Pamantasan ng Lungsod ng Valenzuela

College of Accountancy and Business Administration

Department of Accountancy

Conceptual Framework and Accounting Standards [FAR 2]

Academic Year 2022 – 2023, 1st Semester
COURSE FILE 07 [CF07]
Property, Plant and Equipment Acquisition, Classification and Depreciation

TOPIC LEARNING PLAN

Week Number and Hours
Essential Questions
Intended Learning
Outcome
Learning Delivery Modes
Assessment Tasks
Reference
15-17 (9 hours)
What are the standard-based principles governing the asset accounts under the
group property, plant and equipment and how do you identify an item as part of
this asset group?
How do you initially recognize and measure PPE items under various acquisition
scenarios?
How do you apply the principles of each depreciation method in allocating the cost
of PPE to specific periods?
• Classify various accounts to appropriate PPE accounts
• Indicate how accounts under the PPE asset group are measured and reported
• Compute for initial cost of PPE under various acquisition scenarios
• Prepare journal entries to recognize acquisition of PPE
• Compute for periodic depreciation using time-based depreciation methods and
activity-based depreciation methods
• Recognize circumstances under which special depreciation systems are used
and how to apply them
Interactive Discussion, Reporting, Situational Cases
Seatwork (Theory and/or Problem Solving), Appropriate Disclosure Preparation
Valix, C.T., Peralta, J.F. & Valix, C.A.M. (2021). Intermediate Accounting
(Volume 1). GIC Enterprises & Co., Inc.

BASIC CONCEPTS:

Property, Plant and Equipment (PPE) – These are tangible assets that are held for use in production or supply of
goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than
one period.

Characteristics of Property, Plant and Equipment:

1. Tangible Assets – These assets should be with physical substance.
2. Used in Normal Operations – These assets are used in production/ supply of goods or services, rental (except
land and building), and administrative purposes.
3. Long- Term in Nature – These assets are expected to be used for more than one year

Standard: PAS16 – Property, Plant and Equipment

Recognition Criteria:
1. Probability of Future Economic Benefits – PPE shall be recognized when it is probable that future economic
benefits that are associated with PPE will flow to the entity.
2. Measurement Reliability – Cost of PPE can be measured reliably.

MEASUREMENT:

Initial Measurement: PPE should be measured at cost, which is composed of the following:
1. Purchase price, including import duties and nonrefundable purchase taxes, net of trade discounts and rebates
2. Directly attributable costs (DAC)/ transaction costs (TC) - These are costs incurred in bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management.

Subsequent Measurement:
1. Cost model – PPEs are depreciated periodically and are carried in financial statements at carrying amount.
2. Revaluation model- PPEs are adjusted at fair value at time of revaluation; still subject to depreciation.
*Measurement should be applied to an entire class, not item per item basis.

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 FAR2 –Property, Plant and Equipment Acquisition, Classification and Depreciation

Directly Attributable Cost NOT Directly Attributable Cost; Immediate Expense

Site preparation cost
Cost of testing
Professional fees including broker, agent or real
estate commission and consultant, legal and escrow
Installation and assembly cost
Employee benefits related to construction/
acquisition of PPE
Initial delivery, handling and in-transit insurance cost
Future retirement costs (dismantling, site restoration
and decommissioning costs) the entity has present
obligation at time of recognition
Cost of opening a new facility
Cost of introducing new product/service; marketing costs
Cost of conducting business in a new location including
staff training
Administrative and other general overhead costs
Costs incurred because PPE isn’t used/ is not at full
capacity
Initial operating losses
Relocating or reorganizing costs

RULES ON INITIAL MEASUREMENT OF PPE UNDER VARIOUS ACQUISITION METHODS

1. Cash basis:
Purchase of 1 PPE: PPE is measured at amount of cash paid
Purchase of more than 1 PPE: The PPEs are measured as follows –
(a) At individual prices if available
(b) If purchased at a basket/ lumpsum price, allocate the paid price based on fair value

Illustration: On January 1, ABC Company purchased a vehicle paying a total of P 800,000: P 500,000 for the
purchase price, P 50,000 of nonrefundable tax, P 80,000 of site preparation cost and the remaining for reorganization
costs. Compute for initial measurement of the vehicle.

