LECTURE NOTES ON PPE

(Acquisition, Recognition, Measurement, Derecognition)

Nature of Property, Plant and Equipment

Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period.

Recognition
Items of property, plant, and equipment should be recognized as assets when it is probable that:
• the future economic benefits associated with the asset will flow to the enterprise; and
• the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are
incurred. These costs include costs incurred initially to acquire or construct an item of property, plant
and equipment and costs incurred subsequently to add to, replace part of, or service it.

Initial Measurement
Property, plant, and equipment should be initially recorded at cost.

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to
acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed
to that asset when initially recognized in accordance with the specific requirements of other PFRSs, eg
PFRS 2 Share-based Payment.

The cost of an item of property, plant and equipment comprises:

(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates.
(b) any 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 management.
(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which
it is located, the obligation for which an entity incurs either when the item is acquired or as a
consequence of having used the item during a particular period for purposes other than to produce
inventories during that period.

PPE acquisitions - Determination of purchase price

Cash
Amount paid

On account subject to cash discount

Net of cash discounts whether taken or not

Installment/Deferred payment
Interest bearing:
Realistic/Market rate = Face value
Unrealistic/Below market rate:
1) Cash price
2) PV of payments
Non-Interest bearing:
1) Cash price
2) PV of payments

Issuance of own securities

Equity (e.g. Ordinary shares) – PFRS 2
1) FV of consideration received
2) FV of shares issued
3) Par value of shares issued

Debt (e.g. Bonds payable) – PAS 39

1) FV of bonds payable (FL)
2) FV of consideration received
3) Face value of bonds payable

Exchange – No Boot
With commercial substance
1) FV of asset given up (AGU)
2) FV of asset received
3) Carrying amount of asset given up
Gain (loss) = FV of asset given – CA of asset given
No commercial substance
Carrying amount of asset given up
No gain or loss

Exchange – With Boot

With commercial substance
Payor = FV of AGU + cash paid = FV of AR
Recipient = FV of AGU - cash received = FV of AR

No commercial substance
Payor = CA of AGU + cash paid
Recipient = CA of AGU – cash received

Trade-in
Same with exchange

Donation
Fair value of asset received

Government grant
Fair value of asset received

Self-construction
DM + DL + Overhead
If appropriate, plus borrowing costs

Examples of directly attributable costs:

(a) costs of employee benefits (as defined in PAS 19 Employee Benefits) arising directly from the
construction or acquisition of the item of property, plant and equipment;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from
selling any items produced while bringing the asset to that location and condition (such as samples
produced when testing equipment); and
(f) professional fees.

Examples of costs that are not costs of an item of property, plant and equipment are:
(a) costs of opening a new facility;
(b) costs of introducing a new product or service (including costs of advertising and promotional
activities);
(c) costs of conducting business in a new location or with a new class of customer (including costs of
staff training); and
(d) administration and other general overhead costs.

Land Acquired with Building

Before PIC Q&A No. 2012-2

Old building demolished RIGHT AWAY:

• Total cost charged to Land including demolition costs

Old building USED INITIALLY before demolition:

• Total cost allocated to land and building pro rata based on fair values
• Demolition of old building accounted for as derecognition (ie the difference between the proceeds
and carrying amount recognized as gain or loss)
• Demolition costs are included in computing gain or loss on derecognition

In accordance with PIC Q&A No. 2012-2

• Total cost allocated to land and building pro rata based on fair values REGARDLESS of intention
• Allocated cost or CA of old building generally recognized in profit or loss as loss on derecognition
• Exception, old building demolished right away and the new building is inventory
Demolition costs are preferably included in the cost of the NEW building
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

The residual value of an asset is the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the
age and in the condition expected at the end of its useful life.

Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an entity.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the
total cost of the item shall be depreciated separately.

The depreciable amount should be allocated on a systematic basis over the asset's useful life.

The residual value and the useful life of an asset should be reviewed at least at each financial year-end
and, if expectations differ from previous estimates, any change is accounted for prospectively as a
change in estimate under PAS 8.
The depreciation method used should reflect the pattern in which the asset's economic benefits are
consumed by the enterprise.

The depreciation method should be reviewed at least annually and, if the pattern of consumption of
benefits has changed, the depreciation method should be changed prospectively as a change in estimate
under PAS 8.

Depreciation should be charged to the income statement, unless it is included in the carrying amount of
another asset.

Depreciation begins when the asset is available for use and continues until the asset is derecognized,
even if it is idle.

