Property, Plant, and Equipment

Bestnookit

Tangible assets for use in the production, for rentals, or for use of administration of an entity
Recognition
1. It is probable that future economic benefits will flow to the entity
2. Cost can be measured reliably
- While spare parts are carried as inventories, major spare parts and stand-by equipment
are recognized as PPE when entity expects to use the same during more than one period
Initial measurement
At cost
- Cash or cash equivalent paid
- FV of other consideration given
Elements of cost
a. Purchase price – including import duties and nonrefundable purchase taxes minus trade
discounts and rebates
b. 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 management
c. Initial estimate of the cost of dismantling and removing the item and restoring the site
on which it is located, the obligation for which an entity incurs
Subsequent measurement
a. Cost model – carried at cost less depreciation and impairment
b. Revaluation model – carried at revalued carrying amount, FV less depreciation and
impairment
ACQUISITION OF PROPERTY
Cash Basis
- Asset is recorded at cash price equivalent
- Cash paid + directly attributable cost
Several assets acquired at basket price or lump-sum
If building and land is acquired at basket price of 100,000, then at the time the FV of building is
60,000 and land is 30,000:

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 FV Fraction Allocated cost
Land 50,000 5/8 62,500
Building 30,000 3/8 37,500
80,000 100,000

On Account Subject to Cash Discount

- Asset is recorded at equal to invoice price less discount
Installment Basis
- If asset is offered at a cash price and at an installment price and is purchased at
installment price, the asset is recorded at cash price
- The excess is treated as interest to be amortized
- Problem 23-2
- Acquisition
Equipment 580,000
Discount 120,000
Cash 200,000
Note payable 500,00
- Installment
Notes payable 100,000
Cash 100,000
- Amortization
Interest expense 40,000
Discount 40,000
Note payable Fraction Amortization
2020 500,000 5/15 40,000
2021 400,000 4/15 32,000
2022 300,000 3/15 24,000
2023 200,000 2/15 16,000
2024 100,000 1/15 8,000
1,500,000 120,000
No available cash price
- The asset is recorded at present value of all installments
- Problem 23-3
- Acquisition
Equipment 734,000
Discount 166,000
Cash 100,000
Note payable 800,000

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 - Annual payment
Note payable 200,000
Cash 200,000
- Amortization
Interest expense 63,400
Discount 63,400
Annual Amortization Principal Carrying amount
2020 634,000
2020 200,000 63,400 136,600 497,400
2021 200,000 49,740 150,260 347,140
2022 200,000 34,714 165,286 181,854
2023 200,000 18,185.4 181,814.6 -

Issuance of Share Capital

- The asset is carried at by hierarchy:
a. FV of property received
b. FV of share capital
c. Par value or stated value of share capital
Issuance of Bonds Payable
- The asset is carried at by hierarchy:
a. FV of bonds payable
b. FV of asset
c. Face amount of bonds payable
Exchange
- Asset is carried at FV
1. FV of asset given + cash payment – payor
2. FV of asset given - cash received – recipient
(Gain or loss is recognized, because it is measured at FV)
- Asset is carried at carrying amount when:
a. Exchange lacks commercial substance
b. FV of asset given or received cannot be measured reliably
1. Carrying amount of asset given + cash payment – payor
2. Carrying amount of asset given - cash received – recipient
( Gain or loss is not recognized, because it is measured at carrying amount)
Commercial substance

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 - There is a commercial substance when cash flows from asset received differs
significantly from asset given, their amount, timing, and risk
- The entity-specific value of the portion of entity’s operation affected by transaction
changes as a result of exchange
Entity-specific value
- PV of cash flows an entity expects to arise from the continuing use of an asset and from
disposal at the end of useful life or expects to incur when settling a liability
- Problem 23-7
- Payor’s book
Equipment 500,000
Accumulated depreciation 2,000,000
Equipment 2,400,000
Gain from exchange 100,000
- Recipient’s book
Equipment – new 500,000
Accumulated depreciation 1,750,000
Equipment – old 2,200,000
Gain from exchange 50,000
Trade in
- A form of exchange
- Property acquired by exchanging another property as part payment and the balance
payable in cash or any other form of payment
- Involves a nondealer acquiring asset from a dealer
- Measurement by hierarchy:
a. FV of asset given + cash payment
b. Trade in value of asset given + cash payment or the list price of new equipment
- Cash payment = List price of new equipment - Trade in value of old equipment
- Problem 23-8
Equipment – new 1,400,000
Accumulated depreciation 600,000
Equipment – old 1,000,000
Cash 980,000
Gain on exchange 20,000
Donation
- Asset is carried at FV, Philippine GAAP
- Entry
Equipment XXX
Donated capital XXX
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 - Expenses incurred in connection with donation is charged to donated capital account
- Directly attributable costs incurred subsequently is capitalized
- Capital gifts or grants are carried at FV, these are donated by non-shareholders, thus an
income
Government Grant
- An assistance by government in the form of transfer of resources to an entity in return
for part or future compliance with certain conditions relating to the operating activities
of the entity
- Measured at FV
Recognition
- Recognized when there is reasonable assurance that:
a. Entity will comply with conditions attaching to the grant
b. Grant will be received
- Grant related to asset – the condition is to acquire or construct long-term asset,
otherwise it is grant related to income
Accounting for government grant (Problem 24-1)
- Grant in recognition of specific expenses shall be recognized as income over the period
of the related expense
2020 30,000,000 2/20 3,000,000
2021 30,000,000 4/20 6,000,000
2022 30,000,000 6/20 9,000,000
2023 30,000,000 8/20 12,000,000
Cash 30,000,000
Deferred grant income 30,000,000

Deferred grant income 3,000,000

Grant income 3,000,000

Environmental expense 2,000,000

Cash 2,000,000
- Grant related to depreciable asset shall be recognized as income over the periods and in
proportion to the depreciation of the related asset
Building 50,000,000
Cash 50,000,000

Cash 40,000,000
Deferred grant income 40,000,000

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 Deferred grant income 2,000,000
Grant income 2,000,000

Depreciation expense 2,500,000

Accumulated depreciation 2,500,000
- Grant related to non-depreciable asset requiring fulfillment of certain conditions shall
be recognized as income over the periods which bear the cost of meeting the conditions
Land 50,000,000
Deferred income 50,000,000

Building 80,000,000
Cash 80,000,000

Deferred income 2,000,000

Grant income 2,000,000

Depreciation expense 3,200,000

Accumulated depre 3,200,000
- Grant that becomes receivable as compensation for expenses or losses already incurred
or for the purpose of giving immediate financial support to the entity with no further
related costs shall be recognized as income of the period in which it becomes receivable
Cash 10,000,000
Grant income 10,000,000
(Problem 24-5)
Deferred income approach
- The grant is treated as deferred income upon meeting or acquiring the conditions
- The deferred income is then realized over the useful life less residual value of the asset
necessary for the condition to be met
Machinery 5,400,000
Cash 5,400,000

