CHARACTERISTICS OF PPE  The cost of an item of PPE is the

a) Tangible assets – items of PPE have cash price equivalent at the

physical substance recognition date. If payment is
b) Used in normal operations – items of deferred beyond normal credit
PPE are used in the production or terms, the difference between the
supply of goods or services, for cash price equivalent and the total
rental, or for administrative purposes payment is recognized as interest
c) Long-term in nature – items of PPE over the period of credit unless such
are expected to be used from more interest is capitalized in accordance
than a year with PAS 23 Borrowing Costs.
Modes of Acquisition
RECOGNITION  Cash Basis
The cost of an item of property, plant and  On Account
equipment shall be recognized as an asset  Installment Basis
only if:  Issuance of share capital
a) it is probable that future economic  Issuance of Bonds payable
benefits associated with the item will  Exchange
flow to the entity; and  Donation
b) the cost of the item can be  Grants
measured reliably.  Construction
1. CASH BASIS
INITIAL MEASUREMENTS  Cost of asset acquired on cash basis
 An item of PPE is initially measured is the cash price equivalent at the
at its cost. recognition date.  It includes the
Elements of Cost cash paid plus directly
attributable cost and other cost
1. Purchase price, including non- necessary in bringing the asset to
refundable purchase taxes, after the location and condition for its
deducting trade discounts and intended use.
rebates.  The acquisition cost of a group of
2. Costs directly attributable to bringing items of PPE acquired on a lump-
the asset to the location and sum price (basket price) is allocated
condition necessary for it to be to the individual assets based on
capable of operating in the manner their relative fair values at the date
intended by the management. of purchase. 
3. Present value of decommissioning Example:
For Lump Sum
and restoration costs to the extent
Land and Building are acquired at a single
that they are recognized as
cost of P5,500,000. At the time of
obligation acquisition, the land has a fair value of
Cessation of capitalizing costs to P1,000,000 and the building, P4,000,000
PPE FV Fraction Allocated Cost
 Recognition of costs in the carrying Land 1,000,000 1/5 1,100,000
amount of an item of PPE ceases Bldg. 4,000,000 4/5 4,400,000
when the item is in the location and JOURNAL ENTRY
condition necessary for it to be Land 1,100,000
capable of operating in the manner Bldg. 4,400,000
intended by management. Cash 5,500,000
Measurement of Cost 2. ON ACCOUNT
Gross Method Net Method
 o Acquisition Implied Interest rate: 10%  PV ordinary
Equip 100,000 Equip 98,000 annuity: 2.487
A/P 100,000 A/P    98,000 To record acquisition
Machinery 597,400
Discount on N/P 102,600
o Payment within discount period N/P 600,000
A/P 100,000 A/P 98,000 Cash 100,000
Cash 98,000 Cash 98,000 (Machinery = DP + PV of N/P)
DP =      100,000
Equip 2,000 PV = (2.487  x 200,000) = 497,400
TOTAL     597,400
o Beyond the discount period EXAMPLE 3
A/P 100,000 A/P  98,000 To record 1st installment
N/P 200,000
PDL 2,000 PDL 2,000 Cash 200,000
Cash 100,000 Cash 100,000
Equip 2,000 To amortize the discount in N/P.
Interest Expense 49,740
3. INSTALLMENT BASIS
Discount on N/P 49,740
 The cost on installment basis is the
CASH PRICE EQUIVALENT. YEAR PAYMENT INTEREST PRINCIPAL PV
 If an asset is offered at CASH PRICE JAN 1 497,400
and at an INSTALLMENT PRICE and 1ST YR 200,000 49,740 150,260 347,140
is purchased at the installment price, 2ND 200,000 34,714 165,286 181,854
YR
the asset shall be recorded at the 3RD 200,000 18,146 181,854 -
CASH PRICE. YR
EXAMPLE 1
Installment price: 350,000 Exercise 1.1
Cash price: 290,000
Down payment: 50,000 Credulous Company purchased equipment
Balance payable in 3 equal annual on January 1, 2020 under the following
installments. terms:
To record acquisition
Machinery 290,000 a. P200,000 downpayment
Discount on N/P 60,000
N/P 300,000 b. Five annual payments of P100,000,
Cash 50,000 the first installment note to be paid
To record 1st installment on December 31, 2020.
N/P 100,000
Cash 100,000 The same equipment was available at a
To amortize the discount in N/P. cash price of P580,000.
Interest Expense 30,000
Discount on N/P 30,000 Required:
(300,000/600,000 x 60,000) Prepare journal entries

EXAMPLE 2 for 2020 and 2021. 

