oct 1 – 5M
Recognition of Borrowing Costs
The building was completed in
GENERAL BORROWINGS December 31.
 Building 1.467M
Interest expense 1.733M
Interest payable 3.2M

To compute for the average interest

rate: Another example using the original
3,200,000/30,000,000 = 10.67% information except that the loans are
as follows:
To compute for the borrowing cost:
• 12%, 1M and
13.75M x 10.67% = 1.467M
• 10%, 2M Loans payable
To compute for the average interest
Journal entries: January 1 rate:
Building 10M Loan Interest rate Interest
Cash 10M 1,000,000 12% 120,000
Journal entries: July 1 2,000,000 10% 200,000
Building 5M 3,000,000 320,000
Cash 5M To compute for the average interest
Journal entries: October 1 rate:

Building 5M 320,000/3,000,000 = 10.67%

Cash 5M To compute for the borrowing cost:

Journal entries: December 31 13.75M x 10.67% = 1.467M

 Oct 1 – 5M
This time the borrowing cost, P1.467M The building was completed in
is higher than the actual interest, 320K. December 31.
The borrowing cost to be recognize is
the actual interest, as follows:
Building 320K
Interest payable 320K

Recognition of Borrowing Costs

SPECIFIC AND GENERAL
The specific borrowings will be
deducted from the average
expenditure in computing general
borrowing cost.

SPECIFIC AND GENERAL - EXAMPLE

On January 1, X Co. will construct a
building at a cost of P20M. X Co. had
the following loans:
• 12%, P10M Loans payable
• 10%, P20M Loans payable
• Specific borrowings, 12%, P10M
Loans payable
The following expenditure is as follows:
January 1 – P10M
July 1 – 5M

PAS 28 - Investment in Associates
“An entity where an investor had a
significant influence”
Significant Influence
• The power to participate in the
financial and operating policy
decisions of the associate.
• It is a matter of professional
judgment.
• If the investor has 20% or more
interest in the associate, it is
presumed to have significant
influence.
If the investor has less than 20%, he
can still have significant influence if he
can demonstrate the following:
• Representation in the board of
directors
• Participation in policy making
process
• Material transactions between
the investor and the investee
• Interchange of managerial
personnel
• Provision of essential technical
information
Initial Measurement
• Investment in associates is
measured initially at cost, that
is, the transaction price and the
transaction cost.
EXAMPLE 1
• X Co. acquired the 30% interest
of Z, Inc., for P2,000,000 cash.
Journal entry
Investment in associate 2M
Cash 2M
EXAMPLE 2
• X Co. acquired the 18% interest
of Z, Inc., for P2M cash. X Co.
paid transaction cost of P200K.
• X Co. can demonstrate that he
has significant influence.
Journal entries:
Investment in associate 2.2M
Cash 2.2M
Subsequent Measurement to record the acquisition of the
investment
• Investment in associates shall
be subsequently measured Investment in associates 200K
using “Equity Method”
Investment income 200K
• Equity method recognizes the
(1,000,000 x 20%) to record the share
share in the associate’s net
in net income
income as investment income.
Dividend receivable 100K
• However, recognizes the share
in the dividends as return of Investment in associates
investment. 100K
EXAMPLE 3 (500,000 x 20%) to record the share in
dividends
• On January 1, 20x1, X Co.
acquire 20,000 shares of Z, Inc.,
who has 100,000 shares
outstanding for P2.5M.
• Z, Inc., had net income of P1M
in 20x1.
• On October 1, 20x1, Z, Inc.,
declared dividends of P500K.
EXAMPLE 4
Prepare journal entries
• On July 1, 20x1, X Co. acquire
Analysis of significant influence: 20,000 shares of Z, Inc., who
has 100,000 shares outstanding
X Co. acquired 20,000 shares out of
for P2.5M.
100,000 shares outstanding. Therefore,
it acquired 20% (20,000/100,000) • Z, Inc., had net income of P1M
interest. in 20x1.

