Review Lectures for the 2023 Qualifying Examination • Jeryco Q.

Briones, CPA
IA 1
PAS 16 PROPERTY, PLANT, AND EQUIPMENT
PART 1: Nature and Initial Measurement of PPE

NATURE AND DEFINITION

➢ According to IAS 16, PPE are tangible items that:

✓ Are held for use in the production or supply of goods or services, for rental to others, or
to administrative purposes; and
✓ Are expected to be used during more than one period.
➢ Common examples of PPE:
✓ Land used in business
✓ Land held for future plant site
✓ Building used in business
✓ Equipment used in production of goods
✓ Equipment held for rentals
✓ Machines
✓ MAJOR spare parts
✓ Fixtures and furniture
✓ Bearer plants
➢ Not examples of PPE:
• Land held for speculation
• Land held for an undetermined future use
• Land and/or building classified as investment property
• Property held for sale in the ordinary course of business
• Assets classified as held for sale
• Biological assets related to agricultural activity, other than bearer plant
• Intangible assets
• MINOR spare parts

Initial recognition

➢ The cost of an item of PPE shall be recognized as an asset if and, only if:
✓ It is probable that future economic benefits associated with the item will follow the entity;
and
✓ The cost of the item can be measured reliably.

Initial Measurement

➢ At COST
❖ The cost of an item of PPE includes the following:
✓ Its purchase price, including import duties, nonrefundable purchase taxes, after
deducting trade discounts and rebates.
✓ Any costs directly attributable (or related) to bringing the asset to the location
and condition necessary for it to operate in the manner intended by the
management.
✓ The initial estimate of costs of dismantling and removing the asset, as well as
restoring site where the asset is located, for which the entity incurs an obligation
by acquiring or using the asset other than to produce inventories.

Directly Attributable Cost (DACs)

✓ Cost of employee benefits arising DIRECTLY from the construction or acquisition of the item of
PPE;
✓ Cost of site preparation;
✓ Initial delivery and handling cost;
✓ Installation and assembly costs;
✓ Costs of testing whether the asset is functioning properly’ and
✓ Professional fees.

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 Review Lectures for the 2023 Qualifying Examination • Jeryco Q. Briones, CPA
IA 1
Costs not qualified for recognition

➢ Capitalization of costs ceases when the PPE is in the location and condition necessary for it to be
capable of operating in the manner intended by the management.

Modes of Acquisition of PPE

1. Cash basis
2. Deferred/Installment basis
3. On account with available cash discounts
4. Issuance of share capital
5. Issuance of bonds
6. Lump-sum purchase
7. Exchange
8. Trade-ins
9. Donation
10. Self-construction

Mode of acquisition Initial cost basis

Cash basis Cash price equivalent XX
Add: DACs* XX
Initial costs XX
*Such as freight and installation
JE:
Asset XX
Cash XX
Deferred/installment basis Cash price equivalent XX
Add: DACs XX
Initial costs XX

Note:
➢ In case the cash price equivalent is NOT available, compute for
the PRESENT value of future cash flows using an imputed
interest rate.
JE:
Asset (at cash price equivalent) XX
Discount on note payable XX
Note payable XX

On account with available Invoice price XX

cash discounts. Less Cash discount* XX
Initial Cost XX
*Whether taken or not
Issuance of share capital The property shall be measured in the order of priority:
1. Fair value of the property RECEIVED
2. Fair value of the shares ISSUED
3. Par (or stated) value of shares ISSUED

Lump sum purchase The lump sum (or basket) price shall be allocated to the individual assets
based on their relative fair (or market) values at date of purchase.
Exchange General rule: At fair value of the PROPERTY RECEIVED

With commercial substance

Fair value of the property GIVEN UP XX
Add: Amount of cash paid XX
Less: Amount of cash received (XX)
Initial cost* XX
*This is also equal to the fair value of property received.

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Review Lectures for the 2023 Qualifying Examination • Jeryco Q. Briones, CPA
IA 1
JE:
Asset (new) XX
Cash XX
Accumulated Depreciation XX
Loss on exchange XX
Asset (old) XX
Gain on exchange XX
Cash XX
Note:
➢ An exchange is considered to have commercial substance if the
future cash flows significantly change as a result of the
exchange transaction.
➢ Gain or loss on exchange is recognized if the exchange
transaction has commercial substance.
Fair value of property GIVEN UP XX
Less: Carrying value of property GIVEN UP XX
Gain(loss) on exchange XX(XX)
Without commercial substance
Carrying value of the property GIVEN UP XX
Add: Amount of cash paid XX
Less: Amount of cash received XX
Initial cost XX

JE:
Asset (new) XX
Cash XX
Accumulated Depreciation XX
Asset (old) XX
Cash XX
Note:
➢ An exchange does not have commercial substance if the future
cash flows does not significantly change as a result of the
exchange transaction.
➢ Gain or loss on exchange is not recognized if the exchange
transaction has no commercial substance.

