MODULE 4-1: Property, Plant and Equipment

• Tangible assets, meaning, they have physical substance.

• Acquired for use in operations and not for resale
• Long-term in nature and generally subject to depreciation

The following fixed assets must be shown separately on the balance sheet(or footnotes) at original
cost(historical cost)
• Land (Property)
• Buildings (Plant)
• Equipment: May show machinery, tools, furniture and fixtures separately, if these categories
are significant
• Accumulated Depreciation Account (Contra-Asset): May be combined for two or more asset
categories

Acquisition of Property
WAY OF ACQUISITION COMPUTATION OF COST
Cash Basis Cash price equivalent (Cash paid) plus directly attributable costs

On account, subject to cash Invoice price minus the discount, regardless of whether the
discount discount is taken or not, meaning, record the NET amount

Installment Basis a. Cash price equivalent (cash price)

b. If cash price is not given: Present value of all payments using
an implied interest rate

Issuance of Share Capital In the order of priority:

1.
2.
3.

Issuance of Bonds Payable In the order of priority:

1.
2.
3.

Exchange a. With commercial substance, with cash involved:

• Payor – ___________________________
• Recipient – ___________________________

b. No commercial substance:
___________________________

c. Trade-in (in order of priority):

1. ___________________________
2. ___________________________

Compiled by: Coach Orlan

 Donation a. From shareholders: ___________________________
___________________________ Example:
Asset XX
Donated capital XX
b. From nonshareholders: ___________________________
___________________________

Government Grant ___________________________

Construction

Note: If the incremental overhead is not specifically identifiable,

allocation of overhead may be done on the basis of direct labor
cost or direct labor hours.

Valuation of Fixed Assets

Historical cost is the basis for valuation of purchased fixed assets. Historical cost is measured by cash
or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary
for its intended use.

Land
Nature/Purpose Classification
Used as a plant site
Held for a currently undetermined use
Held definitely as a future plant side
Held for long-term capital appreciation
Held for current sale by a real estate developer

All costs incurred up to excavation for the new building are considered land costs. All of the following
expenditures are included.
• Purchase Price
• Brokers’ Commission
• Title and recording fees
• Legal fees
• Escrow fees (Escrow – place in custody or trust until a specified condition has been fulfilled)
• Draining of swamps
• Clearing of brush and trees
• Site development(e.g. grading of mountain tops to make a “pad”)
• Existing obligations assumed by buyer, including mortgages and back taxes
• Cost of razing(tearing down) an old building (demolition)
• Less proceeds from sale of existing buildings, standing timber, etc.

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Other rules to remember as to cost chargeable to land:
Land improvements
a) Not subject to depreciation: ___________________________
EXAMPLES: Cost of surveying, cost of clearing, cost of grading, leveling and landfill,
cost of subdividing and other cost of permanent improvement
b) Depreciable: ___________________________
EXAMPLES: Fences, water systems, drainage systems, sidewalks, pavements, and cost of
trees, shrubs and other landscaping
Special assessments – taxes paid by the landowner; ___________________________
Real property taxes
a) Normal treatment: ___________________________
b) If unpaid real property taxes are assumed by the buyer in acquiring land:
___________________________

Building (Plant)
Included if a building is PURCHASED:
• Purchase price
• Legal fees and other expenses incurred in connection with the purchase
• Unpaid taxes up to date of acquisition
• Interest, mortgage, liens and other encumbrances on the building assumed by the buyer
• Payments to tenants to induce them to vacate the building
• Any renovating or remodeling costs incurred to put a building purchased in a condition
• suitable for the intended use: lighting installations, partitions, and repairs

On the other hand, here are the things to be included if the building is CONSTRUCTED:
• Materials used, labor employed and overhead incurred during the construction
• Building permit or license
• Architect fee
• Superintendent fee
• Cost of excavation
• Cost of temporary buildings used as construction offices, and tools or materials used
• Expenditures incurred during the construction period such as interest on construction loans
and insurance
• Expenditures for service equipment and fixtures, made a permanent part of the structure
• Cost of temporary safety fence around the construction site and cost of subsequent removal
thereof.
o The construction of permanent fence after the completion of the building:
charged to LAND IMPROVEMENT account
• Safety inspection fee

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Whether the building is purchased or constructed, here are certain concepts to remember:
Sidewalks, Pavements, Parking Lot, Driveways
Part of the blueprint for the construction of the new building:
Occasionally made or incurred not in connection with the
construction of a new building:

Claims for damages – Insurance

Taken during the construction of a building:
Insurance is not taken, when the entity is required to pay claims
for damages for injuries sustained during the construction:

Building fixtures – Shelves, cabinets, and partitions

Immovable (attached to the building in such a manner that the
removal thereof may destroy the building):
Movable:

Ventilating system, lighting system, elevator

Installed during construction:
Installed after construction:
Land and an old building are purchased at a single cost
Old building is usable:

Old building is unusable:

Old building is demolished immediately to make room for

construction of a new Building
Any allocated carrying amount of the usable old building
New building is accounted for as PPE or Investment property:
New building is accounted for as Inventory:
Demolition cost minus salvage value
New building is accounted for as PPE/Inv. property/or Inventory
Prepare the land for the intended use but not to make room for
the construction of new building

Building is acquired and used in a prior period but demolished in the current period to
make room for construction of new building
Carrying amount of the OLD building: whether new building is
(whether new building is PPE, Inv Property, Inventory)
Net demolition cost (demolition cost minus salvage value):
(whether the new building is PPE, Investment property, or
Inventory)
If the OLD building is subject to a contract of lease, any
payments to tenants to induce them to vacate the OLD building:

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Machinery
The following are included when computing for the cost of a purchased machinery:
• Purchase price (net of discount)
• Freight, handling, storage and other cost related to the acquisition
• Insurance while in transit
• Installation cost, site preparation, and assembling
• Cost of testing and trial run, and other cost necessary in preparing the machinery for its
• intended use
• Initial estimate: Cost of dismantling and removing the machinery and restoring the site
• on which it is located, and for which the entity has a present obligation
• Fee paid to consultants for advice on the acquisition of the machinery
• Cost of safety rail and platform surrounding the machine
• Cost of water device to keep machine cool

Moreover, here are other concepts related to machinery:

Machinery is moved to a new location
Undepreciated cost of the OLD installation cost
NEW Installation Cost

Machinery is removed and retired to make room for the installation of a new one
the removal cost not previously recognized:
VAT on the purchase of machinery:

Irrecoverable/Nonrefundable purchase tax:

Tools
Patterns and dies – used in designing or forging out a particular product
Used for regular product:
Used for Specially ordered Product
Equipment
a. Delivery equipment (examples: cars, trucks, other vehicles used in business operations)
*Motor vehicle registration fees: ___________________________
b. Store equipment (examples: computers, typewriters, adding machines, cash register,
calculator) – ___________________________
c. Office equipment (examples same as store equipment)
d. Furniture and fixtures (examples: showcases, counters, shelves, display fixtures, cabinets,
partitions, safes, desks and tables)

Returnable Containers
In big units or of great bulk (tanks, drums, barrels):
Small and individually involve small amount (boxes, bottles:)

Not returnable:

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Subsequent Costs
Additions: modifications or alterations which increase the physical size or capacity of asset
An entirely new unit:
An expansion, enlargement, or extension of the old asset:

Improvements or betterments – modifications or alterations which increase the service life or

the capacity of the asset; substitution of a better or superior quality
Replacement of an asset or part thereof with one of a better or
superior quality:
• A tile roof is substituted for wooden shingles
• A shatter proof glass is substituted for ordinary glass
• An old motor in a machine is replaced by a new and
powerful one
• Galvanized iron roofing is substituted for nipa roofing
• Replacement of wooden floor by concrete flooring

Do not involve replacement of parts:

Repairs – used to restore assets to good operating condition upon their breakdown or
replacement of broken parts
Extraordinary repairs – material replacement of parts, involving
large sums and normally extend the useful life of the asset:

Ordinary repairs – minor replacement of parts, involving small

sums and are frequently encountered

Rearrangement Cost - relocation or reinstallation of an asset which proves to be less

efficient in its original location
If it increases the future service potential of the machines:
• Facilitates future production
• Secures greater efficiency
• Achieves substantial reduction in previously assessed
operating cost
it merely maintains the existing level of performance of the asset

For major replacements, here are the accounting procedures:

• Major Replacement: ___________________________
• Cost and Acc Dep, old asset: ___________________________
• Carrying Amount, old asset: ___________________________
NOTE: IF Not practicable for an entity to determine the carrying amount of the replaced part:
o Use the ___________________________as an indication of the “likely original cost” of
the replaced part at the time it was acquired or constructed
o The current replacement cost shall be ___________________________

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