No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

PROPERTY, PLANT AND EQUIPMENT

I. Definitions
Cost 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
PFRS.

Entity-specific Present value of the cash flows an entity expects to arise from the continuing
value use of an asset and from its disposal at the end of its useful life or expects
to incur when settling a liability.

Property, plant are tangible items that:

and equipment (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.

II. Basic Recognition Principle

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.

Measurement at Recognition - An item of property, plant and equipment that qualifies for recognition,
as an asset shall be measured at its cost.

III. Cost Components

(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.

Examples of directly attributable costs are:

(a) Costs of 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)
(f) Professional fees

Examples of costs that are not costs of an item of property, plant and equipment and should be expensed:
(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)
(d) Administration and other general overhead costs.
1|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

IV. Limitation of Capitalization of Direct Cost

Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the
item is in the location and condition necessary for it to be capable of operating in the manner intended by
management. Therefore, costs incurred in using or redeploying an item are not included in the carrying
amount of that item.

For example, the following costs are not included in the carrying amount of an item of property, plant and
equipment:

(a) Costs 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
(b) Initial operating losses, such as those incurred while demand for the item’s output builds up
(c) Costs of relocating or reorganizing part or all of an entity’s operations.

Part 2: Method of Acquisition and Cost Basis or Measurement

A. Measurements with an order of priority to be followed:

Exchange Transaction* with

Issuance of Shares Issuance of Bonds
difference in Cash Flows
1st FV of Asset FV of Bonds FV of Asset Given
2nd FV of Shares FV of Asset FV of Asset Received
rd
3 Par value of Shares Face value of BP BV of Asset Given

*Assets acquired by an exchange transaction (3rd) shall be adjusted for the amount of cash paid or
received.

B. Measurements that use the cash price or its equivalent

Acquired through Cost should be net of the discount regardless whether taken or
Short-term credit not.

Acquired through The cash price shall be used but if it not available the present
Long-term financing value of the deferred payment or the installments shall be used.

C. Measurements at fair value of the asset received

Asset donated by a Recorded at the fair value of the asset. An equity account
shareholder “Donated Capital” shall be credited which is part of share
premium. However, cost incurred to transfer the title paid by the
recipient shall not be capitalized, instead debited from Donated
Capital.

Asset from a Also recorded at fair value. Income shall be credited if there are
government grant no conditions attached and cost incurred to transfer the title shall
be recognized as an expense.

D. Other measurement considerations

Self-Constructed asset Includes the cost of materials, direct labor and overhead
specifically attributable to the construction. Savings from the
construction, meaning lower total cost compared if the assets
was purchased are not included in the cost nor recognized as
income.

2|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Exchange transactions The term “lacking commercial substance” applies if both assets
lacking commercial from the exchange represents a configuration of cash flows
substance that does not differ from each other. Therefore, the transaction
shall be accounted for in a manner that might seem that no
exchange occurred.
Measured at book value of the asset given with NO “gain or
loss” to be recognized.

LAND AND BUILDING

I. The purchased price of land and an existing or old building based on the latest Philippine Interpretation
will be treated as follows:
• If the old building acquired is USABLE, the purchase price shall be allocated based on the relative
fair value of the land and old building. The actual intention with the old building is irrelevant.

• Example: Land and a usable old building is acquired for 5,000,000 only, and the FV of the land is
5,400,000 and the building is 600,000.

• 4,500,000 shall be capitalized as land (5.4M / 6M) and 500,000 (600K / 6M) shall be capitalized
as building regardless if there is an intention to use the old building or demolish it to construct a
new building as long as it is usable.

• If we can only determine the fair value of the building and not the land, 600,000 will be the cost of
the building and 4,400,000 (5,000,000 – 600,000) shall be the cost of the land.

• If the OLD BUILDING IS UNUSABLE, the entire purchase price shall be recorded as LAND ONLY.