Cash 400,000
Deferred grant income 400,000

Depreciation 1,080,000
Accumulated depre 1,080,000

Deferred income 80,000

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 Grant income 80,000
Deduction from asset approach
- The grant is treated as a deduction from the cost of asset related to the grant
Machinery 5,400,000
Cash 5,400,000

Cash 400,000
Machinery 400,000

Depreciation 1,000,000
Accumulated depre 1,000,000
Repayment
- Noncompliance with conditions
- Accounted for as a change in accounting estimate
- Repayment of a grant related to income shall be applied first against any unamortized
deferred income and any excess shall be recognized immediately as an expense
- Repayment of a grant related to asset shall be recorded by increasing the carrying
amount of the asset
Grant of interest-free loan
- Forgivable loan from government or government loan with a NIL or below-market rate
of interest is treated as government grant
- Measured as the difference between face amount and PV
- Problem 24-6
Cash 8,000,000
Discount on notes 2,021,600
Note payable 8,000,000
Deferred income 2,021,600
8,000,000 – 2,021,600 = 5,978,400 x 6% = 358,704

Deferred income 358,704

Grant income 358,704

Interest expense 358,704

Discount on notes 358,704
Government assistance
- Provision of economic benefits to specific entity or range of entities such as:
a. Free technical or marketing advice
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 b. Provision of guarantee
Construction
- The asset is carried at cost which include:
1. Direct cost of materials
2. Direct cost of labor
3. Initial cost and incremental overhead specifically identifiable or traceable to the
construction
- If incremental overhead is not specifically identifiable, allocation of overhead may be
done on the basis of direct labor cost or direct labor hours
- Problem 23-10
- No. 1
Finished goods Building Total
Overhead 2,000,000 0 2,000,000
- No. 2
Finished goods Building Total
Overhead 1,500,000 500,000 2,000,000
Finished goods = 135/180 x 2,000,000
Building = 45/180 x 2,000,000
- No. 3
Finished goods Building Total
Overhead 1,400,000 600,000 2,000,000
Finished goods = 42/60 x 2,000,000
Building = 18/60 x 2,000,000
Savings or loss on construction
- If the actual cost of construction is less than the price at which the constructed asset can
be purchased, then it is savings and not an income
- Savings then realized in future periods by reason of lower depreciation charges
- The asset is carried at cost thus if actual cost is more than the price the difference is not
loss
- If actual cost is materially excessive by reason of inefficiencies or failures, the excess is a
loss and chargeable against management
- Cost which is abnormal is not capitalized to the cost of asset
Intervening operations
- Operation which is not related to bringing the asset to location and condition for
intended use
- Recognized in profit or loss
DERECOGNITION

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 - An item in PPE together with its accumulated depreciation is removed from the account
- Derecognized on disposal or when no future economic benefits are expected
- Any gain or loss on derecognition is recognized in profit or loss
- Gain or loss is determined by the difference of net disposal proceeds and carrying
amount
FULLY DEPRECIATED PROPERTY
- When carrying amount is equal to zero or to residual value
- The asset account together with its accumulated depreciation is closed and separate
account is set up for the residual value
- Fully depreciated property which is still in use and its accumulated depreciated shall not
be removed from the accounts
- Entity is encouraged but not required to disclose fully depreciated property
PROPERTY CLASSIFIED AS HELD FOR SALE
- If an item in PPE is classified as held for sale and is available for immediate sale in the
present condition within one year from the date of classification as held for sale, the
item is excluded from PPE and presented separately as current assets
- Not depreciated anymore
Measurement
- Lower of carrying amount or FV less cost of disposal
- The write down to FV less of cost of disposal is treated as impairment loss
IDLE OR ABANDONED PROPERTY
- Property that is to be abandoned shall not be classified as not held for sale
BORROWING COST
- Interest and other cost that entity incurs in connection with borrowing funds
a. Interest expense calculated using the effective interest method
b. Finance charge with respect to finance lease
c. Exchange difference arising from foreign currency borrowing to the extent that it is
regarded as an adjustment to interest cost
Qualifying asset
- Asset that necessarily takes substantial period of time to get ready for intended use or
sale
a. Manufacturing plant
b. Power generation facility
c. Intangible asset

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 d. Investment property

Excluded from capitalization of borrowing cost

a. Asset measured at FV such as biological asset
b. Inventory manufactured in a large quantity on a repetitive basis even if it takes
substantial period
c. Assets that are ready for intended use or sale when acquired
Accounting for borrowing cost
1. Borrowing cost that is directly attributable to acquisition, construction, or production of
a qualifying asset is required to be capitalized as cost of the asset
2. Borrowing cost that is not directly attributable is expensed as incurred
Asset financed by specific borrowing
- Borrowed funds are for specific purpose which is acquiring a qualifying asset
- Capitalizable amount = actual borrowing cost - any investment income
Asset financed by general borrowing
- Borrowed funds are generally acquired in which used for acquiring a qualifying asset but
not for that sole purpose
- Capitalizable amount
= (𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡)(𝑐𝑎𝑝𝑖𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 𝑜𝑟 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡
(𝑀𝑜𝑛𝑡ℎ 𝑐𝑜𝑠𝑡 × 𝑀𝑜𝑛𝑡ℎ 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔)1 + (𝑀𝑜𝑛𝑡ℎ 𝑐𝑜𝑠𝑡 × 𝑀𝑜𝑛𝑡ℎ 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔)2
=
12
𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
𝐶𝑎𝑝𝑖𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑜𝑓 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑 𝑓𝑢𝑛𝑑𝑠
- The capitalizable amount shall not exceed the actual interest incurred or annual
borrowing cost
- Any investment income is not deductible from general borrowing cost
- The excess over the difference of capitalizable amount and total interest incurred is
charged to interest income
- Problem 25-1
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡
(2,000,000 × 12)𝐽𝑎𝑛 1 + (2,000,000 × 6)𝐽𝑢𝑛 30 + (1,000,000 × 0)𝐷𝑒𝑐 31
=
12
= 3,000,000

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 360,000 + 700,000
𝐶𝑎𝑝𝑖𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 13.25%
3,000,000 + 5,000,000
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 = 3,000,000 × 13.25% = 397,500
- Thus, the amount chargeable to interest expense is 662,500
- The cost of building is 5,397,500
Asset financed both by specific and general borrowing
- Problem 25-2
- Capitalizable amount from specific borrowing is 230,000, 240,000 less 10,000
- Capitalizable amount from general borrowing
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡
(2,000,000 × 12)𝐽𝑎𝑛 1 + (1,000,000 × 9)𝑀𝑎𝑟 31 + (3,000,000 × 3)𝑆𝑒𝑝𝑡 30
=
12
= 3,500,000
300,000 + 600,000
𝐶𝑎𝑝𝑖𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 11.25%
3,000,000 + 5,000,000
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 = (3,500,000 − 2,000,000) × 11.25% = 168,750
- The amount chargeable to interest expense is 731,250
- The cost of building is 6,398,750
Construction more than one year but less than 2 years
- Problem 25-4
- Capitalizable amount from specific borrowing for 2020 is 300,000 and for 2021 is
150,000
- Capitalizable amount from general borrowing for 2020

