Calculate capitalized borrowing costs

MODULE 2 – Property Plant and Equipment (Part 2)
1.1.6 Borrowing Costs
Borrowing costs are defined as the interest and other costs incurred by a company when borrowing
funds. It specifically includes the following:
1. Interest expense from loans computed using effective interest rate.
2. Interest expense from finance lease computed using effective interest rate.
3. Exchange differences from foreign currency borrowings to the extent as regarded as adjustment to
interest cost.
Borrowing costs usually arise when a construction of a qualifying asset is financed through borrowing of
funds. These qualifying assets are those that need substantial period of time before getting ready for
sale or intended use, such as:
1. Building, manufacturing facilities, etc.
2. Intangible assets
3. Investment property
Borrowing costs that are directly attributable to the acquisition or construction of a qualifying assets are
capitalized as part of cost of the qualifying asset. All other borrowing costs not related to the acquisition
or construction of qualifying assets are expensed as incurred.
Borrowing costs arise from either:
1. Specific Borrowings
2. General Borrowings
Specific Borrowings
Specific borrowings are borrowings that are contracted primarily for the purpose of the acquisition or
construction of a qualifying assets.
The borrowing cost from these funds are capitalizable to property plant and equipment in full and
adjusted by deducting any incidental interest income from temporary investment of the borrowed funds
up to the period of completion of acquisition or construction of qualifying assets to arrive with the
capitalizable borrowing costs.
Should there be no interest income or the funds are not temporarily invested, the actual borrowing costs
is already the capitalizable borrowing costs.
Actual borrowing cost from specific borrowings xxx
Less: Interest income from temporary investment of funds (if any) (xxx)
Capitalizable borrowing cost xxx
Page 1 of 22
General Borrowings
General borrowings, are borrowings that are not contracted primarily for the acquisition or construction
of a qualifying asset. In other words, these borrowings were incurred for either a general or special
purpose, other than that of acquisition or construction of a qualifying asset.
There are two terminologies related to borrowing costs involved under general borrowings.
They are as follows:
1. Actual borrowing cost – This is computed by multiplying the principal of the borrowings with
the related borrowing rate or interest rate.
2. Computed borrowing cost – This is computed as multiplying the average expenditures
incurred for the qualifying asset with the capitalization rate.
Computed Average Capitalization
= X
borrowing cost expenditure rate
When there are multiple general borrowings existing, the capitalization rate is
computed as follows:
Total general interest expense
Capitalization rate =
Total general borrowings
If there is only one general borrowing, the capitalization rate is equal to the actual
borrowing rate or interest rate.
The average expenditure is computed by multiplying the actual expenditures with a

fraction representing their month outstanding during the period.
After determining the two borrowing costs the following rules shall be observed:
1. The two borrowing costs will be compare and the LOWER amount shall be considered as the
capitalizable borrowing costs.
2. If the actual borrowing costs is LOWER than the “computed” borrowing costs, the difference
between the two will just be “ignored”.
3. If the “computed” borrowing costs is LOWER than the actual borrowing costs, the difference
between the two will be treated as “interest expense”.
Illustration: Specific borrowings

Bulbasaur Company constructed a building during the year 2022. The construction started on January
1 and was completed on December 31 and was financed specifically by funds borrowed from a bank
with 10% interest per annum. The following pertains to the construction:
Notes payable, 10%, specifically borrowed for building construction P2,000,000
Interest income from temporary investment 50,000
Average expenditures 1,500,000
Requirement:
Compute the capitalizable borrowing cost.
Page 2 of 22
Solution:
Actual borrowing costs (P2,000,000 x 10%) P 200,000
Less: Interest income from temporary investment ( 50,000)
Capitalizable borrowing costs P 150,000
Illustration: General borrowings (a)

Charmander Company constructed a building during the year 2022. The construction started on
January 1 and was completed on December 31 and no funds were borrowed specifically for the
construction. However, a fund borrowed for general purposes were used as an alternative. The
following pertains to the construction:
Notes payable, 10%, general borrowings P4,000,000
Requirement:
Solution:
Capitalization rate: 10%
“Computed” borrowing costs (P2,500,000 x 10%) P 250,000
LOWER amount (capitalizable borrowing costs) P 250,000

