PROPERTY, PLANT AND EQUIPMENT

QUESTION 1-1
Define property, plant and equipment
ANSWER 1-1
Property, plant and equipment are tangible assets which are held by an entity for use in production or supply of
goods and services, for rental to others, or for administrative purposes, and are expected to be used during more
than one period.

QUESTION 1-2
What are the major characteristics of property, plant and equipment?
ANSWER 1-2
a. The property, plant and equipment are tangible assets, meaning with physical substance.
b. The property, plant and equipment are used in business, meaning used in production or supply of goods
and services for rental purposes and for administrative purposes.
c. The property, plant and equipment are expected to be used over a period of more than one year.

QUESTION 1-3
What are the elements of cost of an item of property, plant and equipment?
ANSWER 1-3
The cost of an item of property, plant and equipment comprises.
a. Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade
discounts and rebates.
b. Cost 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. Initial estimate of the cost of dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs.

The present obligation must exist when the item is acquired.

QUESTION 1-4
Give examples of directly attributable costs.
ANSWER 1-4
Example of directly attributable costs include:
a. Cost of employee benefits arising directly from the acquisition of property, plant and equipment
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly coat
e. Professional fees
f. Cost of testing whether the asset is functioning properly

QUESTION 1-5
Give examples of costs that are expensed rather than recognized as element of cost of property, plant and
equipment.
ANSWER 1-5
Example of costs that are expensed rather than recognized as element of cost of property, plant and equipment.
a. Cost of opening a new faculty
b. Cost of introducing a new product or service, including cost of advertising and promotion
c. Cost of conducting business in a new location or with a new class of customer, including cost of staff
training
d. Administration and other general overhead cost
e. Cost incurred while an item capable of operating in the manner intended by management has yet to be
brought into use or is operated at less than full capacity
f. Initial operating loss
g. Cost of relocating or reorganizing part or all of an entity’s operations.

QUESTION 1-6
What is the cost of new asset acquired under a cash purchase?
ANSWER 1-6
The cost of property acquired by direct cash purchase includes the cash paid plus all directly attributable costs of
bringing the asset to the location and condition for the intended use, such as freight, installation and testing cost.
When various assets are acquired for a lump sum price, the total cost is allocated to the individual assets based
on their relative fair value

QUESTION 1-7
What is the cost of asset required on credit or on account?
ANSWER 1-7
The cost of property acquired on credit is equal to the invoice price minus the discount regardless whether the
discount is taken or not.
If the discount is not taken, it is charged to purchase discount lost which is shown as other expense.
Cash discounts and rebates are generally considered as reduction of cost and not as income.

QUESTION 1-8
What is the cost of asset acquired by installment?
ANSWER 1-8
The cost of property acquired by installment is equal to the cash price equivalent.
The excess of the installment price over the cash price is recognized as interest expense over the credit period.
When there is no established cash price, the cost of the asset is equal to the present value of all installment
payments using the market rate of interest.

QUESTION 1-9
What is the cost of asset acquired by issuing share capital?
ANSWER 1-9
When a property is acquired through the issuance of share capital the property shall be measured at an amount
equal to the following in the order of priority.
a. Fair value of the property received
b. Fair value of the share capital
c. Fair value of stated value of the share capital
QUESTION 1-10
What is the cost of asset acquired by issuing bonds payable?
ANSWER 1-10
An asset acquired by issuing bonds payable is measured in the following order:
a. Fair value of bonds payable
b. Fair value of assets received
c. Face amount of bonds payable

QUESTION 1-11
Explain the cost of asset acquired in an exchange.
ANSWER 1-11
If an asset is acquired in an exchange with commercial substance the cost of the asset is equal to the following:
a. Fair value of asset given plus cash payment – on the part of the payor.
b. Fair value of asset given minus the cash received – on the part of the recipient.
IF the exchange transaction lacks commercial substance, the cost of the acquired asset is measured at:
a. Carrying amount of asset given plus cash payment on the part of payor.
b. Carrying amount of asset given minus cash received on the part of the recipient
No gain or loss is recognized when the exchange lacks commercial substance.
Commercial substance is a new notion and is defined as the event or transaction causing the cash flows of the
entity to change significantly by reason of the exchange.
An exchange transaction has commercial substance when the cash flows of the asset received differ significantly
from the cash flows of the asset transferred.

QUESTION 1-12
Explain the accounting for acquisition of property, plant and equipment by donation.
ANSWER 1-12
At present, IFRS does not address donation or contribution. However, IFRS explicitly addresses government
grant.
Philippine GAAP provides that contributions received from shareholders shall be recorded at the fair value with
the credit going to donated capital.
Expenses incurred in connection with the donation, like payment of registration fee and legal fees shall be
charged in the donated capital account.
The reason is that such expenses do not increase or enhance the value of the asset.
However, directly attributable costs incurred necessary to bring the donated asset to the location and condition
for the intended use shall be capitalized.
Philippine GAAP further provides that donations of property, plant and equipment from nonshareholders are
generally considered subsidies and therefore recognized as income.

QUESTION 1-13
Explain the cost of self-constructed property, plant and equipment shall include direct labor and incremental
overhead specifically identifiable or traceable to the construction.
ANSWER 1-13
PAS 16, paragraph 22, provides that the cost of abnormal amount of wasted materials, labor or overhead
incurred in the production of self-constructed asset is not included in the cost of the asset.
Any internal profit or saving on construction is eliminated in arriving at the cost of self-constructed asset.