LAND, BULDING &

MACHINERY
 LAND
- classification of land in the statement of financial
position depends on the nature and purpose of the
land.
Land used as a plant site shall be treated as property,
plant and equipment.
Land held for a currently undetermined use is treated as
an investment property.
*if the land is held definitely as a future plant site, it is
classified as owner-occupied property and not an
investment property and therefore shall be included in
property, plant and equipment (PAS 40).
Land held for long-term capital appreciation is
treated as an investment property.

Land held for current sale by a real estate developer

as in the case of subdivided lots is treated as current
asset as part of inventory.
 Land
Broker
Purchase price commissions Escrow fees

Mortgages assumed
by buyer Legal fees for clean title

Survey cost Reg. & transfer of title

 COSTS CHARGEABLE TO LAND
a.Purchase price
b. Legal fees and other expenditures for establishing
clean title
c. Broker's commission

d. Escrow fees - Escrow fees are charges an escrow

business sets for its services. These
fees are typically charged to cover the
expenses the escrow company has
as part of running a business,
including overhead costs, and
providing escrow services.
An escrow service is a company that acts as a
middleman for transactions between two parties.
When an escrow service is used in a transaction, a buyer
doesn't give the money for the purchase of a product or
service directly to the seller. Instead, the buyer gives his
money to an escrow service to hold until the transaction
is completed successfully.

Essentially, this type of service is used as a safety

mechanism to ensure that a transaction goes
smoothly, the buyer gets the product or service he is
expecting, and the seller gets the right amount of
funds.
e. Fees for registration and transfer of title

f. Cost of relocation or reconstruction of property belonging to

others in order to acquire possession

g. Mortgages, encumbrances (legal technical terminology for

anything that affects or limits the title of a property, such as
mortgages, leases, easements, liens, or restrictions. Also,
those considered as potentially making the title defeasible are
also encumbrances. For example, charging orders, building
orders and structure alteration)and interest on such
mortgages assumed by buyer
h. Unpaid taxes up to date of acquisition assumed by buyer
i. Cost of survey
j. Cost of clearing and demolishing unwanted old
structures, less proceeds from salvage.

k. Payments to tenants to induce them to vacate the land in

order to prepare land for intended use but not to make
room for the construction of new building
I. Cost of permanent improvements such as cost of
grading, leveling and landfill
m. Cost of option to buy the acquired land. If the land is
not acquired, the cost of option is expensed outright.
LAND IMPROVEMENTS

The treatment of land improvements depends on

whether the improvements are subject to depreciation
or not.

If land improvements are additions to cost not subject

to depreciations they are charged to the LAND
account.

Examples: cost of surveying, cost of clearing, cost of

grading, leveling and landfill, cost of subdividing and
other cost of permanent improvement.
SPECIAL ASSESSMENTS
Special assessments are taxes paid by the landowner
as a contribution to the cost of public
improvements.

Special assessments are treated as part of the cost of

the LAND.

REAL PROPERTY TAXES

As a rule, real property taxes are treated as outright
expense.
However, if unpaid real property taxes are assumed
by the buyer in acquiring land; the taxes are
capitalized but only up to the date of acquisition.
Acquisition Cost - Buildings
Legal fees

Purchase price

Remodeling/renovation
costs
Unpaid taxes
assumed

Real estate
commissions
paid
Bu
ildi
ng
Co
st
Costs of building when PURCHASED
The following expenditures are normally charged to the
building account when building is acquired by purchase:
a. Purchase price
b. Legal fees and other expenses incurred in connection
with the purchase
c. Unpaid taxes up to date of acquisition
d. Interest, mortgage, liens and other encumbrances on
the building assumed by the buyer
e. Payments to tenants to induce them to vacate the
building
f. Any renovating or remodeling costs incurred to put a
building purchased in a condition
suitable for its intended use such as lighting
installations, partitions and repairs.
COSTS OF BUILDING WHEN CONSTRUCTED
-The following expenditures are normally charged to the
building when acquired by means of construction:

a. Materials used, labor employed and overhead

incurred during the construction
b. Building permit or license
c. Architect fee
d. Superintendent fee
e. Cost of excavation
f. Cost of temporary buildings used as construction
offices and tools or materials shed
g. Expenditures incurred during the construction
period such as interest on construction
loans and insurance.
h. Expenditures for service equipment and
fixtures made a permanent part of the
structure.
i. Cost of temporary safety fence around
construction site and cost of subsequent
removal thereof. However, the construction of
a permanent fence after the completion of the
building is recognized as land improvement.
j. Safety inspection fee
SIDEWALKS, PAVEMENTS, PARKING
LOT, DRIVEWAYS

a. If the said expenditures are part of the

BLUEPRINT for the construction of a new
building, they are charged to the building
account.
b. On the other hand, if the expenditures are
occasionally made or incurred not in
connection with the construction of a new
building, they are charged to LAND
IMPROVEMENTS.
CLAIMS FOR DAMAGES
Where insurance is taken during the construction of a building,
the cost of insurance is charged to the building because it is a
necessary and a reasonable cost of bringing the building into
existence.

However, where insurance is not taken, an accounting problem

arises when the entity is required to pay claims for damages for
injuries sustained during the construction hence, payment for
damages is EXPENSED OUTRIGHT .
BUILDING FIXTURES
Expenditures for shelves, cabinets and partitions may
be charged to the building or furniture and fixtures
depending upon the nature of the expenditures.

If such expenditures are immovable in the sense that

they are attached to the building in such a manner that
the removal thereof may destroy the building, they are
CHARGED TO THE BUILDING ACCOUNT.

On the other hand, if movable, they are charged to

FURNITURE AND FIXTURES and depreciated over
their useful life.
SPECIFIC PRINCIPLES ON LAND AND BUILDING
Land and old building acquired at a
SINGLE COST:
►a. If the old building is usable, the single
cost is allocated to land and building
based on relative fair value.
►b. If the old building is unusable, the
single cost is allocated to Land only.
SOME HIGHLIGHTS ON THE OLD & NEW
PRINCIPLES FOR LAND & BUILDING
OLD
Capitalize cost of demolishing
old bldg., less proceeds from
Salvage capitalize to LAND
NEW
-capitalize to LAND if done in
to prepare land for intended use
but not for construction of new
Building.
-when old bldg. is demolished to
make room for new building,
carrying amt of old building is
treated as LOSS whether it is
accounted as PPE, investment
prop. or inventory.
- net demolition cost is
capitalized as cost of new building
whether it is accounted as PPE,
investment prop. or inventory.
SOME HIGHLIGHTS ON THE OLD & NEW
PRINCIPLES FOR LAND & BUILDING
OLD
Payment to tenants to induce
them to vacate premises
capitalize to LAND.
NEW
-capitalize to LAND if done in
to prepare land for intended use
but not for construction of new
Building.
-if old bldg. is subject to contract
of Lease, payment to tenants to
vacate old bldg. is charged to
cost of NEW BUILDING.
Acquisition Cost -
Machinery
Testing
Transportation
costs
costs

Installation
costs
Net purchase
price

Insurance
while in
transit
MACHINERY
When machinery is purchased, the cost normally
includes the following:

a. Purchase price
b. Freight, handling, storage and other cost
related to the acquisition
c. Insurance while in transit
d. Installation cost, including site preparation
and assembling
e. Cost of testing and trial run, and other cost
necessary in preparing machinery for its intended
use
f. Initial estimate of cost of dismantling and
removing the machinery and restoring the site
on which it is located, and for which the entity has
a present obligation
g. Fee paid to consultants for advice on the
acquisition of the machinery.
h. Cost of safety rail and platform surrounding
machine
i. Cost of water device to keep machine cool

If a machinery is removed and retired to make

room for the installation of a new one, the
removal cost not previously recognized as a
provision is charged to expense.
The value added tax or VAT on the
purchase of machinery is not capitalizable
but charged to input tax to be offset against
output tax. However, any irrecoverable
purchase tax is CAPITALIZED AS COST
OF THE ASSET.
TOOLS
Tools are classified as machine tools and hand
tools. Machine tools are those used in connection
with the operation of the machine.
Examples: drills, and punches

Hand tools are those not used in operating the

machine.
Examples: hammer and saws.

Tools should be segregated from the

machinery account.
PATTERNS AND DIES
Patterns and dies are those used in designing
or forging out a particular product. If patterns
and dies are used for the regular products of the
company, they are recorded as assets and
depreciated over their useful life.

If the patterns and dies are used for specially

ordered products, they are EXPENSED
OUTRIGHT and form part of the cost of the
special product.
EQUIPMENT
The term, equipment includes delivery equipment,
store equipment, office equipment, furniture and
fixtures, and similar assets.
The cost of such assets includes the purchase price,
freight and other handling charges, insurance, while in
transit, installation costs and other costs necessary, in
preparing them for the intended use
Delivery equipment includes cars trucks and other
vehicles used in business operations. Motor vehicle
registration fees should be expensed and not be
included as part of the cost of the delivery equipment
Store and office equipment include
computers, typewriters, adding machines, cash
registers, calculators and similar assets If the
assets are identified with the selling
function, they are classified as store
equipment otherwise they are charged to
office equipment.

Furniture and fixtures include showcases,

counters, shelves, display fixtures, cabinets,,
partitions, safes, desks, tables and similar
items In a broad sense, furniture and fixtures
may include store and office equipment
RETURNABLE CONTAINERS
Returnable containers include bottles, boxes, tanks, drums,
barrels, and similar items which are returned to the seller by
the buyer when the contents are consumed or used
Returnable containers may be classified as property, plant
and equipment or other noncurrent asset. If the containers
are in big units or of great bulk as in the case of tanks,
drums and barrels, they are classified as property, plant
and equipment.

On the other hand, if the containers are small and

individually involve small amounts as in the case of
bottles and boxes, they are classified as other noncurrent
assets.
CAPITAL EXPENDITURE AND REVENUE
EXPENDITURE

An expenditure that benefits only the current

period is a revenue expenditure and
therefore reported as an expense. An
expenditure that benefits the current period
and future periods is a capital expenditure
and therefore reported as an asset.
An expenditure that benefits more than one
year is recognized as expense if the
amount is not material.
RECOGNITION OF SUBSEQUENT COST
The recognition of subsequent cost is subject to the
same recognition criteria for the initial cost of
property, plant and equipment.

Accordingly, the subsequent cost incurred for

property, plant and equipment shall be recognized
as an asset when:

a. It is probable that future economic benefits

associated with the subsequent cost will flow to the
entity.
b. The subsequent cost can be measured reliably.
Subsequent Expenditures
on Assets

Please note:
“Expenditure” = “Expense”
In general, a subsequent cost on an item of
property, plant and equipment will benefit future
periods when:

a. The expenditure extends the life of the

property.
b. The expenditure increases the capacity
of the property and quality of output.
c. The expenditure improves the efficiency
and safety of the property.
 Subsequent Expenditures
on Assets
Increases quality Extends services Does not extend the
of services of beyond original quality or
the asset. estimate. quantity of services.

Debit maintenance
Capital expenditure
expense
(allocate over life
of asset)

Revenue expenditure
(expensed in the
current period)
 Subsequent Expenditures
on Assets
Increases quality
of services of
the asset. Relates to betterments or
improvements.
(e.g., adding air conditioning
to a delivery vehicle.)
Debit asset account.
 SUBSEQUENT COST
Generally, the following expenditures are incurred
during ownership of existing property, plant and
equipment:
a.Additions
are modifications or alterations which
increase the physical size or capacity of
the asset. Such expenditures are of two
types, namely
a. An entirely new unit
b. An expansion, enlargement or extension
of the old asset
b. Improvements or betterments
are modifications or alternations which
increase the service life or the capacity of
the asset. They may represent replacement
of an asset or part thereof with one of a
better or superior quality. Such
expenditures are normally capitalized.
Examples of improvements are:
a. An old motor in a machine is replaced by a
new and powerful one
b. Replacement of wooden floor by concrete
flooring
c. Replacements
involve substitution but the new asset is not
better than the old asset when acquired.

Replacements may be classified into three:

a Replacement of the old asset by a new one.
This replacement is capitalizable as a new
asset.
b. Replacement of major parts. This refers to
extraordinary repairs.
c. Replacement of minor parts. This refers to
ordinary repairs.
d. Repairs
Repairs are those expenditures used to restore assets to
good operating condition upon their breakdown or
replacement of broken parts. Repairs may be classified as
extraordinary repairs and ordinary repairs.
REPAIR AND MAINTENANCE
Repair is different from maintenance in that repair restores
the asset in good operating condition while maintenance
keeps the asset in good condition.
Repair is restorative or curative while maintenance is
preventive.
The theoretical distinction is difficult to maintain in
practice thus both expense.
Subsequent Expenditures
on Assets
Extends services
Relates to beyond original
extraordinary estimate.
repairs.
(e.g., replacing the
engine in a delivery
Debit accumulated
vehicle.) depreciation.
Subsequent Expenditures
on Assets
Does not extend the
Relates to ordinary quality or
repairs and quantity of services.
maintenance.
(e.g., changing the
engine oil in a
Debit maintenance
delivery vehicle.) expense
 e. Rearrangement cost
-is the relocation or reinstallation of an
asset which proves to be less efficient in
its original location.

The rearrangement cost is capitalized

and amortized over the remaining life
of the asset to which it pertains.
 Accounting for Major Replacement
- An important consideration here is whether the original
part of an existing asset is separately identifiable.

-If separate identification is practicable, the major

replacements is debited to the asset account. The cost of
the part eliminated and the related accum. Depreciation is
closed/removed from the accounts and the remaining
carrying amt is treated as LOSS.

- If separate identification is NOT possible, it may use the

replacement cost as its “ likely original cost” of the
replaced part. However, the current replacement cost must
be DISCOUNTED.
 Separate Identification: PRACTICABLE
Proforma entries:
Eliminate orig. Cost
Loss on retirement of Asset xx
Accum. Depreciation xx
Asset xx
To record Replacement
Asset xx
Cash xx
Subsequent Annual Depreciation
Dep’n xx
Accum Depn xx
* New basis of Dep’n
To compute for the ANNUAL DEPRECIATION:
Asset = Asset cost-original cost of part removed
+ replacement cost XX
Accum. Depreciation = Total Accum. Depreciation
- accum. Depreciation (replaced part) XX
NEW CARRYING AMOUNT XX

ANNUAL DEPRECIATION = NEW carrying amount/remaining useful life

 Separate Identification: NOT PRACTICABLE
Same proforma entries as with the case of the part that can be
separately identified except that the replacement cost is the
same amount to be assumed as the historical amount, subject
to discounting:

HISTORICAL COST = DISCOUNTED AMOUNT

Ex. Replacement cost = 500,000
present value of 1 for 4 years(useful life) 0.683
500,000 x 0.683 = 341,500 --- ASSUMED
HISTORICAL COST
1. To eliminate the portion of the asset part replaced:
Loss on Retirement of the asset xx
Accum. Depreciation xx
Asset xx
*requires discounting of the replacement cost.
2. To record the replacement:
Asset xx
Cash xx

3. To record the subsequent annual depreciation

Depn xx
Accum. Depreciaiton xx