Journal entries • On October 1, 20x1, Z, Inc.,

declared dividends of P500K.
Investment in associates 2.5M
Cash 2.5M
Prepare journal entries • Z, Inc., had 10% cumulative
preference share of P1.5M.
Journal entries
• On October 1, 20x1, Z, Inc.,
Investment in associates 2.5M
declared dividends of P500K to
Cash 2.5M the ordinary shareholders.

to record the acquisition of the

investment
Investment in associates 100K
Prepare journal entries
Investment income 100K
Deduct first the dividends attributable
(1,000,000 x 6/12 x 20%) to record the to the cumulative preference
share in net income shareholders regardless if not declared.

Dividend receivable 100K Preference share dividends =

Investment in associates P1.5M x 10% = 150K

100K
(500,000 x 20%) to record the share in
dividends

Journal entries
Associate with Preference Shares Investment in associates 170K
EXAMPLE 5 Investment income 170K
• On Jan. 1, 20x1, X Co. acquire Dividend receivable 100K
20,000 shares of Z, Inc., who
has 100,000 shares outstanding Investment in associates
for P2.5M. Z, Inc., had net 100K
income of P1M in 20x1.
(500,000 x 20%) to record the share in • Impairment loss occur when the
dividends “recoverable amount” is less
than the “carrying amount”
Carrying amount
• The value recorded in the books
of accounts
Recoverable amount
The higher between:
PAS 36 - Impairment of Non-Financial
Assets 1. Fair value less cost of disposal;
and
“The fall of the market value of an
asset” 2. Value in use, the present value
of cash flows.
External sources
EXAMPLE 1
• Decrease in market value
• On January 1, 20x1, X Co.
• Change in technology purchased a machine for P100K
• Increase in interest rate and depreciate it using straight-
line method for 10 years. The
• Over-capitalization machine had no residual value.
Internal sources • On January 1, 20x4, there was
• Obsolescence an indication that the machine
was impaired.
• Worsening of economic
performance • On such date, X Co. determined
that the fair value of the
Recognition machine was P75,000, cost to
• Impairment testing is done sell was P3,000.
when there is an indication of • The value in use of the machine
impairment except on goodwill was P60,000.
which is tested annually.
Prepare journal entries.

Carrying amount P70,000
Fair value less cost to sell
Value in use (given) P60,000
Is the machine impaired?
EXAMPLE 2
• On January 1, 20x1, X Co.
purchased a machine for P100K
and depreciate it using straight-
line method for 10 years. The
machine had no residual value.
• On January 1, 20x4, there was
an indication that the machine
was impaired.
• On such date, X Co. determined
that the fair value of the
machine was P65,000, cost to
P72,000 sell was P3,000.
• The value in use of the machine
was P60,000.

Answer is NO. Prepare journal entries.

