17 Property Plant and Equipment - Discussion PDF

PROPERTY, PLANT AND
EQUIPMENT
COVID-19 PROJECT FOR ACCOUNTANTS
FINANCIAL ACCOUNTING AND REPORTING
DEFINITION
Property, plant and equipment are 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.
COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

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.

VALUATION
Measurement at Recognition
An item of property, plant and equipment that
qualifies for recognition, as an asset shall be
measured at its 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.
VALUATION
Measurement after Recognition
The entity shall choose between :
o Cost model - Cost less any accumulated
depreciation and accumulated impairment loss.
o Revaluation model - revalued amount, being the
fair value at the date of revaluation, less any
subsequent accumulated depreciation and
subsequent accumulated impairment loss.
Elements of Cost
❖ Its purchase price, including import
duties and non-refundable purchase
taxes, after deducting trade discounts
and rebates.

Elements of Cost
❖ 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.

Elements of Cost
Examples of directly attributable costs are: (TIPPED)
✓ Costs of Testing whether the asset is functioning properly
✓ Installation and assembly costs
✓ Costs of site Preparation
✓ Professional fees
✓ Costs of Employee benefits arising directly from the
construction or acquisition of the item of property, plant
and equipment
✓ Initial Delivery and handling costs
Elements of Cost
Under the amendments, proceeds from
selling items before the related item of PPE
is available for use should be recognized in
profit or loss, together with the costs of
producing those items.

Elements of Cost
❖ 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.
❖ These costs are also called restoration costs or
decommissioning costs.
Elements of Cost
Examples of costs that are not costs of an item of
property, plant and equipment and should be
expensed:
• Costs of opening a new facility
• Costs of introducing a new product or service (including
costs of advertising and promotional activities)
• Costs of conducting business in a new location or with a
new class of customer (including costs of staff training)
• Administration and other general overhead costs.
VALUATION
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.
VALUATION
For example, the following costs are not included in the
carrying amount of an item of property, plant and
equipment:
• 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
• Initial operating losses, such as those incurred while
demand for the item’s output builds up
• Costs of relocating or reorganizing part or all of an
entity’s operations.
ACCOUNTING FOR ACQUISITIONS
Measurement of cost

Measurements that use the cash price or its
equivalent
Acquired through cash The amount of cash paid
basis
Acquired through short Cost should be net of the
term credit discount regardless whether
taken or not
Acquired through long ✓ The cash price shall be

term financing used
✓ The present value of the
deferred payment or the
installments shall be used
Measurements with an order of priority to be
followed:
Exchange (with
Issuance of Issuance of
commercial
shares bonds
substance)
1st FV of Asset FV of Bonds FV of Asset Given
2nd FV of Asset
FV of Shares FV of Asset
Received
3rd Par value of
Face value of BP BV of Asset Given
Shares
NOTE: Assets acquired by an exchange transaction shall be adjusted for the amount of cash
paid or received.
Measurements at fair value of the asset
received only
Asset donated by a shareholder
• Recorded at the fair value of the asset. An
equity account “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.
Measurements at fair value of the asset
received only
Asset from a government grant
• Also recorded at fair value. Income
shall be credited if there are no
conditions attached and cost incurred
to transfer the title shall be
recognized as an expense.
Other measurement considerations
Acquisition of two or more items of PPE
• The acquisition cost shall be allocated to
acquired items based on their relative
fair market values.

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 and
shall not be recognized as income.
Exchange transactions that lacks
commercial substance
• Measured at book value of the asset
given.
• As a result, NO “gain or loss” is to be
recognized.

PROBLEM SOLVING
PROPERTY, PLANT AND EQUIPMENT

Problem Solving
Nielsen Company acquired a welding machine with an invoice price
of P3,000,000 subject to a cash discount of 5% which was not
taken. Nielsen incurred freight and insurance during shipment of
P50,000 and testing and installation cost of P200,000. Nielsen also
incurred cost of P20,000 in removing the old welding machine prior
to the installation of the new one. Welding supplies were acquired
at a cost of P100,000. The VAT on the acquisition is P360,000.
What is the cost of the new welding machine?
A. 3,100,000
B. 3,220,000
C. 3,250,000
D. 3,400,000
Problem Solving
SOLUTION
Invoice price, net of discount (3M x 95%) P 2,850,000

Freight and insurance 50,000
Testing and installation 200,000
Total P 3,100,000
Cost of removing the old machine - EXPENSE P 20,000

Welding supplies – PREPAID EXPENSE 100,000
VAT – INPUT VAT – OTHER ASSETS 360,000

Problem Solving
Nassie Company acquired two items of machinery as follows:
On December 30, 2019, Nassie Company purchased a machine in exchange for a
non-interest-bearing note requiring three payments of P1,000,000. The first payment
was made on December 30, 2020, 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. The new machine was damaged during its installation and
the repair cost amounted to P50,000.
On January 1, 2019, Nassie Company acquired used machinery by issuing the
seller a three-year, noninterest-bearing note for P4,000,000. In recent borrowing,
Nassie has paid a 12% interest for this type of note. The present value of 1 at 12%
for 3 years is .71.
What is the total cost of both machines?
A. 4,530,000 B. 4,580,000 C. 4,820,000 D. 5,240,000
Problem Solving
SOLUTION
Machine 1
PV of P (1,000,000 x 2.40) P 2,400,000
Repair cost during installation - EXPENSE 50,000
Machine 2
PV of P (4,000,000 x 0.71) P 2,840,000
TOTAL P 5,240,000