“Computed” borrowing costs (P2,500,000 x 10%) 250,000
Interest expense P 150,000
1. The capitalization rate is equal to the actual borrowing rate since there is only one general borrowing.
2. Since the “computed” borrowing costs is LOWER than the actual borrowing costs, it will be the
amount to be considered as the capitalizable borrowing costs.
3. The difference of P150,000 is treated as an interest expense. Should the actual borrowing costs be the
LOWER amount, then the P150,000 will just be ignored.
Page 3 of 22
Illustration: General borrowings (b)
Squirtle Company constructed a building during the year 2022. The construction started on January 1
and was completed on December 31 and no funds were borrowed specifically for the construction.
However, a fund borrowed for general purposes were used as an alternative. The following pertains to
the construction:
Notes payable, 10%, general borrowings from Wartortle P4,000,000
Notes payable, 12%, general borrowings from Blastoise 3,000,000
Requirement: Compute the capitalizable borrowing cost.
Solution:
Actual interest
Notes payable, 10%, Warturtle P4,000,000 X 10% = P 400,000
Notes payable, 12%, Blastoise 3,000,000 X 12% = 360,000
Total P7,000,000 P 760,000
P 760,000
Capitalization rate = = 10.86%
P7,000,000
Actual borrowing costs P 760,000
“Computed” borrowing costs (P4,500,000 x 10.86%) P 488,700
LOWER amount (capitalizable borrowing costs) P 488,700
Actual borrowing costs P 760,000

“Computed” borrowing costs 488,700
Borrowing Cost with both specific and general borrowings

If the acquisition or construction of a qualifying asset is financed by both specific and general
borrowings, the following shall be observed:
1. Compute average expenditure.
2. Deduct the amount of specific borrowings from the amount of average expenditure to arrive
the amount applicable to general borrowings. This will have an effect of dividing the average
expenditure into two parts:
• Expenditures related to specific borrowing (equal to actual specific borrowing)
• Expenditures applicable to general borrowings (the residual amount of average
expenditure as computed above.
Average expenditures xxx
For specific borrowings xxx
For general borrowings xxx
3. Apply the rules separately for specific borrowings and general borrowings.
Page 4 of 22
Illustration: Borrowing Cost with both specific and general borrowings
Metapod Company constructed a building during the year 2022. The construction started on January 1
and was completed on December 31. The following pertains to the construction:
Notes payable, 10%, specific borrowings P2,000,000
Interest income from temporary investment of specific borrowings 50,000
Notes payable, 10%, general borrowings 4,000,000
Notes payable, 12%, general borrowings 3,000,000
Expenditures:
January P2,000,000
April 1,500,000
July 1,000,000
October 500,000
Requirement:
Solution:
Average expenditures
January P2,000,000 X 12/12 = P 2,000,000
April 1,500,000 X 9/12 = 1,125,000
July 1,000,000 X 6/12 = 500,000
October 500,000 X 3/12 = 125,000
Total P3,750,000
Actual interest
Notes payable, 10%, P4,000,000 X 10% = P 400,000
Notes payable, 12%, 3,000,000 X 12% = 360,000
Total P7,000,000 P 760,000
P 760,000
Capitalization rate = = 10.86%
P7,000,000
Average expenditures P3,750,000

For specific borrowings 2,000,000 x 10 % = P 200,000
Less: Interest income ---------------------------------------> ( 50,000) P 150,000
For general borrowings P1,750,000
x 10.86%
“Computed” BC P 190,050
Actual BC 760,000
LOWER amount P 190,050 -------------------------------------> 190,050
Total capitalizable borrowing costs P 340,050
Page 5 of 22
Actual borrowing costs for general P 760,000
“Computed” borrowing costs for general 190,050
1.1.7 Land, Building and Machinery
When we account for specific property, plant and equipment account, we should consider determining
the costs that are attributable and specific for that account.
The following shall be observed for land, building, and machinery:
Cost of the Land

