Property, Plant, and Equipment

(aka fixed assets)

Tangible Assets Used in business To be used over a

period of more than 1
Meaning, used in production
year
or supply of goods and
services, for rental, and for
administrative purposes

Examples:  Ship  Office Equipment

 Land  Aircraft  Patterns
 Building  Motor Vehicle  Molds and dies
 Machinery  Furniture & Fixtures  Tools
 Leasehold improvements

Recognition
Criteria

Probable that future economic benefits associated with the asset will flow to the entity

Cost of the asset to the entity can be measured reliably

Measurement

Subsequent measurement

Initial measurement @ COST

COST MODEL REVALUATION MODEL

Cost – accumulated Fair Value @ date of

depreciation – accumulated revaluation – subsequent
impairment loss (if any) accumulated depreciation –
subsequent accumulated
impairment loss (if any)
 ` 1. Plant assets may properly include
a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.

2. Which of the following is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years

3. Which of these is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.

ANSWER 1.D, 2.B, 3.D

Cost of an item of property, plant, and equipment

Purchase price, including Cost directly attributable Initial estimate of cost of

import duties and
nonrefundable purchase
taxes, after deducting trade
discounts and rebates
to bringing the asset to the
location and condition
necessary for it to be
capable of operating in an
intended manner
dismantling and removing
the item and restoring the
site in which it is located,
the obligation for which an
entity incurs

DIRECTLY ATTRIBUTABLE COSTS COSTS THAT ARE EXPENSED

a) Cost of employee benefits arising a) Cost of opening a new facility

directly from the construction or
acquisition of the item of property,
plant and equipment
b) Cost of site preparation
c) Initial delivery and handling cost
d) Installation and assembly cost
e) Professional fees
f) Cost of testing, after deducting the net
proceeds from selling any items
produced
b) Cost of introducing a new product or
service, including cost of
advertisement and promotion
c) Cost of conducting business in a new
location
d) Administrative and other general
overhead cost
e) Cost incurred while an item capable of
operating in an intended manner
f) Initial operating loss
g) Cost of relocation
Use the following information for questions 1 and 2.

Seiler Co. purchased land as a factory site for P600,000. Seiler paid P60,000 to tear down two buildings on the land.
Salvage was sold for P5,400. Legal fees of P3,480 were paid for title investigation and making the purchase.
Architect's fees were P31,200. Title insurance cost P2,400, and liability insurance during construction cost P2,600.
Excavation cost P10,440. The contractor was paid P2,200,000. An assessment made by the city for pavement was
P6,400. Interest costs during construction were P170,000.

1. The cost of the land that should be recorded by Seiler Co. is

a. P660,480.
b. P666,880.
c. P669,880.
d. P676,280.

2. The cost of the building that should be recorded by Seiler Co. is

a. P2,403,800.
b. P2,404,840.
c. P2,413,200.
d. P2,414,240.

3. On February 1, 2007, Morgan Corporation purchased a parcel of land as a factory site for P200,000. An old
building on the property was demolished, and construction began on a new building which was completed
on November 1, 2007. Costs incurred during this period are listed below:
Demolition of old building P 20,000
Architect's fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 1,090,000
(Salvaged materials resulting from demolition were sold for P10,000.)
Morgan should record the cost of the land and new building, respectively, as
a. P225,000 and P1,115,000.
b. P210,000 and P1,130,000.
c. P210,000 and P1,125,000.
d. P215,000 and P1,125,000.

4. Tyson Chandler Company purchased equipment for P10,000. Sales tax on the purchase was P500. Other costs
incurred were freight charges of P200, repairs of P350 for damage during installation, and installation costs
of P225. What is the cost of the equipment?
a. P10,000
b. P10,500
c. P10,925
d. P11,275

5. Carpenter Company purchased equipment for P12,000. Sales tax on the purchase was P600. Other costs incurred
were freight charges of P240, repairs of P420 for damage during installation, and installation costs of P270.
What is the cost of the equipment?
a. P12,000.
b. P12,600.
c. P13,110.
d. P13,530.

6. During self-construction of an asset by Jannero Pargo Company, the following were among the costs incurred:
Fixed overhead for the year P1,000,000
Portion of P1,000,000 fixed overhead that would
be allocated to asset if it were normal production 40,000
Variable overhead attributable to self-construction 35,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. P -0-
b. P35,000
c. P40,000
d. P75,000
Answers:

1. B P600,000 + P60,000 – P5,400 + P3,480 + P2,400 + P6,400 = P666,880.

2. D P31,200 + P2,600 + P10,440 + P2,200,000 + P170,000 = P2,414,240.

3. D Land: P200,000 + P20,000 + P5,000 – P10,000 = P215,000.

Building: P35,000 + P1,090,000 = P1,125,000.