Illustration: ABC Company purchased a building, land and vehicle. A total of P 5,000,000 is paid for the transaction.
Individual prices are P 1,500,000, P 2,500,000 and P 1,000,000, respectively. ABC also incurred staff training cost
worth P 25,000 and P 15,000 miscellaneous expenditure due to operation of the property at less than full capacity.
Compute for initial measurement of the PPEs.

Illustration: On January 1, ABC Company purchased a building, land and vehicle. A total of P 5,000,000 is paid for
the transaction. Fair values are P 2,088,000, P 2,552,000 and P 1,160,000, respectively. ABC incurred P 20,000 in
testing the vehicle. Professional fees amounting to P 100,000 were also settled to brokers and real estate agents in
connection to the purchase of building and land. Marketing costs and costs of conducting new business in new
location totaled P 300,000. Compute for initial measurement of the PPEs.

2. On account subject to cash discount- PPE acquired on an on-account basis subject to cash discount should
be initially measured at invoice price minus the discount, whether the discount is availed/ taken or not.

Illustration: On January 1, ABC Company purchased on account a machine with a list price of P 2,200,000, subject
to trade discount of P 200,000. Discount terms of the transaction are 5/15, n/30. Installation cost amounted to P
50,000 while assembly cost amounted to P 10,000. Initial delivery, handling and in-transit insurance cost ABC
shouldered amounted to P 80,000. Rebates in connection to the purchase were P 15,000. Compute for initial
measurement of the machine.

3. Installment basis- PPE acquired on an installment basis should be valued based on this order of priority:
(a) Cash price equivalent at the dale of sale
(b) Present value of payments

Illustration: On January 1, 2022, ABC Company acquired a building. Terms of the payment include a P 1,000,000
down payment and P 4,000,000 to be paid in the future. Cost incurred in opening a new facility to the building
amounted to P 30,000. Upon purchase, ABC also became currently liable for future retirement costs which include
dismantling, site restoration and decommissioning costs amounting to P 40,000. Compute for initial measurement
assuming that:
(1) Cash price of the building on 01/01/2022 is P 4,100,000.
(2) P 4,000,000 is to be paid on December 31, 2025. PV of 1 at 10% for 4 periods is 0.68.
(3) P 4,000,000 is to be paid P 1,000,000 annually starting December 31, 2022. PV of ordinary annuity of 1 at 10%
for 4 periods is 3.17.

4. Issuance of share capital - PPE acquired by issuing share capital of the company is valued in the following
order:
(1) Fair value of property received
(2) Fair value of shares issued
(3) Par value/ stated value of shares issued

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 FAR2 –Property, Plant and Equipment Acquisition, Classification and Depreciation

Illustration: ABC company acquired a transportation equipment with a fair value of P 5,000,000 by issuing 100,000
P 45 par shares. These shares are quoted at P 52 / share. Legal fees incurred in connection to the purchase of the
PPE amounted to P 25,000. Initial operating loss in testing the equipment amounted to P 5,000. Compute for initial
measurement

5. Issuance of bonds payable- PPE acquired by issuing bonds payable is valued in the following order:
(1) Fair value of bonds payable issued
(2) Fair value of property received
(3) Face amount of bonds payable issued

Illustration: ABC company acquired a vehicle with a fair value of P 3,200,000 by issuing 3,000 P 1,000 bonds
payable. The bonds payable are quoted at 105. Import duties related to the purchase amounted to P 150,000.
Compute for initial measurement.

6. Exchange (non-dealer) - Acquiring PPE via exchange means ‘swapping’ company’s asset with another
company. This transaction can either be:
a. With Commercial Substance
- This means that in the exchange transaction, the cash flows of the asset received differ significantly from
the cash flows of the asset transferred.
- Gain or loss from exchange can be recognized computed as FV of asset given minus carrying amount of
asset given.
- Initial measurement is computed as:
On the POV of the payor On the POV of the cash recipient
FV of asset received = FV of asset given + Cash FV of asset received = FV of asset given – Cash
b. No commercial substance
- This means that in the exchange transaction, the cash flows of the asset received differ significantly from
the cash flows of the asset transferred.
- No gain or loss one exchange is recognized.
- Initial measurement is computed as:
On the POV of the payor On the POV of the cash recipient
CA of asset received = CA of asset given + Cash CA of asset received = CA of asset given - Cash