Acquisition or purchase cost xxx
Legal and other fees to secure clean title xxx
Broker/agent/middleman fees xxx
Registration and other fees for transfer of title to acquire ownership xxx
Cost of relocation or reconstruction of the property of the other to acquire ownership xxx
Mortgage, encumbrances, or other liabilities attached assumed at acquisition date xxx
Unpaid taxes up to the date of acquisition such as real property taxes on land xxx
Cost of land survey and clearing xxx
Vacation costs paid to tenants of the land xxx
Cost of land levelling/filling, grading, and other permanent land improvements xxx
Cost of option to buy paid to acquire the land xxx
Cost of special assessments for drainage and other considerations xxx
Total cost of the land xxx
Cost of Building
I. Computation for the cost of the Building account if purchased:
Acquisition or purchase cost xxx
Legal and other fees to secure acquisition xxx
Broker/agent/middleman fees xxx
Registration and other fees for transfer of title to acquire ownership xxx
Mortgage, encumbrances, or other liabilities attached assumed at acquisition date xxx
Unpaid taxes up to the date of acquisition such as real property taxes on building xxx
Cost of major renovations or remodeling xxx
Total cost of the building if purchased xxx
Page 6 of 22
II. Computation for the cost of the Building account if constructed:
Costs of direct materials used xxx
Costs of direct labor paid to construction personnel xxx
Costs of construction overhead (indirect materials, indirect labor, and other utilities) xxx
Building permit or license xxx
Architect fee xxx
Superintendent fee xxx
Excavation costs xxx
Costs of temporary housing and buildings during construction xxx
Borrowing costs incurred xxx
Expenditures on major equipment and fixtures used in making permanent parts xxx
Costs of temporary fencing and the cost of subsequent removal of the fences xxx
Costs of sidewalks, pavements, parking lots, and driveways, if part of the blueprint xxx
Costs of ventilating and lighting systems and elevator installed during construction xxx
Cost of insurance incurred during the construction period xxx
Safety inspection fees by authorities xxx
Total cost of the building if constructed xxx
Land improvements are those such as fences, water systems, drainage systems, sidewalks, pavements,
parking lots and driveways, cost of trees and other shrubs, landfills, grading, survey and clearing and other
landscaping. Land improvements may be permanent or temporary. The cost incurred for the land
improvements are treated as follows:
1. If permanent or cannot be removed, shall be treated as part of the cost of the land account and shall
not be subject to depreciation.
2. If temporary and depreciable, shall be treated as a separate asset account “land improvements” and
shall be depreciated over the useful life of that improvements.
1. If sidewalks, pavements, parking lots, and driveways are not part of the blueprint of the building or
constructed after and not in connection with the building, such are treated as land improvements and
shall be depreciated over the useful life of that improvements.
2. Expenditures on building fixtures that are immovable or permanent shall be considered part of the
building account.
3. Expenditures on building fixtures that are movable shall be considered as separate building
improvement account and shall be depreciated over the useful life of that improvements.
4. If ventilating and lighting systems and elevator installed after construction, such are treated as building
improvements and shall be depreciated over shorter between the useful life of that improvements
and the useful or remaining life of the building.
Page 7 of 22
Basket cost for Land and Building
Rules on purchasing land and building in a single or lump sum:
1. Land and old building purchased in single cost:
a. If the old building is still usable, allocate the single cost between the land and old
building using the relative fair value.
b. Should the fair value available is only for land, it shall be used as the allocated cost of
the land and the excess of the single cost shall be of the old building.
c. Should the fair value available is only for old building, it shall be used as the allocated
cost of the old building and the excess of the single cost shall be of the land.
d. If the old building is unusable, allocate the single cost to the land account only.
2. The old building on the land is demolished to make room for the construction of a new
building:
a. If the old building is still usable, the allocated cost shall be treated as a loss if the new
building is either a PPE or investment property.
b. If the old building is unusable, the allocated cost shall be capitalized as part of the
new building if the new building is either a PPE or investment property.
c. If the old building is whether usable or unusable, the allocated cost shall be
capitalized as part of the new building if the new building is an inventory.
d. The net demolition costs (demolition costs less salvage value from scrap materials) is
part of the new building if the new building is a PPE, investment property, or
inventory.
e. The net demolition costs (demolition costs less salvage value from scrap materials) is
part of the land account if the demolition is not intended for construction of new
building.
Other cost incurred that cannot be traced as to either land or building shall be allocated on the basis of
the relative fair values.
Computation for the cost of the Machinery (or equipment) account:
Purchase or invoice price less any value added taxes, trade discounts and rebates,
and less any cash discounts whether taken or not xxx
Other nonrefundable purchase taxes xxx
Freight, handling, storage, insurance, and other cost related to acquisition xxx
Installation, site preparation, and assemble costs xxx
Refurbishing costs during installations xxx
Testing and trial run costs xxx
Initial estimate of dismantling and removing the machine and site restoration xxx
Consultation fee for advice necessary before acquiring the machine xxx
Cost of safety rails and platform surrounding the machine xxx
Cost of water device to keep the machine cool xxx
Total cost of the machine (or equipment) xxx
Page 8 of 22
Subsequent costs for Machinery
Rule for subsequent costs incurred for the machine:
1. Subsequent cost classified as revenue expenditures are treated as an expense when incurred.
Hence, not part of the machine such as those that were incurred to benefit only one accounting
period.
2. Subsequent cost classified as capital expenditures are treated as an additional and capitalizable
cost of the machine. Hence, part of the machine such as those that were incurred to benefit more
than one accounting period.
3. Additions to be considered capitalizable must be of major modifications or alterations to the
machine which increases the physical size. Otherwise, if minor then expensed as incurred.
4. Improvements to be considered capitalizable must be of major modifications or alterations to the
machine which increases the service life or capacity. Otherwise, if minor then expensed as
incurred.
5. Replacements to be considered capitalizable must be of major modifications or alterations to the
machine which include total replacement of machine. Minor replacements are treated as ordinary
repairs and are expensed as incurred.
6. Repairs and maintenance to be considered capitalizable must be of major or those that improves
capacity or extends the service life or the benefits to be derived from the machine for more than
one period. Otherwise, if minor then expensed as incurred.
7. Rearrangements including reinstallations to be considered capitalizable must be of major or those
that improves capacity or extends the service life or the benefits to be derived from the machine
for more than one period. Otherwise, if minor then expensed as incurred.
Illustration: Land and building purchased in a single cost (a)

