CA51016 | Intermediate Accounting 3 – January 24, 2023, F2F Discussion

SHORT RECAP OF CA51010:

 To complete the initial valuation of the PPE, it should comprise of at least three
(3) items:
1. There should be Purchase Price
2. You should add to the PP any Directly Attributable Cost in putting the
asset to the condition and location intended for it to be solved.
3. Should there be any future payments that you are going to make which is
brought for by this acquisition, that Future Payments must already
be credited to provision for this monthly cost, provision for commissioning
cost, and the debit is capitalized as part of the cost of PPE.

In summary,
Purchase Price + Directly Attributable Cost + Future Payments

 In some scenarios, interest expense can be capitalized as part of a cost of the

PPE if it meets the requirements of PAS 23.
 In CA51010, we were also taught how to depreciate depreciable PPE.
 Additionally, we were also taught of different depreciation methods.
o Most famous of them all and is used when the problem does not tell you
what depreciation method you should be using (if the problem is silent) –
Straight-line Method.
 Other methods are:
 Double-declining balance method, 150% declining balance
method, Sum of the years’ digits method (SYD), Unit-of-
output method.

Financial Statements
 More than 50% of the amounts in the FS are Products of Estimation.
 Only less than 50% are products of actual computation which are the following

Interest Expense – can be capitalized for PPE

Straight-line, DBB, SYD, 150% DB, Output Method

Product of Estimation
 80% of the items in FS are products of estimation, less than 50% is a product of
actual computation.
 Ano ang totoo sa FS na totoong totoo siya / computed through actual
computation?
o Cash
 Examples of Product of Estimaiton:
o Accounts Receivable – bago ilagay sa FS, kailangan may future
economic benefit; dapat ma-collect mo. Pero kung mayroon kang
 accounts receivable at ito ay “pinagdududahan” mo na hindi mo siya ma-
collect, nag-eestimate ka lang naman at hindi naman sigurado na hindi mo
na collect. Iba ang hindi mo na-collect at baka hindi ko na ito ma-collect –
kaya we use Allowance for Doubtful Accounts. So yung Net Realizable
Value sa receivables ay also an estimate. And allowance is the possibility
of may not be able to collect in the future. As we cannot see what will
happen in the future, the only choice we have is to estimate.
o Inventories – You value your inventories at the end of the year using Cost
and the cost depends upon the Cost Formula that you have chosen –
FIFO, Average, Moving Average, Simple Average, Specific Identification.
But even if you already valued it at Cost, the correct valuation of your
inventories is LOWER OF COST AND NET REALIZABLE VALUE. It
means that even if the inventory has an actual cost, I bought it at end and
how should I present the one that I bought at end in the FS? - it should be
at lower of cost and NRV. And how do you compute for NRV? In NRV,
that inventory with you at end, you estimate it at selling price (your
question is “when I am going to sell that, what is my estimated selling
price?”) and deduct your estimated selling price your estimated cost to sell
and estimated cost to complete. Thus, everything is estimate when
computing for your NRV. Kaya if the NRV is lower, you value your
inventories at NRV.
o Property, Plant, and Equipment – Both of the classes of your assets in
PPE (class – refers to Land, Building, Machinery and Equipment) are
being depreciated (Building and Machinery). Yung building na binili mo
dati, nagsusubtract ka ng ACCUMULATED DEPRECIATION. At kapag
nagsusubtract ka ng Acc. Dep., ni-estimate mo lang ang Depreciation. Ni-
add mo lang kaya nag-accumulate ang depreciation. At ano ang ni-
estimate mo? That your equipment na ito siguro 10 years ang life niya –
pero sino ba naman nakakapagsabi sayo na totoong 10 years nga yung
life niya? = It is just an estimation. Yung salvage value niya, it is a product
pa rin ng estimation. Why is a salvage value an estimate? If you have an
asset at the end of the year and the asset is still new, you talk to the asset
and ask, “Assuming asset that you are old and it is the end of your life,
even though I know that you are just 1 year old now and still have 4 more
years to go, but assuming now that you are 5 years old, and since you are
already old I am going to sell you. How much do you think I can sell you
assuming you are now at the end of your life?” And if the asset answered,
“Assuming I am old now, you can sell me for P5,000” ergo, that is the
salvage value of the equipment. Conclusion, the salvage value is the
estimated amount assuming the asset is old. Thus, gumamit ka na naman
ng estimation to find the value of the salvage value.
 Salvage Value – Estimate
 Life of an asset – Estimate
 Depreciation Method – Estimate
 Why is the depreciation method an estimate? It is an
estimate because it’s like this.
 o If I acquired a PPE and I know that this is going to last
for 4 years, so the future economic benefit of this
since I acquired this for P100,000 dapat ko siyang
ispread over the years na ikaw ay nagbebenefit sa
asset. Therefore, ikaw ay nag-aasume na naman. So
if 4 years na magsstay ang asset, siguro gagamitin
kita na pantay pantay. Kung paano kita gagamitin sa
1st year, ganun din kita gagamitin sa 2 nd year, and so
forth. Since, ineestimate mo kung paano mo kung
paano gagamitin ang economic benefit mo dito, dapat
lapatan ito ng depreciate method na nagsasabi na
pantay pantay din ang pag-allocate mo ng cost niya
over the periods na nagbebenefit ang period na yun
sa paggamit ng asset – therefore you will use the
straight-line method because you should know the
pattern of your consumption. So, if the pattern of your
consuming the asset is equal, you go for a straight-
line depreciation. But if you say na, “I guess I’m going
to use you more while you are young and while you
grow old, I’ll diminish my utilization sayo”, therefore
you can use any of the declining methods; Double-
declining Balance Method, 150% Declining Balance,
and Sum of the years digits. Pero kapag sinasabing
“ginagamit kita pero ako type nang type, hindi rin
naman pababa nang pababa, minsan mataas at
minsan mababa”, since erratic ang paggamit, ang
erratic computation of depreciation is based on
output; depende kung 100,000 units ang na-produce
mo ngayon, tapos the following year 98,000, tapos
next year naman you expect much sales. Kapag
erratic, the choice therefore should be Output Method.
o Conclusion, therefore hindi mo pinipili ang
depreciation method dahil gusto mo, mayroon logic sa
accounting. Minamatch mo at ineestimate ang
paggamit kaya lapatan mor in dapat ng tama.
 The product of estimation sa PPE:
1. Salvage Value
2. Total Life
3. Remaining Life (computed by: Total Life – Age of the Asset)
 Para lang sa tao, if God created you, and assuming God told
you that your total life is 100 years and you celebrated your
20th birthday now, so your total life is 100 but your age is 20,
your remaining life on Earth is only 80.
4. Depreciation Method (SL, SYD, DBBM, 150% DBM, and Output
Method.
What does change means?
 Kapag may change, there is old and there is new, and a reckoning point as to
point when the change is going to happen. Paano mo malalaman na may before
and after change – because mayroong date.