Illustration: Company A had a machine with a CA of P 450,000. Company B had a vehicle with a CA of P 300,000.
Companies A and B exchanged the machine and vehicle, and Company B paid an additional P 90,000 cash as part
of the exchange. Assume the fair value of the vehicle is P 420,000.
Provide the entries and compute for the following:
a. With commercial substance
1. Initial measurement of vehicle and machine
2. Gain or loss on exchange
b. Without commercial substance
1. Initial measurement of vehicle and machine

7. Trade - This transaction happens between a dealer and a non-dealer where the former accepts used PPE as
part of the payment of the new PPE the latter will receive. Remaining balance is paid by non-dealer in cash
or any other form of payment in accordance with the agreed term. Initial measurement of the new PPE is
in this order of priority:
(a) Fair value of asset given plus cash payment
(b) Trade-in value of asset given plus cash payment

Illustration: A used delivery truck was traded in for a new truck.

Information pertaining to used truck are as follows:
Cost- P 1,600,000
Accumulated Depreciation- P 1,200,000
Estimated Fair Value- P 320,000

Information about New Truck are as follows:

List price- P 2,000,000
Cash price: without trade in- P 1,900,000
Cash price with trade in- P 1,560,000
Required:
How much is the initial measurement of the new truck?
If FV of used truck is not available, how much is the initial measurement of the new truck?

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 FAR2 –Property, Plant and Equipment Acquisition, Classification and Depreciation

8. Donation – This is a transaction where an entity receives for free PPE from an unrelated party. Initial
measurement of the PPE is at fair value on the date of donation. This can either be:
a. Donation from shareholder - Upon receipt, account to be credited is donated capital (part of shareholders’
equity). For directly attributable costs, these are debited to:
(a) Donated capital, if the DAC are in connection with the donation
(b) PPE, in short capitalized, if the DAC are not connected with the donation.
b. Donation from non-shareholder - Upon receipt, account to be credited is income. For directly attributable
costs, these are capitalized, that is, capitalized to PPE.
Further discussion of this type of PPE acquisition is under government grant topic.

Illustration: ABC receives a land and building as a donation. The carrying amount of donation from donator’s book
is P 1,000,000 and P 500,000, respectively. Based on current assessed valuation, the donation is valued at P
1,200,000 and P 700,000, respectively. ABC paid P 100,000 for the title transfer. ABC also paid P 200,000 for
renovation of the building, including lighting installations, partitions, remodeling and repairs, and P 500,000 for
permanent improvements of land.
How much is the initial measurement of the donation if donation is from (a) a shareholder? (b) a non-shareholder?

9. Construction - The cost of self- constructed PPE shall include:

a. Direct Materials
b. Direct Labor
c. Factory Overhead (either directly identifiable with the construction or strategic allocation)
• If cost incurred is less than the cost if such as asset is purchased from others, difference is not income but
saving. Internal profit is eliminated in arriving at the cost of asset constructed.
• If cost incurred is greater than the cost if such as asset is purchased from others, difference is not loss. If
there are indications that cost incurred are materially excessive due to construction inefficiencies or failures,
excess of cost shall be treated as loss.
• Some activities occur while the asset is under construction (ex: rentals from vacant lot) that shall provide
revenue and expenses. Such shall not be capitalized. Instead, these should be immediately recognized as
income or expense.

Illustration: The ABC fabricated furniture and fixture for its office use in the company’s plant during 2015. The
following data about materials and direct labor were taken from the company’s records:
Finished Goods (FG) Furniture and Fixture
Materials 100,800 67,200
Direct Labor 151,200 50,500
Factory overhead amounted to P 134,000, P 18,000 of it is related to employee benefits related to construction of
both finished goods and furniture and fixture. Normal production of finished goods results to 420 units. Due to the
fabrication of office furniture and fixture, finished goods produced totaled 294 units only in 2015. Upon analysis,
it is identified that the furniture and fixture costs P 15,000 more than the price to be paid if this was purchased from
outside parties. P 10,000 of the P 15,000 is considered materially excessive. Also, ABC incurred administrative and
other general overhead costs worth P 61,000. What is the total cost of office furniture and fixture?