Recoverable amount is the higher Compute for fair value less cost to sell:
between: Fair value P65,000
Fair value less cost to sell P72,000 Cost to sell (3,000)
Value in use (given) P60,000 Fair value less cost to sell P62,000
Recoverable amount is P72,000 Carrying amount P70,000
Fair value less cost to sell P62,000
Recoverable amount is P72,000 Value in use (given) P60,000
Carrying amount is 70,000 Is the machine impaired?
Recoverable amount is greater than Answer is YES.
CA, therefore it is not impaired.
Recoverable amount is the higher
between:
Fair value less cost to sell P62,000 • On January 1, 20x4, there was
an indication that the machine
Value in use (given) P60,000
was impaired.
Recoverable amount is P62,000
• On such date, X Co. determined
that the fair value less cost to
sell of the machine was
Recoverable amount is P62,000
P40,000.
Carrying amount is 70,000
• The machine is expected to
Recoverable amount is less than CA, generate P10,000 throughout
therefore it is impaired. its remaining life discounted at
10%.
Journal entry:
Prepare journal entries.
Impairment loss 8,000
Accumulated depreciation
8,000
Presentation after impairment:
Machine 100,000
Accumulated depreciation (38,000)
Carrying amount, Jan, 20x4 62,000
“The carrying amount is equal to the
recoverable amount.” Journal entry:
Impairment loss 21,316
EXAMPLE 3 – Value in use Accumulated depreciation
• On January 1, 20x1, X Co. 21,316
purchased a machine for P100K Presentation after impairment:
and depreciate it using straight-
line method for 10 years. The Machine 100,000
machine had no residual value.
Accumulated depreciation (51,316)
Carrying amount, Jan, 20x4 48,684
“The carrying amount is equal to the • On January 1, 20x5, the
recoverable amount.” recoverable amount was
P65,000
Prepare journal entries.
Reversal of Impairment
The impairment loss was:
"the increased carrying amount of an
asset due to a reversal of an Recoverable amount 45,000
impairment loss shall not exceed the
Carrying amount, Jan. 20x4 (70,000)
carrying amount that would have been
determined had no impairment loss Impairment loss (25,000)
been recognized for the asset in prior
years."
Journal entry of Jan. 20x4
“furthermore, the recovery should not
exceed the amount of impairment Impairment loss 25,000
loss.”
Accumulated depreciation
EXAMPLE 4 25,000
• On January 1, 20x1, X Co.
purchased a machine for P100K
and depreciate it using straight-
line method for 10 years. The
machine had no residual value.
• On January 1, 20x4, there was
an indication that the machine
was impaired.
• On such date, X Co. determined “recovery is only up to the extent of
that the recoverable amount loss and the carrying amount as if there
was P45,000. was no impairment”

• After impairment, the machine

will have a remaining life of 4
years.
 • On January 1, 20x5, the
recoverable amount was
P65,000
Prepare journal entries.

Journal entry The impairment loss was:

Accumulated depreciation 25,000 Recoverable amount 45,000

Gain on reversal of impairment Carrying amount, Jan. 20x4 (70,000)

25,000 Impairment loss (25,000)

Journal entry of Jan. 20x4

Impairment loss 25,000
Accumulated depreciation
25,000
EXAMPLE 5
• On January 1, 20x1, X Co.
purchased a machine for P100K
and depreciate it using straight-
line method for 10 years. The
machine had no residual value. Recovery of impairment
• On January 1, 20x4, there was 29,000
an indication that the machine Impairment recognized
was impaired. 25,000
• On such date, X Co. determined “recovery is only up to the extent of
that the recoverable amount loss and the carrying amount as if there
was P45,000. was no impairment”
• After impairment, the machine
will have a remaining life of 5
years.
 use that are largely independent of the
cash inflows from other assets or group
of assets."
Impairment loss shall be allocated as:
• First to goodwill
• Then to non-cash assets,
prorate.
EXAMPLE 6 – CGU

CA, no impairment 60,000

CA, after recovery 61,000
“recovery is only up to the extent of
loss and the carrying amount as if
there was no impairment”
Recover only 24,000. • X Co. determined that the
Journal entry: recoverable amount of the CGU
was only P700,000.
Accumulated depreciation 24,000
• The building had recoverable
Gain on reversal 24,000 amount of P400,000.
Compute for impairment loss