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡

(4,000,000 × 12)𝐽𝑎𝑛 1 + (5,000,000 × 9)𝐴𝑝𝑟 1 + (3,000,000 × 1)𝐷𝑒𝑐 1
=
12
= 8,000,000
𝐶𝑎𝑝𝑖𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 12%
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 = (8,000,000 − 3,000,000) × 12% = 600,000
- Interest expense is 2,400,000
- Cost of new building is 12,900,000 as of 2020
- Capitalizable amount for general borrowing for 2021
(12,900,000 × 6)𝐽𝑎𝑛 1 + (6,000,000 × 4)𝐴𝑝𝑟 1
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 =
6
= 16,900,000

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 6
𝐶𝑎𝑝𝑖𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 12% × = 6%
12
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 = (16,900,000 − 3,000,000) × 6% = 834,000
- Interest expense is 2,316,000
- Cost of new building is 19,884,000 as of 2021
Specific borrowing for asset used for general purpose
- When a specific borrowing is used for another purpose, it is treated as general
borrowing
Commencement of capitalization
a. When entity incurs expenditures for the asset
b. When entity incurs borrowing costs
c. When the entity undertakes activities that are necessary to prepare the asset for the
intended use or sale
Suspension of capitalization
- When development for intended use has is interrupted
- Not suspended when:
a. When substantial technical and administrative work is being carried out
b. Temporary delay is a necessary part of the process of development
Cessation of capitalization
- When development for intended use has been completed
- It is complete when physical construction of the asset is complete
Disclosure related to borrowing costs
a. Amount of borrowing costs capitalized
b. Capitalization rate used to determine the amount of borrowing cost to be capitalized
LAND, BUILDING, AND MACHINERY
LAND
Land classification
- Land for used or to be used as plant site – PPE
- Land held for a currently undetermined use – Investment property
- Land held for long-term capital appreciation – Investment property
- Land held for current sale – inventory as current asset
Cost chargeable to land

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 a. Purchase price
b. Legal fees and other expenditures for establishing title
c. Broker or agent commission
d. Escrow fees
e. Fees or registration and transfer of title
f. Cost of relocation or reconstruction of property belonging to others in order to
acquire possession
g. Mortgages, encumbrances, and interest on such mortgages assumed by buyer
h. Unpaid taxes up to date of acquisition assumed by buyer
i. Cost of survey
j. Payments to tenants to induce them to vacate the land in order to prepare the land
for the intended use but not to make room for the construction of new building
k. Cost of permanent improvements such as cost of clearing, cost of grading, leveling
and landfill
l. Cost of option to buy the acquired land, expensed outright when land is not
acquired
Land improvements
- Land improvement that is not depreciable is capitalized to the cost of the land
a. Cost of surveying
b. Cost of clearing
c. Cost of grading, levelling, and landfill
d. Cost of subdividing
e. Other costs of permanent improvement
- Land improvement that is depreciable is accounted separately as “Land improvements”
account, and depreciated over their useful life
a. Fences
b. Water systems
c. Drainage
d. Sidewalks
e. Pavements
f. Cost of trees, shrubs, and other landscaping
Special assessment
- Cost paid by landowner as a contribution to the cost of public improvement
Real property taxes
- Subsequent real property taxes are expensed when incurred
- Real property taxes incurred to purchase the land and assumed by the buyer are
capitalized to the cost of the land

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BUILDING
Building costs when purchased
a. Purchase price
b. Legal fees and other expenses incurred in connection with the purchase
c. Unpaid taxes up to date of acquisition
d. Interest, mortgage, liens and other encumbrances on the building assumed by the
buyer
e. Payments to tenants to induce them to vacate the building
f. Any renovating or remodeling costs incurred to put a building purchased in a
condition suitable for the intended use such as lighting installations, partition, and
repairs
Building cost when constructed
a. Materials used, labor employed and overhead incurred during the construction
b. Building permit or license
c. Architect fee
d. Superintendent fee
e. Cost of excavation
f. Cost of temporary buildings used as construction offices and tools or materials used
g. Interest on construction loans and insurance
h. Expenditures for service equipment and fixtures made a permanent part of the
structure
i. Cost of temporary safety fence, any cost of fence subsequent to completion of the
structure is charged to land improvements
j. Safety inspection fee
Sidewalks, pavements, parking lot, and driveways
- If part of the blueprint or in connection with the same, charged to the building account
- If it is not part, just occasionally made, or not in connection with the same, charged to
land improvements account
Claim for damages
- For injuries sustained during the construction
- If there is insurance, the cost of insurance is charged to building account
- If there is no insurance, the cost is expensed outright as a management failure not to be
conceal
Building fixtures
- When immovable, charge to building account

