Reminders:

• Kindly set your name for the session, as follows:

Section_Student No._Last Name_First Name_MI
Ex: OL1234_UA456_DELA CRUZ_JUAN_E.

• Set microphones to mute when not speaking.

• Use the chat box or raise hand button to prompt the

moderator should you wish to say something.
Chapter 6 PPE

  Learning Objectives

• Identify the different modes of acquisition of

property, plant and equipment.
• State the elements of cost of property, plant
and equipment.
• State when the capitalization of costs of
property, plant and equipment ceases.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Characteristics of PPE

PAS 16 paragraph 6, defines property, plant and equipment

as tangible items that:
• are held for use in the 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.
Recognition

The cost of an item of property, plant and equipment is

recognized as an asset if, and only if:
• it is probable that future economic benefits associated
with the item will flow to the entity; and
• the cost of the item can be measured reliably.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Initial measurement
• An item of PPE is initially measured at its cost.

Elements of Cost
1. Purchase price, including non-refundable purchase taxes,
after deducting trade discounts and rebates.
2. Costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by the management.
3. Present value of decommissioning and restoration costs to
the extent that they are recognized as obligation
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Cost of Land (Property)
1. Purchase price including other necessary costs such as broker’s commissions.
2. Closing costs, such as titling costs, attorney’s fees, and recording fees.
3. Costs incurred in getting the land in the condition for its intended use, such as
surveying, grading, filling, draining, and clearing.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Assumption of any liens, mortgages, or encumbrances on the property
6. Special assessments for local government-maintained improvements, such as
pavements, street lights, sewers, and drainage systems.
7. Option paid to acquire the land.
8. Costs incurred to induce tenants to vacate premises and costs of relocating and
reconstructing property belonging to others.
9. Initial estimate of restoration costs for which the entity has a present obligation
10. Any additional land improvements that have indefinite useful life such as costs of
draining, clearing, grading, leveling and filling, surveying, subdividing, and other
permanent improvements. INTERMEDIATE ACCTG 1B (by:
MILLAN)
Land improvement

• Land improvements are enhancements to the land which have

definite useful life, such as private driveways, walks, fences,
parking lots, drainages and water systems, and cost of trees, shrubs,
plants and other landscaping.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Cost of purchased Building (Plant)
1. Purchase price including other necessary costs such as broker’s
commissions and legal fees.
2. Assumption of any liens, mortgages, or encumbrances on the
property
3. Option paid to acquire the building.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Costs incurred to induce tenants to vacate premises.
6. Costs of getting the building in the condition for its intended
use, such as remodeling, renovation, and other repairs prior to
occupancy.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Building improvement

• Building improvements refer to costs incurred subsequent to

occupancy of a purchased building or subsequent to completion of a
self-constructed building that either increase the useful life of the
building or improve its current state.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Cost of equipment

1. Purchase price including other necessary costs such as broker’s

commissions and non-refundable purchase taxes.
2. Freight, handling charges, and insurance on the equipment while
in transit
3. Cost of necessary special foundations or platform,
4. Assembling and installation costs
5. Costs of testing and conducting trial runs
6. The initial estimate of decommissioning and restoration costs for
which the entity has a present obligation

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Cost of equipment - continuation

• The following costs are not included in the cost of an 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.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Sample Problem

Kim Manufacturing Company purchased a machine on January 2, 20x2.

The invoice price of the machine was ₱40,000, and the vendor offered a 2
percent discount for payment within ten days. The following additional
costs were incurred in connection with the machine:
Transportation-in 1,200
Installation cost 700
Testing costs prior to regular operation 550

If the invoice is paid within the discount period, Kim should record the
acquisition cost of the machine at what amount?
 Sample Problem - continuation

Purchase cost of machine net of discount

(40K x 98%) 39,200
Transportation-in 1,200
Installation cost 700
Testing costs prior to regular operation 550

Total cost of machine 41,650

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Acquisition through issuance of own equity instrument or debt
instrument

The assets acquired is measured using the following order of priority:

1. Fair value of asset Received
2. Fair value of instrument Issued

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Acquisition through exchange

• If the exchange has commercial substance, the asset received from

the exchange is measured using the following order of priority:

a. Fair value of asset Given up Plus cash Paid/ minus cash received

b. Fair value of asset Received

c. Carrying amount of asset Given up Plus cash Paid/ minus cash received

• If the exchange lacks commercial substance, the asset received from

the exchange is measured at (c) above.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Lump-sum purchase

• The acquisition cost of a group of items of PPE acquired on a lump-

sum price (basket price) is allocated to the individual assets
based on their relative fair values at the date of purchase.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Sample Problem

The Oscar Corporation acquired land, buildings, and equipment from a

bankrupt company at a lump-sum price of ₱180,000. At the time of
acquisition, Oscar paid ₱12,000 to have the assets appraised. The
appraisal disclosed the following values:
Land 120,000
Buildings 80,000
Equipment 40,000

What cost should be assigned to the land, buildings, and equipment,

respectively?

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Sample Problem - continuation

Lump-sum purchase price 180,000

Appraisal fee 12,000
Total cost to be allocated 192,000

Fair values Allocation Costs

Land 120,000 (192K x 120/240) 96,000
Buildings 80,000 (192K x 80/240) 64,000
Equipment 40,000 (192K x 40/240) 32,000
240,000 192,000

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Demolition costs

•The accounting treatment for demolition costs depends on the reason for the
demolition.

Example:
Case: An old structure is demolished to make way for the construction of a new
building.

Accounting: The demolition costs are considered as costs of site preparation

under PAS 16.; and therefore, capitalized as cost of the new building.


Any proceeds from sale of salvaged materials from the demolition are
deducted from the demolition cost that is capitalized to the new building.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Acquisition by donation
Items of PPE received as donation are measured at fair value and
accounted for as:
a. Income – if the donor is an unrelated party.
b. Donated capital – if the donor is an owner (shareholder).
c. Government grant, in accordance with PAS 20 Accounting for
Government Grants and Disclosure of Government Assistance.
Accounting (see Chapter 17) – if the donor is the government.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Government Grants
• Government grants are assistance by government in the form
of transfers of resources to an entity in return for past or future
compliance with certain conditions relating to the operating
activities of the entity. They exclude those forms of government
assistance which cannot reasonably have a value placed upon
them and transactions with government which cannot be
distinguished from the normal trading transactions of the entity.

• Other terms for government grants include subsidies,

subventions, or premiums.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Accounting for Gov’t. Grants
• The main concept in accounting for gov’t. grants is the
MATCHING CONCEPT.
• This means that the gov’t. grant is recognized as income as the
entity recognizes as expense the related cost for which the grant is
intended to compensate.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Sample Problem
• On January 1, 20x1, Entity A received land with fair of ₱200,000 from
the government conditioned on the construction of a building on the
lot. Entity A started immediately the construction and it was completed
on December 31, 20x1 for a total cost of ₱1,000,000. The building has
an estimated useful life of 10 years and zero residual value.

• How much is the income from government grant in 20x1 and 20x2,
respectively?
20x1 20x2
0 20,000

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Presentation of Government grants related to assets

• Government grants related to assets are presented in the

statement of financial position either by:
a. Gross presentation –the grant is presented as deferred
income (liability); or
b. Net presentation – the grant is deducted when
computing for the carrying amount of the asset

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Sample Problem
• On January 1, 20x1, Entity A received land with fair of ₱200,000 from
the government conditioned on the construction of a building on the
lot. Entity A started immediately the construction and it was completed
on December 31, 20x1 for a total cost of ₱1,000,000. The building has
an estimated useful life of 10 years and zero residual value.

• How much is the carrying amount of the building on December 31,

20x2 under the following presentations?
Gross presentation: (1M x 9/10) = 900,000;
Net presentation: (1M – 200K) x 9/10 = 720,000

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Presentation of Government grants related to income

• Grants related to income are sometimes presented in the

income statement either by:
a. Gross presentation – the grant is presented separately
or under a general heading such as “Other income”, or
b. Net presentation – the grant is deducted in reporting
the related expense

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Sample Problem
• On January 1, 20x1, Entity A received land with fair of ₱200,000 from
the government conditioned on the construction of a building on the lot.
Entity A started immediately the construction and it was completed on
December 31, 20x1 for a total cost of ₱1,000,000. The building has an
estimated useful life of 10 years and zero residual value.

