Chapter 8: Acounttuy : bor Property, Plant and Equipment ACCOUNTING FOR proven _ ce = FOR ERTY, PLANT AND EQUIPMENT ING STANDARD REFERENCE, oe oN" property, Plant and Equipment. ature and Initial Measurement. of Property, we ‘According to IAS 16, paragi Equipment Pl a tangible items that: Ph 6, Property, plant’ and equipment (PPE) are Y Are held for use in the to others, or to adminis Plant and Equipment Production or supply or i oats Pune te Beads series, for rental ¥__ Are expected to be used during more than one period. re (Note: Property, plant and equipment are- ¢ Property, plant, and equipment are ta i ale ingible assets, which means that they have ¥ The property, plant, and equipment are used in the course of business, which | means that they are used in the production or delivery of i vellas for renal and auininisietve procs | The property, plant, and equipment are expected to be in operation for at least | ayear. > The following are common examples of PPE: Land used in business Land held for future plant site Building used in business i Equipment used in the production of goods Equipment held for rentals Machines Major spare parts Furniture and fixture Bearer plants SAA K 4488 The following are not examples of PPE: x Land held for speculation x. Land held for an undetermined future use x Land and/or building classified as investment property x Property held for sale in the ordinary course of business. X Assets classified as held for sale X Biological assets related to agricultural activity, other than bearer plants x Intangible assets * Minor spare parts 437 Scanned with CamScannerChasen eanetig ov Petty. Pla et Eg, { Note! Ttems including spare or replacement parts, stand-by equipment, and seryige: ‘equipment are recognized in line with IAS 16 when they fit the criteria of property, me uipment, according to IAS. 16, paragraph 8. 2 nt, | vent, act diel iti D According to IAS 16, paragraph 7, the cost of an item of property, plant ang equipment shall be recognized as an asset if and, only if: Y itis probable that future economic benefits associated with the iter vil fg, to the entity; and ¥ The cost of the item can be measured reliably. ial i ‘An item of PPE is initially measured at cost. > The cost of an item of PPE includes the following: Y Its purchase price, including import duties, nonrefundable purchase taxes, after deducting trade discounts and rebates. Any costs directly attributable (or related) to bringing the asset to the location and condition necessary for it to operate in the manner intended by the management. ¥ The initial estimate of the costs of dismantling and removing the asset, as well as restoring the site where the asset is located, for which the entity incurs an obligation by acquiring or using the asset other than to produce inventories. Directly Attributable Costs > Examples of directly attributable costs are: Cost of employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment; Cost of site preparation; Initial delivery and handling costs; Installation and assembly costs; Costs of testing whether the asset is functioning propery; and Professional fees. < S465 Note: | Amendment to IAS 16 Property, plant and equipment | & Proceeds before intended use ; + This amendment prohibits the deduction of the net proceeds from selina any items produced while bringing the asset to the location and condition necessary for it to operate in the manner intended by the management (ie., samples produced when testing whether the asset is functionind properly). ‘+ The entity shall recognize the net proceeds in profit or loss. after JanuaY | | > his afnendinent is effective for annual periods beginning on or 438 ‘Scanned with CamScanner___ Chater 8, Aecounting for Property, Plant and. Equipment some operations occur in connecti al ia an item of PPE, but are not noes el re condition necessary for it to be capable. a management. © of op «These incidental operations ‘ mi development activities, ay Occur before or during the construction or > For example, income ma corer a consreeny, ne ees through using a building site as a e Construction or development of | ring the item to the location and erating in the manner intended by ° eae oa Bre not Necessary to bring an item to the al il 1 manner intended by manag TY for it to be capable of operating in the mar a jement, the in y cient ope rations are recognized in profit ey ie related expenses of snot au jalified for recognition p Examples of costs that do not form ; part of the co: . x Costs of opening a new facility; Cute are: x Costs of introducing @ new product or service (including costs of advertising and promotional activities); . Costs of Conducting business in a new location or with a new class of customer (including costs of staff training); and x Administration and other general overhead