Professional Documents
Culture Documents
2. The asset must be used in business. Held for use in production or supply of goods or services,
for rental to others, or for administrative purposes.
3. Expected to be used during more than one period. This only means that the asset must be
usable for more than one reporting period or simply means more than one year of usage.
1. It is probable that the asset will provide future economic benefits on the advantage of the
company.
2. The cost of that item of property, plant and equipment can be measured with reliability.
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2. Directly attributable costs (DACS):
Example:
a. Freight or transportation cost and handling costs;
b. Site preparation, installation and testing costs; and
c. Professional fees and cost of employee benefits arising directly form the construction or
acquisition of an item of property, plant and equipment
3. Initial estimate of cost of dismantling and removing the item and restoring the site on which
it is located, this must be required by contract.
Item of property, plant and equipment in can be acquired thru different modes of acquisition.
I. On Cash Basis
When we acquire PPE on cash basis, the cost of the asset at the moment of purchase is the cash
price equivalent or the amount of cash required to acquire the asset. The total cost of the asset
shall be the cash paid to purchase the asset plus any directly attributable costs incurred computed
as follows:
Purchase price of the asset xxx
Add: Directly attributable costs xxx
Total cost of the asset xxx
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Requirement 1:
Machine (P1,200,000 + P200,000) P1,400,000
Cash P1,400,000
To record the acquisition of the machine
Requirement 2:
Purchase price of the machine (at net purchase price) P1,400,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,480,000
Requirement:
Under both gross method and net method:
1. The required journal entries to record the acquisition of machine.
2. The required journal entries to record the payment within the discount period.
3. The required journal entries to record the payment beyond the discount period.
4. Compute the total cost of the machine after acquisition.
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Gross Method:
Requirement 1:
Machine P1,200,000
Accounts payable P1,200,000
To record the acquisition of the machine.
Requirement 2:
Accounts payable P1,200,000
Cash (P1,200,000 – P24,000) P1,176,000
Machine (P1,200,000 x 2%) 24,000
To record the payment of accounts payable.
Requirement 3:
Accounts payable P1,200,000
Purchase discount lost 24,000
Cash P1,200,000
Machine (P1,200,000 x 2%) 24,000
To record the payment of accounts payable.
Requirement 4:
Purchase price of the machinery (at net invoice price) P1,176,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machinery P1,256,000
Net Method:
Requirement 1:
Machine P1,176,000
Accounts payable P1,176,000
To record the acquisition of the machine.
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Requirement 2:
Accounts payable P1,176,000
Cash (P1,200,000 – P24,000) P1,176,000
To record the payment of accounts payable.
Requirement 3:
Accounts payable P1,176,000
Purchase discount lost 24,000
Cash P1,200,000
To record the payment of accounts payable.
Requirement 4:
Purchase price of the machine (at net invoice price) P1,176,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,256,000
Regardless of the method to be used, the amount of cost of the asset shall still be at net amount,
meaning less any cash discount. If the problem is silent, use the gross method.
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Requirement 1:
Machine P 1,050,000
Discount on notes payable 150,000
Cash P 300,000
Notes payable 900,000
To record the acquisition of the machine.
Requirement 2:
First installment payment:
Notes payable P 300,000
Cash P 300,000
To record the first annual installment payment.
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The amortization is computed as follows:
Year Balance Fractions Discount Interest/Amortization
First P 900,000 9/18 X P 150,000 = P 75,000
Second 600,000 6/18 X P 150,000 = 50,000
Third 300,000 3/18 X P 150,000 = 25,000
Total P1,800,000 P 150,000
Requirement 3:
Purchase price of the machine (at cash price equivalent) P1,050,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P1,130,000
Requirement:
1. The required journal entries to record the acquisition of machine.
2. The required journal entries to record the annual payments.
3. Compute the total cost of the machine after acquisition.
Solution:
Annual installment payments P 300,000
Multiplied by: Present value factor x 2.40
Present value of the notes payable P 720,000
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Total installment payments (P300,000 x 3 year) P 900,000
Present value of the notes payable 720,000
Discount on notes payable P 180,000
Requirement 1:
Machine P1,020,000
Discount on notes payable 180,000
Cash P 300,000
Notes payable 900,000
To record the acquisition of the machine.
Machine P 80,000
Cash P 80,000
To record the directly attributable costs.
Requirement 2:
First installment payment:
Notes payable P 300,000
Cash P 300,000
To record the first annual installment payment.
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Third installment payment:
Notes payable P 300,000
Cash P 300,000
To record the third annual installment payment.
Requirement 3:
When we acquire PPE through issuance of share capital, we must consider first the hierarchy of the
proper valuation of the asset acquired. For that purpose, we will observe the following:
1. The fair value of the consideration received shall be used as the amount to be debited to
the asset account. Meaning, the fair value of the asset received and is the most preferred
measurement.
The share capital issued shall be credited at par value, and any excess of the fair value of
the asset over the par value of the share capital issued shall be credited to share premium
account.