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 - When movable, charge separately to furniture and fixture and depreciated over their
useful life
Ventilating system, lighting system, and elevator
- If installed during construction, charged to building account
- Otherwise, charged to building improvement and depreciated over their useful life ore
remaining life of building, whichever is shorter
PIC interpretation on land and building
- By hierarchy
1. Land and an old building purchased as single cost
a. If the old building is usable, the cost is allocated to building and land on the basis
of FV
b. If the old building is unusable, the cost is allocated only to the land
2. Old building is demolished to make room for the construction of new building
a. If the new building is to be accounted as PPE or investment property – any
allocated carrying amount of old building is recognized as a loss
b. If the new building is to be accounted as inventory – any allocated carrying
amount of old building is capitalized to the cost of new building
c. Demolition cost minus salvage value is capitalized to the cost of new building
d. If the demolition is not to make room for the construction of new building but to
prepare the land for intended use – demolition cost minus salvage value is
capitalized to the cost of the land
3. Building acquired and used in prior period but demolished in the current period to
make room for construction of new building
a. The carrying amount is recognized as a loss
b. Demolition cost minus salvage value is capitalized as a cost of new building
c. If subject to a contract of lease, any payment to tenants to induce them to
vacate old building is charge to the cost of new building
MACHINERY
- Cost
a. Purchase price
b. Freight, handling, storage, and other cost related to the acquisition
c. Insurance while transit
d. Installation cost, including site preparation and assembly
e. Cost of testing and trial run, and other cost necessary in preparing the machinery for
its intended use
f. Initial estimate of cost of dismantling and removing the machinery and restoring the
site on which it is located, and for which the entity has a present obligation
g. Fee paid to consultants for advice on the acquisition of the machinery
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 h. Cost of safety rail and platform surrounding the machine
i. Cost of water device to keep machine cool
- If removal cost is not recognized as a provision and when machinery is removed to make
room for new one, it is charge to expense
- VAT is not capitalized, but charged to input tax to be offset against output tax
- Irrevocable or nonrefundable taxes are capitalized
Tools
- Includes machine tools such as drills and punches, and hand tools such as hammer and
saws
- Segregated from machinery and classified as “Machine tools” and “Hand tools”
Patterns and dies
- Used in designing a particular product
- Patterns and dies that are used in the regular product are recorded as assets and
depreciated over their useful life
- Pattern and dies that are used in the special product are capitalized to the cost of the
special product
Equipment
- Cost
a. Purchase price
b. Freight and other handling charges
c. Insurance while in transit
d. Installation costs
e. Other costs necessary to prepare the asset for intended use
- Delivery equipment
a. Cars
b. Trucks
c. Other transporting vehicles occupied as OOP
(Registration fees and subsequent cost such as renewal of license is expensed
outright)
- Store and office equipment
a. Computers
b. Typewriters
c. Adding machines
d. Cash registers
e. Calculators
- Furnitures and fixtures may include store and office equipment
a. Showcases
b. Counters
16 | B e s t n o o k i t
 c. Shelves
d. Display fixtures
e. Cabinets
f. Partitions
g. Safes
h. Desks
i. Tables
Returnable containers
- The nature is that the buyer will return them to the seller after consumption
- Includes bottles, boxes, tanks, drums, and barrels
- Big units and great bulk – PPE
- Small units or small amount – other NCA
CAPITAL EXPENDITURES AND REVENUE EXPENDITURES
- The former expenditure benefits the future periods – recognized as asset
- The latter expenditure benefits only the current periods – recognized as expense
RECOGNITION OF SUBSEQUENT COST
- When:
a. Probable future economic benefit will flow to the entity
b. Can be measured reliably
- The nature is that if the cost will increase future service potential – capitalized
- If the cost merely maintains the existing level of standard performance – expensed
- It has future economic benefits when:
a. The cost extends the life of the property
b. The cost increases the capacity or improve the output of the property
c. The cost improves the efficiency and safety of the property
SUBSEQUENT COST
Additions
- The nature is that there is a mean which increases the physical size or capacity of the
asset
a. Entirely new unit – depreciated over their useful life
b. Expansion, enlargement, or extension of old asset – depreciated over their useful life
or remaining life of old asset, whichever is shorter
- Capitalized to the cost of PPE
Improvements or betterments

17 | B e s t n o o k i t
 - The nature is that there is a mean which increases the service life or the capacity of the
asset
- A replacement of an old asset whole or part by a new one which is better or superior in
quality
- Examples:
a. Tile roof is substituted for wooded shingles
b. Shatter proof glass is substituted for ordinary glass
- Capitalized to the cost of PPE, but improvements that do not involve replacement of
parts is simply added to the cost of existing asset
Replacements
- The nature is the same with improvements but does not involve a new asset or part
thereof to be superior than the old asset or part of it
- The replacement may be equal or lesser quality
a. Replacement contemplated – old asset replaced by new one, capitalized as new
asset
b. Extraordinary repairs – replacement of major parts to the extent that it extends the
useful life of the asset, capitalized to the cost of existing asset
c. Ordinary repairs – replacement of minor parts or when the cost of repairs is
frequently incurring, expensed when incurred
Repair and maintenance
- Former is restorative and curative
- Latter is preventative
Rearrangement
- The cost of redeployment or relocation of an existing PPE
- Expensed when incurred as the purpose is to maintain existing level of standard of
performance
Accounting for major replacement
- Two situations if original part of the asset is separately identifiable
Separate identification practicable
- The major replacement is debited to asset account
- The cost and related accumulated depreciation of part eliminated are removed and any
carrying amount is treated as a loss
Separate identification not practicable
- The cost of the replacement may be use as the cost of the PPE as a whole

18 | B e s t n o o k i t
 - The cost of replacement is discounted
Problem 26-5
- Cost of land
Purchase price of land and old building 4,500,000
FV of old building (250,000)
Title insurance and legal fees to purchase land 200,000
Survey before construction 100,000
Total 4,550,00
- Cost of new building
Cost of demolition 300,000
Architect fee 950,000
New building construction cost 8,000,000
Building permit 150,000
Excavation 200,000
Liability insurance 100,000
Total 9,700,000
- Cost of land improvements
New fence 100,000
Driveway 550,000
Cost of trees 300,000
Total 950,000
DEPRECIATION
- Applies to PPE
- Depletion applies to wasting asset
- Amortization applies to intangible assets
- The systematic allocation of the depreciable amount of an asset over the useful life
- The cost allocation of exhausted life of an item in PPE
- To have each period benefiting from the use of asset bear an equitable share of the
asset cost
- All items in PPE are depreciated on a systematic basis regardless of earnings on the
same period
- Begins when asset is available for use – when the intended location and condition are in
place
- Ceases when asset is derecognized or is held for sale, and not from temporary idle
Kinds of depreciation
- Physical depreciation – ultimate retirement of service life
a. Wear and tear due to frequent use
b. Passage of time due to nonuse
19 | B e s t n o o k i t
 c. Action of elements such as wind, sunshine, rain, or dust
d. Casualty or accident such as fire, flood, earthquake, and other natural disaster
e. Disease or decay for animals and wooden buildings
- Functional depreciation
a. Inadequacy – asset is not useful because of increase in volume of operation
b. Supersession – when new asset becomes more efficient and substantially less cost
c. Obsolescence – when an asset is inadequate or superseded, in other words, the
asset has become obsolete
Factors of depreciation
The nature is that if separately identifiable and individually significant, then separately
depreciated even if the asset is whole like an aircraft with separately identifiable parts which is
tires and glass windows
Depreciable amount
- The cost of the asset or other substituted cost less residual value
Residual value
- Estimated net amount obtainable if the asset is at the end of the useful life
- Reviewed at every year end, the difference is treated as a change in accounting estimate
Useful life
- Period or units which an asset is expected to be available or obtained
a. Time period as in years
b. Units of output or production
c. Service hours or working hours
- Factors
a. Expected usage of asset
b. Expected physical wear and tear
c. Technical and commercial obsolescence
d. Legal limits
- Service life and physical life
a. Former is the equivalent of useful life and the period of time which asset will be
used
b. Latter pertains to how long the asset will last
DEPRECIATION METHOD
- The current method is reviewed at least every year end and there will be change in the
method when there is a significant change in the expected pattern of future economic
benefits
- This change is accounted as change in accounting estimate
20 | B e s t n o o k i t
Equal or uniform charge methods