CAPITALIZABLE COSTS RELATED TO SPECIFIC PPE

Capitalizable Costs of Machine and/or Equipment (Aside from purchase price and DAC)
1. Cost of necessary base, special foundations, safety rails or platform
2. Costs of conducting trial runs
3. Cost of water device to keep machine cool
4. Fees paid to consultants for advice on acquisition of machine/equipment
5. Unloading charge
6. Cost of adjustment to machine/equipment for operational efficiency and to increase capacity
7. Escrow fees
8. Machine refurbishment cost

The following costs are not included in the cost of a machine/ equipment:
1. Cost of relocating the equipment after it has been put to the location and condition originally intended by
management
2. Cost of training personnel who will be responsible in operating the equipment
3. Cost of dismantling and removing an old equipment belonging to the entity prior to the installation of a new
equipment
4. Removal cost of old machine/equipment
5. Royalty payment on machine purchased
6. Starting January 1, 2022, net proceeds from selling any produce of the machine/equipment test runs are no
longer allowed to be deducted from cost of machine/equipment.

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 FAR2 –Property, Plant and Equipment Acquisition, Classification and Depreciation

Illustration: ABC acquired a new machine. Details of the acquisition are as follows:
Cash paid for machine including VAT of P 60,000 – P 560,000
Royalty payment based on units produced – 19,000
Cost of transporting the machine – 15,000
Cost of installation by expert fitter – 40,000
Labor of testing machine – 20,000
Materials used and damaged as a result of testing the machine – 10,000
Repair cost of new machine damaged in the process of installation – 12,000
Cost of training for personnel who will use the machine – 25,000
Cost of safety rails and platforms surrounding machine – 50,000
Cost of water device to keep machine cool – 70,000
Cost of adjustment to machine to make it operate more efficiently – 57,000
Estimated dismantling cost be incurred as required by contract – 65,000
Cost of removing old machine – 10,000
Loss on premature retirement- old machine – 120,000
Gratuity paid to operator of old machine, who was laid off – 20,000
Required: Compute the cost of the machine

Capitalizable Costs of Land (Aside from purchase price and DAC)

1. Closing costs, such as titling costs to transfer the property to name of the buyer and establish clean title,
attorney’s fees, and recording fees
2. Costs incurred in getting the land in the condition for its intended use, such as surveying, grading, filling,
draining, and clearing
3. Unpaid taxes prior to date of acquisition assumed by the buyer.
4. Assumption of any liens, liabilities, mortgages, or encumbrances on the property
5. Special assessments for local government-maintained improvements, such as pavements, streetlights,
sewers, and drainage systems
6. Option paid to acquire the land
7. Costs incurred to induce tenants to vacate premises and costs of relocating and reconstructing property
belonging to others
8. Any additional land improvements that have indefinite useful life such as costs of leveling, subdividing,
and other permanent improvements
9. Cost of clearing unwanted old structures, less proceeds from salvage

Capitalizable Costs of Purchased Building (Aside from purchase price and DAC)
1. Assumption of any liens, mortgages, or encumbrances on the property
2. Option paid to acquire the building
3. Unpaid taxes prior to date of acquisition assumed by the buyer
4. Costs incurred to induce tenants to vacate premises
5. Costs of getting the building in the condition for its intended use, such as remodeling, renovation, and other
repairs and refurbishment prior to occupancy
6. Immovable shelves, cabinets and partitions (These are recognized separately as building improvement if
movable.)

Capitalizable Costs of Self-Constructed Building (Aside from DAC)

1. Materials, labor, and overhead costs incurred during construction
2. Architectural costs, supervision and/or superintendent costs, and costs of building permit
3. Excavation costs
4. Insurance costs and safety inspection fees during construction period
5. Costs of temporary structures built during construction (sleeping quarters, safety fences, construction
offices, storage building for construction tools and materials)
6. Interest on borrowings made to finance construction (also known as capitalizable borrowing cost)
7. Service equipment and fixture which is a permanent part of the structure
8. Immovable shelves, cabinet and partition
9. Ventilating system, lighting system and elevator installed during construction
10. Cost of necessary construction changes

The following costs are not included in the cost of a self-constructed building:
1. Internal profits or savings on self-construction
2. Cost of abnormal amounts of wasted material, labor, or other resources due to inefficiencies
3. Costs of uninsured hazards or claims for uninsured accidents
4. Costs of private driveways, walks, permanent fences, parking lots, and drainages and water systems that
are not included in the building’s blueprint