Problem Solving
Nerissa Company purchased new machinery on account as well as
incurring the following cost:
Invoice price of the machinery 3,000,000
Cash discount not taken on the purchase 150,000
Freight on new machine 50,000
Insurance during freight 40,000
Cost of moving old machinery to a new location 5,000
Installation cost of new machine 30,000
Testing cost before new machine before new machine 80,000
was put into regular operation
Operating cost during the first month of regular use 300,000
The total cost to be capitalized as part of the new machinery is
A. 2,960,000 B. 2,970,000 C. 3,050,000 D. P3,260,000
Problem Solving
SOLUTION
Invoice price of the machinery 3,000,000

Cash discount not taken on the purchase (150,000)
Freight on new machine 50,000
Insurance during freight 40,000
Cost of moving old machinery to a new location - EXPENSE
Installation cost of new machine 30,000
Testing cost before new machine before new machine was put into 80,000
regular operation
Operating cost during the first month of regular use - EXPENSE
TOTAL 3,050,000

Problem Solving
In December 2019, Nash Company exchanged an old
machine, which cost P6,000,000 and 50% depreciated, for a
used machine and 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 P2,000,000. What is the cost of the new
machine to Nash?
A. 2,000,000
B. 3,000,000
C. 3,500,000
D. 6,000,000
Problem Solving
SOLUTION
Fair value of old machine P 2,000,000

Cash paid 1,500,000
Total P 3,500,000
Gain or loss on exchange

Fair value of the old machine P 2,000,000
Carrying amount (6,000,000 x 50%) 3,000,000
Loss on exchange P 1,000,000

Problem Solving
Berry Motor Sales exchanged a car from its inventory for a computer to be used
as a noncurrent operating asset. The following information relates to this
exchange that took place on July 31, 2019:
Carrying amount of the car P 300,000
Listed selling price of the car 450,000
Fair value of the computer 430,000
Cash difference paid by Berry 50,000
On July 31, 2019, how much is the gain that should be recognized by
Berry on this exchange?
A. 0
B. 80,000
C. 100,000
D. 130,000
Problem Solving
SOLUTION
Fair value of the computer P 430,000

Less: Cash paid by Berry 50,000
Fair value of the car P 380,000
Gain or loss on exchange
Fair value of the car P 380,000
Carrying amount of the car 300,000
Gain on exchange P 80,000
Problem Solving
Ricardo Company and Leonardo Company are fuel oil distributors. To
facilitate the delivery of oil to customers, Ricardo and Leonardo
exchanged ownership of 5,000 barrels of oil without physically moving
the oil. Ricardo paid Leonardo P2,000,000 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: Ricardo Company Leonardo Company
Cost 45,000,000 40,000,000
Fair value 51,000,000 53,000,000
Ricardo should record the oil inventory received in exchange at
A. 45,000,000 B. 47,000,000 C. 51,000,000 D. 53,000,000
Problem Solving
SOLUTION
Ricardo Leonardo
Fair value of old machine P 45,000,000 P 40,000,000
Cash paid/(received) 2,000,000 ( 2,000,000)
Total P 47,000,000 P 38,000,000

Problem Solving
Corleone made the following individual cash purchases:
Land and building P 6,000,000
Machinery and office equipment 1,800,000
Delivery equipment 500,000
The question of apportioning the cost of the purchases between the assets arose. An
appraisal was made which disclosed the following values:
Land P 1,000,000
Building 3,000,000
Machinery 800,000
Office equipment 400,000
Delivery equipment 350,000
How much is the cost of the machinery in Corleone’s cash purchase?
A. 1,800,000
B. 1,200,000
C. 1,000,000
D. 800,000
Problem Solving
SOLUTION
Fair values Allocation
Machinery (1,800,000 x 8/12) P 800,000 P 1,200,000
Office equipment (1,800,000 x 4/12) 400,000 600,000
Total P 1,200,000 P 1,800,000

Problem Solving
Corleone acquired the assets of Realist Company, which had discontinued
operations. The fair values of the property are:
Land P 1,000,000
Building 5,000,000
Machinery 2,000,000
Corleone 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 in Corleone’ purchase by issuing
shares?
A. 5,000,000
B. 2,000,000
C. 1,500,000
D. 1,000,000
Problem Solving
SOLUTION
Fair values of assets received

Land P 1,000,000
Building 5,000,000
Machinery 2,000,000

Problem Solving
A shareholder gave the company a piece of land as a plant
site. The fair value of this land is determined to be
P2,000,000. Corleone spent an additional P50,000 to transfer
the title.
How much is the cost of the land in donated by the
shareholder to Corleone?
A. 2,050,000
B. 2,000,000
C. 1,950,000
D. 0
Problem Solving
SOLUTION
Fair value of Land P 2,000,000

