Modes of Acquisition of PPE > Items of PPE may be acquired through the following modes: 1. 2 3. 4. L} 6. 7 Cash basis Deferred/installment basis On account with available cash discounts Issuance of share capital © Issuance of bonds Lump-sum purchase Exchange 439 ‘Seanad anScamerChapter §: rlecounting for Property, Plat tad Eputpngs, 8, Trade-Ins 9. Donation 10, Self-construction ‘The folowing table summarizes the levat concepts and Ital cost bass under each gy of acquisition: __ [eas basis ‘Cash price equiva wm fa: Drety abate coset _ 10 Deteredinstaliment basis | Cash pie equvalent === | ‘dé: Drectiyatibutable costs _20¢_ | Initial cost xx Note: > The difference between the cash price equivalent and the total payment shall be recognized as interest expense over the cei period. > Incase the cash price equivalent isnot avalable, compute for the present Value of the future cash ows using an Imputed interest rate. JoumaL enti: ‘Asset (at cash price equivalent) XX Discount on note payabie* aX | Note payable xx | *0r interest expense ‘On account with avaliable | Invoice price x | cash discounts Less: Cash dscount™ _(60) Initial cost x “Whether taken or not |iiance of share captal | The property habe nay measured inthe oder of pony: | 1. Fair value of property received | 2. fair value of shares isued 3 Par (or tated) value of shares issued Journal ent | Asset ™ | ‘Share capa x | Share premium* | unto be ecg the ese be valued at pa (rs) value ofthe shares sued. ‘ScanndthanStametPurchase, ‘Asset ‘Asset 2 Asset 3 Cash Acoumul Loss on: ‘Asset Note: > ent Ente te stb aed ocean of ‘Asset (new) Cash Gain on exchange Cosh Fatah of pry res | of bonds sued | neat | Discount on bo a ns payabler i Bonds payaie a mm lum on bonds payabies tf | | Te np i ar bs) psa be ws aa met ec (ask) pia shal be alocaed Wate Wai 0” ther reat for (or market) values ot date of “HK x x we i Genera le: Rar val Fe propery recaved Fair value f property ven up 9x ‘Add: Amount of esh pid m Less: Amount of cash rected _ 004 Initial cost* XX “Tiss also equal othe far value of property reeled. lated deprecation (ld) EERE HEE ‘An exchange i considered t have commercial substance if ‘the future cash flows significant change as a rest ofthe | exchange transaction. the two partes tothe exchange experience changes | conten te osc es oem | substance, Gain or loss on exchange is recognized if the exchange | transaction has commercal substance. Fair value of property oven up x Less Crying vate of propay shen 0) | (ain (oss) on exchange 200 aa ‘SeanedthanStameta arcu of as po Po tess: Amo Initial cost Journal entny: ‘sae Cm ned erection Note: > An exchange does not have commercial su ue of property given up Initial cost of the new asset* XX In case the for vlu of property given up snot aaa ten {tof the new asset il be computed 2s follows Tien va of rope gen wy 2 Ad Cash payment Int eno tenew asset" “XX “Equivalent tothe fair value of the new asset. Note: | are Soe Sn ey 9 value ofthe property ven UP Xx unt of ash received 009 a x ‘Asset (ld) pa ‘Cash ~ future cash flows does not significantly change as °% ‘ofthe exchange transaction. rt > Gain or fss on exchange isnot recognized the exe transaction has no commercial substance. > > Trade-Inis a payment in a form ofan old asset > Trades value fers tothe allowance or maximum ana thatthe dealers lng to vale the od equpmet et exchanged by the buyer plus addtional cash to math amount ofthe new asst. ‘This may also refer tothe second-hand vabe of | asset, & May be computed as Cash price without Trade-in. XX ea: Cath price wih Trade-in 7020 Trade-in Vave > Shag ten meen nose | follows: “Trade-In vat Less: Caring value of property oven UP By | Gain (os) on aden ‘Sand thCanStametProperty, Plact cod Eguipmeet Feceived through donation, Teceived or receivable considering the The far value should be ceded to donated capital Sehr! nan nh tn sh tn ets del fees Oe Gee be cote al acon Grea sina cos aed sch 8s ran an ten et nese tong the donated eto the eaten ard coon for 1s tnd in sabe epted, Asset wx Cash ~ Donated capital »~ or payment of costs and expenses related tothe donated property. ‘© From nomsherehotders > The ir value shoul ether be credited to income (if no restrictions) or abilty until the restrictions are met. If | the resticions are met, the labilty shall then be