II. Cost of the Old Building when Demolished

PPE & Investment

Classification of Land and Inventory
Property
Building

Allocated Cost of Old Bldg. LOSS/EXPENSE CAPITALIZED

CAPITALIZED AS CAPITALIZED AS
Cost Incurred for Demolition
BUILDING INVENTORY
Salvage Value from Scrap DEDUCTED DEDUCTED

III. Additional Cost for Land

a) Unpaid mortgages and taxes in arrears assumed by the buyer.

b) Special assessment or taxes levied on land for government improvements.
c) Cost to relocate present occupants from existing lease contracts and informal settlers unless the payment
is part of the demolition the old building in order to construct a new one. If so, it is treated similarly to
demolition cost which is cost of the new building.
d) Option money or the reservation fee for land that is ultimately acquired. This should not be confused with
earnest money or a down payment.
e) Cost of permanent improvements to the land that is determined to be nondrepreciable. This once again
should be clearly distinguished concrete and metal structures that are naturally temporary and subject to
wear and tear with the potential for replacement. Such items shall still be capitalized as “land
improvement” separately from the land.

3|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

PROBLEMS

1. The Dana Company acquired land, buildings, and equipment from a bankrupt company at a lump-sum price
of P18,000,000. At the time of acquisition, Oscar paid P1,200,000 to have the assets appraised. The
appraisal disclosed the following values:

Land 12,000,000
Buildings 8,000,000
Equipment 4,000,000

What cost should be assigned to the land, buildings, and equipment, respectively?
a. 6,400,000, 6,400,000, and 6,400,000
b. 9,000,000, 6,000,000, and 3,000,000
c. 9,600,000, 6,400,000, and 3,200,000
d. 12,000,000, 8,000,000, and 4,000,000

2. Jersey Company acquired the assets of Alvin Company, which had discontinued operations. The following
values of the property are available:

Book Fair
Land 600,000 1,000,000
Building 3,600,000 5,000,000
Machinery 1,500,000 2,000,000

Jersey Company gave 60,000 shares of its P100 par value ordinary shares in exchange. The shares had a
quoted price of P200 per share on that date of purchase of the property. How much is the cost of the building
that Jersey purchased?
a. 5,000,000
b. 2,000,000
c. 1,500,000
d. 1,000,000

3. Minda Company acquired a welding machine with an invoice price of P3,360,000 subject to a cash discount
of 5% which was not taken. Minda incurred freight and insurance during shipment of P100,000 and testing
and installation cost of P150,000. Minda also incurred cost of P30,000 in removing the old welding machine
prior to the installation of the new one. Welding supplies were acquired at a cost of P80,000. The value added
tax on the acquisition is P360,000. What is the cost of the welding machine?
a. 3,160,000
b. 3,250,000
c. 3,230,000
d. 3,610,000

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

 On December 31, 2022, Lovely Company purchased a machine in exchange for a non-interest-
bearing note requiring three payments of P1,500,000. The first payment was made on December
31, 2023, 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
1.74 for two periods and 2.49 for three periods. The new machine was damaged during its
installation and the repair cost amounted to P100,000.

 On January 1, 2022, Lovely Company acquired used machinery by issuing the seller a three-year,
noninterest-bearing note for P5,000,000. In recent borrowing, Lovely has paid a 12% interest for
this type of note. The present value of 1 at 12% for 3 years is .751.

4|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

What is the total cost of the two machineries?

a. 9,500,000
b. 7,865,000
c. 6,365,000
d. 7,490,000

5. In December 2021, Nelly Company exchanged an old machine, which cost P5,000,000 and a residual value
of 10%. The old machine’s depreciable amount is 40% depreciated. Nelly paid a cash difference of
P1,500,000. There is a substantial difference with the cash flows associated to both machines exchanged.
The fair value of the old machine was determined to be P2,500,000. What is the cost of the new machine to
Nelly?
a. 6,000,000
b. 4,500,000
c. 4,000,000
d. 3,000,000

6. Morrison Company exchanged a car from its inventory for equipment to be used as a noncurrent operating
asset. The following information relates to this exchange that took place on December 31, 2022:

Carrying amount of the car 2,000,000

Listed selling price of the car 2,500,000
Fair value of the equipment 3,500,000
Cash difference paid by Morrison 1,200,000

On December 31, 2022, how much is the gain that should be recognized by Morrison on this exchange?
a. 200,000
b. 300,000
c. 500,000
d. 0

7. Rachelle Company and Leonardo Company are fuel oil distributors. To facilitate the delivery of oil to
customers, Rachelle and Leonardo exchanged ownership of 5,000 barrels of oil without physically moving
the oil. Rachelle paid Leonardo P3,000,000 to compensate for a difference in the grade of oil. It was reliably
determined that the exchange lacks commercial substance because the configuration of the cash flows of
the asset received does not differ from the configuration of the cash flows of the asset transferred. On the
date of exchange, cost and fair value of oil were:

Rachelle Company Leonardo Company

Cost 40,000,000 42,000,000
Fair value 45,000,000 47,000,000

Rachelle should record the oil inventory received in exchange at

a. 45,000,000
b. 43,000,000
c. 58,000,000
d. 44,000,000

8. Doris Corporation purchased a new machine on August 1, 2022. A P1,000,000 down payment was made
and three-monthly installments of P500,000 each are to be made beginning on September 1, 2023. The
cash price would have been P2,250,000. Doris paid no installation charges under the monthly payment plan
but a P30,000 installation charge would have been incurred with a cash purchase. What is the capitalized
cost of the new machine?
a. 2,500,000
b. 2,250,000
c. 2,280,000
d. 2,470,000
5|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

9. A shareholder gave Haim Company a piece of land as a plant site. The fair value of this land is determined
to be P2,000,000. Shares were not issued to the shareholder who donated the land. Haim spent an additional
P50,000 to transfer the title. How much is the cost of the land in donated by the shareholder to Haim?

a. 2,000,000
b. 2,050,000
c. 1,950,000
d. 0

10. During the current year, Tristan Company purchased a secondhand machine at a price of P3,200,000. A
cash payment of P500,000 was made and a two-year, non-interest-bearing note was issued for the balance
of P2,700,000. Recent transaction involving similar machinery indicate that the used machine has a
secondhand market value of P2,400,000. The following costs were incurred during the year:

Cost of removing old machine that is replaced 30,000

Cash proceeds from the sale of the old machine replaced 10,000
General overhaul and repairs to recondition machine
prior to use 150,000
Cost of spare parts to cover breakdowns 200,000
Cost of installation 80,000
Cost of testing machine prior to use 110,000
Cost of hauling the machine from vendor
to company premises 10,000
Cost of repairing damage to machine caused
when the machine was dropped during installation 30,000
Repairs incurred during the first year of operation 90,000
Safety device added to the machine 250,000
Cost of training workers to operate the machine 20,000

What is the amount to be capitalized as cost of the machine?

a. 3,000,000
b. 3,800,000
c. 3,120,000
d. 3,550,000

11. Nora Company uses many kinds of machines in its operation. The company constructs some of these
machines itself and acquires others from manufacturers. The following information relates to a machine that
was acquired on January 1, 2022.

Cash paid for machine, including VAT of P96,000 896,000

Cost of transporting machine 30,000
Labor cost of installment by expert fitter 50,000
Labor cost of testing machine 40,000
Insurance cost for 2021 15,000
Cost of training for personnel who will use the machine 25,000
Cost of safety rails and platform surrounding the machine 60,000
Cost of water device to keep the machine cool 80,000
Cost of adjustment to machine to make it operate
more efficiently 75,000

How much should be capitalized as cost of the machine?

a. 1,135,000 c. 1, 160,000
b. 1,231,000 d. 1, 150,000
6|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

12. Nancee Company is installing a new plant at its production facility and incurred the following costs:

Cost of plant per supplier’s invoice 2,500,000

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
Interest charges paid to supplier for deferred credit 200,000
Estimated dismantling costs to be incurred as required by contract 300,000
Operating losses before commercial production 400,000