costs, Cessation of capitalization of costs > Capitalization of costs ceases when the PPE is in the location and condition necessary for it to be capable of operating in the manner intended by management. + > The following are not included in the carrying amount of PPE: x Costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity; x Initial operating losses; and x Costs of relocating or reorganizing part or all of an entity's operations. Scanned with CamScannerChapter 19 - Property, Plant Sad equipment ee ry’ ased (SWAC PIFIT CUD) Cost of Machinery When Pure! ble Sales tax: 1) Nonrefundable Sales taxi oy. 2 ice to keep machine cool; 2) Cost of Water device to keep maclt ee 3) Cost of Adjustment to machinery for of cieny an increase capacity; safety rail and platform 4) Construction of base (cost of safety p SUrTOUNdng | machine); | 5) Purchase Price; surance while in transit; | ae cost related to the acquisition; i her 7) Freight, handling, storage and oll t ca 8) Installation cost, including site preparation and assembling; 9) Cost of Testing and Trial run, and other cost necessary in preparing the | machinery for use; cen : 10) Fees paid to Consultants for advice on acquisition of the machinery, 11) Unloading charge; : f Dismantling and removing the machinery ang | 12) Initial estimate of cost o! restoring the site on which itis located. | | Old and New Installation Cost: E : | a. The machinery The undepreciated old installation cost is expensed, | is moved to Newinstallation cost is charged to the NEW asset, new location b. The machinery is removed and retired Non-recoverable Purchase Tax (e.g., Value Added Tax) For VAT-registered entities, the value added tax on the purchase is not capitalizable as part of the cost of the item acquired but debited to input tax (an asset account) to be offset against the output tax. However, for Non-VAT entities, the value added tax is non-recoverable. In the event the entity pays VAT on acquiring an item of PPE, the VAT paid forms part of the capitalized asset. If the problem does not state whether the entity is VAT or Non-VAT registered, the entity is presumed to be a VAT registered entity. The undepreciated old installation cost is expensed New installation cost is charged to the NEW asset. In addition, the removal cost is also charged to expense. Royalty Payment on Machines Gling Eeyment on machines purchased should be accounted as follows: W gased on units produced - included as part of manufactur (6) Ibased on units produced and sold - reported as a selling expen ‘Scanned with CamScannerchapter 12 RA j aa ‘acquired a new machine. Details of the acquisition are as follows: . paid for machine including VAT of P60,000 cash me 560,000 ity payment base on units produced 19,000 neh of transporting machine 15,000 Cost of installation by expert fitter 40,000 por of testing machine : 20,000 jaterials used and damaged as a result of testing the machine 10,000 Mar cost of new machine damaged in the process of installation 12,000 Cost of training for personnel who will use the machine 25,000 Cost of safety rails and platforms surrounding machine 50,000 Cost of water device to keep machine cool 70,000 Cost of adjustment to machine to make it operate more efficiently 57,000 gstimated dismantling cost be incurred as required by contract 65,000 Cost of removing old machine 10,000 Loss on premature retirement-old machine 120,000 Gratuity paid to operator of old machine, who was laid off 20,000 Required: Compute the cost of the new machine. SOLUTION: Cash paid for machine excluding VAT (P560,000-P60,000) 500,000 Cost of transporting machine 15,000 Cost of installation by expert fitter 40,000 Labor of testing machine 20,000 Materials used and damaged as a result of testing the machine 10,000 Cost of safety rails and platforms surrounding machine 50,000 Cost of water device to keep machine cool 70,000 Cost of adjustment to machine to make it operate more efficiently _ 57,000 Estimated dismantling cost be incurred as required by contract __ 65,000 Total cost of machinery 827,000 Treatment of other items: Y The royalty payment on machines purchased should be included as part of manufacturing overhead because it was based on units produced. The repair cost of new machine damaged in the process of installation is charged to repairs expense. The cost of training for personnel who will use the machine shall be charged to training expense. ‘The cost of removing old machine and the loss on premature retirement-old a machine is charged to loss on retirement of the machine. The gratuity paid to operator of old machine, who was laid off is also charged to expense. v 723 ‘Scanned with CamScannerproperty, Plant and Equipment Chapter 1 Costs Chargeable to Land 1) Purchase price; rey cost pe : a ae register the land and other cost of transferring the