07/11/2022

Property, Plant,
and Equipment
– Initial
Recognition
JONALD P. BINALUYO

Definition and Nature

IAS 16 – PPE are tangible items that are held by an enterprise for use in production or
supply of goods or services or for administrative purposes, and are expected to be used
for more than one period.

Assets of this nature include:

Property ordinarily not subject to depreciation or depletion, such as land;
Property subject to depreciation or amortization, such as buildings, land
improvement, machinery,- equipment, and furniture; and
Property subject to depletion such as timber tracts and mineral oil deposits.

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Scope
IAS 16 shall be applied in accounting for property, plant and equipment except when
another Standard requires or permits a different accounting treatment.

This Standard does not apply to:

a. property, plant and equipment classified as held for sale in accordance with IFRS 5
Non-current Assets Held for Sale and Discontinued Operations;
b. biological assets related to agricultural activity (see IAS 41 Agriculture);
c. the recognition and measurement of exploration and evaluation assets (see IFRS 6
Exploration for and Evaluation of Mineral Resources); or
d. mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources.
However, this Standard applies to property, plant and equipment used to develop or maintain the assets described
in (b)–(d).

Measurement – Initial Recognition

An item of PPE should be recorded as an asset when:
It is probable that the future economic benefits associated with the asset will flow to
the enterprise; and
The cost of the asset to the enterprise can be measured reliably.

IAS 16, paragraph 16 – components of cost:

Purchase price, including import duties and non-refundable taxes, after deducting
trade discounts and rebates;
Cost directly attributable to bringing the assets to its present location and condition
(see IAS 16, paragraph 17); and
Initial estimate of the cost of dismantling and removing the item and restoring the site
on which it is located (decommissioning costs).

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Modes of Acquiring PPE

1. Purchase
◦ Cash purchase
◦ Lump-sum purchase
◦ Deferred payment and Purchase by instalment
2. Issuance of equity securities
3. Acquisition by donation
4. Acquisition by self-construction
5. Acquisition under lease contract
6. Exchange of non-monetary assets

Spare Parts
Spare parts and servicing equipment are usually carried as inventory and recognized in
profit or loss as consumed. However, major spare parts and stand-by equipment qualify as
property, plant and equipment when an entity expects to use them during more than one
period. Similarly, if the spare parts and servicing equipment can be used only in connection
with an item of property, plant and equipment, they are accounted for as property, plant
and equipment.

The Standard does not prescribe the unit of measure for recognition, i.e., what constitutes
an item of property, plant and equipment. Thus, judgement is required in applying the
recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate
individually insignificant items, such as moulds, tools and dies, and to apply the criteria to
the aggregate value.

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Land & Building

Land
The cost of the land includes the original purchase price, brokers’ commissions, cost of
closing and obtaining title, title insurance, escrow fees, surveying costs, local government
special assessment tax, any liens, mortgages or encumbrances on the property assumed
from previous owner, cost of clearing, grading, filling or leveling and all other costs that
permanently improve the land or prepare it for use as intended by the management.

Land Improvements
Land Improvements not subject to depreciation (permanent in nature) are charged to land
account. Examples: cost of surveying, clearing, leveling and filling.
Land Improvements that are depreciated are charged to “land improvements” account.
Example: fences, water systems, drainage, sidewalks, pavements, trees and shrubs, and
other landscaping.

Land & Building (Cont.)

Building
The cost of the building includes the purchase price, legal fees and other expenses related
to purchase, unpaid taxes up to the date of purchase, mortgages, liens, encumbrances on
the building assumed by the buyer, payment to tenants to vacate the building, and any
other costs incurred to put a building in a condition suitable for the intended use.

Accounting for self-constructed building and for borrowing cost (IAS 23) will be discussed in a separate session.

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PIC Q & A No. 2012-02

Land and Building are purchased at a lumpsum price.
• If the old building is usable (not dilapidated), the purchase price is allocated to the land
and building based on relative fair values.
• If the old building is not usable (dilapidated), the purchase price is allocated to the land
only.
The entity intends to demolish the old building and will not use the old building prior to
its demolition.
• Any allocated cost to the old building shall not form part of the cost of the new building if
the new building is accounted for as PPE or Investment Property. The loss arising from
de-recognition is included in profit or loss.
• Any allocated cost to the old building shall form part of the cost of the new building if the
new building is accounted for as Inventory.