Straight line
𝐶𝑜𝑠𝑡 − 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
- Straight line rate
100%
𝑆𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝑙𝑖𝑛𝑒 𝑟𝑎𝑡𝑒 =
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
- This considers the depreciation as a function of time rather than a function of usage
- Widely use because of simplicity
- At the end of useful life, the carrying amount should equal the residual value
Composite method and group method
- Unit depreciation
- Time consuming and costly
- Used in large entities with many individual assets – treated as one and single PPE
- In composite method – assets that are dissimilar in nature or physically different and
vary widely in useful life are grouped and treated as a single unit
- In group method – assets that are similar in nature and estimated useful life are
grouped and treated as single unit
- Procedures (Problem 27-4)
a. Depreciation is reported in a single accumulated depreciation account – it is not
related to any specific asset account
b. Composite rate or group rate is multiplied by the total cost of asset
𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑟𝑎𝑡𝑒 𝑜𝑟 𝑔𝑟𝑜𝑢𝑝 𝑟𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑃𝑃𝐸
𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
=
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
+
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
6,100,000 − 100,000 2,550,000 − 50 1,030,000 − 30,000
= + +
20 5 10
= 900,000
900,000
𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑟𝑎𝑡𝑒 𝑜𝑟 𝑔𝑟𝑜𝑢𝑝 𝑟𝑎𝑡𝑒 = = 9.3%
6,100,000 + 2,550,000 + 1,030,000

21 | B e s t n o o k i t
 The total annual depreciation depends on how many assets there in a group or
composition
The total cost of PPE is the sum of all asset cost in a group or composition
𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑟𝑎𝑡𝑒 𝑜𝑟 𝑔𝑟𝑜𝑢𝑝 𝑟𝑎𝑡𝑒 × 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑃𝑃𝐸
𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = (6,100,000 + 2,550,000 + 1,030,000) × 9.3%
= 900,000
There is a minor difference because of round off, however, without retirement and
replacement of a new PPE, the total annual depreciation must equal the periodical
depreciation computed
The composite life is the life of the asset as a whole
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑃𝑃𝐸 − 𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑙𝑖𝑓𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑙𝑖𝑓𝑒
(6,100,000 − 100,000 + (2,550,000 − 50,000) + (1,030,000 − 30,000)
=
900,000
= 10.6 𝑦𝑒𝑎𝑟𝑠
c. No gain or loss is recognized when item in PPE is retired, the item is credited at
historical cost and accumulated depreciation debited minus the proceeds from
retirement
Cash 40,000
Accumulated depreciation 2,510,000
PPE 2,550,000
d. If upon retirement of an item in PPE and immediately replaced by a new asset, the
periodical depreciation is then computed by multiplying the composite rate by
𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = (6,100,000 + 1,030,000) × 9.3% = 66,309
There is a difference because of round off
Variable charge or activity methods
- Depreciation is function of use rather than of time
- Useful life is considered in terms of output and number of hours
- The reason is that asset depreciates depending on their usage or the time it is used, for
example if machine is used more than full time in the current period to create more
revenue, it is sound to match the revenue generated with depreciation expense which is
even larger in amount compare to a period where the machine is not used more than
full time
Working hours method (Problem 27-2)
- The depreciation rate is multiplied by actual hours worked per year to get the annual
depreciation

22 | B e s t n o o k i t
 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑡𝑒𝑟𝑚𝑠 𝑜𝑓 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 ℎ𝑜𝑢𝑟𝑠
570,000 − 20,000
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 11 𝑝𝑒𝑠𝑜𝑠
50,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 × 𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 11 × 3,000 = 33,000
- The annual depreciation for 2020 is 33,000 while for 2021 is 55,000
Production method
- Same with working hours but the depreciation base is production unit
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑡𝑒𝑟𝑚𝑠 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡
570,000 − 20,000
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 2.75
200,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 × 𝐴𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 2.75 × 18,000 = 49,500
- The annual depreciation for 2020 is 49,500 while for 2021 is 60,500
Decreasing charge or accelerated methods
- It provides higher depreciation in earlier years and low depreciation in later years
- The reason is that a new PPE is more efficient to provide more revenue than its later
years of useful life
- It compensates repairing cost because the repair cost is low in earlier years and higher
in later years
Sum of year’s digits (Problem 27-9)
- The sum of the digits of useful life is the SYD
𝐿𝑖𝑓𝑒 + 1
𝑆𝑌𝐷 = 𝐿𝑖𝑓𝑒 ( )
2
8+1
𝑆𝑌𝐷 = 8 ( ) = 36
2
- The half year is multiplied by two in order to get whole years, if there is 1/3 of year,
multiplied by 3 and if 1/4, multiplied by 4
- The SYD is the denominator in the formula to get the annual depreciation, the
numerator is the year where it is used, for example if a PPE is purchased with 10 years
of useful life and it is on third used, the numerator will be 7, the formula us then
multiplied to depreciable amount

23 | B e s t n o o k i t
 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
=( ) × (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒)
𝑆𝑌𝐷
8
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = ( ) × (1,200,000 − 120,000) = 240,000
36
If the PPE is acquired on January 1 and the entity is using calendar year, the depreciation
for the first period of the useful life is 240,000
- If the PPE is acquired not in accordance with the period, for example the PPE is acquired
on June 6 but the entity is using calendar year; the formula is just extended

𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
=( ) × (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒)
𝑆𝑌𝐷
𝑀𝑜𝑛𝑡ℎ 𝑎𝑐𝑐𝑟𝑢𝑒𝑑
×( )
12
8 9
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = ( ) × (1,200,000 − 120,000) × ( ) = 180,000
36 12
The depreciation expense to be recognized in the first period of useful life in a calendar
year is 180,000, the expense is reported at the end of the year, while the remaining 3
months is accrued in the next calendar year, which is 60,000
While on the next calendar year
7 9
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = ( ) × (1,200,000 − 120,000) × ( ) = 157,500
36 12
The year-end depreciation of next calendar year is the sum of 157,500 and 60,000,
217,500, while on the third calendar year, the remaining 3 months of second calendar
year is accrued at 52,500
Declining balance
- The fixed or uniform rate is computed as below is then multiplied by the declining
carrying amount to get the depreciation for the year
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
𝐹𝑖𝑥𝑒𝑑 𝑟𝑎𝑡𝑒 = 1 − √𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 ÷ 𝐶𝑜𝑠𝑡
- This method cannot be used in a PPE with no residual value, in absence of residual
value, it is assumed to be 1
- To get the depreciation of the year, the fixed rate is multiplied by carrying amount that
is historical cost minus accumulated depreciation, the residual value is ignored
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐹𝑖𝑥𝑒𝑑 𝑟𝑎𝑡𝑒 × (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛)

