ACB

Property, Plant
and Equipment
(Part 1)
NACAYA, OAFERINA, PAILAGAO, PALOMAR, PAYOT, PITAO,
QUIDLAT, QUIMZON
 Definition of PPE

Requirement: Compute for the total amount of PPE.

DEFINITION OF PPE
 INCLUDED
Manufacturing equipment is included because it meets the
definition of PAS 16 Property, Plant, and Equipment.
Land used in business is included because it meets the definition of
PAS 16 Property, Plant, and Equipment.
Building owned is included because it meets the definition of PAS
16 Property, Plant, and Equipment.
Servicing Equipment is included in the total PPE because it meets
the definition of PAS 16 Property, Plant, and Equipment
Safety and environmental equipment is included because it is
necessary for obtaining future economic benefits from other assets.
 NOT INCLUDED
Land held for capital appreciation is not included in the total PPE
because it is an investment property.
Patents are not included because it does not have a physical
substance.
Land held for resale is not included in the total PPE because it is
under PFRS 5, Non-current assets held for sale and discontinued
operations,
Small tools and minor spare parts are not included because it is
expected to be used for a year only, thus it is under Inventory.
Acquisition through purchase
2. Tumeng Co. Acquired a piece of equipment for P1,000,000 and
incurred the following costs:

The samples generated from testing the equipment were sold for
P2,000.

Requirement: Compute for the initial cost of the equipment

ACQUISITION THROUGH PURCHASE
 ACQUISITION THROUGH PURCHASE

Broker's Commission is included in the initial cost since it is a professional fee.

Freight costs and freight insurance are included since they are initial delivery
and handling costs
Installation Costs are included because it is a directly attributable cost.
Calibration and testing costs are included because it is a directly attributable
cost.
Any disposal proceeds of samples generated during the testing are net of the
testing costs. Thus, the sub-total of the costs mentioned above are deducted to
the proceeds from sale of sample generated to get the initial cost of
equipment.
Acquisition through purchase
3. Glassworks Co. acquired equipment through P896,000,
inclusive of P96,000 refundable purchase tax. A cash
discount of P24,000 was available but Flassworks deferred
the payment until the end of the credit term. Glassworks
incurred freight and installation costs of P40,000. Three
weeks after the equipment was installed and used in
Glasswork's main office, Glassworks relocated the
equipment to one of its branches incurring relocation and
reinstallation costs of P50,000.

Requirement: Compute for the total cost of the equipment

ACQUISITION THROUGH PURCHASE
 ACQUISITION THROUGH PURCHASE

Refundable purchase tax is deducted from the purchase price

because only non-refundable tax is supposed to be included.
Utilizing the net method, cash discount is immediately deducted
from the purchase price exclusive of VAT resulting to cash price
equivalent. The total cost of equipment is then computed by
adding the cash price equivalent and the freight and installation
cost.
Lump-sum acquisition
— Building used
4. Noon Co. acquired land and building for P10,000,000. Noon Co, also made
the following expenditures:

The fair value of the building is thrice as much as the land. Of the options
taken, P120,000 relate to the land and building acquired; the balance relates
to properties not acquired.

Requirement: Compute for the costs of (a) land, (b) land improvement, and
(c) building.
 ANSWERS:

(a) P2,690,000
(b) P320,000
(c) P8,450,000
Explanation

The fair values of the land and the building were determined using x + 3x = 10,000,000,
where x is land and 3x is building (given: the FV of the building is thrice as much as the
land). The fractions were determined by dividing the allocated FVs with the total FV
which is 10,000,000.
The lump-sum price was determined by allocating the lump-sum acquisition cost of P10M
according to the relative fair values/fractions of both the land and the building.
Payments to tenants and option paid are allocated both to the land and the building based on
their fractions. The entire 300K balance of option paid was not used since only 120K of it is related
to the land and building acquired.
Land titling cost and special assessment are capitalized to the land only. Building remodeling
prior to occupancy is capitalized to the building only.
Repairs and maintenance after occupancy are recognized as expense, therefore not included
in the cost of the building.
Landscaping on the premises and addition of driveway and parking lot on the premises are
land improvements, which are recognized separately from land.
Lump-sum acquisition -
Building demolished
5. Sunset Co. acquired land with old building for P6,000,00. After the
acquisition, Sunset Co. demolished the old structure and started the
construction of a new building. Sunset Co. incurred the following additional
costs:

Salvaged materials from the demolition were sold for P10,000.