PIC Q & A No. 2012-02 (Cont.)

The entity acquired land and building and will use the old building prior to its
demolition.
• Any allocated cost to the old building shall not form part of the cost of the new
building whether the new building is accounted for as PPE, Investment Property, or
Inventory. The loss arising from de-recognition is included in profit or loss.

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Demolition Cost
Demolition costs of the old building can be considered as part of costs of site preparation
mentioned under IAS 16.17(b) and, therefore, may be capitalized. Although there is no
clear guidance as to what account (i.e., land or new building) such demolition costs should
be capitalized, it is preferable to capitalize the demolition costs as part of the cost of the
new building since the demolition of the old building is a direct result of the decision to
construct the new building.
Property, Plant and Equipment — Proceeds before Intended Use (Amendments to IAS
16) amends the standard to prohibit deducting from the cost of an item of property, plant
and equipment any proceeds from selling items produced while bringing that asset to the
location and condition necessary for it to be capable of operating in the manner intended
by management. Instead, an entity recognizes the proceeds from selling such items, and
the cost of producing those items, in profit or loss. (The amendments are effective for
annual periods beginning on or after 1 January 2022)

Bearer Plants
Where an item is a bearer plant, the plant and its produce will have different accounting
treatments. A bearer plant should be accounted for as property, plant and equipment (PPE) in
accordance with IAS 16. Therefore, companies will now be required to measure bearer plants
initially at cost and will thereafter have an option to apply either the cost or the revaluation
model.

Bearer plants are used solely to grow produce over several periods and therefore meet the
definition of PPE. The use of bearer plants to produce agricultural produce is similar to the use of
machinery to manufacture goods. The manner in which an entity derives economic benefits from
bearer plants and a production plant is similar. Further, the progressive decline in the future
earning potential of a bearer plant over its life is also similar to other depreciable assets, for
example, plant and machinery. Although bearer plants are dissimilar in form to plant and
machinery, similarities in how they are used supports accounting for them in the same way.

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Problem No. 1

Problem No. 1 Cont.

Answer: P290,000 – cash equivalent price

Suggested Journal Entry:

Machinery 290,000
Cash 90,000
Ordinary share capital 150,000
Ordinary share premium 50,000

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Problem No. 2

Problem No. 2 Cont.

Down Payment 200,000
PV of the note 453,561
Cost of Equipment 653,561

Suggested Journal Entry:

Equipment 653,561
Discount on NP 106,439
Cash 200,000
Notes Payable 560,000

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Problem No. 3

Problem No. 3 Cont.

Land: (44.3M x 20/50) = 17,720,000
Building: (44.3M x 25/50) = 22,150,000
Equipment: (44.3M x 5/50) = 4,430,000

Suggested Journal Entry:

Land 17,720,000
Building 22,150,000
Equipment 4,430,000
Cash 44,300,000

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Problem No. 4

Problem No. 4 Cont.

List price of equipment 2,000,000
Trade discount (2M x 5%) (100,000)
Cash discount (1.9M x 2%) (38,000)
PV of dismantling cost 46,651
Cost of equipment 1,908,651

Suggested Journal Entry:

Equipment 1,908,651
Discount loss 38,000
Cash 1,900,000
Provision for dismantling 46,651

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Problem No. 5

Problem No. 5 Cont.

Suggested Journal Entry:

Land 5,000,000
Unearned Income 5,000,000
Land 2,500,000
Donated Capital 2,500,000
Land 18,000,000
Building 9,000,000
Ordinary share capital 10,000,000
Ordinary share premium 17,000,000
Answer: 34,500,000

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Problem No. 6

Problem No. 6 Cont.