24 | B e s t n o o k i t
Double declining balance
- Same with declining balance, but this is much common to be used than it
- The depreciation is determined by multiplying the fixed rate and declining carrying
amount
- However, there is a difference in determining the rate, in here the straight-line rate is
used but it is doubled
- It can be called as 200% declining method
100%
𝑆𝑡𝑟𝑎𝑖𝑔ℎ𝑡𝑙𝑖𝑛𝑒 𝑟𝑎𝑡𝑒 = ( ) × 200%
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
- The rate is then multiplied by the carrying amount that is historical cost less
accumulated depreciation, residual value is ignored
- However, the accumulated depreciation on the last period of useful life must not exceed
a value which would cause the carrying amount lesser than the residual value
- In 150% declining balance, instead of 200% the straight-line is just multiplied by 150%
Other methods
Inventory method (Problem 27-24)
- This only carry the cost of PPE at a value recognized at the end of every year, therefore,
there is no accumulated depreciation
- This is only applicable to PPE which is low of value and a useful life which is immaterial
such as hand tools
- To get the annual depreciation, the sum of beginning balance of the tools and acquired
hand tools at cost during the year less the proceed of sale, and finally subtracted by the
value of the tools to be recognized at the end of the year
Beg bal 140,000
Acquisition 60,000
Proceeds of sale (4,000)
Value at year-end (150,000)
Depreciation 46,000
Thus, the depreciation for the year is 46,000 and no accumulated depreciation is to be
maintained
Depreciation 46,000
Tools 46,000
Retirement and replacement method (Problem 27-25)
- In retirement method, the depreciation is only recognized when tools are retired
- This follows the FIFO method and is applicable to PPE which is low of value, which
means the first acquired tools are first retired
2020

25 | B e s t n o o k i t
 Tools (400 x 300) 120,000
Cash 120,000

Cash (300 x 50) 15,000

Depreciation 45,000
Tools (300 x 200) 60,000
- In replacement, the depreciation is recognized only when tools are replaced
2020
Tools (100 x 300) 30,000
Cash 30,000

Depreciation ((300*300)-(300*50)) 75,000

Cash 75,000
The clue is that the sum of tools acquisition cost, depreciation, and proceed must equal
to the value entered in the “retirement method’s” tools acquisition cost
CHANGE IN USEFUL LIFE
- Because of physical deterioration and technological improvement, useful life may
change
- The useful life is then reviewed at least every year-end
- The current and future depreciation shall be then adjusted
- Problem 27-21
The past depreciation recorded is not corrected, hence the carrying amount is carried to
the new depreciation
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
=( ) × (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒)
𝑆𝑌𝐷
5
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 2017 = ( ) × (3,760,000 − 240,000) = 1,173,333
15
4
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 2018 = ( ) × 3,520,000 = 938,667
15
3
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 2019 = ( ) × 3,520,000 = 704,000
15
Thus, the carrying amount would be 944,000, the sum of annual depreciations for past 3
years deducted against historical cost of 3,760,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 1 × (944,000 − 352,000) = 938,667
The remaining life is 1 year because it should have been 4 years, now it is on fourth year
CHANGE IN DEPRECIATION METHOD
- Depreciation method must reflect the pattern in which the asset’s economic benefits
are expected to be consumed

26 | B e s t n o o k i t
 - Problem 27-18
Straight-line for 2017-2019
7,200,000 − 0
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = 720,000
10
The accumulated depreciation as of beginning of 2020 will be 2,160,000, thus, the
carrying amount of asset would be then 5,040,000
The remaining useful life would be then 7 years
7+1
𝑆𝑌𝐷 = 7 ( ) = 28
2
7
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = ( ) × 5,040,000 = 1,260,000
28
Thus, the depreciation for 2020 will be 1,260,000
DEPLETION
Exploration and evaluation of mineral resources
- The search for mineral resources such as nickel, iron, and others that are found naturally
- The search must be subsequent to the obtainment of legal right to explore as well as the
determination of technical feasibility and commercial viability of extracting the mineral
resources
Exploration and evaluation expenditures
- The cost incurred before the technical feasibility and commercial viability
- Cost excluded:
a. Cost incurred before the obtainment of legal right to explore
b. Development expenditures – after technical feasibility and commercial viability such
as building roads and tunnels
- Cost included:
a. Acquisition of rights to explore
b. Topographical, geological, geochemical, and geophysical studies
c. Exploratory drilling
d. Trenching
e. Sampling
f. Activities in relation to evaluating the technical feasibility and commercial viability
g. General and administrative cost directly attributable to exploration and evaluation
cost
- May qualify as exploration and evaluation asset
- Measurement – initially at cost, and subsequently either of cost model or revaluation
model
- Classification – may be tangible such as drills and vehicle for exploring, or intangible
such as drilling rights

27 | B e s t n o o k i t
Wasting assets
- Natural resources – that includes coal, oil, ore, precious metals like gold and silver, and
timber
- The nature is that the asset is physically consumed to extent that it is not replaceable
but in the process of nature and not by a man
- Cost
a. Acquisition cost
b. Exploration cost
c. Development cost
d. Estimated restoration cost
Acquisition cost
- The initial cost of the wasting asset
- The land value is the residual value wasting asset
- The residual value is deducted against the total acquisition cost to get the depletable
amount
Exploration cost
- Cost incurred before technical feasibility and commercial viability
- Cost incurred in an attempt to locate the natural resource that can be extracted
a. Acquisition of right to explore
b. Geological study
c. Exploratory drilling
d. Trenching
e. Sampling
- The nature is that, there is a resulting event that is either success or failure
- Two methods of accounting
a. Successful effort method – unsuccessful discovery is expensed
b. Full cost method – whether successful or unsuccessful is capitalized
Development cost
- Cost incurred to exploit or extract a natural resource that has been located from
successful exploration
- Tangible equipment – is not capitalized as cost of natural resource but set up in a
separate account and depreciated over their useful life
a. Transportation
b. Heavy machinery
c. Tunnels
d. Bunker
e. Mine shaft

28 | B e s t n o o k i t
 - Intangible development cost – capitalized as cost of natural resource
a. Drilling
b. Sinking mineshaft
c. Construction of wells
Restoration cost
- The estimated cost of restoration must be a present obligation of the entity
- Same with PPE
Depletion
- Removal, exhaustion, or extraction of a natural resource
- Systematic allocation of depletable amount of a wasting asset over the period the
natural resource is extracted
Depletion method
- Computed using the output or production method
(𝐶𝑜𝑠𝑡 𝑜𝑓 𝑤𝑎𝑠𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒)
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝑈𝑛𝑖𝑡𝑠 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑡𝑜 𝑒𝑥𝑡𝑟𝑎𝑐𝑡𝑒𝑑
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 = 𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 × 𝐴𝑐𝑡𝑢𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑒𝑥𝑡𝑟𝑎𝑐𝑡𝑒𝑑
Revision of depletion rate
- Depletion rate has to be change either because of new information is available or
because production is production processes has become more sophisticated
- Same treatment as to PPE, the formula is simple dividing the carrying amount by the
revised estimate of productive output
Depreciation of mining property
- Tangible equipment used in extraction of natural resource
- Depreciated over shorter of their useful life or of the wasting asset
- If useful life of wasting asset is used – production method
- If useful life of equipment is used – straight-line method
- The nature is that the tangible equipment must be immovable – if the property is
movable to extent that it can be used in future projects – in such case the property is
depreciated over its useful life using straight-line method
Shutdown
- Applicable to equipment used in extraction
- The production method cannot be used in the event of shutdown
- The straight-line method is used based on the carrying amount of the equipment