title in th $ he f the buyer; " narne of he dditures for establishing clean title; 4) Legal fees and other expen‘ ; a Cetnmisston cost paid to brokers or agents; 6) Cost of clearing unwanted old structures, excluding demolition cost; Liabilities on the land assumed by the buyer (eg, mortgages 7 ) ati nbrances and interest on such mortgages assumed by buyer.) Unpaid real property taxes on the land up to the date of acquisition, assumed by the buyer; Payments to tenants to convince them to vacate the premises; 9) ; 10) Cost to relocate or reconstruct property of others occupying the land sp as to obtain ownership; 11) Option cost of the land acquired. If the land is not acquired, the cost of option is treated as expensed; Option price The price to be paid by an investor for an option contract, based upon the security of the underlying asset and the time left until the option less proceeds from sayy 8) expires. Earnest Money Deposit Down payment made by a purchaser of real estate as evidence of good faith; a deposit or partial payment. Earnest money therefore is capitalizable cost of the asset acquired. 12) Cost of permanent improvement such as draining cost, cost of filling the land, cost of grading and leveling; Special Notes: 1. Land improvements a. Not subject to depreciation Examples: Cost of surveying, clearing grading and leveling subdividing, Treatment: capitalizable cost of the land b. Depreciable Examples: Fences, water systems, drainage systems, side-walks and pavements, landscaping. Treatment: 1) Part of blueprint of the building -building . 2) Not part of the blueprint - land improvement - Special assessment - this is capitalizable cost of the land. 724 ‘Scanned with CamScannercnopter 19 - Property, Plant and Equipme eal property tax - this should be ex 3 inpaid real property taxes accruin and Account atement of financial position classification Items Pensed when incur iB as ‘assumed by the buyer, should be capitalized, nt red. However, Of the date of acquisition Treatment {Land used as a plant site Property, plant and equipment a land held for a currently undetermined use appreciation. T Land held as a site for a building being constructed or developed for future use as investment property 1x Land held for long-term capital | Investment property ee Investment property See | Investment property 3,_ Land leased out under operating lease Investment property 6. Land leased out under finance lease 7 Land held definitely as a future plant Not reported in the books of the company. site Property, plant and equipment & Land held for sale in the ordinary | course of business pena Classified as noncurrent asset 9, Land held for sale under PFRS 5 held for sale, presented as current asset. 10. Land related to agricultural activity Investment property or | property, plant and equipment Building Account Statement of financial position classification Items Accounting Treatment 1._ Building used as a plant site Property, plant and equipment 2. Building being constructed developed for future use investment property or as Investment property Building owned by the company and leased out under operating lease Investment property Building owned by the company and Jeased out under finance lease Not reported in the books of the company. Building held for sale in the ordinary Course of business Inventory Building held for sale under PFRS 5 Classified as noncurrent asset held for sale, presented as current asset. 725 r- ‘Scanned with CamScannerplant and Equipment hapter 19 — Property, Sree jen Purchased to Building w! ee oe ‘hargeable to building when purchased include yy, Examy s following: 2 a eae expenses incurred in connection Ho the purchasy 3 Liabilities on the building assumed by the buyer including unpaid re ) ihe building up to the date of acquisition assumeq by property taxes on t the buyer; ding to make it suitable jy, ‘a and remodeling cost on the buil 4) Renovatio1 its intended use; ; 5) Payments to tenants to convince them to vacate the premises. structed : 4 ble to building when constructed include the Cost of Building when Con: Examples of costs chargeal following: : 1) Construction cost (materials, labor employed and overhead incurred during the construction; 2) Building permit and license; 3) Architect fee; 4) Fees paid for supervision; 5) Excavation cost; 6) Expenditures for service equipment and fixtures made a permanent coats part of the structure; Expenditures incurred during the construction period such as interest on construction loans (i.e., borrowing cost) and insurance; 8) Cost of security fences while construction and other temporary buildings to house constructions materials and tools. 