Land Building Machinery and Improvements OPEX

Equipment
Land: (56.7M x 10.5/63) 9,450,000 28,350,000 18,900,000
Building (56.7M x 31.5/63)
M&E: (56.7M x 21/63)
Special assessment on land 540,000

Construction of bases for M&E 4,050,000

Driveways and Parking 3,660,000
Ribbon cutting 250,000
Purchase of equipment (net) 7,644,000
Freight on Purchase 315,000
TOTAL 9,990,000 28,350,000 30,909,000 3,660,000 250,000

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Problem No. 7

Problem No. 7 Cont.

Materials 600,000
Labor 500,000
Overhead (1.2M x 15/50) 360,000
Cost of equipment 1,460,000

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Problem No. 8

Problem No. 8 Cont.

Land Building Machinery
Purchase price of the land 1,200,000 - -
Demolition and removal of old building - 80,000 -
Clearing and grading the land before construction 150,000 - -
Various closing costs related to the purchased of land 40,000 - -
Architect fee for the plans for the new building - 50,000 -
Payment to contractor for the building construction - 3,250,000 -
Machinery purchased - - 850,000
Freight charge on machinery - - 30,000
Trees, plants, and other landscaping - - -
Installation of sprinkler system for the landscaping - - -
Cost incurred to build special platform and install wiring for
machinery - - 10,000
Cost of trial runs to ensure proper installation of the
machinery - - 20,000
Fire insurance on the factory for the first year of operation - - -
TOTAL 1,390,000 3,380,000 910,000

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Problem No. 9

Problem No. 9 Cont.

Land
Land Building Improvements
Purchase of land 7,892,000 7,892,000 - -
Land survey 104,000 104,000 - -
Fees for search of title for land 12,000 12,000 - -
Building permit fee 70,000 - 70,000 -
Temporary quarters of construction crews 215,000 - 215,000 -
Cost of demolition of old building 940,000 - 940,000 -
Excavation of basement 200,000 - 200,000 -
Delinquent property tax on land assumed 40,000 40,000 - -
Dividends 100,000 - - -
Damages awarded for injuries sustained in construction (no insurance
168,000
carried) - - -
Cost of construction 58,000,000 - 58,000,000 -
Cost of paving and parking lot 800,000 - - 800,000
Cost of shrubs, trees and other landscaping 660,000 - - 660,000
TOTAL 8,048,000 59,425,000 1,460,000

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Problem No. 10

Problem No. 10 Cont.

BOOKS OF SORN – with commercial substance
FV of assets received (350+50) 400,000
BV of asset given up (900-540) 360,000
Gain on exchange 40,000
Suggested Journal Entry:
Equipment 350,000
Cash 50,000
A/D 540,000
Building 900,000
Gain on exchange 40,000

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Problem No. 10 Cont.

BOOKS OF SIN – with commercial substance
FV of assets received (400-50) 350,000
BV of asset given up (800-320) 480,000
Loss on exchange 130,000
Suggested Journal Entry:
Building 400,000
Loss on exchange 130,000
A/D 320,000
Equipment 800,000
Cash 50,000

Problem No. 10 Cont.

BOOKS OF SORN – without commercial substance

Equipment(new) 310,000
Cash 50,000
A/D 540,000
Equipment (old) 900,000
BOOKS OF SIN – without commercial substance
Equipment (new) 530,000
A/D 320,000
Equipment (old) 800,000
Cash 50,000

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Problem No. 11
Faithful Company exchanged a machine for a technologically newer model. Data pertaining to the
old machine follows: Cost – P1,700,000; Accumulated depreciation – P680,000. The fair value of
the machine received is P2,400,000 and Faithful Company paid P1,760,000 to complete the
transactions. The exchange had commercial substance.

How much is the gain or loss on the exchange transaction?

Problem No. 11 Cont.

FV of assets received (2,400-1,760) 640,000

BV of asset given up (1,700-680) 1,020,000
Loss on exchange 380,000
Suggested Journal Entry:
Machine (new) 2,400,000
Loss on exchange 380,000
A/D 680,000
Machine (old) 1,700,000
Cash 1,760,000

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Problem No. 12
An entity exchanged a truck with a carrying amount of P1,200,000 and a fair value of P2,000,000
for a truck and P250,000 cash. The cash flows from the new truck are not expected to be
significantly different from the cash flows of the old truck. The fair value of the truck received is
P1,750,000.