29 | B e s t n o o k i t
 - However, if the extraction is continued production method is again utilized – with a new
depletion rate as computed by the carrying amount
Trust fund doctrine
- Payments for share capital at par value is a trust fund and should not be distributed to
the shareholder as this is reserved for the protection of creditors of a corporation
- This is also underlying doctrine why corporation cannot pay dividends if retained
earnings has deficit balance
Wasting asset doctrine
- This doctrine outweighs trust fund doctrine in the case of corporation extracting natural
resources – trust fund can be legally return to the shareholder
- Wasting asset corporation thus cannot only pay dividends out of retained earnings but
to the extent of accumulated depletion
- The amount in excess of retained earnings is a liquidating dividend or return of capital
- The nature is that the accumulated depletion can only be a base of amount of return of
capital and not as a source
- The reason for this doctrine is that retaining business funds are not needed because
wasting asset is irreplaceable – it is unfair for shareholders to retain such funds where it
is actually represent the cost already recovered
- Maximum dividend formula
𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
= (𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 + 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛)
− (𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑙𝑖𝑞𝑢𝑖𝑑𝑎𝑡𝑒𝑑 𝑖𝑛 𝑝𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟𝑠
+ 𝑈𝑛𝑟𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑑𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑖𝑛 𝑒𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦)
- The unrealized depletion in ending inventory is the unit in inventory multiplied by
depletion rate
- Journal entry
Retained earnings XXX
Capital liquidated XXX
Dividends payable XXX
- The capital liquidated account is a deduction to the total shareholder’s equity
REVALUATION
- The PPE is carried at revalued amount – revalued amount is the FV or depreciated
replacement cost of PPE at the time of revaluation less accumulated depreciation and
accumulated impairment
Frequency of revaluation
- There will be a revaluation when revalued amount differs from FV

30 | B e s t n o o k i t
 - If significant and volatile changes in FV occurs – annual revaluation is needed
- If unsignificant – revaluation for every 3 or 5 years
Revaluation of all items in an entire class
- The class of PPE is the grouping of assets with similar natures
- The assets within a class is simultaneously revalued – revalued at once in order to avoid
mixture of different dates of revaluation
Basis of revaluation
- May be based on (by hierarchy)
a. FV – by appraisal conducted by professional qualified valuers
b. Depreciated replacement cost – only when FV is not available, this is the sound value
of asset
- Depreciated replacement cost:
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑒𝑑 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡
= 𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 − 𝐶𝑜𝑟𝑟𝑒𝑠𝑝𝑜𝑛𝑑𝑖𝑛𝑔 𝑎𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
- Replacement cost is cost of purchasing a substitute asset for the current asset
Revaluation surplus
- Also known as revaluation increment
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = 𝐹𝑉 𝑜𝑟 𝑆𝑜𝑢𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 − 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡
- Appreciation or revaluation increase is the excess of replacement cost over historical
cost
- The revaluation surplus then can be computed as
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = 𝐴𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 − 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
ACCOUNTING FOR REVALUATION
No change in useful life
- Problem 29-2
- Original life
Accumulated depreciation – cost 750,000
Divided by 5 years
Annual depreciation 150,000
Equipment – cost 3,000,000
Divided by annual depreciation 150,000
Original useful life 20 years
𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 =
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑡 𝑐𝑜𝑠𝑡
( )
𝐴𝑔𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡

31 | B e s t n o o k i t
Two approach in recording revaluation
Proportional approach
- The accumulated depreciation is restated proportionately
- On the same problem
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑖𝑡𝑜𝑛 =
𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡
750,000
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = 25%
3,000,000
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = 25% × 4,800,000 = 1,200,000
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑒𝑑 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = 4,800,000 − 1,200,000 = 3,600,000
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = 3,600,000 − (3,000,000 − 750,000) = 1,350,000
- Or
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = (4,800,000 − 3,000,0000) − (1,200,000 − 750,000) = 1,350,000
- Journal entry of revaluation
Equipment 1,800,000
Accumulated depreciation 450,000
Revaluation surplus 1,350,000
- Journal entry for annual depreciation after revaluation
3,600,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = 240,000
(20 𝑦𝑒𝑎𝑟𝑠 − 5 𝑦𝑒𝑎𝑟𝑠)
Depreciation 240,000
Accumulated depreciation 240,000
- Journal entry of realization of revaluation surplus
1,350,000/(20-5)=90,000
Revaluation surplus 90,000
Retained earnings 90,000
- Problem 29-3 Requirement 1
5,000,000
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 = = 40 𝑦𝑒𝑎𝑟𝑠
1,250,000
( )
10
1,250,000
𝐺𝑟𝑜𝑠𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = 6,000,000 ÷ (100% − ) = 8,000,000
5,000,000
1,250,000
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = ( ) × 8,000,000 = 2,000,000
5,000,000
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑒𝑑 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 𝑜𝑟 𝐹𝑉 = 8,000,000 − 2,000,000 = 6,000,000

32 | B e s t n o o k i t
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = (8,000,000 − 5,000,000) − (2,000,000 − 1,250,000) = 2,250,000
Building 3,000,000
Accumulated depreciation 750,000
Revaluation surplus 2,250,000
- Journal entry for annual depreciation after revaluation
6,000,000/30
Depreciation 200,000
Accumulated depreciation 200,000
- Journal entry of realization of revaluation surplus
2,250,000/30
Revaluation surplus 75,000
Retained earnings 75,000
Elimination approach
- The related accumulated depreciation of the historical cost is offset against the carrying
amount of the asset to get the net carrying amount – the net carrying amount is
restated to the revalued amount
- Problem 29-3
- Getting the net carrying amount
5,000,000-1,250,000
Accumulated depreciation 1,250,000
Building 1,250,000
- Adjustment to the FV
6,000,000-(5,000,000-1,250,000)
Building 2,250,000
Revaluation surplus 2,250,000
- The proceeding journal entries is the same as to proportional approach
Revaluation surplus
- Component of OCI
- Transferred to retained earnings when realized
- The whole surplus may be realized on the disposal
- The revaluation surplus is realized same period with the related asset being depreciated
over their useful life
Change in life and residual value
- Problem 29-5
- Residual value to be computed in depreciable amount must be based on the revised
residual value