Example 1
January 1, 2023  Date of Change (Estimate)
Age of the Asset = 3 years

OLD DATA NEW DATA

Cost (01/01/20) P1,000,000 CA (01/01/23) P715,000
SV P50,000 SV P30,000
TUL 10 years RL 5 years
SL SL

Question: How much is your 2023 Depreciation Expense?

Why is Ma’am Ireneo asking about 2023 Depreciation Expense? Because
if you are changing at the beginning of 2023, have you not observed that
when you depreciate in 2023, you need the data beginning of 2023. You
don’t use the ending of 2023 because if you use it for depreciation, you
are 2024 and not 2023. That’s the reason why when you compute for the
depreciation of the first year of acquisition, isn’t it you make use of the
Acquisition Cost? And isn’t it acquisition cost is the value of the asset at
the beginning of the year? So the data that you are using for depreciating
is not ENDING but the BEGINNING. Since you are changing at the
beginning of 2023, if you use those figures you are depreciating for the
year 2023. So, if tinatanong how much is the depreciation in 2022, it
should be the balance PRIOR to 2023.

Listen/Read carefully, kapag mayroon kang date of change and you are
changing estimates, sabi ng standard – kung ano ang depreciation mo
nung nakaraan (if computed 1,000,000 – 50,000 / 10 years = 95,000 each
for 2020, 2021, 2022) ay hindi mali = walang mali sa prior computation.
Dahil sabi ng accounting standard, kaya tayo nagpalit ay dahil mayroon
kang panibagong information na available lang nung January 1, 2023
which prompted you to change your estimate. So, there is something that
triggers a change in estimate which is telling us we should be consistent.
Therefore, we could be consistent but it also allow us to change as long
as it is not just a whimsical desire to change but there is information – can
either be physical information (Ex. Nakita mo yung silya na dinedepreciate
mo nung Jan. 1 ay natumba ng Janitor habang naglilinis. So therefore,
nangyari lang ang pagtumba nung Jan. 1, 2023 at doon mo lang nakita na
medyo gumegewang gewang na ang paa nung silya. If hindi
gumegewang gewang, sana ang total life pa ng silya ay 7. Pero sa tingin
 mo kasi hindi na siya maglalast pa ng 7 years dahil gumegewang gewang
na yung apat na paa ng silya at kaunting upo lang ng ibang tao ay bibigay
na ito. Kaya pinalitan mo ng shorter life.) Kaya we can say na hindi mali
ang information mo kasi hindi pa naman gumegewang gewang nung
panahon na yun kasi yung information ng pagpapalit nakuha mo lang
lately – Jan. 1, 2023. Because you without you knowing that information
new during the date of change came to your attention without you
students knowing that prompts a change in estimate, you will never
appreciate the rule in accounting that we are not supposed to adjust the
depreciation in prior years kasi wala naman palang mali nung prior.