SUMMARY OF DEPRECIATION METHODS

Uniform/Equal

Straight line
Depreciable Amount (DA)/useful life
Or DA x Depreciation rate (DR)
DR = 1/useful life

Group/Composite
Cost or balance x DR
DR = annual dep/total cost

Activity

Output/Production
Output x Depreciation rate
DR = DA/total est. output

Working hours
Hours used x Depreciation rate
DR = DA/total est. hours

Accelerated/Diminishing

Sum of the years digits (SYD)

DA x Fraction
SYD = [(life+1)/2] x life

Declining
Previous CA x Depreciation rate

Regular = 1 – [nth root of (RV/Cost)]

150% = (1/UL) x 1.5
200% = (1/UL) x 2

Other Methods

Retirement
Cost of assets retired – Proceeds from retirement

Replacement
Replacement cost of assets retired – Proceeds from retirement

Inventory
Recorded balance of assets – Value at period end

Derecognition (Retirements and Disposals)

An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and
no future economic benefits are expected from its disposal. The gain or loss on disposal is the
difference between the proceeds and the carrying amount and should be recognized in the income
statement

PROBLEMS

1. Extra Corporation is installing a new plant at its production facility. It has incurred these costs:
Purchase price of plant P2,500,000
Initial delivery and handling costs 200,000
Cost of site preparation 600,000
Consultants used for advice on the
acquisition of the plant 700,000
Estimated dismantling costs to be incurred
after 7 years 300,000
Operating losses before commercial
production 400,000
The total costs that can be capitalized in accordance with PAS 16 is

2. Cabiao Company purchased a machine on December 2, 2015 at an invoice price of P4,500,000 with terms 2/10,
n/30. On December 10, 2015, Cabiao paid the required amount for the machine. On December 2, 2015, Cabiao
paid P80,000 for delivery of the machine and on December 31, 2015, it paid P310,000 for installation and testing
of the machine. It was estimated that the machine would have a useful life of 5 years, and a residual value of
P800,000. What amount should be capitalized as cost of the machine?

3. Seller Co. sold a used an asset to Buyer Co. for P800,000, accepting a five-year 6% note for the entire amount.
Buyer's incremental borrowing rate was 14%. The annual payment of principal and interest on the note was to
be P189,930. The asset could have been sold at an established cash price of P651,460. The present value of
an ordinary annuity of P1 at 8% for five periods is 3.99. The asset should be capitalized on buyer's books at

4. Imus Company acquired two items of machinery as follows:

• On January 1, 2015, Imus Company acquired used machinery by issuing to the seller a three-year, 12%
interest note for P3,000,000.
• On December 30, 2015, Imus Company purchased a machine in exchange for a noninterest bearing note
requiring three payments of P1,000,000. The first payment was made on December 30, 2015, and the
others are due annually on December 30. The prevailing rate of interest for this type of note at date of
issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 1.69 for two periods and 2.40
for three periods.
What is the total cost of the machinery?

5. Cavite Company acquired land and building by issuing 60,000, P100 par value, ordinary shares. On the date of
acquisition, the shares had a fair value of P150 per share and the land and building had fair value of P2,000,000
and P6,000,000 respectively.
During the year, Cavite also received land from a shareholder to facilitate the construction of a plant in the city.
Cavite paid P100,000 for the land transfer. The land is fairly valued at P1,500,000.
As a result of these acquisitions, Cavite Company’s equity had a net increase of

6. Company A had a machine with a carrying amount of P450,000. Company B had a delivery vehicle with a
carrying amount of P300,000. Companies A and B exchanged the machine and vehicle, and Company B paid an
additional P90,000 cash as part of the exchange. Assume that the fair value of the delivery vehicle is P420,000.
If the exchange has commercial substance, how much gain or loss should be recorded by Company A?

Use the following information for the next two questions.

Payor Inc. and Recipient Co. have an exchange with no commercial substance. The asset given up by Payor Inc. has
a book value of P12,000 and a fair value of P15,000. The asset given up by Recipient Co. has a book value of
P20,000 and a fair value of P19,000. Boot of P4,000 is received by Recipient Co.
7. Payor Inc. should record the asset received at
8. Recipient Co. should record the asset received at

9. A used delivery truck was traded in for a new truck. Information relating to the trucks follows:
Used truck:
Cost P1,600,000
Accumulated depreciation 1,200,000
Estimated current fair value 320,000
New truck:
List price 2,000,000
Cash price without trade-in 1,900,000
Cash price with trade-in 1,560,000
The amount that should be capitalized as the cost of the new truck is
10. The Royal Furniture Mfg. Co. fabricated furniture and fixtures for its office use in the company’s plant during
2015. The following data were taken from the company’s records:
Materials Direct Labor
Finished goods P100,800 P151,200
Office furniture & fixtures 67,200 50,500
Factory overhead amounted to P134,000. Normal production of finished goods results to 420 units. Due to the
fabrication of office furniture and fixtures, finished goods produced totaled 294 units only in 2015. The assets
are to be charged with the overhead which would have been apportioned to the 126 units which were not
produced.
What is the total cost of office furniture and fixtures?

11. On May 1, 2015, Lenny Corporation purchased for P690,000 a tract of land on which a warehouse and office
building were located. The following data were collected concerning the property:
Current Assessed Vendor's
Valuation Original Cost
Land P280,000 P180,000
Warehouse 320,000 315,000
Office Building 200,000 129,000
P800,000 P624,000
Determine the appropriate amount that Lenny should charge to land.