2. If the fair value of the asset is not available, the fair value of the share capital issued shall
be used as the amount to be debited to the asset account.
The share capital issued shall be credited at par value, and any excess of the fair value of
the asset over the par value of the share capital issued shall be credited to share premium
account.
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3. If neither the fair values are available, the par value of the shares issued shall be used as
the amount to be debited to the asset account.
The share capital shall also be credited at par value. There will be no share premium to be
recognized in this case.
4. Cost incurred that is necessary for the acquisition of the asset such as freight or shipment,
handling costs, testing costs are treated as directly attributable costs to be part of the total
costs of the asset.
5. Cost incurred that is necessary for the issuance of the shares are not treated as directly
attributable costs but are treated as a deduction from the share premium arising from the
issuance of shares. Should there be no share premium arising from the issuance of shares
or when the par value of the shares issued will be used, the same shall be treated as a
reduction against share premium–control account.
Requirement 1:
Machine P1,200,000
Ordinary share capital (100,000 x P10.00) P1,000,000
Share premium–ordinary shares 200,000
To record the acquisition of the machine.
Machine 80,000
Cash P 80,000
To record the directly attributable costs.
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Requirement 2:
Machine (100,000 x P15.00) P1,500,000
Ordinary share capital (100,000 x P10.00) P1,000,000
Share premium–ordinary shares 500,000
To record the acquisition of the machine.
Machine 80,000
Cash P 80,000
To record the directly attributable costs.
Requirement 3:
Machine P1,000,000
Ordinary share capital (100,000 x P10.00) P1,000,000
To record the acquisition of the machine.
Machine 80,000
Cash P 80,000
To record the directly attributable costs.
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2. If the fair value of the bonds payable is not available, the fair value of the asset received shall
be used as the amount to be debited to the asset account.
The bonds payable shall be credited at face value, and any difference between the fair value of
the asset received and the face value of the bonds payable shall either be credited to premium
on bonds payable or debited to discount on bonds payable.
3. If neither the fair values are available, the face value of the bonds payable shall be used as the
amount to be debited to the asset account.
The bonds payable shall also be credited at face value. There will be no premium or discount to
be recognized in this case.
4. Cost incurred that is necessary for the acquisition of the asset such as freight or shipment,
handling costs, testing costs are treated as directly attributable costs to be part of the total
costs of the asset.
Requirement:
1. Journal entries to record the acquisition of machine using the fair value of the bonds.
2. Journal entries to record the acquisition of machine using the fair value of the machine.
3. Journal entries to record the acquisition of machine using the face value of the bonds.
Requirement 1:
Machine P 850,000
Discount on bonds payable 150,000
Bonds payable P1,000,000
To record the acquisition of the machine.
Machine 80,000
Cash P 80,000
To record the directly attributable costs.
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Requirement 2:
Machine P1,200,000
Bonds payable P1,000,000
Premium on bonds payable 200,000
To record the acquisition of the machine.
Machine 80,000
Cash P 80,000
To record the directly attributable costs.
Requirement 3:
Machine P1,000,000
Bonds payable P1,000,000
To record the acquisition of the machine.
Machine 80,000
Cash P 80,000
To record the directly attributable costs.
Exchange transactions are also way of acquiring assets. It is done by exchanging our asset with
another’s asset. The assets involved may be similar or dissimilar in nature.
When we account for exchange transactions, it actually depends whether or not it has commercial
substance. A commercial substance means that there is a significant difference between the benefits
that can be derived from the new asset received from exchange. Therefore, exchange can either be
with commercial substance or lacks commercial substance.
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An exchange transaction has a commercial substance if the expected cash flows from the new asset
received differ significantly from the old asset transferred. Otherwise, an exchange transaction lacks
commercial substance if the expected cash flows will not differ from either of the assets subject of
exchange.
The J-Hope Company also incurred P20,000 for transportation and handling, and P60,000 for site
preparation, installation and testing of the machine.
Requirement:
The required journal entries to record the exchange on the books of J-Hope Company.
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Solution:
If the fair value of the old asset transferred is used:
Machine P 990,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
Gain on asset exchange 390,000
To record the acquisition of the machine.
Machine 80,000
Cash P 80,000
To record the directly attributable costs.
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If the carrying value of the old asset transferred is used:
Machine P 600,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
To record the acquisition of the machine.
Machine 80,000
Cash P 80,000
To record the directly attributable costs.
Discussion Problem: Acquisition by Exchange - with commercial substance, with cash involved
Jimin Company exchanged its second-hand delivery truck with second-hand machine of Jungkook
Company. The exchange is said to have commercial substance. The following pertains to the exchange:
Jimin Jungkook
Fair values P 690,000 P 800,000
Original cost 1,200,000 1,500,000
Accumulated depreciation 600,000 750,000
Carrying/book value 600,000 750,000
Cash paid by Jimin to Jungkook 110,000
Requirement:
1. Journal entries to record the exchange on the books of Jimin Company.
2. Journal entries to record the exchange on the books of Jungkook Company.
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Requirement 1:
Machine P 800,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
Cash 110,000
Gain on asset exchange 90,000
To record the acquisition of the machine.