transfered to income. ¥-Incurrence or payment of direct costs such as payment for transfer of tite to the corporation, | shall be copied. Joumal entry: ‘If the donation comes with no restrictions Asset a ‘cash* bed Income from donation ~ {If the donation comes with no restrictions Asset cash" om Unearned income from donation x “restrictions are met Urea nae am donation 9K me from donation sited for payment of costs ad expenses related tothe donated property. | Direct material bs ‘Add: Direct labor fd: Manufacturing overiend _ Initial cost ‘ScannedithanStametF; Accounting for Property. Plant and E ate Cl En, "pny intemal profit or avis On COnSIUCON ae ing, tre actual ost of construction exceeds the pk Ie ace be purchased (om Wd pers %S the et Pa be raed a tae ey dona tat ese tecomtonbecaastss eer tat the 250 wl be Ue some sitar? | it was built. wen ver ever, there ls dear evidence thatthe rel en tora) gh due to consrtonIefierces ‘Race, eer oning t temporary, de eapacy Fadl dputes the exes Is charged tag, > The cost of abnormal amounts of wasted material labor, ‘overhead incured in the creation of asef-constructe ase = not included inthe cost ofthe asset. “Ttustration 1: (Cash Basis) Inventty acquired an equipment overseas on cash basis for P100,000. Directy attributable costs incurred totaled 40,000. @o: How much is the initial cost of the equipment? | @a: P140,000 Purchase price of the equipment 100,000 ‘Add: Directly attributable costs 40,000, Initial cost of the equipment — 140,000 | Journal entry Equipment 140,000 Cash 140,000 | Illustration 2: (Deferred/Installment basis) | On January 1, 2021, Alyanna Company purchased equipment with an installment pore | oF P6S,000 by paying PS,000 down payment and issuing a three-year noninterest bear9 | cote of PS0,000 payable in equal annual instalments stating December 31,2024. The prevailing rate for the note as of January 1, 2021 is 12%. | ‘The cash price equivalent is P50,000. | @Q-4: Compute for the initial cost of the equipment. | | @o-2: Prepare the journal entry to record the acquisition of the equipment. ‘Case 2: The cash price equivalent is not availabe. | @Q-1: Compute for the initial cost of the equipment. | @0-2: Prepare the journal entry to record the acquisition of the ‘equipment: — ‘SeannedthanStametChapter "Mer Fs Accounting don Property, Plant and Eguipncat he Initial cost of thee + inment: 1uipmer sed under installment. bas! a2 Niz0et Equipment sa000 iscount on notes is ao °s payable 15,000 5,000 Notes payable 0000 case? @a-1 753,000 ‘ash down payment 5,000 pda: Present value of the note /(607/3) x 2.40) __ 48,000 present value 53,000" ‘comment: If the cash price equivalent is not available, compute for the present valve a ture cashflows Using animputedinteestate’ Qa: “1/2021 ‘Equipment 53,000 Discount on notes payable 12,000 Gash 5,000 Notes payable 60,000 Illustration 3: (On account with available cash discount) ‘Caner Company recently acquired two items of equipment: Equipment no. 1: Acquired a press at an invoice price of P1,500,000 subject 0.2 5% cash discount which was taken. «Equipment no. 2: Acquired a welding machine at an invoice Price of 2,000,000 subject to a 10% cash discount which was no taken. @ 0-1: How much is the initial cost of Equipment no. 1? @0-2: How much is the initial cost of Equipment no. 27 6 Grea: P1,425,000 1,500,000 x (100% - 59%) 1,800,000 ¥ , 7,000,000 x (100% ~ 10%) | price, whether taken oF nt | | Comments Cas agcounts are deduced fram te Inoke ‘SeanndthanStamet= Chr 8: semtig n Pty, Plt Eng, “llustration 4: (Acquisition through issuance of share capital) ‘ {A plot of land is purchased by issuing 25,000 ordinary shares with a P40 par value, | fei market value of the land was PI,500,000 at the time of acquisition, and the store was trading at P100 per share, | Gat: what isthe appropiate Jounal entry bulng recorded based on ks fie) | value? | @Q-2: What is the appropriate journal entry if building is recorded based on the fi value of the share capital? | @Q-S: What isthe appropiate journal entry if bulking is recorded based on the par value or stated value of the share eat? | @m Sournal entry mets Land 1,500,000 ] Ordinary shares (25,000 sh, x P40/sh,) 1,000,000 j | Share premium 500,000 Az: Land (100 x 25,000) 2,500,000 Ordinary shares 1,000,000 | Share premium 