A delivery van was destroyed in an accident. The carrying amount was P2,500,000. The entity
received an unrecorded P800,000 invoice for a new engine installed in the van and another P200,000
invoice for various repairs. The entity received P3,500,000 under an insurance policy on the van
which it plans to use to replace the van.
.
Required
1. What is the cost of the truck received in exchange?
2. What amount should be reported as gain or loss on the disposal of the van?

Problem No. 12 Cont.

BV of assets given up 1,200,000

Cash received (250,000)
Cost of truck received 950,000

Carrying amount of van 2,500,000

Installation cost 800,000
Proceeds from insurance (3,500,000)
Gain on disposal 200,000

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Problem No. 13

Problem No. 13 Cont.

New Land OPEX
Land Old Building Building Improvements (Income)
Cash paid for land and old building 4,000,000 3,200,000 800,000 - - -
Broker's commission 200,000 160,000 40,000 - - -
Legal fees of obtaining the title 50,000 50,000 - - - -
Payment to tenants to vacate the old building 100,000 - - 100,000 - -
Demolition cost 250,000 - - 250,000 - -
Proceeds from sale of salvage materials 45,000 - - - - (45,000)
Delinquent property taxes on the land assumed by the company 75,000 75,000 - - - -
Architech fee for the new building 35,000 - - 35,000 - -
Payment to contractor of the new building 7,000,000 - - 7,000,000 - -
Cost of grading and leveling 350,000 350,000 - - - -
Temporary quarters of the construction employees 80,000 - - 80,000 - -
Payment of medical bills of employees accidentally injured during
construction 20,000 - - - - 20,000
Cost of building permit and related licenses 32,000 - - 32,000 - -
Cost of installing parking lot and driveways 575,000 - - - 575,000 -
Cost of installing lights in the parking lot 60,000 - - - 60,000 -
Expenses for open house party to celebrate the opening of the
building 98,000 - - - - 98,000
Cost of repairing windows broken by the guest during the house
party 5,000 - - - - 5,000
TOTAL 3,835,000 840,000 7,497,000 635,000 78,000

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Problem No. 14

Problem No. 14 Cont.

Land Land Improvements Building Machinery & Equipment
Beginning Balances 400,000 130,000 2,000,000 800,000

A 200,000

B 250,000 850,000

C 439,000

D 120,000

E (90,000)

TOTAL 850,000 250,000 2,850,000 1,149,000

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Problem No. 15
A building with a useful life of 50 years is constructed a total cost of P50,000,000.
After 20 years, the wooden roof is replaced with a concrete roofing costing
P5,000,000.

Journalize the accounting for replacement assuming:

1. The cost of replaced part is separately identifiable with original cost of
P4,000,000
2. The cost of replaced part is not separately identifiable.

Problem No. 15 Cont.

The cost of replaced part is separately identifiable

To eliminate the cost of wooden roof

Accumulated depreciation 1,600,000
Loss on retirement of building 2,400,000
Building 4,000,000

To record the replacement

Building 5,000,000
Cash 5,000,000

To record the subsequent depreciation

Depreciation expense 1,086,667
Accumulated depreciation 1,086,667

Building (50,000,000 - 4,000,000 + 5,000,000) 51,000,000

Accumulated depreciation (20,000,000 - 1,600,000) 18,400,000
Carrying amount 32,600,000

Revised annual depreciation (32.6M / 30 years) 1,086,667

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Problem No. 15 Cont.

The cost of replaced part is not separately identifiable

To eliminate the cost of wooden roof

Accumulated depreciation (5M / 50 years) x 20 years 2,000,000
Loss on retirement of building 3,000,000
Building 5,000,000

To record the replacement

Building 5,000,000
Cash 5,000,000

To record the subsequent depreciation

Depreciation expense 1,066,667
Accumulated depreciation 1,066,667

Building (50,000,000 - 5,000,000 + 5,000,000) 50,000,000

Accumulated depreciation (20,000,000 - 2,000,000) 18,000,000
Carrying amount 32,000,000

Revised annual depreciation (32M / 30 years) 1,066,667

Problem No. 16
Careful Company provided you with the following charges to repairs and
maintenance account:

Service contract on office equipment, 45,000

Design fee for the building extension, 200,000
Condenser for the AC unit, 5,000
Purchased of executive chairs and desks, 300,000
Purchase price and installation costs of the storm windows and screens, 600,000
Sealing of roof leaks in the production area, 10,000
Replacement of broken door knob in the conference room, 2,000
Installation of the automatic door and alarm system in the building, 150,000
Overhead crane in the assembly department to speed up production, 500,000
Replacement of broken lights in the factory, 20,000

What total amount of expenditure should be capitalized?