Requirement 2:
Delivery truck P 690,000
Cash 110,000
Accumulated depreciation–machine 750,000
Machine P1,500,000
Gain on asset exchange 50,000
To record the acquisition of the delivery truck.
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Discussion Problem: Acquisition by Exchange - without commercial substance, w/ cash involved
Suho Company exchanged its second-hand delivery truck with second-hand machine of Xiumin
Company. The exchange is said to have no commercial substance. The following pertains to the
exchange:
Suho Xiumin
Original cost P1,200,000 P1,500,000
Accumulated depreciation 600,000 750,000
Carrying/book value 600,000 750,000
Cash paid by Suho to Xiumin 150,000
Requirement:
1. Journal entries to record the exchange on the books of Suho Company.
2. Journal entries to record the exchange on the books of Xiumin Company.
Requirement 1:
Machine P 750,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
Cash 150,000
To record the acquisition of the machine.
Requirement 2:
Xiumin Company (recipient of cash):
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Discussion Problem: Acquisition by Exchange - without commercial substance, no cash involved
Baekhyun Company exchanged its second-hand delivery truck with second-hand machine of Chanyeol
Company. The exchange is said to have no commercial substance. The following pertains to the
exchange:
Baekhyun Chanyeol
Original cost P1,200,000 P1,500,000
Accumulated depreciation 600,000 750,000
Carrying/book value 600,000 750,000
Cash paid by Baekhyun to Chanyeol 150,000
Requirement:
1. Journal entries to record the exchange on the books of Baekhyun Company.
2. Journal entries to record the exchange on the books of Chanyeol Company.
Requirement 1:
Machine P 600,000
Accumulated depreciation–delivery truck 600,000
Delivery truck P1,200,000
To record the acquisition of the machine.
Requirement 2:
Delivery truck P 750,000
Accumulated depreciation–machine 750,000
Machine P1,500,000
To record the acquisition of the delivery truck.
Trade-in happens when we buy a new asset and exchange our asset (similar asset) as part of the
purchase price of the new asset. It typically occurs when the seller of the asset allows us, due to
short of cash at the moment of sale, to exchange a similar asset as cover up of the cash shortage.
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A trade-in transaction is an example of an exchange with commercial substance. It has commercial
substance since in a trade-in transaction a significant amount of cash is involved. Therefore, it is not
a trade-in transaction if the exchange involves an amount of cash that is lower in amount than the
value of the asset to be traded.
Trade in transaction can be accounted either under of the following methods:
1. Fair value method
2. Trade-in value method
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Requirement 1:
Machine–new P3,300,000
Accumulated depreciation–old machine 1,950,000
Cash 2,500,000
Machine–old 2,600,000
Gain on asset exchange 150,000
To record the acquisition of the new machine.
Machine-new 80,000
Cash P 80,000
To record the directly attributable costs.
Requirement 2:
Machine–new P3,500,000
Accumulated depreciation–old machine 1,950,000
Cash 2,500,000
Machine–old 2,600,000
Gain on asset exchange 350,000
To record the acquisition of the new machine.
Machine-new 80,000
Cash P 80,000
To record the directly attributable costs.
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Trade-in value of the asset P1,000,000
Add: Cash paid 2,500,000
Total P3,500,000
Add: Directly attributable costs (P20,000 + P60,000) 80,000
Total cost of the machine P3,580,000
Requirement:
The journal entries to record the donation transaction.
Solution:
Machine P1,200,000
Donated capital P1,200,000
To record the receipt of machine through donation.
Machine P 80,000
Cash P 80,000
To record the directly attributable costs.
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Donated capital P 20,000
Cash P 20,000
To record the cost incurred on the donation
Requirement:
Compute the cost of the new building acquired through self-construction.
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Solution:
Cost of construction traceable materials (direct material cost) P1,500,000
Add: Cost of labor to construction personnel (direct labor cost) 2,200,000
Add: Construction overhead costs
Cost of supplies needed during construction P 600,000
Salary paid to construction supervisor 200,000
Utilities incurred during construction 300,000
Depreciation of the construction machine and equipment 600,000 1,700,000
Total cost of the new building P5,400,000
In a reporting period subsequent to initial measurement we may choose to adopt one of the two
measurement models for PPE:
1. Cost model – equal to the initial measurement of property, plant and equipment at cost less any
accumulated depreciation and any accumulated impairment losses.
2. Revaluation model – the property, plant and equipment are carried at a revalued amount, being the
fair value at revaluation date, less any accumulated depreciation and any subsequent accumulated
impairment losses subsequent from the revaluation date.
Subsequent measurement, Depreciation, Revaluation model & Impairment will be discussed in PPE Part 3.
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