Installment price: 700,000
Cash price: none
Exercise 2.2
Down payment: 100,000
Balance payable in 3 equal annual
installments.
On January 1, 2020, Illustration
Enrich Company The cash flows of the asset received do not
purchased a machine differ from the cash flows of asset
under the following terms: transferred.
Yee Zee
a. P100,000 downpayment
b. Four annual payments of P200,000, Equipment 800,000 1,000,000
the first installment note to be paid
on December 31, 2020. Accumulated 380,000 400,000
depreciation
The fair value of the machine is not clearly Carrying amount 420,000 600,000
determinable on the date of acquisition.
Fair value 450,000 500,000
The prevailing rate of interest for this type of
obligation is 10%. The present value factors Cash paid by Yee to 50,000 50,000
Zee
at 10% for four periods are:

Present value of 1 .683

Present value of ordinary annuity of 1
3.170 Books of Yee (Payor) 470,000
Equipment - new 380,000
Accumulated
Acquisition through exchange depreciation
o If the exchange has commercial Equipment- old 800,000

substance, the asset received from

the exchange is measured using the Cash 50,000

following order of priority:

Books of Zee
a. Fair value of asset Given up Plus (Recipient)
cash Paid/ minus cash received Equipment - new 550,000

b. Fair value of asset Received Accumulated 400,000

depreciation
c. Carrying amount of asset Given
Cash 50,000
up Plus cash Paid/ minus cash
received
Equipment - old 1,000,000

Acquisition through issuance of debt

instrument
Illustration

A building is acquired by issuing bonds

payable with face amount of P5,000,000.

At the time of acquisition, the fair value of

the building is P6,000,000 and the quoted
price of the bonds is P5,800,000.

Journal entry

The fair value of the bonds payable is

used.
 Building The fair value of the share capital
5,800,000 is used:

Bonds Land (20,000 x 90)

payable                   5,000,000 1,800,000

Share capital
Premium on bonds payable         1,000,000
800,000
      Share premium
The fair value of the building is used.     800,000

The par value of the share capital

Building         6,000,000 is used:

Land 1,000,000
Bonds payable             Share capital
5,000,000 1,000,000
Acquisition by donation
Items of PPE received as donation are
Premium on bonds payable measured at fair value and accounted for
1,000,000 as:

The face amount of the bonds payable is a. Income – if the donor is an

used. unrelated party. 

b. Donated capital – if the donor is an

Building         5,000,000 owner (shareholder). 

Bonds payable         c. Government grant, in accordance

5,000,000 with  PAS 20 Accounting for
Acquisition through issuance of own Government Grants and Disclosure
equity instrument of Government Assistance.
Illustration Accounting

A piece of land is acquired by issuing d. (see Chapter 17) – if the donor is

20,000 shares with par value of P50. At the
time of acquisition, the fair value of the land
is P1,600,000 and the share is quoted at
P90 per share.
Journal entry' to record the acquisition
The fair value of the land is used.
the government.
Cost of self-constructed Building (Plant)
1. Materials, labor, and overhead costs
incurred during construction.
2. Architectural costs, supervision costs,
and costs of building permit

Land 1,600,000 3. Excavation costs

Share capital 4. Insurance costs and safety inspection

(20,000 x P50) 1,000,000 fees

Share 5. Costs of temporary structures built

premium                 600,000 during construction
 6. Interest on borrowings made to finance
construction (Borrowing costs are
discussed in Chapter 18)
Cost of self-constructed Building –
continuation
The following costs are not included in the
cost of a self-constructed building:

1. Internal profits or savings on self-

construction

2. Cost of abnormal amounts of wasted

material, labor, or other resources due
to inefficiencies

3. Costs of uninsured hazards or claims

for uninsured accidents

Costs of private driveways, walks,

permanent fences, parking lots, and
drainages and water systems that are not
included in the building’s blueprint