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Problem No. 16 Cont.

Capitalized costs: (see marked in red)

Service contract on office equipment, 45,000

Design fee for the building extension, 200,000
Condenser for the AC unit, 5,000
Purchased of executive chairs and desks, 300,000
Purchase price and installation costs of the storm windows and screens, 600,000
Sealing of roof leaks in the production area, 10,000
Replacement of broken door knob in the conference room, 2,000
Installation of the automatic door and alarm system in the building, 150,000
Overhead crane in the assembly department to speed up production, 500,000
Replacement of broken lights in the factory, 20,000

What total amount of expenditure should be capitalized? P1,750,000

Problem No. 17
The following information are based on the biological assets of Plantation Company. The
following costs were incurred from 1/1/2018 being the time the biological assets were
cultivated up to the time of initial commercial harvest being on December 31, 2022:

Direct labor costs (50% incurred in 2018, 20% incurred in 2019 and
10% each incurred in 2020, 2021 and 2022) P 1,400,000
Costs of seedlings (incurred in 2018) 120,000
Costs of fertilizers and chemicals incurred during the first two years 40,000 per year
Depreciation of farm equipment & plantation overheads (incurred evenly) 800,000

As of December 31, 2022, the estimated fair value of the combined assets (living plants and
the fruits) is P6,000,000. The estimated fair value of the fruits bearing on the plants is
P800,000. The estimated costs to sell are P200,000 and P40,000 for the living plants and
the fruits respectively. The estimated useful life of the living plants is 10 years with a
residual value of P40,000. The company is using the straight-line method of depreciation.

Assuming the living plants are considered as bearer plants, how much is the depreciation
expense for the year 2022 in relation to the bearer plants?

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Problem No. 17 Cont.

Total labor costs 1,400,000
Cost of seedlings 120,000
Cost of fertilizaers 80,000
Depreciation of equipment 800,000
Total cost of bearer plants 2,400,000
Salvage Value (40,000)
Depreciable costs 2,360,000
Useful life 10 years
Depreciation 236,000

Property, Plant,
and Equipment
DEPRECIATION

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Definition and Nature

Depreciation is the process of allocating the depreciable amount of an asset over its
useful life in a systematic and rational manner. Each part of an item of property, plant,
and equipment with a cost that is significant in relation to the total cost of the item shall
be depreciated separately.

Factors involved in the depreciation process include:

Cost of the asset;
Residual value/salvage value/scrap value; and
Estimated useful life.

Definition and Nature (Cont.)

Depreciation is not so much a matter of valuation but a matter of cost allocation in
recognition of the exhaustion of the useful life of an item of PPE. The objective of
depreciation is to have each period benefiting from the use of the asset bear an equitable
share of the asset cost.

Depreciation of an asset begins when it is available for use. The asset is said to be
available for use when it is in the location and condition necessary for it to be capable of
operating in the manner intended by the company.

Depreciation ceases when the asset is derecognized (or classified as held for sale, per
IFRS 5). Depreciation does not cease when the asset becomes idle temporarily.

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Depreciation Methods
The depreciation method used should reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the enterprise.

These methods are as follows:

Straight-line method
Sum-of-the-years digit
Double-declining balance
150% declining balance
Service hours
Productive output
Group/Composite

Problem No. 1

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Problem No. 1 Cont.