Trade-Ins Fair value of the property GIVEN UP XX

Add: Amount of cash paid XX
Initial cost* XX

In case the fair value of property given up is not available, the initial cost of
the new asset will be computed as follows:
Trade-in value of the property GIVEN UP XX
Add: Amount of cash paid XX
Initial cost* XX
*Equivalent to the fair value of the new asset.

Note:
➢ Trade-in is a payment in a form of an old asset.
➢ Trade-in value refers to the allowance or maximum amount that
the dealer is willing to value the old equipment being exchanged
by the buyer plus additional cash to match the amount of the new
asset.
❖ This may also refer to the second-hand value of the asset.
❖ May be computed as”
Cash price without Trade-in XX
Less: Cash price with Trade-in XX
Trade-In Value XX
➢ Gain of loss on trade-in is recognized and computed as follows:
Trade-in value* XX
Less: Carrying value of property given up XX
Gain(loss) on trade-in XX(XX)
*Fair value of property given up can also be used, if available.

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 Review Lectures for the 2023 Qualifying Examination • Jeryco Q. Briones, CPA
IA 1
Capitalizable Costs on Specific Items of PPE

Land

✓ Purchase price
✓ Legal fees and other costs establishing clean title
✓ Broker or agent commission
✓ Escrow fees
✓ Fees for registration and transfer of title
✓ Costs associated with relocating or reconstructing property owned by others in order to
acquire possession
✓ Mortgages, encumbrances, and interest on such mortgages ASSUMED BY THE BUYER
✓ Unpaid taxes up to the date of acquisition ASSUMED BY THE BUYER
✓ Cost of land survey
✓ Payment to tenants to induce them to vacate the land in order to prepare the land for its
intended use but not make room for the construction of new building
✓ Cost of permanent improvements such as cost of clearing, cost of grading, levelling and landfill
✓ Cost of option to buy the acquired land
✓ Special assessments paid

Land improvements

➢ Land improvements that are not subject to depreciation are charged to the land account.
Examples:
✓ Costs of surveying, clearing, grading, leveling, and landfill
✓ Cost of subdividing, and other costs or permanent improvements.
➢ Land improvements that are subject to depreciation are charged to the land improvements
account.
Examples:
✓ Fences
✓ Water systems
✓ Drainage systems
✓ Sidewalks
✓ Pavements, and the cost of trees, shrubs, bushes, and other landscaping.

Building

➢ Two ways of acquiring a building:

1. By purchase
2. By self-construction
➢ Costs associated in purchasing a building:
✓ Purchase price
✓ Legal fees and other costs incurred in connection with the purchase
✓ Unpaid taxes up to the date of acquisition ASSUMED BY THE BUYER
✓ Mortgages, encumbrances, liens, and interest on such mortgages ASSUMED BY THE
BUYER
✓ Payment to tenants to induce them to vacate the building
✓ Any renovating or remodeling costs incurred to put the building purchased in a condition
suitable for its intended use, such as lighting installations, partitions, and repairs.
➢ Costs associated in constructing a building:
✓ Materials used, labor employed, and overhead incurred during the construction process
✓ Building permit or license
✓ Architect fee
✓ Superintendent fee
✓ Excavation cost
✓ Cost of temporary structures used as construction offices and tool or material storage
✓ Interest on construction loans and insurance premiums incurred during the construction
period
✓ Service equipment and fixtures that were made a permanent part of the structure
✓ Cost of TEMPORARY safety fence around construction site and cost of subsequent
removal thereof.

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 Review Lectures for the 2023 Qualifying Examination • Jeryco Q. Briones, CPA
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o However, the construction of a PERMANENT fence after the completion of the
building is recognized as land improvement.

Note:

➢ Treatment of expenditures for sidewalks, pavements, parking lots, and driveways

❖ Charged to the building account if they are part of the blueprint for the construction of
the new building.
❖ Charged to the land improvements account if they are not related to the the construction
of the new building.
➢ Cost of building fixtures (shelves, cabinet, and partitions)
❖ Charged to the building account if they are immovable in the sense that they are attached
to the building in such a way that their removal would destroy the building.
❖ Charged to the furniture and fixtures account if they are movable and depreciated over
their useful life.
➢ Cost of ventilating system, lighting system and elevator
❖ Charged to building account if they are installed during the construction.
❖ Charged to building improvement and depreciated over their useful life or remaining
useful life of the building, whichever is shorter.
➢ When the land and an old building are purchased at a SINGLE cost:
✓ If the old building is still usable, the single cost is split between land and building, based
on relative fair value.
✓ If the old building is no longer usable, the single cost is allocated solely to the land.
➢ When usable old building is demolished
❖ When the old building is demolished immediately to make way for the construction of a new
one
✓ The demolition cost is capitalized as the cost of the new building.
✓ If the old building is demolished to prepare the land for the intended use but not
make place for the construction pf a new building, the demolition cost is capitalized
as cost of land.

Subsequent expenditures on PPE

➢ Subsequent expenditures on PPE shall be capitalized as part of cost of the asset if there is probable
future economic benefits along with the cost that will flow to the entity and such subsequent cost
can be measured reliably.
➢ If subsequent expenditures do not increase the future service potential of an asset and merely
maintain the existing level of standard of performance, such cost shall be expensed outright.
➢ Common measurement of future economic benefits:
✓ Extension of life of an asset as a result of the expenditure.
✓ Upgrade in the capacity of the property to produce number of outputs more than its usual
after incurring an expenditure.
✓ Adoption of new manufacturing scheme with less cost which improves effectiveness,
efficiency and safety after incurring an expenditure.

Part 2: Depreciation

➢ Depreciation – is the systematic allocation of the depreciable amount of an asset over its useful
life.

Factors of Depreciation

➢ Useful life
✓ The amount of time the entity expects to use the asset.
➢ Residual value
✓ The amount expected to be recovered by an entity after the asset’s useful life.
➢ Depreciable amount
✓ Amount subject to depreciation
✓ Formula:
Acquisition cost XX
Less Residual value XX
Depreciable amount XX

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 Review Lectures for the 2023 Qualifying Examination • Jeryco Q. Briones, CPA
IA 1
Depreciation Methods

1. Straight-line method
2. Sums-of-the-years’ digits (SYD) method
3. Double-declining balance method
4. 150% declining balance method

Straight-line Method

Annual Depreciation = Cost – Residual Value

Estimated Useful life (in years)

Sums-of-the-years’ digits (SYD) method

Annual depreciation = Depreciable amount x Useful life as of beginning of the period

Sum of the years digits (SYD)

SYD = n(n+1)

Where: n is the useful life

Double-declining balance method

Annual depreciation = Carrying value, beg x 2

Where: n is the useful life

Note: Under this method, residual value is not considered when computing the depreciation expense per
year (except for the final year of the asset’s useful life).

150% Declining balance method

Annual depreciation = Carrying value, beg x 2

Note: Under this method, residual value is not considered when computing the depreciation expense per
year (except for the final year of the asset’s useful life).

Valuation at Reporting Date

➢ a choice of either the Cost Model or the Revaluation Model:

✓ Cost Model- the class of PPE shall be carried at cost less accumulated depreciation any
accumulated impairment loss
✓ Revaluation Model- the class of PPE shall be carried at revalued amount less any subsequent
accumulated depreciation and subsequent accumulated impairment losses Gain or Loss on
Derecognition This is the difference between the net disposal proceeds and the carrying amount
of the asset at date of disposal.

THEORIES

1. Which among the following is not to be classified as Property, plant and equipment?
a. Property not subject to depreciation or depletion, such as land used for plant site
b. Property subject to depreciation, such as building used for administrative purposes
c. Property subject to amortization, such as franchise acquired to obtain rights
d. Property subject to depletion, such as timber, oil and mining lands
2. Which is not chargeable to LAND?
a. Attorney’s fee and any other expenditure for establishing clean title
b. Broker’s commission and fees for the title transfer
c. Cost of survey by engineers
d. Expenditure for fence, water system, sidewalk and pavement

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 Review Lectures for the 2023 Qualifying Examination • Jeryco Q. Briones, CPA
IA 1
3. The following charges are capitalizable to land account, EXCEPT
a. Payments to tenants to induce them to vacate the premises to pave the way for the
construction of a new building
b. Buyer-assumed mortgages and encumbrances like property taxes
c. Special assessments for local improvement which benefit the property
d. Costs of clearing, grading and filling
4. Donation of property, plant and equipment made by a shareholder should be recorded at fair
value and a corresponding credit to
a. Income account taken to profit or loss
b. Unearned income from government grant
c. Donated capital taken to equity
d. Retained earnings unappropriated
5. For assets acquired on credit or by installment, the cost or fair value is equal to
a. Cash purchase price c. Installment price
b. Invoice price d. List price
6. If the non-monetary exchange transaction lacks commercial substance or the fair value of
neither the asset received nor the asset given up is not reliably measurable, its cost is measured
at
a. Net realizable value c. Fair value
b. Carrying amount of the asset given up d. Future value
7. The depreciation method used where the usage of the asset varies considerably from period to
period and the service life is more of a function of use than passage of time
a. Straight-line method c. Sum of years’ digits method
b. Units of production method d. Declining balance method
8. A depreciation method that provides higher depreciation expense during the early years of the
asset life
a. Sum of years’ digits method c. Service hours method
b. Straight-line method d. Units of production method

