Pamantasan ng Lungsod ng Valenzuela

College of Business and Accountancy

Department of Accountancy

INTERMEDIATE ACCOUNTING 1 (FAR 3)

Accounting for Property, Plant and Equipment

PROPERTY, PLANT AND EQUIPMENT

- tangible assets 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.

MEASUREMENT:
At initial recognition - PPE shall be measured at cost which is the amount of cash or cash equivalent paid and the fair value of the
other consideration given to acquire on asset at the time of acquisition or construction.
Subsequent measurement – entity shall choose between cost model or revaluation model.
Cost Model – PPE are carried at cost less any accumulated depreciation and any accumulated impairment loss.
Revaluation Model – means that PPE are carried at revalued carrying amount.

WAYS OF ACQUIRING PPE

1. Cash basis – cost of PPE is the cash price equivalent at the recognition date.
2. On account subject to cash discount – cost of the asset is equal to the invoice price minus the discount, regardless of whether the
discount is taken or not.

Problem 1. On account subject to cash discount

ABC Company acquired a machine with an invoice price of P3,000,000 subject to a cash discount of 10% which was not taken.
The entity incurred cost of P50,000 in removing the old machine prior to the installation of the new one. Machine supplies were
acquired at a cost of P150,000.

Required:
Journalize the transaction using gross method and net method.

3. Installment basis – the asset shall be recorded at the cash price.

Problem 2. Installment basis

DEF company purchased a machine for P500,000 down and four monthly installments of P1,250,000. The cash price of the
machine was P4,700,000.

Required:
Journalize the transaction

Problem 3. Installment basis

GHI company purchased a machine for P2,000,000 in exchange for non-interest bearing note requiring four installment payments
of P500,000. The first payment was made at the end of the current year.

The implicit rate of interest for this note at the date of issuance was 10%. The present value of an ordinary annuity of 1 at 10% is
3.17 for four periods.

The present value of an annuity of 1 in advance at 10% is 3.49 for four periods.

Required:
Journalize the transaction.

4. 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. Par value or stated value of the share capital.

Problem 4. Issuance of share capital

JKL company acquired the assets of another entity with the following fair value:
Land 1,000,000
Building 5,000,000
Machinery 2,000,000

The entity issued 60,000 shares with P100 par value in exchange. The share had a quoted price of P150 on the date of purchase of
the property.

Required:
Journalize the transaction.

1
Accounting for Property, Plant and Equipment FAR 3

5. Issuance of bonds payable – the property shall be measured in the following order:
a. Fair value of the bonds payable.
b. Fair value of the asset received.
c. Face amount of the bonds payable.

Problem 5. Issuance of bonds payable

MNO Company purchased a building by issuing bonds payable with face amount of P5,000,000. At the time of acquisition, the fair
value of the building is P6,000,000 and the bond is quoted at 116.

Required:
Journalize the transaction.

6. Exchange – acquired PPE are measured at fair value.

However, recognized at carrying amount under the following instances:
a. The exchange transaction lacks commercial substance.
b. The fair value of the asset given or the fair value of the asset received is not reliably measured.
6.1. Exchange with commercial substance – the cost of the property is equal to the following:
a. Fair value of asset given plus any cash payment – on the part of the payor.
b. Fair value of asset given minus any cash received – on the part of the recipient.
6.2. Exchange without commercial substance – acquired PPE is measured at the carrying amount of the asset given.

Problem 6. Exchange with commercial substance

On January 5, 2021, A Company and B Company exchanged machineries.
A B
Machineries 1,600,000 2,000,000
Accumulated depreciation 900,000 1,350,000
Fair value 600,000 800,000
Cash paid by A to B 200,000 200,000

The cash payment of P200,000 made by A to B is the difference in fair value, P800,000 minus P600,000.

Required:
Compute for the gain or loss on exchange of both A and B.

Problem 7. Exchange without commercial substance

On January 5, 2021, C Company and D Company exchanged machineries.
C D
Machineries 800,000 1,000,000
Accumulated depreciation 380,000 400,000
Fair value 450,000 500,000
Cash paid by C to D 50,000 50,000

The cash flow of the asset received do not differ from the cash flows of asset transferred.

Required:
Compute for the cost of new asset of both C and D.

Problem 8. Exchange –Fair value and trade in value approach

PQR Company traded a used equipment for a newer model with a dealer.

Old Equipment:
Original cost 1,400,000
Accumulated depreciation 1,000,000
Fair value 350,000
Trade in value 500,000

New equipment:
List price 2,000,000
Cash payment with trade in 1,500,000

Required:
Prepare journal entry to record the exchange transaction using fair value and trade in value approach.

Problem 9. Exchange
X Company and Y Company are fuel oil distributors. To facilitate the delivery of oil to their customers, X and Y exchanged
ownership of 1,200 barrels of oil without physically moving the oil.

X paid Y P300,000 to compensate for a difference in the grade of oil.

The configuration of cash flows from the asset received is not expected to be significantly different from the configuration of the
cash flows of the asset exchanged.

2
Accounting for Property, Plant and Equipment FAR 3

On the date of exchange, cost and market value of the oil were as follows:
X Y
Cost 1,000,000 1,400,000
Market Value 1,200,000 1,500,000

Required:
a. Compute for the initial measurement of the oil inventory received in exchange by X Company.
b. Compute for the initial measurement of the oil inventor received in exchange by Y Company.

7. Donation – recorded at fair value with the credit to donated capital, plus directly attributable cost incurred.
8. Government grant – recorded at fair value when received or receivable.
9. Construction – cost shall include:
a. Direct cost of materials.
b. Direct cost of labor.
c. Indirect cost and incremental overhead specifically identifiable or traceable to the construction.

Problem 10. Construction

Acrylic Company summarized the following manufacturing and construction activities for 2021:

Finished Goods Machinery

Material 3,000,000 500,000
Direct labor 4,000,000 1,000,000

Overhead for the prior year was 75% of the direct labor cost. Overhead in 2020 related to both product manufacture and
construction activities amounted to P3,600,000.

Required:
a. Calculate the cost of the machinery, assuming that manufacturing activities are to be charged with overhead at the rate
experienced in the prior year.
b. Calculate the cost of the machinery if manufacturing and construction activities are to be charged with overhead at the
same rate.

LAND, BUILDING AND MACHINERIES

Land Account
– owner-occupied land property such as land used currently or in the future as a plant site shall be treated as property plant and
equipment.
Land improvements not subject to depreciation – charged to land account
Land improvement subject to depreciation – charged to “land improvement” account.
Special assessments – capitalized.
Real property taxes – outright expensed.

Building Account
– building can be acquired by purchase or construction.
Sidewalks, pavements, parking lot, driveways
• Included in the blue print – charged to building account.
• Not included in the blue print – charged to “land improvements” account.
Claims for damages
• With insurance – cost of insurance for damages is charged to building account.
• Without insurance – payment for damages should be expensed outright.
Building Fixtures
• Immovable – charged to building account.
• Movable – charge to furniture and fixtures.
Ventilating system, lighting system, elevator
• Installed during construction – charged to building account.
• Not installed during construction – charged to “building improvements”.

Machinery Account
– if retired or removed to make room for the installation of new one, the removal cost not previously recognized as a provision is
charged to expense.
Tools – segregated from the machinery account.
Patterns and dies
• Used for regular product – recorded as asset.
• Used for special product – form part of the cost of the special product.
Equipment – delivery equipment, store and office equipment, furniture and fixtures.
Returnable containers – classified as PPE.
Capital expenditure – reported as an asset.
Revenue expenditure – reported as an expense.

3
Accounting for Property, Plant and Equipment FAR 3

Problem 11. Land, Building, Machinery

At the beginning of the current year, Saturn Corporation reported the following property, plant and equipment.

Land 3,500,000
Land Improvements 900,000
Building 6,000,000
Equipment 1,500,000
The following transactions occurred during the current year:
o A tract of land was acquired for P1,250,000 and intended definitely for use as future building site.
o A plant facility consisting of land and building was acquired from another entity in exchange for 100,000 shares.
On the acquisition date, the share had a closing market price of P45 on a stock exchange.
The plant facility was carried at P1,000,000 for land and P3,000,000 for the building at the exchange date.
Current appraised value for the land and building, respectively, are P1,200,000 and P2,400,000.
o Expenditures totaling P750,000 were made in early part of the year for new parking lot, street and sidewalk at the entity’s
various locations. These expenditures had an estimated useful life of 15 years.
o Equipment was purchased at a cost of P3,000,000. Freight and unloading charge of P50,000, and installation cost of
P350,000 were incurred.
o At the middle of the current year, an equipment was sold for P175,000. The original cost of the equipment acquired two
years ago was P500,000. The equipment was depreciated on the straight line basis over an estimated useful life of five years
and no residual value.

Required:
Compute for the total cost of the following at year end:
a. Land
b. Building
c. Land improvements
d. Equipment

- END OF COURSE FILE –

References
Valix, C. T., Peralta, J. F., & Valix, C. A. (2020). Intermediate Accounting Volume One. GIC Enterprises & Co., Inc.