2021 2022
1. SL (800,000 – 80,000) / 8 = 90,000
90,000 x 9/12= 67,500 90,000

2. Hours 720,000/100,000 hrs = 7.20/hr.

worked 7.20 x 5,000 hrs = 36,000 7.20 x 6,000 hrs = 43,200

3. Units of 720,000/900,000 units = 0.80/unit

output 0.80 x 45,000 units = 36,000 0.80 x 64,000 units = 51,200

4. SYD 720,000 x 8/36 x 9/12 = 120,000 720,000 x 7.25/36 =145,000

5. DDB 2/8 = 25% 800,000-150,000=650,000

25% x 800,000 x 9/12=150,000 25% x 650,000 = 162,500

6. 150% DB 1.5/8 = 18.75% 800,000-112,500=687,500

18.75% x 800,000 x 9/12= 112,500 18.75% x 687,500) = 128,906

Problem No. 1 Cont.

Depreciation Method Cost Accum. Depr. Carrying amount

1. Straight-line 800,000 157,500 642,500

2. Hours worked 800,000 79,200 720,800

3. Units of output 800,000 87,200 712,800

4. SYD 800,000 265,000 535,000

5. DDB 800,000 312,500 487,500

6. 150% declining balance 800,000 241,406 558,594

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Problem No. 2

Gray Company acquired a machine on December 31, 2018 for P2,500,000, with an estimated
residual value of P100,000. The estimated useful life of the machine is 10 years, and the company
uses the double declining balance method.

On January 1, 2021, Gray decided to use the straight-line method of depreciating the machine. The
total estimated useful life from the date of acquisition of the machine was reduced by two years
with the same residual value.

What is the accumulated depreciation of the machine on December 31, 2021?

Problem No. 2 Cont.

Depreciation – 2019 (2.5M x 20%) 500,000

Depreciation – 2020 (2.5M x 80% x 20%) 400,000
Accumulated depreciation (2019 – 2020) 900,000

Cost, 12/31/2018 2,500,000

A/D,12/31/2020 900,000
CV, 12/31/2020 1,600,000

Depreciation – 2021 (1,600,000 – 100,000)/6 250,000

A/D, 2019 – 2020 900,000
A/D, 12/31/2021 1,150,000

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Problem No. 3

Golden Photos Company purchased a machinery for P250,000 on July 1, 2019. Freight and
installation costs incurred by Golden Photos amounted to P18,000. The asset is estimated to have a
useful life of 5 years and estimated salvage value of P20,000. It is the company’s policy to
depreciate this machinery to the nearest month using double declining balance method.

On January 1, 2021, the company spent P79,360 for the upgrade of this machinery that improved its
condition beyond its original assessed standard of performance that led to a significant improvement
in the quality of its output. At this time, the machinery’s estimated residual value has changed to
P40,000 and the company decides to change to straight-line method.

How much is the revised depreciation expense for this machinery for the year ended December 31,
2021?

Problem No. 3 Cont.

Depreciation – 2019 (268,000 x 40% x 6/12) 53,600

Depreciation – 2020 (268,000 x 80% x 40%) 85,760
Accumulated depreciation (2019 – 2020) 139,360

Cost, 07/01/2019 268,000

A/D,12/31/2020 139,360
CV, 12/31/2020 128,640

Depreciation – 2021 ((128,640 + 79,360) – (40,000))/3.5 48,000

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Problem No. 4

The December 31, 2021 and 2020 comparative financial statements of World Gallery Company
showed equipment with an original cost P379,000 and P344,000 with accumulated depreciation of
P153,000 and P128,000, respectively. During 2021, the company purchased equipment costing
P50,000, and sold equipment with a carrying value of P9,000.
What amount should the company report as depreciation expense for 2021?

Problem No. 4 Cont.

Cost of assets, beginning 344,000

Purchases 50,000
Disposal (15,000) squeezed
Cost of assets, end 379,000

A/D, beginning 128,000

Disposal (6,000)
Depreciation for the year 31,000 squeezed
A/D, end 153,000

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Problem No. 5

Problem No. 5 Cont.

Machine 2 depreciation (2017 – 2021) 300,000

Machine 4 depreciation for 2021 ((750K/10) x (6/12)) 37,500
A/D, 12/31/2021 337,500

Note that Machine 1 and 3 are no longer existing (disposed) as of

12/31/2021, therefore, the A/D of those machine were already written-off
and will not appear in the balance sheet.