9) Cost of demolishing old building, less proceeds from salvage; As provided by PIC Q&A No. 2012-02, “demolition costs of the old building can be considered as part of costs of site preparation and therefore, may be capitalized. Although there is no clear guidance as to what account (ie, land or new building) such demolition costs be capitalized, it is preferable to capitalize the demolition costs as part of the cost of the new building since the demolition of the old building is@ direct result of the decision to construct the new building. 7) Acquisition of land and old building Treatment of the and the: demolition cost (a) Old building is to be demolished so as Part of the cost of the ne to make room for the construction of building. the new building during the same period (b) Old building is to be demolished but Part of the cost of the land the construction of the new building is or included in the "°™ 726 Scanned with CamScannercopter 32 tobe made next accounting period. ig account. cial Notes: asurance : : fq) Taken during construction - part of the cost of the building p) Not taken and there is a claim for damages - claims for damages shall be treated as expense Building fixtures (e.g, shelves, cabinets and partitions) {a) Immovable - part of the cost ofthe building ) Movable - charged to furniture and fixtures and depreciated over their useful life. 4) Savings or loss on construction - not recognized as an addition or deduction to the cost of the self-constructed asset. If there are savings ‘on construction, the company will eventually benefit through reduced depreciation expense, conversely if there is loss on construction, the company will eventually incur additional expense through increased depreciation expense. 2 ACQUISITION OF LAND AND A BUILDING (PIC Q&A No. 2012-02) ‘The cost of the property acquired should be allocated to the land and the building at date of acquisition based on their relative fair values. The specific intention of the acquiring entity to demolish rather than use a building does not affect its fair value that will be used in the cost allocation. An entity may acquire a piece of land with one or more existing buildings, with the intention to either demolish the old building right away in order to construct a new building on its site as part of its planned redevelopment, or to initially use the old building as an owner-occupied property and then demolish it in a future period and replace it with a new building. In accounting for the cost or carrying value of the old building, the following rules should be observed: Scenario Treatment ofthe | Treatment Net purchase price of other demolition common cost costs on the acquisition 1. Old building is | Purchase price is | Charge to the | New unusable AND | allocated entirely | land building likely to be | to the land. In demolished right | other words, the away (ie, the fair | cost of old value of the | building is pulling is | included as part insignificant) of cost of land. 727 ‘Scanned with CamScannerer 19 - Property plant chapt - Z old _ building a Usable in the “me and the meantime iNew Pid building will be | asses cate the Allocate to | New a. PPE archase price to the land and | building id the land an building puilding based 0” based on the the relative fair | relative fair values. |values. |__| b. Inventories The land and | Added to the | Added tp : building will be | cost of the | the cost of Piassified as one | inventories the item under inventories Inventories. © Investment property: Pele cost | The land and Allocate to | New model building will be | the land and building as building investment classified as two separate items under Investment Property at their allocated cost determined using the relative fair based on the | property relative fair values. value i, @ fair| The land and Added to the | New value building will be | cost of the | building as model classified as one | investment investment item under | property property Investment Propet 3. Old building is Allee the | Allocate to | New usable but likely to | purchase price to | the land and | building be demolished the land and old | old building ight away building —_using | using relative relative fair | fair values values (allocated | (allocated cost of the | cost of the building is | buildi build: i charged to loss) chargeal 5 loss) : 728 ‘Scanned with CamScannerroperty, Plant and Equipment chapter on costs on the acquisition include but no d to the following: con ment to broker and other real estate agents in order to acquire the 7 rns yerties; mi real property taxes as of the date of acquisition; 2 Tiapiites such as mortgage including unpaid interest assumed by the payers option 5, Paymenl g, Escrow cost of the properties acquired; ts to tenants to vacate the premises; fees on the properties acquired, juWUSTRATION 1: Od Building will not be Demolished Mifare 1, 2021, Abe Tayde Co. acquired land and building by paying 3,000,000 and assuming a mortgage of P 1,000,000. The