4. C P10,000 + P500 + P200 + P225 = P10,925.

5. C P12,000 + P600 + P240 + P270 = P13,110.

6. D P40,000 + P35,000 = P75,000.

Cost of new asset acquired Cost of asset acquired by

Cost of asset acquired on
under a cash purchase installment
credit or on account

Cash paid + all directly Cash price equivalent,

Invoice price – discount
attributable costs of if none, present value of
whether taken or not
bringing the asset to the all installments using
location and condition in market rate of interest
an intended manner

Cost of asset acquired by Cost of asset acquired by Cost of asset acquired in

issuing share capital issuing bonds payable an exchange

In order of priority: In order of priority: At Fair Value, except

a) FV of property a) FV of bonds a) When exchange
received payable transaction lacks
b) FV of share b) FV of asset commercial substance
capital received b) When the fair value of
c) FV of stated neither the asset
value or value given up nor the asset
of the share received is reliably
capital measured
When does an exchange transaction have commercial substance?

An exchange transaction has commercial substance when the cash Commercial substance
flows of the asset received differ significantly from the cash flows is a new notion and is
of the asset received. defined as the event or
transaction causing the
cash flows of the entity
to exchange significantly
by reason of exchange.

Cost of asset acquired in a Cost of asset acquired in a combination of

non monetary exchange nonmonetary and monetary exchange

If acquired in exchange w/commercial substance and

In order of priority:
there is cash involved or monetary consideration, the
a) FV of property cost is the ff:
given
a) FV of asset given up plus cash payment – on
b) FV of property
part of the payor.
received
b) FV of asset given minus the cash received –
c) Carrying amount
on part of the recipient.
of property given

Cost of self-constructed Derecognition of property, plant, and equipment

property, plant, and equipment

PAS 16, paragraph 67, PPE shall be derecognized

It includes: on disposal or when no future economic benefits
are expected from the use or disposal
 Cost of materials
Means that the cost
 Cost of direct
of the PPE together
labor Net disposal proceeds XX
with the related
 Incremental accumulated Carrying amount of PPE (XX)
overhead depreciation shall
traceable to the be removed from Gain or loss arising from
construction the accounts disposition of PPE XX
What is the treatment of fully depreciated property?

The asset account and the related

It is fully depreciated
accumulated depreciation account are
when the carrying
closed and the residual value is set up in a amount is equal to
separate account. zero or the carrying
amount is equal to the
The cost of fully depreciated property residual value
remaining in service and the related
accumulated depreciation ordinarily shall
not be removed from the accounts.

If the asset is available for

immediate sale in its
P.P.E. classified as held for sale
present condition within
one year from the date of
classification as held for sale
Such asset shall be excluded from
property, plant, and equipment but
presented separately as current asset.

Noncurrent asset held for sale shall

Shall not be depreciated
measure at the lower of carrying amount
or fair value less cost of disposal.

The write down to fair value less

cost of disposal is treated as an
impairment loss
Treatment of idle or abandoned property

Shall not be classify as held for sale a noncurrent asset

that is to be abandoned

Still subject to depreciation

Optional disclosures in P.P.E.

a) Carrying amount of temporary idle

property, plant, and equipment
b) Gross carrying amount of any fully
depreciated PPE still in use
c) Carrying amount of PPE retired
from active use and classified as
held for sale
d) When cost model is used, FV of PPE
when this is materially different
from the carrying amount
1. Which of the following costs are capitalized for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead

2. Which of the following assets do not qualify for capitalization of interest costs incurred during
construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their
intended use.

3. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.

Use the following information for questions 4 and 5

Equipment that cost P66,000 and has accumulated depreciation of P30,000 is exchanged for
equipment with a fair value of P48,000 and P12,000 cash is received. The exchange lacked
commercial substance.

4. The gain to be recognized from the exchange is

a. P4,800 gain.
b. P6,000 gain.
c. P18,000 gain.
d. P24,000 gain.

5. The new equipment should be recorded at

a. P48,000.
b. P36,000.
c. P30,000.
d. P28,800.

ANSWERS: 1. D, 2. D, 3. A
P12,000
4. A ————————— × P24,000 = P4,800.
P12,000 + P48,000

5. D P48,000 – (P24,000 – P4,800) = P28,800.