1,500,000 | tang 1,000,000 | ordinary shares 1,000,000 | Illustration 5: (Acquisition through issuance of bonds) | ‘The purchase of 2 bulding is accomplished by issuing bonds with a face value of | | 4,500,000. The fir vale ofthe buling was P4,B00,000 atthe time of acquton, | tile the quoted price of the bonds was P4,250,000. | | @Q-1: What isthe appropiate journal enry if bling is recorded base on the fa value of bonds payable? | @Q-2: What is the appropriate journal entry if building is recorded based on is fait value? @q-3: What is thé appropriate journal entry if building is recorded based on the face ‘amount of bonds payable? ‘Scanned anScametCt 5: Aematiy fos Pop, Plan nk Epon Oh gary \ et 89 44250 000 attaten bonds patie 250,000 Bonds payable 4,500,000 % a ‘pullding 4,800,000 ‘ponds payable fremum on bonds payable 4,500,000, "300,000 a3: suing Bonds payable iiustration 6: (Lump-sum purchase) ‘The total cost ofthe land and building is P9,000,000. The land was worth P2,000,000 at thetime of acquistio, while the building was worth 4,000,000, @Question: What should be the costs that will be assigned in each asset? @Answer: Fro ata is Computed through the basis of the far values of the acquired assets. Their respective pro rata were multiplied to the single cost whichis P9,000,000. The resut wll be thelr allocated costs. Fair Value Prorata Allocated Cost | | tan 2,000,000.00 2/10 1,800,000.00 | Baling 8,000,000.00_ 8/10 7,200,000.00 10,000,000.00 '9,000,000.00, lustration 7: (Exchange) Sanz Co exchanged equipment with Sunset Co Pertinent data are shown below Sunise Co: Sunset Co, 7) uipment 4000000 2.000000, ‘cumulated depreciation 200,000 ‘S00, Fal vale 950,000 1,100,000 Cash 150,000 "| | ih ethed 19000 ‘Case 13 The configuration of the cash flows of the equipment are determined to be “can ateren. 5 ‘Sunrise Co, and (2) Sunset Co. record the asset? 2 How ich ae gn loss) on exchange of (1) Sunise Co. and (2) Sunset Co,? —— / aa7 ‘Scanned ith anStameti Chaser 8: coating for Property, Plt se Espey 3. Prepare the journal entzy to record the transaction in the books of ‘Sunrise Co. and Sunset Co. \t ‘case 2: The configuration of the cash flows of the equipment are determined to be insignificant. g | "1. How much should (1) Sunrise Co. and (2) Sunset Co. record the asset? 2. How much is the gain (loss) on exchange of (1) Sunrise Co. and (2) Sunset Co.? 3. Prepare the journal entry to record the transaction in the books of Sunrise Co, and Sunset Co, | Case 1 — WITH COMMERCIAL SUBSTANCE 1, ANSWER: (1) 1,100,000; (2) 950,000 Sunrise Sunset Faic value of the asset given up 950,000 1,100,000 ‘Add (Deduct): Cash paid (received) _ 150,000. _(150,000 Initial cost 00,000 ~ 950,000 2. ANSWER: (1) 150,000; (2) (100,000) ‘Sunrise Sunset Fair value of the asset given up 950,000 1,100,000 Less: Carrying value ofthe asset given up - (800,000). _(1,200,000), | Gain (Ioss) on exchange 450,000 (400,000) | | The caring values computed as folows | Sunrise Sunset | Historical cost. 41,000,000 2,000,000 | ‘Accumulated depreciation __(200,000)__ (800,000 | Canying value ‘600,000 ~ 1,200,000 | | 3, answer | Sunrise Co. sunset Co. | Eupment (new) 110000 Equpment(rew) 950000 | ‘Accumulated ceprecition 200000 con 150000 | qupment (0) 1000000 Accumustedeepriiton | 60,000 | cn 150000 Loss on exchange 100,000 | Gan on exchenge 150,000 Equipment) 200,000 Case 2 - WITHOUT COMMERCIAL SUBSTANCE ‘L. ANSWER: (1) 950,000; (2) 1,050,000 ‘Sunrise - Sunset Carrying value 300,000 1,200,000 ‘Add (Deduct): Cash pald (received) __150,000_ __(450,000)_ Initial cost 950,000 1,050,000 2, ANSWER: Zero i ‘Comment: Gain or loss on exchange Is not recognized Ifthe exchange transaction has commercial substance. | Bc ee ‘Seamed ith anStametegg re 5 SHER EOS: Aecoetey fx Pepe, Plat and Egat a So, suns eon (eecatch 20008 Earner (nn) a9 | or) cor ent rte fo Company exchanged their old equipment fora new sa Pee ea meena cone ogearest origin ‘eal depreciten noon freee moon se ealpment Ust price -2,000,000.00 adem alovance ‘oonoonte From the given information: @Q-1: What is the amount that will be recorded as a cast ofthe new asset? @Q-2: What is the amount that will be recorded as a gain or loss on asset disposal? @Q-3: What is the appropriate journal entries to record the transaction? Ust price 2,000,000.00 less: trade-in allowance (1,000,000.00 Cash payment needed 1,000,000.00 Add: Flr value of the used equipment. 