• How much is the depreciation expense recognized in 20x3 under the

following presentations?
Gross presentation: (1M ÷ 10) = 100,000;
Net presentation: (1M – 200K) ÷ 10 = 80,000

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Repayment of Gov’t. Grants

• A government grant that becomes repayable is accounted for

as a change in accounting estimate that is treated
prospectively under PAS 8.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Cost of self-constructed Building (Plant)
1. Materials, labor, and overhead costs incurred during construction.
2. Architectural costs, supervision costs, and costs of building permit
3. Excavation costs
4. Insurance costs and safety inspection fees
5. Costs of temporary structures built during construction
6. Interest on borrowings made to finance construction (Borrowing
costs are discussed in Chapter 18)

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Cost of self-constructed Building - continuation

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

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Determining borrowing costs eligible for capitalization

1. Qualifying assets financed through Specific

borrowing
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost eligible for capitalization ₱ xx

INTERMEDIATE ACCTG 1B (by:

MILLAN)
 Sample Problem
• On January 1, 2020, Canlas Company borrowed P6,000,000 at an annual interest
rate of 10% to finance specifically the cost of building an electricity generating
plant. Construction commenced on January 1, 2020, with a cost of P6,000,000. Not
all the cash borrowed was used immediately, so interest income of P80,000 was
generated by temporarily investing some of the borrowed funds prior to use. The
project was completed on November 30, 2020. What is the carrying amount of the
plant on November 30, 2020?

Construction cost 6,000,000

Interest (6,000,000 x 10% x 11/12) 550,000
Interest income (80,000)
Total cost of plant 6,470,000

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Determining borrowing costs eligible for capitalization

2. Qualifying assets financed through General borrowing

Total interest expense on general borrowings ₱ xx
Divide by: Total general borrowings xx
Capitalization rate %
 
Average expenditure on the asset ₱ xx
Multiply by: Capitalization rate %
Borrowing cost that may be eligible for capitalization ₱ xx

The amount computed in the formula above shall be compared with the actual
borrowing costs incurred during the period. The amount to be capitalized is the
lower amount. INTERMEDIATE ACCTG 1B (by:
MILLAN)
Sample Problem
On January 1, 20x1, Entity A had the following general borrowings. A part of the proceeds was used to
finance the construction of a qualifying asset:
Principal
12% bank loan (1.5 years) ₱ 1,000,000
10% bank loan (3-year) 8,000,000

Expenditures made on the qualifying asset were as follows:

Jan. 1 ₱ 5,000,000
March 1 4,000,000
August 31 3,000,000
December 1 2,000,000

Construction was completed on December 31, 20x1.

• Actual Interest
1M x 12% 120,000
8M x 10% 800,000
Total 920,000
Solution
3. Qualifying assets financed through both Specific & General borrowing

3.1 Average accumulated expenditure method (Traditional)

Specific Borrowing:
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost from specific borrowing xx

General Borrowing:
Average expenditures xx
Less: Specific borrowing xx
Expenditures financed by general borrowing xx
Multiply by: Capitalization rate %
Borrowing cost from general borrowing xx
 Total ₱ xx

Again, the amount computed in the formula is compared with the actual borrowing costs incurred during the period. The
borrowing cost to be capitalized is the lower amount.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
3. Qualifying assets financed through both Specific & General borrowing

3.2 Avoidable interest method (Contemporary)

Specific Borrowing:
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost from specific borrowing xx

General Borrowing:
Average expenditures xx
Multiply by: Capitalization rate %
Borrowing cost from general borrowing xx
 Total ₱ xx

Again, the amount computed in the formula is compared with the actual borrowing costs incurred during
the period. The borrowing cost to be capitalized is the lower amount.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Sample Problem

Acosta Company borrowed P4,000,000 on a 10% note payable to finance a new

warehouse which the entity is constructing for own use. The only other debt of the
entity is a P6,000,000, 12% mortgage payable on an office building. At the end of the
current year, average accumulated expenditures on the new warehouse totaled
P4,750,000. What amount should be capitalized as interest for the current year?

• Specific borrowing (4,000,000 x 10%) 400,000

• General borrowing (750,000 x 12%) 90,000
• Capitalizable interest 490,000

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Financial statement presentation

• Qualifying assets are not segregated from other assets in the

financial statements. They are presented as regular assets under
their normal classification as provided under other standards.

INTERMEDIATE ACCTG 1B (by:

MILLAN)