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 FAR2 –Property, Plant and Equipment Acquisition, Classification and Depreciation

Land and old Building is usable- allocate cost based on relative FV

building are
purchased at a
single cost Building is not usable- all cost to land

CA of old bldg - LOSS, if new building is PPE/ Inv Prop

Old building
PIC is demolished CA of old bldg- CAPITALIZED, if new bldg is Invty
Interpretation immediately
on Land and for
Building construction demolition cost minus salvage value- capitalized to new bldg
of new
building net demolition cost- captalized to land if old bldg is demolished to
prepare land for intended use, not for new bldg
Bldg is acquired
in prior period
but demolished CA of old bldg- LOSS; net demolition cost- CAPITALIZED; IF old
currently for new bldg is subj to contract of lease, payment to tenants to vacate is
building CAPITALIZED to new bldg

If proceeds from scrap (arising from demolition) is retained by building contractor, such is not deducted to
demolition cost.

Illustration: On March 1, 2022, ABC acquired land and building by paying P 8,000,000 and assuming a mortgage
of P 1,000,000. The building will be used by ABC as its head office. Other costs incurred are as follows:
Draining cost and filling the land – 35,000
Cost of option of the acquired properties – 20,000
Escrow fees on properties acquired – 11,000
Broker’s fee on the properties acquired – 10,000
Cost of relocating and reconstructing the property belonging to others in order to acquire the property – 23,000
Registration fees and transfer of title – 13,000
Legal fees for contract to purchase land – 11,000
Cost of windows broken by vandals – 22,000
Cost of grading and leveling the land – 8,000
Title insurance – 15,000
New fence surrounding the property – 40,000
Required: Determine how to account the above costs assuming that:
Case 1 – On date of acquisition, land and building have fair values of P 9,000,000 and P 3,000,000 respectively.
Case 2 – On date of acquisition, the old building has a minimal fair value.

Illustration: On April 1, 2022, ABC acquired land and building by paying P 6,000,000 and assuming a mortgage of
P 1,000,000. The old building will be demolished immediately for the construction of a new building. Other costs
incurred are as follows:
Special assessments – 4,600
Cost of option of the land not acquired – 7,000
Cost of grading and leveling the land – 8,000
Cost of relocating and reconstructing the property belonging to others in order to acquire the properties – 23,000
Registration fees and transfer of title – 13,000
Title insurance – 15,000
Liability insurance taken during constructon – 12,000
Legal fee for title investigation – 25,000
Materials used in construction – 600,000
Labor paid for the construction – 300,000
Other overhead cost incurred as result of construction – 120,000
Excavation expense including 20,000 excavation equipment – 100,000
Safety fence around construction site – 35,000
Driveway, parking bya and safety lighting – 19,000
Saving on construction – 27,000
Cost of changes during construction to make new building more energy efficient – 50,000
Required: Determine how to account the above costs assuming that:
Case 1 – On date of acquisition, d land and building have fair values of P 3,500,000 and P 500,000 respectively.
Case 2 – On date of acquisition, the old building is unusable/dilapidated and has immaterial fair value.

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 FAR2 –Property, Plant and Equipment Acquisition, Classification and Depreciation

Illustration: ABC Corporation on January 1 of the current year purchased a parcel of land with an old building for
P 4,000,000. The appraised values of the land and building are P 3,000,000 and P 2,00,000, respectively. The
building is estimated to have remaining useful life of 5 years. On April 1 of the current year, the company began
demolishing the old building to make room for a new one. The construction ended December 31 of the current year.
The following additional costs are incurred:
Cost of survey – 40,000
Demolition cost / Cost of razing old structure – 100,000
Construction cost of new building – 2,000,000
Building permit fees – 120,000
Lighting system and elevator (3/4 is installed during construction – 200,000
Profit on construction, as the difference between the appraised value of the asset after construction and actual cost
incurred – 20,000
Payments made to construction workers injured during the construction not covered by insurance – 15,000
Modification of building ordered by building inspectors due to poor planning – 90,000
Property taxes on land covering 4 years including the current year – 120,000
Required: Determine the following:
1. Cost of land and old building at initial recognition
2. Loss on retirement of old building to be recorded in profit or loss
3. Cost of new building