Impairment of CGU
"A cash generating unit is the smallest
identifiable group of assets that
generate cash inflows from continuing
Observation on building:
• Independent impairment of
building would be P100,000
(500,000 – 400,000)
• Based on CGU impairment it
would be P150,000.
“PAS 36, paragraph 105, provides that
the carrying amount of an asset shall
not be reduced below the highest of
fair value less cost of disposal, value in
use and zero.”
PAS 16 – PPE
Scope of PAS 16
“Examples of property, plant and
equipment include land, building,
machinery, ship, aircraft, motor vehicle,
furniture and fixtures, office equipment,
patterns, molds and dies, tools, leasehold
improvement and book plates. The old
term for property, plant and equipment is
"fixed assets".”
Outside the scope of PAS 16
PAS 16 on property, plant and equipment
does not apply to:
• Biological assets (PAS 41).
• Mineral rights and mineral reserves
(PFRS 6).
EXAMPLE 1.1: Initial Measurement
X Co. acquired a machine for P100,000.
Terms: 10%, 2/10, n/30. VAT is included in
the transaction price.
Solution:
Machine 100,000
Trade discount (100K x 10%) (10,000)
Net of trade discount 90,000
Cash discount (90K x 2%) (1,800)
Net of cash discount = 88,200
Solution:
Net of cash discount 88,200
VAT (88,200 x 12/112) (9,450)
Net cost of machine = 78,750
Journal entry:
Machine 78,750
VAT Input 9,450
Accounts payable 88,200
Notes:
• The trade discount is not recorded.
• The machine was recorded net of
cash discounts.
• VAT is a recoverable tax, excluded
from cost
EXAMPLE 1.2: Initial Measurement
• X Co. acquired a machine for
P100,000 cash.
•Useful life is 5 years.
•Under the contract, X Co. is required
to dismantle the machine after its
useful life.
• The amount of obligation for
dismantling was P10,000 discounted at
10%.
Prepare journal entry. • Prior to purchase, X Co. had paid for
Solution: advertising,
Machine 100,000 P500.
Cost of dismantling 10,000 During the early stages of tarpaulin
business, X Co. incurred the following:
PV of 1, 10%, n = 5 0.62 6,200
• Prior to installation, X Co. need to
Cost of Machine 106,200
rearrange its office to accommodate
Journal entry: the printer, P5,000.

Machine 106,200 Solution:

Cash 100,000 Freight In 10,000

Liability for dismantling cost Installation cost 4,000

6,200
Sample test printing 6,000
Total direct cost 20,000
EXAMPLE 2.1: Direct Costs
Solution:
X Co. purchased a new tarpaulin
printing machine and The following are expense when
incurred:
incurred the following costs:
Admin cost 3,000
• Freight in, P10,000.
Operating loss 5,000
•Installation cost, P4,000.
Feasibility study 7,000
• Sample test printing, P6,000.
Advertising 500
• Admin costs for processing the
purchase, P3,000. During the early Rearrangement cost 5,000
stages of tarpaulin business, X Co.
incurred the following:
Initial Measurement – Cost of Land
•Operating loss, P5,000.
• Purchase price
• Feasibility study, P7,000.
• Attorney fees and other expenditures
for establishing clean title
• Broker commission
• Escrow fees
• Fees for registration and transfer of
title
• Cost of relocation or reconstruction
of property.
• Mortgages, encumbrances and
interest on such mortgages assumed
by the buyer
•Unpaid taxes up to date of acquisition
assumed by the buyer.
• Cost of survey.
•Cost of clearing, grading and
demolishing unwanted old building,
less proceeds from salvage
• Payments to tenants to induce them
to vacate.
• Cost of permanent improvements,
leveling, and landfill.
• Cost of option to buy the acquired
land. If the land is not acquired, the
cost of option is expensed outright.
Initial Measurement – Cost of Building
• Purchase price
• Legal fees.
•Unpaid taxes up to date of purchase
assumed by the buyer
•Interest, liens and other
encumbrances assumed by the buyer
• Payments to tenants to induce them
to vacate the building.
• Any renovating or re-modelling costs.
• Material used, labor employed and
overhead directly attributable to
construction
• Building permit or license
• Architect fee
• Superintendent fee
• Cost of excavation
• Cost of temporary building used as
construction office
• Borrowing cost and insurance.
• Expenditures for service equipment
and fixtures made a permanent part of
the structure.
• Cost of temporary safety fence
around construction site and cost of
subsequent removal thereof. However,
the construction of a permanent fence
after the completion of the building is
recognized as land improvement.
• Safety inspection fee
 What is the cost of land and building,
respectively?