Case 1: The land and the old building have fair value of P5,425,000 and
P775,000, respectively. Provide the journal entries.

Case 2: The old building is unusable and has no fair value. Provide the journal
entries.
 CASE 1 JOURNAL ENTRIES
The land and the old building have fair value of P5,425,000 and P775,000, respectively.
Explanation
Computation for the total costs of land, old building, and new building:

When old building has a fair value given that the building is to be demolished right away, still, the
lump-sum price and other direct costs of acquisition are allocated to both the land and the building.
The cost allocated to the old building is recognized as loss.
Just like in the previous item, lump-sum price is allocated to the land and building based on their
relative fair values.
The finder's fee of real estate agent is also allocated to the land and building based on their relative
fair values.
The land registration cost and unpaid taxes on land prior to acquisition date are capitalized to the
land only.
The demolition cost capitalized to the new building is net of the proceeds from sale of salvaged value.
Materials, labor, and overhead are considered as construction cost as they are directly related in
constructing the new building. Thus, allocated in the cost of the new building.
Explanation
Journal entries:

The values of the accounts

on the debit column are
based on the lump-sum
price on the computation.

The value of land is

acquired by adding the
values of the finder’s fee,
land registration cost and
the unpaid taxes. For the
old building, the value of
the finder’s fee allocated to
the building which is based
on the relative fair value is
used.
Explanation
Journal entries:
The account title “Building –
new” is used in this
transaction since
demolition cost is
capitalized to the new
building.

-The account title “Building

– new” is credited with a
value of P10,000 since
proceeds from sale of
salvaged value is net of the
demolition cost. Thus, a
deduction the total cost of
the new building.
Explanation
Journal entries:
In this transaction, the
account title “Building –
new” is debited because the
materials, labor, and
overhead are considered
construction costs and are
capitalized to the new
building.

The cost allocated to the old

building is recognized as
loss since the old building is
already being demolished.
 CASE 2 JOURNAL ENTRIES
The old building is unusable and has no fair value.
Explanation
Computation for the total costs of land and new building:

When the old building is unusable such that it has no fair value, the lump sum price and
other direct costs of acquisition are allocated only to the land.
The cost of the new building is the same whether or not cost is allocated to the building.
Explanation
Journal entries:
The value of the land on the
debit column is based on
the lump-sum price on the
computation. The old
building is not recorded
since it is not usable
anymore and it has no fair
value.

The value of land is

acquired by adding the
values of the finder’s fee,
land registration cost and
the unpaid taxes without
considering the old
building.
Explanation
Journal entries:
Same in case 1, the account
title “Building – new” is used
in this transaction since
demolition cost is
capitalized to the new
building.

Just like in case 1, the

account title “Building –
new” is credited with a
value of P10,000 because
proceeds from sale of
salvaged value is net of the
demolition cost.
Explanation
Journal entries:
The account title “Building –
new” is debited, same in
case 1 since the cost of the
new building is the same
whether or not cost is
allocated to the building.

There is no entry for the allocated cost of old building

demolished because there's no fair value given for the old
building. Thus, cannot record any losses.
 No. 06 Decomissioning &
Restoration Costs
6. Straw Co. acquired mining equipment for P20,000,000.
Additional costs incurred in readying the equipment for its
intended use amounted to P10,000,000. Straw Co. is obligated to
uninstall the equipment and restore the installation site at the end
of the equipment's 8-year useful life, a process which Straw Co.
estimates to cost about P4,000,000. The appropriate pre-tax
discount rate is 10%.

Requirement: Provide the journal entry.

No. 6 Answer
No. 6 Explanation
Aside from the purchase price and direct costs of acquisition, the
cost of a PPE also includes the initial estimate of dismantlement
removal and site restoration costs (a.k.a. 'decommissioning and
restoration costs') for which the entity incurs an obligation by
acquiring or using the asset other than to produce inventories.

"Asset retirement obligation" represents the provision (liability)

recognized for the restoration and decommissioning costs.
Acquisition through self-
construction
7. Four AM Co.purchased a piece of land for P8,000,000 and started
construction of a new building on the site.