building will be esd by Abe Tayde Co. as its head office. praining cost and filling the land 35,000 Cost of option of the acquired properties 20,000 serow fees on the properties acquired 11,000 Broker's fee on the properties acquired 10,000 Cost of relocating and reconstructing the property belonging to others in order to acquire the properties 23,000 Registration fees and transfer of title 13,000 Legal fees for contract to purchase land 11,000 Cost of windows broken by vandals 22,000 Cost of grading and leveling the land 8,000 Title insurance 15,000 New fence surrounding the property 40,000 Required: Determine how to account the above costs under each of the following cases: CASE NO. 1: Assume that on the date of acquisition, the land and building have fair values of P9,000,000 and P3,000,000, respectively. CASE NO. 2: Assume that on the date of acquisition, the old building has a minimal fair value. SOLUTION: SE 1 old Land Building purchase price 6,750,000 2,250,000 raining cost and filling the land 35,000 : ru of option of the acquired properties 15,000 5,000 ‘ow fees on the properties acquired 8,250 2,750 729 Scanned with CamScannerand Equipment ty, Plant Chapter 19 - Prope’ . quired 7500 9-4 the property 50 the prope ee aanl tructing Broke’ ‘of relocating and recons! the P Engi to others in order to acquire the ae roperties 2, 57% Registration fees and transfer of ttle 13,000 } Lega fees for contract to purchase land 1000 Cost of grading and leveling the land _2on0 Title insurance , ca SEBO 2266.5" Adjusted balances Notes: Y The total cost (P8M + PIM) and c relative fair values of the properties 12M for the old building). , VY ‘The new fence surrounding the property is charged to land improvement Y Cost of windows broken by vandals is charged to expense. CASE NO. 2 Old ) and common cost is allocated based on yp, (ie, 9M/12M for the land and aM Land building Purchase price 9,000,000 Draining cost and filling the land. 35,000 : Cost of option of the acquired properties 20,000 Escrow fees on the properties acquired 11,000 Broker's fee on the properties acquired 10,000 Cost of relocating and reconstructing the property belonging to others in order to acquire the land 23,000 Registration fees and transfer of title. 13,000 Legal fees for contract to purchase land 11,000 Cost of grading and leveling the land 8,000 Title insurance 15,000 9,146,000 Adjusted balances Notes: ¥ The common costs just like cost of option, escrow fees and broker's fees ett. isallocated to the land only. The new fence surrounding the property is charged to land improvement, ¥ Cost of windows broken by vandals is charged to expense. ILLUSTRATION 2: Old. Building will be Demolished On March 1, 2021, Rosemarie Reyes Co. acquired land and building bY paying P6,000,000 and assuming a mortgage of 1,000,000. The old building will be demolished for the construction of a new building 4,600 Special assessments Cost of option of the land not acquired 7,000 730 ‘Scanned with CamScannerora | cost oe 8,000 cost a ‘ ae tes and transfer of title an esis guirance * ies rane taken during construction 15,000 ei fee for title investigation 25,0 00 waters used in construction 600.000 Morac forthe construction : 300,000 other’ overhead cost incurred as result of construction 220,000 tty fence around construction site 35,000 sayeway, parking bay and safety lighting 49,000 savingon construction : 27,000 Cast of changes during construction to make new building more energy efficient 50,000 Required: Determine how to account the above costs under each of the following cases: CASE NO. 1: Assume that on the date of acquisition, the building is usable put likely to be demolished right way and the land and building have fair values of P3,500,000 and P500,000, respectively. CASE NO. 2: Assume that on the date of acquisition, the old building is unusable and has minimal fair value. SOLUTION: CASENO.1 old New Land building —_ building Purchase price 6,125,000 875,000 Special assessments 4,600 - eB Cost of grading and leveling the land 8,000 Cost of relocating and reconstructing the property belonging to others in order to acquire the properties 20,125 2.875 Registration fees and transfer of title 13,000 : Title insurance 15,000 e ability insurance taken during construction : - 12,000 = fee for title investigation 25,000 . ‘: aterials used in construction - 27, *7600,000, ner Paid for the construction - = ae 300.000 overhe: "a ofeonstucton : 220,000 731 ‘Scanned with CamScannerproperty, Plant and Equipment construction g construction Chapter 1 safety fence aroun st of changes di a uilding more energy to make new bt a 6,210,725, 877,875 __ 1,217. ‘000 : : 35,009 efficient Adjusted balances Notes: ¥ Theentire P8778: Y The total cost (P6! relative fair values of the prope! for the old building). ' VY The cost of