1,200,000.00. Cost of new equipment 2,200,000.00 fae vale of the used equlment 41,200,000.00 re with: Carrying value of used equipment 1,000,000. ain on disposal of equipment. 200,000. Eaupment (new) 2,200,000.00 mulated Depreciation - equipment (old) 500,000.00, 500,000.00 euprent (ol) 1000,000.00 "200,000.00, tin on disposal of equipment ‘Seamed thanScamet| Delfin Company exchanged their ol Chapter $: Actin fo Property, Plat to Eg ilustration 9: (Trade-Ins) usration 9 TEI) pment ora eon. Te Vonsaion 8 dees | Dati Capen corse eatin mous aa sed Eaupmet: inal Cost, 1,50, 000.00 secumulsted deprecation 50,000.00 rarvalie 600,000.00 | New equipment: tse price 2,000,00.00 40,000.00 ‘Trade-in allowance From the given information: @e-1: What is the amount that will be recorded as a cost ofthe new asset? @Q-2: What is the amount that wi ee ill be recorded asa gain of loss on asset pose? : What is the appropriate journal entries to record the transaction? | | Act and A-2: st price 2,000,000.00 | Less: trade-in allowance 1,000,000.00) ‘Gash payment needed 1,000,000.00 ‘Add: Fair value of the used equipment ‘600,000.00 | Cost of new equipment 1,600,000.00 Fair value of the used equipment 600,000.00 Compare with: Carrying value of used equipment 1,000,000.00 Gain on disposal of equipment (400,000.00) Equipment (new) 1,600,000.00 ‘Accumulated Depreciation - equipment (old) '500,000.00 Loss on disposal of equipment 400,000.00 Equipment (old) 41,500,000.00 Cash 1,000,000.00 ‘Seamed anStamet—_—_Chapten jon 10: (Donation) E: Mecounting fx Property, Plat and Equip artand was donated by a shareholder | Fe a mount to 2a te 0 lana Company. Lea fxs fomale Besar. 00 on ets of ea re of 5,09 ot ae (a: What Is the appropriate journal entry on the acquisition through donation? ox teaift coming from a shareholder should be recorded by the receiving entity in its fair ous Ths, any erences ered conection to the af tat oo mprove te received sha : reese oth seco sl be chess he Dre coal a and 6,000,000, ‘Share premium - Donated Capital 6,000,000 share premium - Donated capital 60,000, cash ' 60,000 Ilustration 11: (Donation) 112 Co. received a land as a donation. The land has a fair value of P900,000. XYZ pald 0,000 for legal expenses for land transfer. | 4. Prepare the journal entry to record the donation of land assuming the donor is a shareholder. 2. Prepare the journal entry to record the donation of land assuming the donor is a non-shareholder who imposed restrictions on the donated land. In relation to item no. 2, prepare the journal entry assuming the company met these donor-imposed restrictions on the donated land. Prepare the journal entry to record the donation of land assuming the donor is a non-shareholder. The donor imposed no restrictions on the donated land. ‘Scanned th anStametChapter 8: Accounting for Property. Plat aud Ey | 1 tana 900,000.00 ‘ | Cash 0,000.00 | Donated capital 820,000.00 | 2 land 980,000.00 | Cash 80,000.00 Unearned income from donation 900,000.00 3.Unearned income from donation 900,000.00 Income from donation 900,000.00 4 land 980,000.00 Cash 80,000.00 Income from donation ‘900,000.00 Illustration 12; (Self-Construction) ‘Megastar Construction's own revenue-generating operation is building construction. The organization chose to develop a new administrative building through self-contruction, The following is @ ist of pertinent cost information: io Fordients For own use Direct materials used 150,000,000 10,000,000, Direct labor cost incurred 20,000,000 4,000,000 Total overhead amounted to P30,000,000. Megastar normally applies overhead at 80% of direct cost. Building Forclients For own use Direct materials used 50,000,000.00 _10,000,000.00 Direct labor cost incurred 720,000,000.00 4,000,000.00 Overhead: Cents (P30,000,000 x 20/24) 225,000,000.00 ‘Own use (P30,000,000 x 4/24) 5,000,000.00 meray .95,000,000.00 _19,000,000.00 452 ‘Sand th anScametel 8 et Patty, Pe nt Ep Building . For clients Fi rials used ‘or own use ct matel 50,000,000.00 10,000,000.00 20,000,000.00 4,000,000.00 ca ¢t labor cost incurred ead: pee (P30,000,000 x 80%) wn use (P30,000,000 - P24,000,000) TOTAL : | 94,000,000.00 _20,000,000.00_| | 24,000,000.00 | 6,000,000.00 | | ‘Seanad anScamer