Information on the construction is as follows:

ANSWERS:
Acquisition through self-
construction
INCLUDED ITEMS:

LAND
Survey Cost - appropriately capitalized to land alone. It
is the costs of delineating the form, extent, and position
of tract of land. Refer to page 86.

Site Clearing - Considered to be a cost of land. It is an

additional land improvement that have indefinite or
permanent useful life. Not subject to depreciation.
Refer to cost of land Page 70-71 letter J.
iNCLUDED ITEMS:
SELF-CONSTRUCTED BUILDING
Architectural and Engineering works - Labor and
architectural costs incurred during construction. Page
83.

Building Permit - cost of building permit. Properly

included as costs of self-constructed building. Page 83

Temporary structures built during construction -

Properly included as cost of self-constructed building.
Examples are temporary safety fence, construction
offices, sleeping quarters for laborers, and materials a,d
tools shed. Page 83
iNCLUDED ITEMS:
SELF-CONSTRUCTED BUILDING
Excavation and backfiling- Excavation costs. Properly
included as cost of self-constructed building. Page 83.

Construction materials and labor costs for

structural works - Properly included as cost of self-
constructed building as costs of materials and labors.
Page 83.

Insurance Cost - Properly inldued as cost of self-

constructed building. Page 83. Additionally, costs
covered by insurance are not expensed but rather
included as cost of PPE. Page 86.
iNCLUDED ITEMS:
SELF-CONSTRUCTED BUILDING
Safety inspection and supervision fees - Properly
included as cost of self-constructed building. Page 83

Elevator included in building design and installe

during construction - included as cost because it is
included in the building design. Page 84.

Finishing - considerd to be a cost of construction.

Pavement and Parking lot included in building

design - included as cost because it is included in the
building design. Page 84.
iNCLUDED ITEMS:
SELF-CONSTRUCTED BUILDING
Clerical and other costs related to construction -
Properly included as cost of self-constructed building.
Overhead cost. Page 83

Rentals for construction equipment - rent is

considered as part of overhead cost. Overhead cost is
part of the cost of self-constructed building. Page 83

Costs of necessary designs changes during

construction - Properly included as cost of self-
constructed building. Not abnormal wasted materials
since its not caused of inefficiences. Page 84.
Acquisition through self-
construction
EXCLUDED ITEMS:

Electrical lighting and wiring works - Considered as

building improvement and not included in the cost of self-
constructed building because its not stated being installed
during construction unlike the elevator that is also
considered as a building improvement. . Refer to page 72.
Acquisition through self-
construction
EXCLUDED ITEMS:
Plumbing and sanitary works - Considered as building
improvement and included in the cost of self-constructed
building because its not stated being installed during
construction unlike the elevator that is also considered as a
building improvement. . Refer to page 72.

Abnormal loss on wasted materials - not included in the cost

of self-constructed asset. It's under the cost of inefficiences
and recognized as expense. Refer to page 84.
Acquisition through self-
construction
EXCLUDED ITEMS:

Uninsured Incidents - not included in the cost of self-constructed

asset. Recognize as expense. Only INSURANCE PREMIUMS paid
may be capitalized as part of the costs of self-constructed assets.

Income from incidental operations during construction -

recognized as income. Does not affect PPE, or either the costs of
the land and building. The income and related expenses are
recognized in profit or loss.

Savings on self-construction - is considered to be an internal

profit on self-construction assets. Ignored.
Acquisition through exchange
8. Ima Co. and Saka Co. exchanged ownership of 1,200 wine barrels.
Ima paid Saka P300,000 to compensate for the difference in the
quality of the barrels. The carrying amounts and fair values on the
date of the exchange were as follows:

Requirement: Provide the journal entries in each of the books of Ima

and Saka assuming the transaction:
a. Has commercial substance.
b. Lack commercial substance.
 HAS COMMERCIAL SUBSTANCE:
FV of asset given up/FV of asset received*
Explanation: FV of asset given up

Initial costs of non-monetary asset received is the value of the new

equipment acquired from exchange. This account is also debited since
the company acquired new asset. The cash account in Saka Co.'s book is
deducted in the initial cost since it is a compensation for the difference
in the quality of wine barrels, however, in the journal entry, this cash
account is debited since the company received cash.