33 | B e s t n o o k i t
 - However, the original residual value is used on computing the accumulated depreciation
based on cost
- Can be expressed in this formula
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡, 𝑐𝑜𝑠𝑡
= (𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒)
𝐴𝑔𝑒 𝑙𝑖𝑓𝑒
− ((𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑂𝑙𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒) × )
𝑂𝑙𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡, 𝑐𝑜𝑠𝑡
2020 − 2017
= (20,000,000 − 4,000,000) − ((20,000,000 − 2,000,000) × )
6
= 7,000,000
- The age life of an asset, if not given, simply determine the annual depreciation based on
old estimate meaning, the date before the revaluation
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝐴𝑔𝑒 𝑙𝑖𝑓𝑒 =
𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑂𝑙𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
( )
𝑂𝑙𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
- Accordingly, the replacement cost and appreciation is computed as follows

𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡, 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡

= (𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 − 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒)
𝐴𝑔𝑒 𝑙𝑖𝑓𝑒
− ((𝑅𝑒𝑝𝑙𝑎𝑐𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 − 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒) × )
𝑂𝑙𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒

𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡, 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡

2020 − 2017
= (30,000,000 − 4,000,000) − ((30,000,000 − 4,000,000) × )
6
= 13,000,000
- To compute for appreciation of building by deducting the depreciable building cost
against depreciable building replacement cost

𝐵𝑢𝑖𝑙𝑑𝑖𝑛𝑔, 𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
= (𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 − 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − (𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡
− 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒)
𝐵𝑢𝑖𝑙𝑑𝑖𝑛𝑔, 𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑖𝑡𝑜𝑛 = (30,000,000 − 4,000,000) − (20,000,000 − 4,000,000)
= 10,000,000
- To compute for appreciation of accumulated depreciation
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑖𝑡𝑜𝑛, 𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
= 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡
− 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝑐𝑜𝑠𝑡

34 | B e s t n o o k i t
 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑖𝑡𝑜𝑛, 𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
2020 − 2017
= ((30,000,000 − 4,000,000) × )
6
2020 − 2017
− ((20,000,000 − 2,000,000) × ) = 4,000,000
6

𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = 𝐹𝑉 𝑜𝑟 𝑆𝑜𝑢𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 − 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡

𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = 13,000,0000 − 7,000,000 = 6,000,0000
- Or
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = 𝐴𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 − 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = 10,000,000 − 4,000,0000 = 6,000,000
- The journal entry would be
Building 10,000,000
Accumulated depreciation 4,000,000
Revaluation surplus 6,000,000
- To determine the realized surplus and depreciation, the revised useful life and age of
the asset is taken to the account
8 years useful life less 3 years age life
Depreciation 2,600,000
Accumulated depreciation 2,600,000

Revaluation surplus 1,200,000

Retained earnings 1,200,000
Reversal of revaluation surplus
- The revaluation decrease is first charge against the balance of revaluation surplus and
the remaining balance is charge to expense
Gross replacement cost
- Sometimes it is the sound value or FV that is given; thus, we have to compute for the
gross replacement cost to determine the appreciation per cost of building and
replacement cost before the accumulated depreciation
- The cost before accumulated is important because the difference of them gives the
appreciation, the amount of appreciation is debited to equipment at the time of
revaluation

𝐴𝑔𝑒 𝑙𝑖𝑓𝑒
𝐺𝑟𝑜𝑠𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = 𝑆𝑜𝑢𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑉 ÷ (100% − ( ))
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒

35 | B e s t n o o k i t
 - Or
𝐺𝑟𝑜𝑠𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
= 𝑆𝑜𝑢𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑉 ÷ (100% − ( ))
𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡

- The sound value is also known as depreciated replacement cost – the FV that is
determined must be associated to the property now having depreciation, in other
words, property that is in 3 years of age cannot have a FV with new same property
- If accumulated depreciation is age life over useful life multiplied by gross replacement
cost – and since gross replacement cost is 100%, that means the sound value or FV is the
remaining percentages after the accumulated depreciation
- Using Problem 29-5 but on the 2 years before the useful life expires, the FV is 8,000,000
Building 26,000,000 – 30,000,000 less 4,000,000 residual value
Accumulated depreciation 11,800,000 – 4,000,000 plus 2,600,000*3
Carrying amount 14,200,000
Revaluation surplus 2,400,000 – 6,000,000 less 1,200,000*3
- To compute for gross replacement cost, the building has 5 years of useful life and now it
is on years before expiration, therefore, the age is 3 years already
3
𝐺𝑟𝑜𝑠𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = 8,000,000 ÷ (100% − ( )) = 20,000,000
5

- To compute for the decrease in cost, using the building appreciation formula
𝐵𝑢𝑖𝑙𝑑𝑖𝑛𝑔, 𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 20,000,000 − 26,000,000 = 6,000,000 (𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒)
- To compute for accumulated depreciation of FV
3
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝐹𝑉 = 20,000,000 × ( ) = 12,000,000
5
- Or
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝐹𝑉 = 20,000,000 − 8,000,000 = 12,000,000
- To compute for the differences of accumulated depreciation using the accumulated
depreciation, appreciation formula
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑖𝑡𝑜𝑛, 𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 12,000,000 − 11,800,000 = 200,000
- To compute for the net decrease using revaluation surplus formula
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = 8,000,000 − 14,200,000 = 6,200,000 (𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒)
- Or
𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = (−6,000,000) − 200,000 = 6,200,000 (𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒)

36 | B e s t n o o k i t
 - Take note that the difference of appreciation is negative -6,000,000 while the difference
of accumulated depreciation appreciation is positive 200,000, the formula is
appreciation less related accumulated depreciation and can be expressed as “(-
6,000,000) - (+200,000)”
- Journal entry
Revaluation surplus 2,400,000
Revaluation loss 3,800,000
Building 6,000,000
Accumulated depreciation 200,000
Sale of revalued asset
- Problem 29-5 but on the 2 years before expiration the building was sold at 20,000,000
Building 26,000,000 – 30,000,000 less 4,000,000 residual value
Accumulated depreciation 11,800,000 – 4,000,000 plus 2,600,000*3
Carrying amount 14,200,000
Revaluation surplus 2,400,000 – 6,000,000 less 1,200,000*3
- The sale is simply done by eliminating the accounts, by debiting the accounts with
normal credit balance and vice versa
Cash 20,000,000
Accumulated depreciation 11,800,000
Building 30,000,000
Gain on sale 1,800,000
- Remember that the cost is used when it is sold, it is because when property is
transferred to another in such that the ownership is also transferred, thus instead of
26,000,000 which is the depreciable amount, 30,000,000 is used
- The difference between carrying amount and sale price is the gain or loss
- The whole remaining surplus is transferred to retained earnings upon sale
Revaluation surplus 2,400,000
Retained earnings 2,400,000
Disclosures
- This disclosure is only used when PPE is carried at revalued amount
a. Effective date of revaluation
b. If independent valuer is involved
c. Method and significant assumption on estimating
d. If FV is determined using the prices in active market or another valuation method
e. Historical cost and carrying amount of each class of revalued PPE
f. Revaluation surplus

37 | B e s t n o o k i t
38 | B e s t n o o k i t