PROBLEMS

Problem 1: On January 1, 2022, Hydrogen Company purchased several machineries that will be used in
the production of goods at a purchase price of P1,000,000. Hydrogen Company paid import duties of
P10,000 and non-refundable purchase taxes of P5,000. Hydrogen Company also incurred a P30,000
installation and assembly cost. Hydrogen Company expects that it will incur dismantling cost amounting
to P132,275 at the end of its 5year useful life. The prevailing market interest rate during the transaction
date was 12%.

The present value factor of P1 at 12% for 5 periods is at 0.567

The present value factor of ordinary annuity at 12% for 5 periods is at 3.6048

How much should the Machineries be initially recognized?

a. 1,045,000 b. 1,177,275 c. 1,120,000 d. 1,521,825

Problem 2: On March 1, 2022, Helium Company purchased an equipment from a local dealer under the
terms of 3/15, n/30 for P3,000,000. Helium Company paid installation costs of P14,000. In addition,
Helium Company paid advertising and promotional expense amounting to P 20,000 and incurred initial
operating losses of P 12,000. Helium Company paid the account on March 16, 2022.

How much is the cost of Equipment to be recorded at the date of acquisition?

a. 2,924,000 b. 3,015,000 c. 2,925,000 d. 3,014,000

Problem 3: Lithium Corporation purchased a new Machine on November 1, 2022. A P2,000 down payment
was made and two annual installments of P4,000 each are to be made beginning November 1, 2023. The
machine has no cash price equivalent but the prevailing interest rate for this type of note is 10%. The
present value of P1 at 10% for 2 periods is 0.8264 while the present value of ordinary annuity at 10% for
2 periods is 1.7355.

The amount to be capitalized as cost of the Machine on November 1, 2022 would be

a. 10,000 b. 8,942 c. 6,942 d. 8,000

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 Review Lectures for the 2023 Qualifying Examination • Jeryco Q. Briones, CPA
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Problem 4: Bery Company acquired Land from Abe Company which will be used as a plant site in exchange
for 20,000 newly issued shares of Bery’s ordinary shares. At the date of acquisition, the Bery’s ordinary
shares had a par value of P20 per share and a fair value of P30 per share. The fair value of the Land was P
500,000 when Abe Company acquired this 2 years ago.

How much is the initial cost of the newly acquired Land?

a. 40,000 b. 500,000 c. 600,000 d. 200,000

Problem 5: Below are the data relative to Boron’s asset that was exchanged for a new asset:

Old Equipment

Book Value Fair Value Cash Paid

With Commercial Substance 75,000 85,000 15,000

Lacking Commercial Substance 50,000 75,000 7,000

1. In the transaction that has commercial substance, Boron will record

Equipment at: Gain or (loss) of:

a. 90,000 0

b. 100,000 10,000

c. 75,000 (5,000)

d. 90,000 10,000

2. In the transaction that lacks commercial substance, Boron will record

Equipment at: Gain or (loss) of:

a. 57,000 0

b. 75,000 25,000

c. 82,000 25,000

d. 50,000 0

Problem 6: On January 1, 2021, Phil Inc. purchased a unit of equipment for a total cost of P5,000,000. The
equipment is expected to have a 5-year useful life and a residual value of 10% of its original cost.

1. Using the straight-line method, how much is the carrying value of the equipment as of December
31, 2024?
a. 4,500,000 b. 500,000 c. 1,400,000 d. 900,000
2. Using the SYD, how much is the carrying value of the equipment as of December 31, 2023?
a. 1,400,000 b. 500,000 c. 900,000 d. 1,200,000
3. Using the double declining balance, how much is the depreciation expense as of December 31,
2023?
a. 1,300,000 b. 720,000 c. 1,152,000 d. 1,200,000

Problem 7: On April 1, 2021, Fluorine Company acquired an equipment worth P2,500,000 for its
operations. The equipment has an estimated useful life of 10 years with P300,000 residual value. It’s the
company’s policy to depreciate all equipment using the SYD method.

1. How much is the depreciation expense for the year 2022?

a. 300,000 b. 370,000 c. 360,000 d. 420,455

2. How much is the accumulated depreciation on December 31, 2022 assuming the method is double
declining balance method?

a. 875,000 b. 800,000 c . 770,000 d. 704,000

END

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