The old equipment is credited since the exchange brought a new one to
the company.
Explanation

Aside from squeezing the gain (loss) on exchange, it can also be

computed using the format above. There is a gain if the fair value of the
asset given up exceeds the carrying amount, there is a loss if it is the
opposite. The cash paid or received does not affect the computation of
the gain or loss above. The gain or loss is recognized in profit or loss.
Explanation: FV of asset received*

Assuming the Ima Co. cannot determine the fair value of the asset given
up, the fair value of asset received of Ima Co. is the given fair value of
Saka Co. The cash paid is also not recorded in Ima Co.'s book. However,
Saka Co.'s initial cost of non-monetary asset received is still the same
with case 1 which involved FV of asset given up.

The shortcut solution of gain (loss) is not applicable when using the fair
value of asset received. Thus, it is best computed by squeezing it
through preparing the journal entry.
Acquisition through issuance
of equity and debt instruments
9. Eure Co. acquired a machine in exchange for 10, 000 of its own shares
with par value of P10 per share and fair value of P130 per share.

Case 1: The cash selling price of the machine is P1, 400, 000. Provide the
journal entry.

Case 2: The cash selling price of the machine is not determinable. Provide the
journal entry.
Journal entry for Case 1: Cash selling price
Explanation: Case 1

According to PFRS 2, the first order of priority when it comes to

measuring the asset is to measure it at fair value of the asset received.

The problem stated that the cash selling price of the machine is
P1,400,000, thus the amount on the journal entry. The share capital was
solved by multiplying the par value of the shares and the amount
exchanged, which equates to P100, 000. The share premium was taken
from subtracting the share capital and the asset acquired which
amounted to P1, 300, 000.
Journal entry for Case 2: Undeterminable
 Explanation: Case 2

According to PFRS 2, the second order of priority when it comes to measuring

the asset is to measure it at fair value of the equity instrument issued.

Assuming the fair value of the asset received is undeterminable, the

equipment would be measured by the issued equity instrument. To get the
amount, Fair value of the share is multiplied to the amount of shares issued.
10, 000 shares multiplied to P130 would equate to P1, 300, 000. Share capital
is by multiplying P10 to 10, 000 shares issued which amounts to P100, 000.
Share premium is subtracted from the equipment acquired and the share
capital which equates to P1, 200, 000.
No. 10 Acquisition Through Issuance
of Equity & Debt Instruments
10. Ancing Co. acquired a machine and, as consideration, issued a three-year, non-
interest bearing note with face amount of P1,600,000, payable in lump-sum.

Case 1: The cash selling price of the machine is P1,400,000. Provide the journal
entry.

Case 2: The cash selling price of the machine is not determinable. The prevailing
market rate of interest for similar debt instruments is 10%. Provide the journal
entry.
No. 10: Case 1 Answer & Explanation

Case 1 Explanation: In accordance to PFRS 2, a PPE acquired through the issuance of a debt
instrument (e.g., bond payable, note payable, and the like) is initially measured using the ff.
order of priority: (1) FV of the asset received & (2) FV of the debt instrument issued.

It is stated in the problem that the cash selling price of the machine is P1,400,000. Hence the
amount placed in the journal entry. This is the "cash price equivalent" which refers to the
amount that would have been paid if the entity acquired the PPE on cash basis rather than defer
the payment by issuing a debt instrument.
No. 10: Case 2 Answer & Explanation

Case 2 Explanation: In accordance to PFRS 2, if the fair value of the asset received is
indeterminable, the PPE received is measured in relation to the fair value of the debt
instrument issued. Such fair value may be determined using an appropriate valuation
technique, e.g., present value of future cash flows discounted at the prevailing
market rate of interest for a similar instrument. Hence, the computation is as
followed in the next slide.
No. 10 Case 2 Solution
No. 11 Acquisition Through
Donation
11. Abu-abu Cow Co. received a machine from a donation. The
machine was originally acquired by the donor for P1,000,000 and had
a carrying amount of P280,000 in the donors' books at the time of
donation. The machine has a second-hand value of P320,000. There
are no conditions attached to the donation.

Requirements: Provide the entries assuming the donor is (a) a

shareholder of Abu-abu Cow and (b) an unrelated party.
No. 11 Answer & Explanation

A PPE received from donation is measured at fair value and accounted for as:
"Donated Capital" - if the donor is an owner (shareholder)
"Income from donation" - if the donor is an unrelated party