Students should know why, so that they should know how to

compute.

Ngayon, since walang mali sa prior computation natin kung ano na lang ang naiwan na
balanse ng ating depreciation, siya na lang ang gagamitin. Kaya we will use the
Carrying Amount at the date of change using old data. Ang naiwan ay Cost –
Accumulated Depreciation.

Cost – Accumulated Depreciation

1,000,000 – 285,000 = P715,000  our carrying amount for the new data

Treat the 715,000 like the cost of a new equipment. Kaya yung cost at remaining life
niya, ittreat mo rin siya na parang bago.

In all depreciation methods, except declining balance method, you should reduce the
cost or carrying amount by the salvage value. Ang salvage value ay palaging inaawas
(binabawas) sa lahat ng depreciation method maliban kung ikaw ay nasa double or
150% declining balance method.

Depreciation Expense = (Cost – Salvage Value) / EUL

Depreciation Expense = (P715,000 – P30,000) / 5 years
Depreciation Expense = 137,000 beginning 2023
It continues to be 137,000 until the end of its life unless again we
meet another change in estimate.

Example 2 – Depreciation Method is changed to SYD

OLD DATA NEW DATA

Cost (01/01/20) P1,000,000 CA (01/01/23) P715,000
SV P50,000 SV P30,000
TUL 10 years RL 6 years
SL SYD

 Depreciable Carrying Amount

 Depreciation Expense = (Carrying Amount – Salvage Value) x SYD
Remaining Life
SYD = ( Remaining Life ) ( Remaining Years+ 1∨the next number of RL)
2
6
Depreciation Expense = (715,000 – 30,000) x ( 6 ) (7)
2
6
Depreciation Expense = (715,000 – 30,000) x
21
6
Depreciation Expense = (685,000) x
21
Depreciation Expense = 195,714.28 or 195,714

Example 3 – Depreciation Method is changed to DDBM

OLD DATA NEW DATA

Cost (01/01/20) P1,000,000 CA (01/01/23) P715,000
SV P50,000 SV P20,000
TUL 10 years RL 4 years
SL DDBM

Depreciation Expense = Acquisition Cost Carrying Amount or the Cost –

Accumulated Depreciation x DDBM Fraction or 2 / Total Useful Life in Years
Depreciation Expense = 715,000 x 2 / 4 years
Depreciation Expense = 357,500 for 2023

If next year, when you have the beginning of 2023, you would deduct 2023
depreciation (not accumulated)
1/1/23 715,000
2023 Depreciation (357,500)
12/31/23 CA 357,500
x 2/4 (DDBM Fraction) 2/4
2024 Depreciation 178,750

The carrying amount of 2023 ending is the beginning of 2024, and if that is the
beginning, this is what you need to compute for the depreciation of 2024.

If it is at 150% DBM, just change the numerator of DDBM fraction to 1.5 instead
of 2.

Kung gagawa raw ng exam si Ma’am Ireneo, ito ang magiging itsura/format ng question
niya.
 Acq. Cost P800,000
SV 75,000
04/01/2020
TUL 5 years
SYD
SV 80,000
01/01/23 TUL 4 years
150% DBM

Question: 2023 Depreciation

SOLUTION:
5
First Fraction = First 12 months
15
4
= Next 12 months
15
3 2.25
x 75% = = 9 months
15 15

Date of Acq. 4/1/20

Date of  1/1/23
Age at  2 years and 9 months

Accumulated Depreciation as of 01/01/2023

11.25
= x (800,000−75,000)
15
11.25
= x 725,000
15
= 543,750

Another Version:
5/15 x 725,000 (Depreciation from April 1, 2020, to April 1, 2021)
4/15 x 725,000 (Depreciation from April 1, 2021, to April 1, 2022)
3/15 x 725,000 x 9/12 (Dep. from April 1, 2022, to Jan. 1, 2023)

COST 800,000
AD 543,750
CA 256,250

3 3.75
or = x (800,000−75,000)
15 15
2
= 181,250+75,00 0
15
1
= 256,250
15
Ano ang relationship ng carrying amount at depreciable carrying amount?
Mas maliit ang depreciable carrying amount at mas malaki ang carrying amount
and the difference is SALVAGE VALUE. So if you add the salvage value to the
depreciable carrying amount, you will get what you want: the carrying amount.