Kakuna Company acquired land and building in a basket price of P5,000,000. The building is still usable
and the company is contemplating to renovate the building, the fact that it was just used for a year
and a half by the previous owner. The following costs were given:
Cost of renovating the old building P1,000,000
Title search 35,000
Surveying the land for proper measurement 10,000
Assessment for drainage and pavements 25,000
Real property taxes assumed at the date of purchase 550,000
Broker’s fees 52,000
Building inspection costs 60,000
Installation costs during renovation 23,000
Fair value of the land during purchase 4,500,000
Fair value of the building during purchase 1,500,000
Requirement:
1. Compute the cost of the land.
2. Compute the cost of the building.
Page 9 of 22
Solution:
Fractions
Fair value of the land during purchase P4,500,000 45/60
Fair value of the building during purchase 1,500,000 15/60
Total P6,000,000
Land Building
Allocated cost for land (P5,000,000 x 45/60) P3,750,000
Allocated cost for building (P5,000,000 x 15/60) P1,250,000
Cost of renovating the old building 1,000,000
Title search 35,000
Surveying the land for proper measurement 10,000
Assessment for drainage and pavements 25,000
Real property taxes assumed at the date of purchase:
Allocated for land (P550,000 x 45/60) 412,500
Allocated for building (P550,000 x 15/60) 137,500
Broker’s fees:
Allocated for land (P52,000 x 45/60) 39,000
Allocated for building (P52,000 x 15/60) 13,000
Building inspection costs 60,000
Installation costs during renovation 23,000
Total P4,271,500 P2,483,500
Illustration: Land and building purchased in a single cost (b)