EXAMPLE 3.1: Land and Building

Isabela Company incurred the
Solution:
following costs during the current year:
Cost of Land
•Option fee for land acquired 10,000
Option fee for land acquired 10,000
•Option fee for land not acquired
10,000 Taxes in arrears 50,000

• Taxes in arrears on land 50,000 Payment for land 1,000,000

• Payment for land 1,000,000 Total cost of land 1,060,000

• Architect fee 230,000

• Payment to city hall for approval of Solution:
building construction 120,000
Cost of Building
• Contract price for factory building
Architect fee 230,000
5,000,000
Payment to city hall 120,000
• Safety fence around construction site
35,000 Contract price 5,000,000

• Safety inspection on building 30,000 Safety fence around construction site

35,000
• Removal of safety fence after
completion of building 20,000 Safety inspection on building 30,000

•New fence surrounding the factory Removal of safety fence 20,000

80,000
Total cost of building 5,435,000
•Driveway, parking bay and safety
lighting 550,000
Notes:
•Option fee for the land which is not
acquired is expensed.
•New fence is classified as land • Fee paid to consultants for advice.
improvements.
• Cost of safety rail and platform
•Driveways, parking bay and safety surrounding machine.
lighting are land improvements.
• Cost of water device to keep machine
Land Improvement cool.
• Additional expenditure done to land.
•If non-depreciable, charged as cost of EXAMPLE 4.1: Cash Payment
land.
• X Co. acquired a machine for P100K
•If depreciable, recognized as land cash. Terms: 2/10, n/30.
improvement.
• X Co. paid P10K for the delivery and
• Examples of these improvements are installation.
fences, water systems, drainage
•It was estimated that P5K dismantling
systems, sidewalks, pavements and
cost is to be incurred but does not
cost of trees, shrubs and other
represent a present obligation of X Co.
landscaping.
Prepare journal entry
Solution:
Initial Measurement - Cost of Machine
Machine 100,000
• Purchase price
Cash discount (100K x 2%) (2,000)
• Freight, handling, storage and other
cost. Net cost of machine 98,000
•Insurance while in transit Direct attributable cost 10,000
•Installation cost. Total cost of machine 108,000
• Cost of testing and trial run.
•Initial estimate of cost of dismantling Journal entry:
and removing the machinery and
Machine 108,000
restoring the site on which it is located,
for which the entity has a present Cash 108,000
obligation.
*Dismantling cost is not recorded • A down payment of P100,000 was
because there is no present obligation. made and 4 monthly installments of
P250,000 each are to be made
EXAMPLE 4.2: Lump-sum
beginning on September 1, 2014.
• Amity Company purchased for
• The cash equivalent price of the
P5,400,000 including appraiser's fee of
machine was P950,000.
P50,000, a building and the land on
which it is located. • The entity incurred and paid
installation costs amounting to
• The current appraised value is
P30,000.
P2,000,000 for the land and P3,000,000
for the building. • What is the amount to be capitalized
as cost of the machine?
What is the initial measurement of the
land? Solution:
Solution: Cash price equivalent 950,000
Fair Value Ratio Cost Installation cost 30,000
Land 2M 2/5 2.16M Cost of Machine 980,000
Building 3M 3/5 3.24M Journal entry:
Total 5M 5.4M Machine 980,000
Journal entry: Discount on notes 150,000
Land 2.16M Cash (down payment +
installation) 130,000
Building 3.24M
Notes payable (250K x 4)
Cash 5.4M
1,000,000