OTHER PROPERTY, PLANT AND EQUIPMENT ITEMS

❖ Land improvements – These are enhancements to the land which are depreciable. These include fences,
water systems, drainage systems, driveways, parking lots, sidewalks and pavements, and cost of trees,
shrubs, plants and other landscaping. If these are part of the blueprint of the building, these should be
recognized as part of the building. Otherwise, these are recognized as land improvement and subject to
depreciation.
❖ Tools – these depreciable assets include:
o Machine tools- drills, punches etc.
o Hand tools- hammer, saw, etc.
❖ Pattern and dies- used in designing or forging out a particular product. These are generally reported as
separate PPE except if these are created for specially ordered (customized) product in which these are
reported as part of inventory and cost of goods sold later on.
❖ Delivery equipment- These include vehicles used in business operations. Motor vehicle registration fees
are expensed.
❖ Store and office equipment- These include computers, typewriters, adding machines, cash register and
calculator
❖ Furniture and fixtures- These showcases, counters, shelves, display fixtures, cabinets, partitions, safes,
desks, tables and chairs. Sometimes, these may also include store and office equipment.
❖ Returnable containers- These include bottles, boxes, tanks, drums and barrels which are reverted back to
the seller when the contents are consumed or used. Big units or of great bulk containers are classified as
PPE. Small containers are classified as other noncurrent assets. Nonreturnable containers are expensed.

Revenue Expenditure- expenditure that benefits only current period (expensed outright)
Capital Expenditure- expenditure that benefits current and future periods (capitalized)

For a Subsequent Cost to be Considered as Capital Expenditure, it Should be Any of the Following:
1. Extends life of property
2. Increases the capacity of property
3. Improves quality of output of property
4. Improves efficiency and safety of the property

Subsequent Costs:
1. Additions- capital expenditure which increases the physical size of asset. These can be:
a. An entirely new unit (depreciated over its useful life); or
b. An expansion or extension of old asset (depreciated over its useful life or remaining useful life of
asset of which it is part, whichever is shorter).
2. Improvements or betterments- capital expenditure which increases the service life or capacity of assets;
substitution of better or superior quality.
3. Replacements- substitution of equal or lesser quality. Replacement of old asset by a new one is capitalized.
4. Repairs- restores assets to good operating condition upon breakdown; restorative or curative
a. Extraordinary- material replacement of parts, involving large sums and extend useful life of the
asset; CAPITALIZED; also called as major repair
b. Ordinary- minor replacement; EXPENSED OUTRIGHT; ex: day-to-day servicing / minor repair

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 FAR2 –Property, Plant and Equipment Acquisition, Classification and Depreciation

5. Maintenance- keeps the asset in good condition (preventive); EXPENSED. Usually, repairs and
maintenance are combined.
6. Rearrangement cost- relocation or reinstallation of an asset; EXPENSED.

Spare Parts and Servicing Equipment (SPSE)

General Rule: SPSE is treated as inventory (under factory supplies) and expensed when incurred/ consumed.
Exception: If major SPSE is expected to be used for more than one period, this qualifies as part of related PPE.
If SPSE is considered PPE, it is depreciated over its useful life or useful life of related PPE, whichever is shorter.
Example: (1)-SPSE’s useful life- 5 years; related PPE’s useful life- 6 years -> such shall be depreciated over 5 years
(2)-SPSE’s useful life- 5 years; related PPE’s useful life- 4 years -> such shall be depreciated over 4 years

Illustration: ABC Company has the following information at the end of the year 2022:
Permanent fences – part of the blueprint of the building – 65,000
Extraordinary repair of system unit – 61,000
Desk and chairs – 72,000
Motor vehicle registration fees – 11,000
Water and drainage system, part of the blueprint of the building – 120,000
Delivery vehicle – 90,000
Small containers – 2,000
Patterns and dies – 16,000
Rearrangement costs – 19,000
Driveway and parking lot, part of expansion of the property – 230,000
Office computer, 3 pieces – 150,000
New engine of equipment that improves output quality – 16,000
Spare parts installed– 2,000
Pattern and die for a specific project – 8,000
Sidewalk and pavement, part of the blueprint of the building – 150,000
Immovable cabinets – 4,000
Servicing equipment to be used in the remaining life of the vehicle – 15,000
Drills, punches, saw, and hammer – 29,000
Large tanks and barrel, 1 dozen – 180,000
Temporary safety screws installed to machine – 1,000
Periodic repairs and maintenance – 9,000
Cost of trees, and other landscaping – 80,000
Newly acquired condominium unit – 1,500,000
Required: Compute for the following:
1. Other PPE
2. Capital Expenditure
3. Revenue Expenditure