Pidgey Company acquired land and usable old building for P8,000,000. The fair value of the usable old
building is P1,000,000 and is the only available. The following pertains to the costs related to the land
and building:
Demolition costs for the old building P 500,000
Sales value of scrap materials junked 120,000
Legal fees incurred to secure clean title of the land 25,000
Cost of land survey 15,000
Title transfer fees 30,000
Fees paid to the contractor of the new building 8,000,000
Assessment for drainage and pavement 10,000
Interest costs incurred on specific borrowing 130,000
Excavation costs incurred 500,000
Driveways and parking lot as part of the blueprint 250,000
Cost of gravels and stones used to level the land next to construction site 900,000
Requirement:
1. Compute the cost of the land.
2. Compute the cost of the building.
Page 10 of 22
Solution:
Land Building
Allocated cost for land (P8,000,000 – P1,000,000) P7,000,000
Demolition costs for the old building P 500,000
Sales value of scrap materials junked ( 120,000)
Legal fees incurred to secure clean title of the land 25,000
Cost of land survey 15,000
Title transfer fees 30,000
Fees paid to the contractor of the new building 8,000,000
Assessment for drainage and pavement 10,000
Interest costs incurred on specific borrowing 130,000
Excavation costs incurred 500,000
Driveways and parking lot as part of the blueprint 250,000
Cost of gravels and stones used to level the land next to
construction site 900,000
Total P7,980,000 P9,260,000
1. Value added taxes are also purchase taxes, however they are considered as refundable.
2. Storage costs must be necessary for purchase, otherwise not part of the machine cost.
3. Initial estimate of dismantling and removing the machine and site restoration must be required by
contract.
Illustration: Machinery account (a)

Ekans Company purchase a new machine for the current year 2022. The data are as follows:
Invoice price P1,400,000
Cash discounts but not taken 20,000
Value added taxes 50,000
Transportation costs 50,000
Installation costs 25,000
Testing and trial run costs 35,000
Refurbishing cost during installation 10,000
Refurbishing costs after installation 15,000
Consultation fees before purchase 40,000
Safety rails and platform surrounding the machine 12,000
Water device installed to keep the machine cool 45,000
Requirement:
Compute the total cost of the new machine.
Page 11 of 22
Solution:
Invoice price (P1,400,000 – P20,000 – P50,000) P1,330,000
Transportation costs 50,000
Installation costs 25,000
Testing and trial run costs 35,000
Refurbishing cost during installation 10,000
Consultation fees before purchase 40,000
Safety rails and platform surrounding the machine 12,000
Water device installed to keep the machine cool 45,000
Total cost of the new machine P1,547,000
Illustration: Machinery account (b)

Raichu Company has a machine with carrying amount of P1,250,000 at the beginning of 2022. The
company incurred the following subsequent expenditures:
Minor repair and maintenance P 20,000
General overhaul and reinstallation costs 177,000
Refurbishing costs after installation 193,000
Testing costs after overhaul 68,000
Replacement of a major parts prior to usage 155,000
Replacement of cooling device necessary for machine performance 166,000
Major repairs incurred during the year 72,000
Maintenance costs to keep machine clean 5,000
Training costs paid to machine personnel 10,000
Requirement:
Compute the adjusted carrying value of the machine.
Solution:
Carrying amount, beginning P1,250,000
General overhaul and reinstallation costs 177,000
Testing costs after overhaul 68,000
Replacement of a major parts prior to usage 155,000
Replacement of cooling device necessary for machine performance 166,000
Major repairs incurred during the year 72,000
Adjusted carrying value of the machine P1,888,000
Page 12 of 22
1.1.8 Derecognition
In derecognizing an item of property, plant and equipment, all accounts related to it are removed the
books of accounts. Derecognition may be in the form of transfer or disposal in exchange of a
consideration.
Upon the removal of an item of property, plant and equipment from the books, we may also recognize
gains or losses resulting from such derecognition which will be the difference of the carrying/book value
of the asset and the disposal proceeds at the time of derecognition.
When disposed for a consideration the gain or loss is computed as follows:
Net proceeds or disposal proceeds xxx
Carrying/book value of the asset upon derecognition xxx
Gain or loss on disposal xxx
The journal entry to record the disposal of property, plant and equipment may be:
Cash (equal to the disposal proceeds) xxx
Accumulated depreciation–old asset (if available) xxx
Loss on disposal (if it resulted to a loss) xxx
Old asset (at cost or carrying value of the asset to be disposed) xxx
Gain on disposal (if it resulted to a gain) xxx
Illustration: Derecognition of Property, plant and equipment

