FAITH COLLEGES

INTACC1
PPE PART I

Acquisition of Property

Rules

Acquisition on a cash basis
Acquisition on account
Acquisition of Deferred Settlement
- The cost of the item of PPE is the cash price
equivalent
- the cost is equal to the invoice price less
discount whether taken or not. Two method
are Gross and Net Method.
- If there is available cash price – cash price
or cash equivalent paid at the acquisition date.
The difference between the cash price
equivalent and the total payment is recognized
as interest over the period of credit unless
such interest is recognized in the carrying
amount of the item in accordance with PAS 23
No available cash price – to the present
value of all payments using imputed interest
rate.

Issuance of shares of stock
Issuance of bonds payable
- The cost of the PPE when issuing shares of
stock is recorded in the following order
1. FMV of the PPE received
2. FMV of the capital stock issued
3. Par value of the shares issued
- The cost of the PPE when issuing shares of
stock is recorded in the following order
1. FMV of the bonds payable issued
2. FMV of the property received
3. Face value of the bonds payable issued

Illustration I

A machinery is purchased at an installment price of P350,000. The terms are P50,000 down and the balance
payable in 3 equal annual installments. The cash price of the machinery is P290,000. A promissory note is
issued for the installment balance of P300,000.
a. What is the cost of the machinery upon acquisition?
b. How much is the interest expense amortize for the 2nd year?

Illustration II

A machinery is acquired at an installment price of P700,000. The terms are P100,000 down and the balance
payable in 3 equal annual installments. A note is issued for the balance of P600,000. There is no available
cash price for the machinery. However, the implied interest rate for this type of note is 10%. Using the
implied interest rate of 10%, the PV or an ordinary annuity of 1 is 2.487 for 3 periods.

a. Compute for the total cost of machinery.

b. Compute for the interest expense for the 1st year.

Exchange – with commercial - The cost of the property is equal to the

substance following
a. FV of asset given plus any cash payment –
on the part of the PAYOR
b. FV of asset given minus any cash received
– on the part of the RECIPIENT
Exchange – no commercial substance - The cost of the property is equal to the
carrying amount of the asset given. No gain or
loss is recognized.
Any cash involved is added to the carrying
amount on the part of the PAYOR and
deducted from the carrying amount on the
part of the RECIPIENT

Illustration III

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 FAITH COLLEGES
INTACC1

A and B exchanged equipment:

A B
Equipment 1,600,000 2,000,000
Accumulated Depreciation 900,000 1,350,000
Carrying Amount 700,000 650,000
Fair Value 600,000 800,000
Cash paid by A to B 200,000 200,000

a. What amount will A record the new equipment?

b. Compute for the amount of gain/loss on exchange in the book of the payor.
c. What amount will B record the new equipment?
d. Compute for the amount of gain/loss on exchange in the book of the recipient.

Illustration IV

Y Z
Equipment 800,000 1,000,000
Accumulated Depreciation 380,000 400,000
Carrying Amount 420,000 600,000
Fair Value 450,000 500,000
Cash paid by Y to Z 50,000 50,000

Assume that the exchange lacks commercial substance

a. What amount will Y record the new equipment?

b. What amount will z record the new equipment?

Trade - In - The cost of the asset is

1. FV of the asset given plus cash payment
2. Trade in value of asset given plus cash
payment

Donation - Contribution received from shareholder shall

be recorded at the FV with the credit to
DONATED CAPITAL. Expenses incurred shall
be charged to donated capital account
- Directly attributable cost incurred
subsequently shall be capitalized
- If from non-shareholder either credit to
subsidies (if not restrictions imposed) or
liability account until the restrictions are met.
If the restrictions have already been lifted or
met, then the liability shall then be
transferred to income, or less desirably, to
donated capital.

Construction - The cost includes direct cost of materials,

direct cost of labor, indirect cost and
incremental overhead specifically identifiable
or traceable to the construction

BORROWING COST

Asset finance by specific borrowings - Capitalizable borrowings cost is the actual

Asset finance by general borrowings
borrowing cost less any investment
income
- Capitalizable borrowing cost is equal to the
average carrying amount of the asset
during the period x capitalization rate or
average interest rate. However the
capitalizable borrowing cost shall not exceed
the actual interest cost.
- Any investment income is not deducted from
capitalizable borrowing cost

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 FAITH COLLEGES
INTACC1

Illustration V

At the beginning of the current year, an entity obtained a loan of P4,000,000 at an interest rate of 10%,
specifically to finance the construction of a new building. Availments from the loan were made quarterly in
equal amounts. Total borrowing cost incurred amounted to P250,000 for the current year. Prior to their
disbursement, the proceeds of the borrowing were temporarily invested and earned interest income of
P40,000. The building was completed at the current year end. How much is the capitalizable borrowing cost?

Illustration VI

An entity had the following borrowings on January 1 of the current year. The borrowings were made for
general purposes and the proceeds were partly used to finance the construction of a new building.

Principal Borrowing Cost

10% bank loan 3,000,000 300,000
12% short term note 1,500,000 180,000
8% long term loan 3,500,000 280,000
8,000,000 760,000
The construction of the building was started on January 1 and was completed on December 31 of the current
year. Expenditures on the building were

January 1 400,000
March 31 1,000,000
June 30 1,200,000
September 30 1,000,000
December 31 400,000
Total cost 4,000,000

Compute for the capitalizable borrowing cost

DIY DRILLS

1. During the year, Faith Company purchased a new machine. A P120,000 down payment was made and
three monthly installments of P360,000. The cash price would have been P1,160,000. The entity paid
no installation charges under the monthly payment plan but a P20,000 installment charge would have
been incurred with a cash purchase. What amount should be capitalized as cost of the machine?

2. On December 31, 2019, Faith company purchased a machine in exchange for a noninterest bearing
note requiring 8 payments of P200,000. The first payment was made in December 31, 2019 and the
others are due annually on December 31. At the date of issuance, the prevailing rate of interest for
this type of note was 11%. PV of an ordinary annuity of 1 at 11% for 8 periods is 5.146, PV of an
annuity of 1 in advance at 11% for 8 periods is 5.712.
a. What amount should be recorded as the initial cost of the machine?
b. What is the discount on notes payable on December 31, 2019?
c. What is the interest expense for 2020?

3. At the beginning of the current year, Faith Company exchanged an old packaging machine, which cost
P1,200,000 and was 50% depreciated for a used machine and paid a cash difference of P160,00. The
fair value of the old packaging machine was determined to be P700,000. What is the cost of the new
asset acquired? What is the gain on exchange?

4. During 2019 Faith Company constructed a new building at a cost of P30,000,000. The expenditure for
the building which was finished late in 2019 were incurred evenly during the year. The entity had the
following loans outstanding on December 31, 2019.

a. 10% note to finance specifically the construction, dated January 1, 2019, P10,000,000. The note is
unpaid on December 31, 2019. Investment were made on the proceeds from the loan and income
of P100,000 was realized in 2019.
b. 12% 10 year bonds issued at face amount on April 30, 2018, P30,000,000
c. 8% 5 year note payable dated March 1, 2018, P10,000,000

What is the capitalizable cost? What is the interest expense for 2019?

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