DEPRECIATION

Depreciation – This is a systematic allocation of the depreciable amount of the asset over its useful life. This begins
when the depreciable asset is available for use not when it is first used. This can be:
1. Physical Depreciation - The depreciation is related to the physical wear and tear over a period of time. The
deterioration of the assets may be caused by:
a. Passage of time
b. Action of elements such as wind, rain, sunshine and dust
c. Wear and tear due to usage
d. Accidents such as fire, flood, and earthquakes
e. Diseases for animals and organic parts of PPE
2. Functional or economical depreciation – The depreciation arises from obsolescence or inadequacy of the
asset to perform efficiently.

Depreciation Methods:
1. Straight Line Method – uniform depreciation over its useful life
Annual Depreciation = (Depreciable Cost/ Useful Life) Depreciable Cost = Total cost – residual value*
*also called as salvage value

2. Working Hours Method – depreciation based on operating hours of the PPE

Depreciation per hour = (Depreciable Cost/ Total hours capacity of PPE)

3. Output Method – depreciation based on maximum expected output of PPE

Depreciation per output = (Depreciable Cost / Total maximum expected output of PPE)

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 FAR2 –Property, Plant and Equipment Acquisition, Classification and Depreciation

4. Sum-of-Years Digits’ (SYD) Method – depreciation based on concept that PPE is more efficient in earlier years;
decreasing amount.
SYD = [(Useful Life + 1)/2] X Useful Life
Annual Depreciation = Depreciable Cost X (n/SYD)
n in the above formula, on year 1, is the useful life. Then, on the following year, it is equal to useful life minus one.
Next year, another minus one is reflected until n would be equal to 1 which is the last annual depreciation to be
recognized.

5. Declining Balance Method* – fixed or uniform rate is multiplied by declining carrying amount of asset; disregards
residual value.
Depreciation rate = 1 - 𝑼𝑳√(𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑽𝒂𝒍𝒖𝒆/𝑪𝒐𝒔𝒕)
Annual Depreciation = Carrying Amount X Depreciation Rate

6. Double- Declining Balance Method – computed depreciation rate is multiplied by 2 in computing depreciation.
Depreciation rate = (1/Useful Life) X 2
Annual Depreciation = Carrying Amount X Depreciation Rate

7. 150% Declining Balance Method – computed depreciation rate is multiplied by 1.5 in computing depreciation.
Depreciation rate = (1/Useful Life) X 1.50
Annual Depreciation = Carrying Amount X Depreciation Rate

8. Composite method* 9. Group method*

10. Inventory or appraisal method* 11. Retirement method*
12. Replacement method* *No longer discussed

Illustration: ABC Company purchased machinery for P 1,140,000 on July 1, 2016. It is estimated that it will have
a useful life of 5 years, residual value of P 40,000, production capacity of 400,000 units and working hours of
25,000. The entity used the machinery for 3,000 hours in 2016 and 5,000 hours in 2017. The machinery produced
36,000 units in 2016 and 44,000 units in 2017.
Required: Compute for 2016 and 2017 depreciation expense and accumulated depreciation using:
(a) straight line method,
(b) working hours method and
(c) output method

Illustration: The equipment of ABC Company has the following data:

Cost P1,400,000
Salvage value 200,000
Useful life 3 years
Required: Compute for 2021 – 2023 depreciation expense and accumulated depreciation using SYD method
assuming that:
(a) the equipment is acquired on January 1, 2021
(b) the equipment is acquired on July 1, 2021

Illustration: An entity has a machinery worth P 233,750, SV of P 33,750 and EUL of 3.5 years.
Compute for annual depreciation using:
(a) Sum-of-Years’ Digits (SYD) method
(b) Double declining balance method
(c) 150% Declining balance method

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PLV - CABA - Department of Accountancy • Series of 2022 • Page 9 of 9