Nidoran Company disposed its second-hand machine for P600,000. The machine had original cost of
P1,200,000 and current accumulated depreciation balance of P720,000.
Requirement:
The required journal entry to record the disposal transaction.
Solution:
Cash P 600,000
Accumulated depreciation–machine 720,000
Machine P1200,000
Gain on disposal 120,000
To record the disposal of a second-hand machine.
Disposal proceeds P 600,000

Carrying/book value of the old asset (P1,200,000 – P720,000) 480,000
Gain on disposal P 120,000
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1.2. Government Grants
1.2.1 Definition
Government grants are those assets received from the government in the form of subsidies or
assistance. These grants may either be in the form cash assets (monetary) or noncash assets
(nonmonetary).
1.2.2 Recognition and Measurement

Government grants are generally measured at fair value and in case of a monetary grant, the face value
of the monetary asset at the date of grant. Conceptually, government grants are recognized when, and
only when, there is probability and reliability that:
1. The company will comply with all the conditions attached to the grant; and
2. The grant will be received.
1.2.3 Classifications and Accounting

Accounting for government grant depend on it classification. Government grants are classified as
follows:
1. Grant related to asset – there are grants the primary purpose and condition attached are
for the acquisition of long-term assets.
2. Grant related to income – there are grants other that those classified as grant related to
assets by residual definition.
When accounting for government grants, the following shall be observed:

1. If related to recognition of related expenses, the grant shall be recognized as income over
the period of the recognition of related expense.
2. If related to recognition of depreciable assets, the grant shall be recognized as income over
the periods of the recognition of depreciation expense of the depreciable asset.
3. If related to recognition of non-depreciable assets with certain conditions attached, the
grant shall be recognized as income over the period of incurrence of the cost of meeting
the conditions.
4. If related to recognition of a grant as compensation for expenses, losses, or damages
incurred or for purposes of immediate financial response and support with which the
company will not incur any further costs, the grant shall be recognized as income at the
moment that such became receivable.
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Illustration: Government Grant related to recognition of related expense
Sandshrew Company received an assistance from the government in 2022 amounting to P20,000,000
for purposes of meeting environmental care and safety over the periods of four years. The following
were the environmental expenses over the four-year period:
2019 P1,000,000
2020 3,000,000
2021 5,000,000
2022 7,000,000
Total P16,000,000
Requirement:
Prepare the required journal entries from 2022 to 2025.
Solution:
Journal entries in 2022:
Cash P20,000,000
Deferred grant income P20,000,000
To record the receipt of grant from the government.
Environmental expense P 1,000,000

Cash P 1,000,000
To record the payment of environmental expense.
Deferred grant income P 1,250,000

Grant income P 1,250,000
To record the grant income.

Cash P 3,000,000


Cash P 5,000,000

Page 15 of 22
Cash P 7,000,000

Illustration: Government Grant related to recognition of depreciable asset

Clefairy Company received an assistance from the government in 2022 amounting to P20,000,000 for
purposes purchasing a factory building for P16,000,000 with useful life of 10 years to be depreciated
using straight-line method.
Requirement:
Prepare the required journal entries from 2022.
Solution:
Annual depreciation: P16,000,000/10 = P1,600,000
Annual grant income: P20,000,000/10 = P2,000,000

Cash P20,000,000
Factory building P16,000,000

Cash P16,000,000
To record the purchase of factory building.
Depreciation expense P 1,600,000

Accumulated depreciation P 1,600,000
To record the depreciation.

Page 16 of 22
Illustration: Government Grant received as financial support
Vulpix Company received an assistance from the government in 2022 amounting to P20,000,000 as an
immediate financial support for damages sustained during a massive fire. The company did not incur
any expenses for the grant.
Requirement:
Prepare the required journal entries for 2022.
Solution:
Journal entry 2022:
Cash P20,000,000
Grant income P20,000,000
Illustration: Government Grant related to recognition of non-depreciable asset

Jigglypuff Company received an assistance from the government in 2021 in the form of a parcel of land
with fair value of P25,000,000. The condition for the grant is for the company to construct a factory
building. The construction was completed in 2021 and will be used starting 2022. The factory building
has useful life of 25 years and the total cost incurred for the construction amounted to P20,000,000.
Requirement:
Prepare the required journal entries for 2022.
Solution:
Annual depreciation: P20,000,000/25 = P 800,000
Annual grant income: P25,000,000/25 = P1,000,000

Land P25,000,000
To record the receipt of land government grant.
Factory building P20,000,000

Cash P20,000,000
To record the construction of factory building.
Depreciation expense P 800,000

Accumulated depreciation P 800,000
To record the depreciation for 2022.