relocating and reconstructing the property belonging to other, in order to acquire the properties allocated to the land and building. VY The driveway, parking bay and safety lighting is charged to lang 75 allocated cost of the old building is charged to loss, Papi) and common cost is allocated based on 1, rties (Le, 3.5M/4M for the land and $Myque improvement. ¥ Cost of option of the land not acquired is charged to expense. Y Savings on construction is ignored in the computation. CASENO.2 Old New Land building building Purchase price 7,000,000 7 4,600 . Special assessments Cost of option of the land not acquired e : Cost of grading and leveling the land 8,000 : Cost of relocating and reconstructing the property belonging to others in order to acquire the properties Registration fees and transfer of title. Title insurance Liability insurance taken during construction Legal fee for title investigation Materials used in construction Labor paid for the construction Other overhead cost incurred as result of construction 220,000 Safety fence around construction site : : 35,000 Driveway, parking bay and safety lighting : Savings on construction Cost of changes during construction to make new building more energy efficient . 50,000. " ee Adjusted balances 7,088,600 > 1,217,000, 732 23,000 a 13,000 : 15,000 i re 12,000 25,000 : . e 2. 600,000 * 300,000 ‘Scanned with CamScannercqapter 12 = Property, Plant and Equipment notre cost of relocating and reconstructing th inorder to acquire the properties ‘the driveway, parking bay improvement. Cost of option ofthe land not acquired is eh land ne aged to expense savings on construction is ignored in the compute © propert ss allocated to the ot '8INg to others and safety: tightin land only. 8 1S charged to tang ity acquired the property in th Fhe entity acquired the property in the current reporti - TMeation of demolishing the old building and replae e wh the puilding, The entity will not use the old building prior to its de clon, New building will be used as: emotion, PPE Invento proper Gost of new | Construction | Allocated carrying | Construction puilding — | cost plus | value of the old | cost lus demolition cost | building plus | demolition cost construction, cost and demolition cost Carrying | Charged to loss| Capitalized as | Charged to " value of the | onretirement — | inventory on retirement old building ILLUSTRATION 1: New Building will be Used as PPE On January 2, of the current year, Kylie Corporation purchased a parcel of land with an old building for P4,000,000. The appraised values of the land and building are P3,000,000 and 2,000,000, respectively. The building is estimated to have a remaining useful life of 5 years. On April 1 of the current year, the company began demolishing the old building to make room for a new one. The construction ended on December 31 of the current year. The following additional costs are incurred: Cost of survey P 40,000 Demolition cost 100,000 Construction cost of the new building 2,000,000 Building permit fees 120,000 Assume that the new building is to be used as property, plant and equipment. Required: Determine the following: i n 1) Cost of the land and old building as property, plant and equipment initial recognition. 2) Loss on retirement of old building to be record 3) Cost of the new building. Jed in the profit or loss. 733 ‘Scanned with CamScannerChapter 19 - Property: plant and Equipmen ~ property, Pla pt sone nt NOH Rati All irement No. jalue satio location a ' 000) 00 3/5 2,400,000 Land 200,000 2s 1.600.009 oe 5,000,000 5/5 4,000,009 oe land 2,400,000 Purchase price allocated (0 la 90.008 Cost of survey 2,440,000_ Total cost of the land ar ildi 600,000 Cost allocated to old building = Cae e 1,600,000 Cost of old buil | Lees: Accumulated depreciation (1.6M/S x 3/12) — Bon Carrying value of old bldg.=Loss on retirement Requirement No. 3 Demolition cost in : nae Construction cost of the new building 900,000 Building permit fees __120,000_ ‘otal cost. 2,220,000 Total cost of the new building ILLUSTRATION 2: New Building will be Held as Investment Property On January 2, of the current year, Jeff Corporation purchased a parcel of land with an old building for P4,000,000. The appraised values of the land and building are P3,000,000 and P2,000,000, respectively. The building is estimated to have a remaining useful life of 5 years. On April 1 of the current year, the company began demolishing the old building to make room for a new one, The construction ended on December 31 of the current year. The following additional costs are incurred: Cost of survey P 40,000 Demolition cost 100,000 Construction cost of the new building 2,000,000 Building permit fees 120,000 Assume that the new building is to be held as investment property, Required: Determine the following: 1) Cost of the land and old building as i iii uildin, i rties at initia! ra the 1g as investment properties : ; 2) (oss on retirement of old building to be recorded in the profit oF 1s: ) Cost of the new investment property. 734 ‘Scanned with CamScannerter 19 Property, Plant and Equipment cra TION: soul emnent NO. 1 peal Appraised value Ratio Allocati 3,000,000 3/5 ion nd 2 2,400,000 oun 000,000 ue 1.600.000 ‘otal ans 55 4,000,000 parce price allocated to land rca sost of SUIVEY seal cost ofthe and costallocated to old building 2 yequirement No. test of old building Less: ‘Accumulated depreciation (1.6M/5 x 3/12) Carrying value of old bldg, = Loss on retirement Requirement No. 3 Demolition cost 100,000 Construction cost of the new building 2,000,000 Building permit fees 120,000 Total cost of the new building 320,000" Note: The same treatment will apply if the new building is to be accounted as PPE or Investment property. ILLUSTRATION 3: New Building will be Held as Inventory On January 2, of the current year, Manny Corporation purchased a parcel of land with an old building for P4,000,000. The appraised values of the land and building are P3,000,000 and P2,000,000, respectively. The building is estimated to have a remaining useful life of 5 years. On April 1 of the current year, the company began demolishing the old building to make room for a new one, The construction ended on December 31 of the current year. The following additional costs are incurred: Cost of survey P 40,000 Demolition cost 100,000 Construction cost of the new building — 2,000,000 Building permit fees 120,000 Assume that the new building will be classified as inventory. Required: Determine the following: 1) Cost the land and old building as property, plant initial recognition. and equipment at 735 ‘Scanned with CamScannerPlant and =< g - Property: Serre “Chapter 19 ~ Propert 2 ree ‘ 1d building to be recorded in the pror, ork Os, fo 2) Loss on retirement o| 3 Cost of the inventory SOLUTION: RequirementN" praised value Ratio Allocation Land 3,000,000 ae 2,400,009 Old building 2 2s ee Total 5,000,000 SL: 4,000,009 Cost of the land: Purchase price allocated to land 2, “ A 0,000 Cost of survey # 440,000 —t.000 Total cost of the and 1,600,000 000 Cost allocated to old building Requirement No. 2 _. : Jue ofthe old building is inventoriable cost. Zero, the carrying va Requirement No. 3 Cost of new building as part of inventory: Carrying value of the old building 1,520,000 Demolition cost 100,000 Construction cost of the new building 2,000,000 Building permit fees 120,000 —3.740,000_ Total cost of the new building ‘The carrying value of the old building is computed as follows: 1,600,000 Cost of old building Less: Accumulated depreciation (1.6M/5 x 3/12) ___80,000 Carrying value of old bldg. 1,520,000 The entity acquired the property in a prior reporting period and used its owner-occupied property. In the current reporting period, the entity decides to demolish the old building and replace it with a new building. New building will be used as: Investment PPE Inventory Property__ Cost of new|} Construction Construction Construction building cost plus cost plus cost plus | demolition cost_| demolition cost_| demolitions Carrying value of | Re-compute the related depreciation charges o | ing value the old building | building to depreciate the remaining catty its life (0° at the time it| the building over the remainder o' 1g main the | remaining period before it is demolished Hence 736 ‘Scanned with CamScannerroperty, Plant and Equipment old building wil have a nl ——— aT planned demolition. | Yate at the date of the one to cis te old sash the OF “te je a vile date in sp re pe fate e( thee some Charged to loss on retirement. FO here isa gon there jemolition wusTRATION: ; IM gnuaty 2,2019, Andray Corporation purchased a parcel of land with an iy building for P4,500,000. The company appropriately computed the cost of the land and building at P3,000,000 and P1,500,000, respectively. The piiding is estimated to have a remaining useful life of 5 years. On January 1.2020, the company decided that it wll demolish the old building to make room for anew one starting on January 1, 2021. The construction of the new puilding started on January 5, 2021 and ended on December 31, 2021. The following costs are incurred during the construction period: Demolition cost 100,000 Construction cost of the new building — 2,000,000 Building permit fees 120,000 Case No. 1: Assume that the new building is to be used as property, plant and equipment. Case No. 2: Assume that the new building is to be used as investment property. Case No. 3: Assume that the new building is to be held for sale in the ordinary course of business. Required: Determine the following: 1) Depreciation expense in 2019. 2) Depreciation expense in 2020. 