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Problem No. 6

Problem No. 7

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Problem No. 8
On January 1, 2015, Forgiveness Company purchased equipment for P1,970,000 with estimated
useful life of 12 years and residual value of P90,000. The company is using the SYD method of
depreciation.

On January 1, 2021, the company assessed that the useful life of the equipment was revised to a
total life of 14 years and residual value was increased to P100,000. Accordingly, the depreciation
method was also changed to straight line.

How much is the carrying value of the asset as of December 31, 2021?

Problem No. 8 Cont.

Cost, 01/01/2015 1,970,000

A/D, 12/31/2020 (1,970,000-90,000) x 57/78 1,373,846
CV, 12/31,2020 596,154
Depreciation – 2021 (596,154 – 100,000) / 8 (62,019)
CV, 12/31,2021 534,135

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Problem No. 9
CPA Company has the following data of several item of equipment used in its operations:

Scrap Useful Life

Cost Value (in years)
Equipment 1 400,000 50,000 10
Equipment 2 500,000 100,000 8
Equipment 3 350,000 70,000 7
Equipment 4 250,000 25,000 5

For convenience of application, the entity uses the group depreciation method.

Compute the depreciation expense

Problem No. 9 Cont.

Depreciable Useful Life Annual
Cost Scrap Value
Cost (in years) Depreciation
Equipment 1 400,000 50,000 350,000 10 35,000
Equipment 2 500,000 100,000 400,000 8 50,000
Equipment 3 350,000 70,000 280,000 7 40,000
Equipment 4 250,000 25,000 225,000 5 45,000
Totals 1,500,000 245,000 1,255,000 170,000

Composite Life (1,255,000 / 170,000) 7.38

Composite Rate (170,000 / 1,500,000) 11.33%

Depreciation expense 169,950

Accumulated depreciation 169,950
(1.5M x 11.33%)

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Problem No. 10
At the beginning of 2022, the total cost of machineries of JPB Company was
P25,000,000 with a total residual value of P3,000,000 and accumulated
depreciation of P15,000,000. In January 5, 2022, the company purchased a
machine for P12,500,000 with no residual value. At the end of 2022, the
company sold a machinery for P1,800,000. It was acquired on January 2020 for
P5,000,000 and has a residual value of P1,000,000.

JPB Company used the composite method of depreciation based on a composite

rate of 20%.

1. How much is the depreciation expense in 2022?

2. What is the gain or loss on disposal on December 31, 2022?

Problem No. 10 Cont.

Cost - 01/01/2022 25,000,000
Acquisition - 01/05/2022 12,500,000
Disposal -5,000,000
Cost - 12/31/2022 32,500,000
Composaite rate of depreciation 20%
Depreciation Expense 6,500,000

Depreciation expense 6,500,000

Accumulated depreciation 6,500,000

To record the disposal

Cash 1,800,000
Accumulated depreciation 3,200,000

Machinery 5,000,000

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Problem No. 11

Problem No. 11 Cont.

Depreciation for the year ended December 31, 2022

Buildings
1.5/25 = 6%; (24,000,000 - 5,262,000) x 6% 1,124,280

Machinery
Depreciation of beginning balance (18M x 10%) 1,800,000
Depreciation of machine destroyed (460,000 x 10% x9/12) -34,500
New machine (6.2M x 10%) x 6/12 310,000
2,075,500
Automotive Equipment
Depreciation of beginning balance (see "d") 360,000
Depreciation of car traded (360,000 x 2/10) -72,000

New car (480,000 x 4/10) 192,000

480,000

Total 3,679,780

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Problem No. 11 Cont.

Gain or (Loss) from disposal

Car traded-in
FV of car traded-in (480,000 - 400,000) 80,000
BV of car traded 108,000
Gain or (Loss) from disposal -28,000

Machine destroyed by fire

Proceeds from
insurance 310,000
CV of machine (460,000 x 4/10) 184,000
Gain or (Loss) from disposal 126,000

Net Gain or (Loss) from disposal 98,000

End

THANK YOU!

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