To record the grant income for 2022.
Page 17 of 22
1.2.4 Financial Statement Presentation
Government grants are presented in the financial statement depending on the classification of the grant.
The following shall be observed:
1. For grants related to asset:
a. By setting up a deferred income account.
b. By deducting the grant in arriving the carrying amount of the asset.
2. For grants related to income:
a. Separately as “grant income” account.
b. Under general “other income” account.
c. As a deduction from the related expenses.
Illustration: Presentation of government grant

Zubat Company received a cash assistance of P6,000,000 in 2022 from the national government for
purposes of acquiring a machine for P26,000,000 with useful life of 20 years to be depreciated using
straight-line method.
Requirement:
Prepare the required journal entries for 2022 under the following:
1. Deferred income approach
2. Deduction from asset approach
Solution:
Requirement 1:
Annual grant income: P 6,000,000/20 = P 300,000
Journal entries in: 2022:

Machine P26,000,000
Cash P26,000,000
To record the purchase of machine.
Cash P 6,000,000

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Deferred grant income P 300,000
Grant income P 300,000
Requirement 2:
Cost of the machine P26,000,000
Less: Government grant ( 6,000,000)
Net cost of the machine P20,000,000
Divided by: Useful life / 20
Annual depreciation P 1,000,000

Machine P26,000,000
Cash P26,000,000
Cash P 6,000,000
Machine P 6,000,000
To record the receipt of grant from the government as
deduction for the cost of the machine.

1.2.5 Repayment of Government Grant
Repayment of government grants actually occur when the grant received has conditions attached and
the conditions were breached or not been fulfilled and is treated as a change in accounting estimate.
Accounting for repayment of government is actually viewed as if there were no grants received from the
very beginning and depends on the classification of the grant. The following shall be observed:
1. For grants related to asset,
a. If the deferred income approach is used, the repayment shall be effected by debiting the
remaining balance of deferred grant income account and debiting the grant income already
recognized from prior periods to current period of repayment and crediting the amount of
government grant received.
b. If the deduction from asset approach is used, the repayment shall be effected by debiting
asset account by the amount of government grant previously deducted from the moment of
receipt and crediting the amount of government grant received.
This will actually amount to an adjustment to the asset account and the depreciation expense
to be recognized in the succeeding periods after the repayment.
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2. For grants related to income, the same with the deferred income approach, the repayment shall
be effected by debiting the remaining balance of deferred grant income account and debiting the
grant income already recognized from prior periods to current period of repayment and crediting
the amount of government grant received.
Illustration: Repayment of grant related to asset

Oddish Company received a cash assistance of P6,000,000 in 2021 from the national government for
purposes of acquiring a machine for P26,000,000 with useful life of 20 years to be depreciated using
straight-line method.
However, coming January 1, 2022, the entire government grant became repayable due to
noncompliance with the attached conditions.
Requirement:
Prepare the required journal entries from 2021 to 2022 under the following:
1. Deferred income approach
2. Deduction from asset approach
Requirement 1:
Annual grant income: P 6,000,000/20 = P 300,000

Machine P26,000,000
Cash P26,000,000
Cash P 6,000,000

Deferred grant income P 300,000

Grant income P 300,000

Loss for repayment of government grant 300,000
Cash P6,000,000
To record the repayment of entire government grant.
Page 20 of 22
Cost of the asset P26,000,000

Less: Depreciation in 2021 ( 1,300,000)
Carrying value of the machine as of 2022 P23,400,000
Requirement 2:
Machine P26,000,000
Cash P26,000,000
Cash P 6,000,000
Machine P 6,000,000

Cost of the machine P26,000,000

Less: Government grant ( 6,000,000)
Net cost of the machine P20,000,000
Divided by: Useful life 20
2021 Depreciation P 1,000,000

Machine P 6,000,000
Cash P 6,000,000
To record the repayment of entire government grant
and the adjustment to the machine.