EXAMPLE 5.1: Installment

EXAMPLE 5.2: Installment
•On August 1, 2014, X Co. purchased a
•On December 31, 2014, Bart Company
new machine on a deferred payment
purchased a machine in exchange for a
basis.
noninterest bearing note requiring
eight payments of P200,000.
• The first payment was made on
December 31,2014, and the others are
due annually on December 31.
At date of issuance, the prevailing rate
of interest for this type of note was
11%.
Present value factors are as follows:
• PV of OA at 11% for 8 periods 5.146
• PV of annuity due at 11% for 8
periods 5.712
What amount should be recorded as
initial cost of the machine?
Solution:
The notes is an annuity due because
the first payment is made at year 0.
Annual payment 200,000
PVF annuity due 5.712
Cost of Machine 1,142,400
Journal entry
Machine 1,142,400
Discount of notes 457,600
Notes payable (200K x 8)
1,600,000
EXAMPLE 6.1: Issuing shares
• Beanery Company purchased land
with a current market value of
P2,400,000.
• The carrying amount of the land was
P1,305,000.
•In exchange for the land, the entity
issued 20,000 ordinary shares with par
value of P100 and an estimated market
value of P140 per share.
What amount should be recorded as
cost of the land?
Solution:
The fair value of asset is given;
therefore, the land is recognized at the
fair value of asset.
Journal entry:
Land, FV 2.4M
Share capital (20K x P100 par)
2M
Share premium, balance .4M
EXAMPLE 6.2: Issuing shares
• Beanery Company purchased land.
• The carrying amount of the land was What amount should be recorded as
P1,305,000. cost of the land?
•In exchange for the land, the entity Solution:
issued 20,000 ordinary shares with par
The fair value of asset is not given as
value of P100 and an estimated market
well as the fair value of the shares,
value of P140 per share.
therefore, the land is recognized at the
What amount should be recorded as par value of the shares issued.
cost of the land?
Journal entry:
Solution:
Land (20,000 x P100) 2M
The fair value of asset is not given;
Share capital (20K x P100 par)
therefore, the land is recognized at the
2M
fair value of the shares issued.
Journal entry:
EXAMPLE 7.1: Issuing bonds payable
Land (20,000 x P140) 2.8M
Figaro Company acquired land and paid
Share capital (20K x P100 par)
in full by issuing P600,000 of its 10%
2M
bonds payable in 5 years. Bond is to
Share premium (20K x P40) .8M yield 12%. Interest is payable at the
end of each year. Present value factors
are as follows:
EXAMPLE 6.3: Issuing shares
PV of OA, 12%, n = 5 3.60
• Beanery Company purchased land.
PV of 1, 12%, n = 5 0.5674
• The carrying amount of the land was
What amount should be recorded as
P1,305,000.
cost of the land?
•In exchange for the land, the entity
Solution:
issued 20,000 ordinary shares with par
value of P100. Fair value of the bonds
• The fair value of the shares cannot PV of principal (600K x 0.5674) 340,440
be determined.
PV in interest (600K x 10% x 3.60) *It shall be recognized at fair value
216,000
Journal entry:
Present value of bonds 556,440
If the donation was from a
Journal entry: shareholder, the journal entry may be:
Land 556,440 Land 1,500,000
Discount on bonds 43,560 Donated Capital 1,500,000
Bonds payable 600,000
EXAMPLE 9.1: Exchange
EXAMPLE 8.1: Donation • At the beginning of the current year,
Bell Company exchanged an old
•Dawson Company has received a
machine, with a book value of
donation of land from a rich local
P390,000 and a fair value of P350,000
philanthropist. The land originally had a
for another used machine having a list
cost of P1,000,000.
price of P500,000.
•On the date of the donation, the land
• At what amount should the machine
had a market value of P1,500,000 and
acquired in the exchange be recorded?
an assessed value of P1,200,000.
Journal entry:
• What amount of income should be
recognized from the donation? Machine (new) 350K
Loss on exchange 40K
EXAMPLE 8.1: Donation Machine (old) 390K
Journal entry:
Land 1,500,000 Journal entry:
Income from donation Assuming there is no commercial
1,500,000 substance
*The donation was from a non- Machine (new) at BV 390K
shareholder.
Machine (old) 390K
*No gain or loss recognized.