3) Cost of the new asset constructed as of December 31, 2021. SOLUTION: Note that the answers for the three cases would be Requirement No, 1 Cost of the old building 1,500,000 Divide by: Useful life 5 *preciation expense in 2019 [ 737 e same. —300,000_ 300,0 ‘Scanned with CamScanner= property, Plant and. Equipment. “chapter 19 - Property, Pant 202° Requirement No.2 Cost of the old building jan, 14,2020 Tess: Accumulated depreciation, Depreciation expense in 2020 riod before the old building wil be demolished, ro etn 2020 shall be equal to the book value yy! ton ruction period, the building will have gy," “ue, ‘The remaining pe! Therefore, deprec! the beginning of the Requirement No. 3 i Construction cost of the new building 2,000,000 Demolition cost 0,000 Building permit fees Cost of the new building hall be treated either as PPE (For Case No. 1), invest, nt The new building s| ie 7 No. 2) or Inventory (For Case No. 3) property (For Case ILLUSTRATION: Old. Building is to be Demolished On January, Jimmy Corporation purchased a parcel of land as a factory sig for P3,200,000. An old building on the property was demolished right aya and construction begun on anew warehouse that was completed Apri 30 of the same year. Costs incurred (and cash inflows for the last two items sold) on the entire project are listed below: Cost of demolishing old building 280,000 Architect's fees 317,000 Legal fees-title investigation 41,000 Construction costs 9,500,000 Interest on specific borrowings 140,000 Landfill for building site 193,000 Clearing of trees from building site 96,000 Insurance on building for one year beginning April 30 150,000 Temporary buildings used for construction activities 290,000 Land survey 40,000 Excavation of basement 132,000 Salvage material from demolition sold 18,000 ‘Timber (after clearing of trees) sold 33,000 Cost of paving parking lot adjoining building 100,000 Cost of shrubs, trees, and other landscaping 130,000 Special assessment for street project 21,000 Building permit fees 171,000 25,000 Savings on construction Required: Determine the cost of the f¢ ing: 1) land e following: 738 ‘Scanned with CamScannerroperty, Plant and Equipment ope? rw Bi 2) Ng improvement 10N: sot ement No.1 Land eal rice pares le investigation 3,200,000 teal forbuildingsite ‘eran fearing of Fees from building site Sea Gear (ater clearing ees) sold (33,000) nd SUTVEY : 40,000 special assessment for street project Total pequirement No. 2 Building fpat of demolishing old building Sate Architect's fees 317,000 Construction costs 9,500,000 interest on specific borrowings 140,000 ‘Temporary buildings used for construction activities 290,000 Excavation for basement 132,000 salvage materials from demolitionsold , (18,000) puilding permit fees 171,000 Total 10,812,000 ‘The insurance on the building is not capitalized since it was acquired after the building was constructed. Requirement No. 3 Land Improvement Cost of paving parking lot adjoining building 100,000 Cost of shrubs, trees, and other landscaping __ 130,000 Total land improvement 230,000 Other Items and Their Treatment 1) Patterns and dies Accounting treatment 2) Used for regular products PPE - depreciated over their useful of the company life b) Used for specially ordered Included as part of the cost of the products special product. 2) Containers Accounting treatment a) Returnable (big in units or PPE or other noncurrent assets great bulk) )_Returnable (small and involve small amounts) ©) Notreturnable Expensed outright Other noncurrent assets 739 Scanned with CamScannerExamples: SUMMARY OF ACQUISITION OF LAND AND BUILDING AT A SINGLE COSTS Purchase price ion Broker's and agents commission Payments to tenants to induce them to vacate the premises Cost of reconstructing and relocating of property belonging to others Escrow fees Common cost allocated Construction cost + net entirely to land demolition costs - charged to new building PPE or Investment Property under cost model: Allocate the costs to the and old building using the relative fair value Old building is: Inventory or Investment Property under fair value model: The entire amount is accounted as inventory or investment property Allocate the purchase price and other common costs to the land and old building using relative fair values Allocated cost to old building ~ charged to loss Applied Auditing by Asuncion, Ngina & Escala Scanned with CamScanner qaeuaymby pue weldFUTURE DEMOLITION OF OLD BUILDING (PPE) FOR CONSTRUCTION OF NEW BUILDING Re-compute the depreciation ‘on the old building so that it will have a NIL value at the date of planned demolition TREATMENT OF Charged to loss on retirement ¢ Added to cost of new building whether new building is a PPE, inventory or investment property Applied Auditing by Asuncion, Ngina & Escala Scanned with CamScanner Gy de? uawidinby pue quejd ‘AWedosd ~