Depreciation before repayment of government grant P 1,000,000

Unrecognized depreciation due to deduction of government grant from
2021 to 2022 [(P6,000,000/20) x 2] 600,000
Adjusted depreciation for 2022 P 1,600,000
Page 21 of 22
Cost of the asset (P20,000,000 + P6,000,000) P26,000,000
Carrying value of the machine as of 2022 P23,400,000
1. Adjustment shall be made in the depreciation for the year of repayment under repayment of grant
related to asset accounted for under the deduction from asset approach since the amount deducted
from the asset were not subject to depreciation when in fact it should have been depreciated should
the amount of grant were not deducted from the cost of the asset.
2. Regardless of the approach used to account for repayment of grant related to asset, the carrying value
of the asset after the repayment shall be the same under both approaches.
Illustration: Repayment of grant related to income

Paras Company received a P5,000,000 assistance from the national government to compensate the
costs to be incurred in cleaning the oil spill for the period of 4 years starting 2021.
However, coming January 1, 2022, it was found out that the company did not comply for it has not yet
started the clean-up. The government ask for the repayment of the entire grant.
Requirement:
Prepare the required journal entries from 2021 to 2022.
Solutions:
Journal entries for 2021:
Cash P5,000,000

Grant income (P5,000,000/4) P1,250,000
Journal entries for 2022:

Loss for repayment of government grant 1,250,000
Cash P5,000,000
To record the repayment of entire government grant.
Page 22 of 22

Calculate capitalized borrowing costs

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Calculate capitalized borrowing costs

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MODULE 2 – Property Plant and Equipment (Part 2)

1.1.6 Borrowing Costs

The average expenditure is computed by multiplying the actual expenditures with a

Illustration: Specific borrowings

Illustration: General borrowings (a)

LOWER amount (capitalizable borrowing costs) P 250,000

Actual borrowing costs (P4,000,000 x 10%) P 400,000

Requirement: Compute the capitalizable borrowing cost.

Actual borrowing costs P 760,000

Borrowing Cost with both specific and general borrowings

Average expenditures P3,750,000

1.1.7 Land, Building and Machinery

Cost of the Land

Computation for the cost of the Machinery (or equipment) account:

Illustration: Land and building purchased in a single cost (a)

Illustration: Land and building purchased in a single cost (b)

Illustration: Machinery account (a)

Illustration: Machinery account (b)

Illustration: Derecognition of Property, plant and equipment

Disposal proceeds P 600,000

1.2.2 Recognition and Measurement

1.2.3 Classifications and Accounting

When accounting for government grants, the following shall be observed:

Environmental expense P 1,000,000

Deferred grant income P 1,250,000

Journal entries in 2023:

Deferred grant income P 3,750,000

Journal entries in 2024:

Deferred grant income P 6,250,000

Deferred grant income P 8,750,000

Illustration: Government Grant related to recognition of depreciable asset

Journal entries in 2022:

Factory building P16,000,000

Depreciation expense P 1,600,000

Deferred grant income P 2,000,000

Illustration: Government Grant related to recognition of non-depreciable asset

Journal entries in 2022:

Factory building P20,000,000

Depreciation expense P 800,000

Deferred grant income P 1,000,000

Illustration: Presentation of government grant

Journal entries in: 2022:

Depreciation expense P 1,300,000

Journal entries in 2022:

Depreciation expense P 1,000,000

1.2.5 Repayment of Government Grant

Illustration: Repayment of grant related to asset

Journal entries in 2021:

Depreciation expense P 1,300,000

Deferred grant income P 300,000

Journal entries in 2022:

Cost of the asset P26,000,000

Depreciation expense P 1,000,000

Cost of the machine P26,000,000

Journal entries in 2022:

Depreciation expense P 1,600,000

Depreciation before repayment of government grant P 1,000,000

Illustration: Repayment of grant related to income

Deferred grant income P1,250,000

Journal entries for 2022:

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