12. Reiley Co. purchased land as a factory site for P1,000,000. Reiley paid P40,000 to tear down two buildings on
the land. Salvage was sold for P5,400. Legal fees of P3,480 were paid for title investigation and making the
purchase. Income of P8,000 was earned through using the land as a car park before construction started.
Architect's fees were P41,200. Title insurance cost P2,400, and liability insurance during construction cost
P2,600. Excavation cost P10,440. The contractor was paid P2,400,000. An assessment made by the city for
pavement was P6,400. Interest costs during construction were P170,000.
The cost of the land that should be recorded by Reiley Co. is

13. The following expenditures were incurred by Lyon Enterprises Co. in 2015:
Purchase of land P3,900,000
Land survey 52,000
Fees for search of title for land 6,000
Building permit 35,000
Temporary quarters for construction crews 107,500
Payment to tenants of old building for vacating
premises 46,000
Razing old building 470,000
Excavating basement 100,000
Special assessment tax for street project 20,000
Dividends 50,000
Damaged awarded for injuries sustained in
construction (no insurance was carried) 84,000
Costs of construction 29,000,000

Cost of paving parking lot adjoining building 400,000

Cost of shrubs, trees, and other landscaping 330,000
Determine the cost of the new building in accordance with PIC Q&A 2012-2

14. Dasmariñas Company has a production assembly line to manufacture furniture. In 2015 Dasmariñas purchased
a new machine and rearranged the assembly line to install this machine. The rearrangement did not increase
the estimated useful life of the assembly line but it did result in significantly more efficient production. The
following expenditures were incurred in connection with this project:
Machine P5,000,000
Labor to install new machine 400,000
Parts added in rearranging the assembly
line to provide future benefits
2,000,000
Labor and overhead to rearrange the
assembly line 600,000
What amount of the above expenditures should be capitalized in 2015?

15. On April 1, 2015, the new machinery was ordered at a quoted price of P56,000. On July 1, 2015, it arrived at
Dodik Corp.’s plant with an actual invoice price of P58,000, which it paid immediately. During July 2015, a new
concrete platform was constructed at a cost of P4,000 to properly install the machine. In August 2015, testing
was performed at a cost of P7,000 to ensure the machine was operating properly. On August 31, 2015, the
machine was entered into service. Minor repairs and maintenance costs on the new machine amounted to
P3,000 in September 2015. No other costs were incurred prior to December 31, 2015. Similar machinery is
depreciated on a straight-line basis over 10 years and typically has no residual value. What should be the
depreciation expense for the year ended 31 December 2015?

16. The Seoul Company purchased an office equipment with a useful life of 10 years on 1 January 2015 for P6,500,000.
At its year end of 31 December 2015, the amount the company would receive from the disposal of the asset if it
was already of the age and in the condition expected at the end of its useful life was estimated at P700,000.
Inclusive of inflation the actual amount expected to be received on disposal was estimated at P900,000.
What should be the depreciation charge for the year ended 31 December 2015?
17. On January 1, 2013, Paete Company signed a 12-year lease for a building. Paete has an option to renew the
lease for an additional 8-year period on or before January 1, 2017. During January 2015, Paete made substantial
improvements to the building. The cost of the improvements was P3,600,000, with an estimated useful life of
15 years. At December 31, 2015, Paete intended to exercise the renewal option. Paete has taken a full year’s
amortization on this improvement. What should be the depreciation charge for the year ended 31 December 2015?

18. Holdaway, Inc., a small furniture manufacturer, purchased the following assets at the end of 2015.
Asset # Cost R,V. D.A. Life
1 P24,000 P5,000 P19,000 5 years
2 900 130 770 7 years
3 320 - 320 8 years
4 9,000 500 8,500 5 years
P34,220 P5,630 P28,590

The group depreciation rate is

19. Takatak, Inc., uses the group depreciation method for its furniture account. The depreciation rate used for
furniture is 21%. The balance in the furniture account on December 31, 2014, was P125,000, and the balance
in Accumulated Depreciation - Furniture was P61,000. The following purchases and dispositions of furniture
occurred in 2015 (assume that all purchases and disposals occurred at the beginning of each year).
Assets Sold
Assets Purchased Cost Selling Price
P35,000 P27,000 P8,000
The carrying amount of furniture at December 31, 2015 is

20. Bongabon Corporation acquired a machine at a total cost of P5,200,000. The estimated life of the machine is 8
years or a total of 100,000 working hours with no salvage value. The operating hours of the machine totaled:
2014, 5,000 hours; 2015, 12,000 hours. The company follows the working hours method of depreciation. On
December 31, 2015, the carrying amount of the machine is

21. The Vientiane Company purchased a machine on 1 January 2014 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:
2014 12,000 units
2015 7,000 units
2016 5,000 units
What should be the depreciation expense for the year ended 31 December 2015, using the most appropriate
depreciation method permitted by PAS16 Property, plant and equipment?

22. Blessing Corp. uses the sum-of-the-years’ digits method to depreciate equipment purchased in January 2013 for
P20,000. The estimated residual value of the equipment is P2,000 and the estimated useful is four years. What
should be the depreciation charge for the year ended 31 December 2015?

23. Cuyapo Company purchased a machine on January 2, 2012, for P500,000. The machine has an estimated useful
life of eight years and a salvage value of P50,000. Depreciation was computed by the 200% declining-balance
method. What should be the depreciation charge for the year ended 31 December 2015?