How much of such costs should be capitalized as cost of the plant?

a. 4,300,000
b. 4,000,000
c. 4,200,000
d. 4,500,000

LAND AND BUILDING

1. The following expenditures were incurred by Covax Company in 2021:

Purchase of land with existing building 10,000,000

Fair value of old building 500,000
Land survey 400,000
Fees for title search for title of land 300,000
Building permit 250,000
Temporary quarters for construction crews 100,000
Payments of tenants of old building for vacating the premises 600,000
Payment to demolition company to raze the old building and clean up 400,000
Excavating basement 350,000
Special assessment tax for street project 60,000
Salvage value of materials from old building 150,000
Damages awarded for injuries sustained in construction 90,000
Costs of construction 20,000,000
Cost of paving parking lot adjoining the building 180,000
Cost of shrubs, trees and other landscaping 40,000

1. What is the cost of the land?

a. 10,760,000
b. 10,260,000
c. 10,750,000
d. 10,860,000

2. What is the cost of the building?

a. 21,550,000
b. 21,700,000
c. 20,950,000
d. 20,850,000

7|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

2. Paula Company has purchased land in Quezon City for construction of buildings to be held for sale in the
ordinary course of business. The following costs were incurred in purchasing the property and
constructing the building:

Land and building purchase price 2,500,000

Fair value of the old building on the land 300,000
Payment of delinquent property taxes 100,000
Title search and insurance 50,000
Special assessment for city improvements water and sewer 150,000
Building permit 30,000
Cost to destroy existing building (P10,000 worth of salvaged
material sold as scrap) 60,000
Contract cost of new building 7,000,000
Land improvements 500,000
Sidewalks and parking lot 200,000

The depreciated value of the old building on the books of the company from which the land was purchased
was P500,000. The old building was never used by Paula.

What is the total cost of the land and building as inventory?

a. 10,580,000
b. 9,880,000
c. 10,280,000
d. 10,430,000

3. Pamela Company paid P10,000,000 for a warehouse on January 1, 2022, the beginning of its fiscal year:

Cost of land 2,500,000

Cost of building 7,500,000
Remodeling and repairs prior to occupancy 500,000
Escrow fee 100,000
Clearing, leveling and other landscaping 250,000
Property tax for period prior to acquisition 200,000
Real estate commission 300,000

The company paid a cash in the amount of P5,000,000 and signed an interest-bearing note for P5,000,000
on January 1, 2022. The stated interest rate is 10%. Payments of P250,000 are to be made semiannually
beginning December 31, 2022, for 10 years.

1. What is the cost of the land?

a. 2,900,000
b. 3,350,000
c. 2,500,000
d. 3,050,000

2. What is the cost of the building?

a. 8,450,000
b. 7,500,000
c. 8,100,000
d. 8,000,000

8|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

4. Razor Company, a newly formed corporation, incurred the following expenditures related to land and
building:

Cost of land, which included an old apartment building

appraised at P500,000 3,000,000
Fee for title search 100,000
Payment to tenants for vacating old building 500,000
Payment for delinquent property taxes assumed by the purchaser 200,000
Removal of apartment building 50,000
Salvaged materials retained by the demolition company 10,000
Cost of grading, leveling and other landscaping 150,000
Architect fees on new building 200,000
Payment to building contractors 10,000,000
Interest cost on specific borrowing incurred during construction 500,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 180,000
Cost of paving driveway and parking lot as part of building plan 100,000
Fences surrounding the property 20,000
Cost of installing lights in the parking lot 50,000
Premium for insurance on the building during construction 250,000
Cost of open house party to celebrate opening of new building 60,000

1. What is the cost of the land?

a. 2,950,000
b. 3,000,000
c. 4,000,000
d. 3,450,000

2. What is the cost of the building?

a. 11,500,000
b. 10,000,000
c. 11,600,000
d. 10,990,000

END

9|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO