Chapter 23: Property, Plant, and Equipment (PPE) Capitalized Expensed

[PAS 16] Appraiser’s fee Removing old machine

Freight in/shipping Machine supplies
charge
ELEMENTS OF COST {PDI}
Special horn for van Storage costs
a. Purchase price, import duties, and Freight and insurance Repair charges
nonrefundable purchase taxes, less trade Trial run and other Motor vehicle
discounts and rebates testing costs registration
b. Directly attributable costs Construction of base Interest on loan
c. Initial estimate of the cost of dismantling, Noncurrent portion of Current portion of
removing the item and restoring the site on insurance premium insurance premium
which it is located, the obligation for which Irrecoverable taxes Cost of replacing
damaged part during
the entity incurs
installation

DIRECTLY ATTRIBUTABLE COSTS {ESD IPT}

1. Cost of employee benefits
2. Cost of site preparation
3. Initial delivery and handling costs
4. Installation and assembly cost
5. Professional fees
6. Costs of testing whether the asset is
functioning properly, less the net proceeds
from selling any items produced while
bringing the asset to the present location and
condition, such as samples produced while
testing equipment
COSTS NOT QUALIFYING FOR RECOGNITION
(EXPENSED OUTRIGHT) {OIC A IIR}
1. Costs of opening a new facility
2. Cost of introducing a new product or service,
including costs of advertising and promotion
Costs of conducting business in a new
location or with a new class or customer,
including cost of staff training
3. Cost of conducting business in a new location
or with a new class of customer, including
costs of staff training
4. Administrative and other general overhead
costs
5. Costs incurred while an item capable of
operating in the manner intended by
management has yet to be brought into use
or is operated less than full capacity
6. Initial operating losses
7. Costs of relocating or reorganizing part or all
of an entity’s operations
ACQUISITION OF PROPERTY
1. Acquisition on a cash basis
a. Cost: Cash price equivalent (at the
recognition date) = cash paid plus
directly attributable costs (i.e. freight,
installation, etc.)
b. “Basket price” or “lump sum price” –
apportion the single price to the assets
on the basis of relative fair value
2. Acquisition on account
a. Cost: Invoice price less discount,
whether taken or not
3. Acquisition on installment basis
Case 1: Cash Price is Given
a. Cost: Cash price equivalent
b. Difference: Discount on Note Payable
(Dr.) – installment price minus cash
price
Case 2: Cash Price is Not Given
a. Cost: Present value of all payments
(downpayment plus PV of note) using
an implied interest rate
b. Difference: Discount on Note Payable
(Dr.) – note payable minus PV of note
4. Issuance of share capital
a. Cost: Order of Priority
1. Fair value of property received
2. Fair value of the share capital
3. Par value or stated value of the
share capital
 b. Difference: Share Premium (Cr.) – fair Priority 1 Priority 2
value minus par value (FV of asset given) (TIV of asset given)
FV of asset given xxx TIV of asset given xxx
5. Issuance of bonds payable CA of asset given CA of asset given (xxx)
a. Cost: Order of priority (xxx)
1. Fair value of the bonds payable Gain/Loss from Exchange xxx Gain/Loss from Ex. xxx
2. Fair value of the asset received 8. Donation
3. Face amount of the bonds payable Case 1: Donation from Shareholder
b. a. Cost: Fair value of asset received –
c. Difference: Premium (discount) on Bonds [cr. Donated Capital]
Payable – fair value minus face amount b. Expenses incurred in connection with the
donation (registration and legal fees) –
6. Exchange [dr. Donated Capital]
Case 1: Exchange with commercial substance c. Directly attributable cost (installation and
– no cash involved testing costs)
a. Cost: Order of priority [capitalized; dr. PPE account]
1. Fair value of the asset given
Case 2: Donation from Non-shareholder
2. Fair value of the asset received
a. Cost: Fair value of asset received
3. Carrying amount of the asset given
1. Without restrictions (subsidies) –
b. Difference: Gain/loss on exchange –
[cr. Income from Donation]
fair value of asset given minus carrying
2. With restrictions (non-subsidies) –
amount of asset given
[cr. Deferred Income]
Case 2: Exchange with commercial substance
– cash is involved 9. Construction
a. Cost: Fair value of asset +/- cash a. Cost
 Payor: Fair value of asset given plus 1. Direct materials
cash payment 2. Direct labor
 Recipient: Fair value of asset given 3. Indirect costs and incremental
minus cash received overhead specifically identifiable or
b. Difference: Gain/loss on exchange – traceable to the construction (if not
fair value of asset given minus carrying identifiable, allocate on the basis of
amount of asset given direct labor cost or direct labor
hours)
Case 3: Exchange with no commercial
substance -------------------------------------------------------------------
a. Cost: Carrying amount of the asset Additional Tables
given
 Payor: Carrying amount of asset ACQUISITION ON ACCOUNT
given plus cash payment Gross method Net method
 Recipient: Carrying amount of Purchase on Equipment xxx Equipment xxx
asset given minus cash received account AP xxx AP xxx
b. No gain or loss recognized Payment within AP xxx AP xxx
discount period Cash xxx Cash xxx
7. Trade In (Form of Exchange) Equipment xxx
a. Cost: Order of Priority Payment beyond AP xxx AP xxx
discount period PD lost xxx PD lost xxx
1. Fair value of asset given plus cash
Cash xxx Cash xxx
payment
Equipment xxx
2. Trade-in value of asset given plus cash
payment (fair value of the asset
INSTALLMENT BASIS
received)
1. Cash price given
b. Difference: Gain/loss from exchange
Year Notes Fraction Interest
Payable expense
 2020 500,000 5/15 40,000  Listed selling price/list price and average
2021 400,000 4/15 32,000 published retail value is ignored. It cannot
2022 300,000 3/15 24,000 be used as fair value.
2023 200,000 2/15 16,000  If fair value of asset given is not given, do
2024 100,000 1/15 8,000 not add cash paid to the fair value of the
1,500,000 120,000 asset received. It should only be added to
the fair value of asset given.
2. Cash price not given  Cash price without trade-in (or cash price) is
Date Payment Interest Principal PV equal to fair value of the asset received
1.1.20 634,000 (trade in value + cash payment).
12.31.20 200,000 63,400 136,600 497,400  VAT is charged to input tax and not
12.31.21 200,000 49,740 150,260 347,140 capitalized
12.31.22 200,000 34,714 165,286 181,854  If there are cash payments not related to
12.31.23 200,000 18,146 181,854 0
trade-in (expensed), exclude from cash
paid. Only capitalizable cash paid are added
3. Term note
to fair value of asset given
Date Interest DNP PV  “would have been” cash price and “would
Expense have been” capitalizable costs are all
1.1.20 - 634,000 1,366,000 capitalizable
12.31.20 136,600 497,400 1,506,600  Treasury shares are treated the same as
12.31.21 150,260 347,140 1,652,860 ordinary share capital. Thus, rules on
12.31.22 165,286 181,854 1,818,146 issuance of share capital apply
12.31.23 181,854 0 2,000,000  As to exchange transactions involving
inventories and other assets, rules on PPE
acquisition still apply
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 Round off to three decimal places for PV,
Notes: unless otherwise stated.
 If silent as to exchange, it is assumed to be  Calculator manipulations
with commercial substance  PV of Annuity Factor (for annual
 If silent as to donation, assume donation installments)
from non-shareholder. Ex. 10% prevailing rate; 4 yrs.
 For acquisition of PPE, purchase discount
lost account is used both in gross and net 1 + 10% = 1.10
method. For purchase, purchase discounts 1.10 ÷ ÷ M+ = = = = GT
= 3.170
lost is used only in net method.
 Same entries and account used for
installment basis, both cash price given and  PV Factor (for lump sum)
cash price not given. Only the tables differ. Ex. 10% ; 4 yrs.
 Fair value is entirely disregarded when
1 + 10% = 1.10
exchange transaction lacks commercial
1.10 ÷ ÷ M+ = = = =
substance.
= 0.683
 Assessed value for tax purposes cannot be
used as fair value figures. However, this can
be used for relative fair value allocation
purposes
 For monthly installments, debit interest
expense instead of DNP
 If there is no downpayment for installment
basis, the cost is the PV of note.
 If no installment payment is mentioned,
assumed lump sum and use PV of 1 factor.