EXAMPLE 9.2: Exchange Subsequent Measurement

• At the beginning of the current year, After initial recognition, the entity shall
Bell Company exchanged an old choose either
machine, with a book value of
• Cost model or
P390,000 and a fair value of P350,000
and paid P100,000 cash for another • Revaluation model
used machine having a list price of
P500,000.
Subsequent costs incurred
• At what amount should the machine
Costs incurred after initial recognition
acquired in the exchange be recorded?
shall be
Journal entry:
recognize as cost of PPE if:
Machine (new) FV + cash paid 450K
•It is probable that future economic
Loss on exchange 40K benefits will flow

Machine (old) 390K •It can be measured reliably.

Cash 100K It includes:

• Addition

Journal entry: •Improvements or betterments

Assuming there was no commercial • Replacements

substance
• Repairs and maintenance
Machine (new) BV + cash paid 490K
• Rearrangement cost
Machine (old) 390K
Cash 100K
Kinds of Depreciation
*No gain or loss recognized.
a. Physical depreciation
b. Functional or economic depreciation
EXAMPLE: SYD
•On January 1, 2014, X Co. purchased
machinery for P7,600,000. Residual
value was estimated at P400,000.
• The machinery is depreciated over
eight years using the sum of years'
digits method.
What amount should be recorded as
depreciation for 2015?
Solution:
SYD = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36
Depreciation for 2014
Depreciable cost (7.6M - .4M) 7.2M
SYD 8/36
Depreciation expense 1.6M
Solution:
SYD = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36
Depreciation for 2015
Depreciable cost (7.6M - .4M) 7.2M
SYD 7/36
Depreciation expense 1.4M
EXAMPLE: Double declining
• Bergen Company purchased factory
equipment which was installed and put
into service January 1, 2014 at a total
cost of P1,280,000.
• Residual value was estimated at
P80,000. The equipment is depreciated
over eight years by the double
declining balance method.
What amount of depreciation expense
should be recorded on the equipment
for 2015?
Solution:
𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 1/8 𝑥 2 = 25%
Depreciation expense in 2014
Carrying amount 1,280,000
Depreciation rate 25%
Depreciation expense 320,000
Note:
The residual value is ignored when
computing for the depreciation
expense.
 Year 2 = P100K x 10/20 = P50,000.
Year 3 = P100K x 2/20 = P10,000.
Solution: EXAMPLE: Composite
𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 1/8𝑥 2 = 25% Lester Company provided the
following:
Depreciation expense in 2015
Total cost Residual value Useful
Carrying amount 960,000
life
Depreciation rate 25%
Machine A 5.5M .5M 20
Depreciation expense 240,000
Machine B 2M .2M 15
Note:
Machine C .4M 5
The depreciation expense is based on
Solutions
the carrying amount not on the cost of
equipment. A B C Total
Cost 5.5M 2M 400K 7.9M
EXAMPLE: Production output Less RV 500K 200K 0 700K
X Co. acquired a machine for P100K. Dep. amount 5M 1.8M 400K 7.2M
The machine is expected to produce a
total of 20,000 units of output.
Solutions
The machine had the following outputs
to date: A B C Total
Year 1 – 4,000 units Dep. amount 5M 1.8M 400K 7.2M
Year 2 – 10,000 units Divide by 20 15 5
Year 3 – 2,000 units Dep’n expense 250K 120K 80K 450K
Compute for depreciation expense.
Solution: Solutions
Year 1 = P100K x 4/20 = P20,000.
Composite rate = depreciation expense Journal entry to record the retirement
divide by total cost. was:
Composite rate = 450K/7.9M Cash 50K
Composite rate = 5.7% Depreciation expense 50K
(rounded-off) Tools 100K
Solutions
Composite life = depreciable amount
divided by
depreciation expense
Composite life = 7.2M/450K
Composite life = 16 years

Solutions
Depreciation expense = 7.9M x 5.7% =
450K
Alternatively;
Depreciation expense = 7.2M / 16
years = 450K

EXAMPLE: Retirement
X Co. had tools with a total cost of 1M.
During the year, tools costing P100K
was retired at a retirement price of
P50K.