ACA: 326 Updates on Financial Accounting Property, Plant and Equipment

Schedule: MW 1:30 – 3:00

PROPERTY, PLANT AND EQUIPMENT (Part 2)

DEPRECIATION
1. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
2. The depreciation charge for each period shall be recognized as expense unless it is included in the carrying
amount of another asset (e.g. depreciation of factory buildings, machineries used in production and other
overhead)
3. Depreciation begins when the asset is in the location and condition necessary for it to be capable of operating
in the manner intended by management or when the asset is available for use (not when actually in use)
4. Depreciation ceases when:
1. The asset is derecognized
2. The asset is classified as held for sale (under PFRS 5)
5. Depreciation does not cease when the asset becomes idle temporarily
FACTORS OF DEPRECIATION
1. Depreciable amount is the cost of the asset less its residual value
2. Residual value is the estimated amount that entity would currently obtain from the disposal of the asset
3. The residual value of an asset shall be reviewed at least at each financial year-end
4. Useful life is either:
1. The period over which an asset is expected to be available for use
2. The number of production or similar units expected to be obtained from the asset by the entity
METHODS OF DEPRECIATION
1. Straight Line Method
Annual depreciation = Depreciable amount / Useful life in years
2. Output or Production Method
Depreciation per unit = Depreciable amount / Useful life in units
3. Changes in depreciation method, residual value and estimated useful life is considered a change in accounting
estimate. Therefore, any changes shall be accounted for prospectively.
REVALUATION MODEL
1. Under the revaluation model, PPE whose fair value can be measured reliably can be carried at a revalued
amount.
2. When PPE are revalued, the entire class of PPE should be revalued.
3. In case of reversal of a revaluation increase, the decrease shall be charged directly against any revaluation
surplus and the balance (if any) to expense.
4. In case of a reversal of a revaluation decrease, the increase shall be recognized as income to the extent of the
impairment loss previously recognized expense and the balance (if any) to revaluation surplus.
ACA: 326 Updates on Financial Accounting Property, Plant and Equipment
Schedule: MW 1:30 – 3:00

Illustrations
1) Delta Company purchased machinery on January 2, 2023 for P1,100,000. The straight-line method is used and
useful life is estimated to be 10 years, with a P100,000 salvage value. How much is the depreciation expense for
2023?
Assuming at the beginning of 2025, Delta company spent P240,000 to overhaul the machinery. After the overhaul,
Delta estimated that the useful life would be extended 4 years and the new salvage value is P50,000. What is the
depreciation expense for 2025?

2) B Company purchased a boring machine on January 1, 2019 for P81,000. The useful life of the machine is
estimated at 3 years with a residual value at the end of this period of P6,000. During its useful life, the expected
units of production from the machine are: 2019 - 12,000 units, 2020 – 7,000 units, 2018 – 5,000 units.

3) On January 1, 2023, Cindy Co. leased land and building from a lessor for a 10-year term. In early January 2024,
Cindy completed the following improvements to the property:
Improvements Useful Life Costs
Parking Lot 5 years 1,350,000
Warehouse 15 years 2,430,000
Sales Office 10 years 540,000
Depreciation of leasehold improvements in 2018 should be?
Assuming the lease has a renewal option to extend the lease for an additional 5 years starting January 1, 2023,
and it is highly probable that Cindy would exercise the renewal option, how much should be the depreciation
expense for leasehold improvements in 2018?

4) Machinery with an original useful life of 10 years is revalued with a revised useful life of 12 years from the date
of acquisition. Details are as follows:
COST REPLACEMENT COST
Machinery 8,500,000 12,400,000
Residual Value 500,000 400,000
Accumulated Depreciation 3,200,000

5) The historical cost of the land is P5,000,000 and the land was revalued upward to P6,000,000 three years ago.
In the current year, the fair value of the land has fallen to P3,500,000.

6) Land with a cost of P5,000,000 was revalued downward to conform with the fair value of P4,000,000 by reason
of slump in land value. However, in the current year, there has been a surge in land prices and the land now has a
fair value of P5,500,000.