Cost incurred on transfer of title
-charged to Donated Capital P 50,000

Problem Solving
The company paid cash for a machinery, P900,000 subject to
5% cash discount, and freight on machinery, P35,000.
Installation and testing cost of 200,000. The discount was not
taken by Corleone.
How much is the cost of the machinery acquired by Corleone
on account?
A. 1,135,000
B. 1,090,000
C. 935,000
D. 855,000
Problem Solving
SOLUTION
Cash paid (900,000 x 95%) P 855,000

Freight on machinery 35,000
Installation and testing cost 200,000
Gain on exchange P 1,090,000

Problem Solving
The company acquired furniture and fixtures by issuing a P400,000
two year payable in lump sum non-interest-bearing note. In a
similar transaction, the company has paid 12% interest. The
present value of 1 at 12% for 2 years is .797, and the present value
of an annuity due of 1 at 12% for 2 years is 1.69.
How much is the cost of the furniture and fixtures by Corleone
by issuing a promissory note?
A. 800,000
B. 676,000
C. 400,000
D. 318,800
Problem Solving
SOLUTION
PV of P (400,000 x .797) P 318,800

BORROWING COST

Borrowing Cost
Interest and other costs incurred by an enterprise in
connection with the borrowing of funds. Borrowing
cost may include:
✓ Interest expense calculated using the effective
interest method.
✓ Finance charges in respect of finance leases
✓ Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as
an adjustment to interest costs.
Borrowing Cost
PAS 23 does not apply to the following:
✓ Actual or imputed cost of equity, including
preferred capital not classified as liability.
✓ Qualifying assets measured at fair value (e.g.
biological assets, investment property under fair
value model).
✓ Inventories that are produced in large quantities
on a repetitive basis.
Qualifying Asset
An asset that takes a substantial period of time to
get ready for its intended use. Examples include:
✓ Inventories
✓ Manufacturing plants
✓ Power generation facilities
✓ Intangible assets
✓ Investment properties measured under cost
model
Qualifying Asset
The following are not qualifying assets:
✓ Financial assets, and inventories that are manufactured,
or otherwise produced, over a short period of time.
✓ Assets that are ready for their intended use or sale
when acquired are not qualifying assets.
✓ Assets that are routinely manufactured or otherwise
produced in large quantities on a repetitive basis.
✓ Assets measured at fair value.

Accounting Treatment
The revised PAS 23 has specifically
mentioned that interest on loans
applied to qualifying assets should
be capitalized.
This eliminates the benchmark and

alternative treatment.
Accounting issues related to capitalization
❖ Commencement of Capitalization
The capitalization of borrowing costs, as part of the
cost of a qualifying asset, shall commence when all
conditions are met:
a. Expenditures for the asset are being incurred
b. Borrowing costs are being incurred
c. Activities that are necessary to prepare the
asset for its intended use or sale are in
progress.
❖ Suspension of Capitalization
Capitalization of borrowing costs shall be
suspended during extended periods
of suspension of active development of a
qualifying asset.

❖ Cessation of Capitalization
Capitalization of borrowing costs shall
cease when substantially all the
activities necessary to prepare the
qualifying asset for its intended use or
sale are complete.

❖ Cessation of Capitalization
When the construction of a qualifying asset is
completed in parts and each part is capable
of being used while construction continues
on other parts, capitalization of borrowing
costs shall cease when substantially all
the activities necessary to prepare that
part for its intended use or sale are
completed
Borrowing Costs Eligible for Capitalization
❖ Specific Borrowings
To the extent that funds are borrowed specifically for the
purpose of obtaining a qualifying asset.
The amount of borrowing costs eligible for capitalization on

that asset shall be determined as follows:
Actual borrowing costs incurred during the period XX
Less: Any investment income on the temporary
investment of those borrowings. (XX)
XX

❖ General Borrowings
To the extent that funds are borrowed generally and used
for the purpose of obtaining a qualifying asset.
The amount of borrowing costs eligible for capitalization

shall be determined as follows:
Weighted average expenditure on the asset XX
Multiply by: Capitalization rate (XX)
XX

❖ General Borrowings
The capitalization rate shall be the weighted average of
the borrowing costs applicable to the borrowings of the
entity that are outstanding during the period, other than
borrowings made specifically for the purpose of obtaining
a qualifying asset.
The amount of borrowing costs capitalized during a period

shall not exceed the amount of borrowing costs incurred
during that period.
❖ Financed through both specific and
general borrowings
The borrowing cost eligible for capitalization is the lower
between:
a. Actual borrowing costs incurred during the period.
b. Sum of (1) borrowing costs on specific borrowings, net
of investment income and (2) borrowing costs on general
borrowings, computed on average expenditures
excluding specific borrowings.
Disclosure Requirements
The financial statements shall disclose:
❖ The accounting policy adopted for borrowing
costs;
❖ The amount of borrowing costs capitalized
during the period; and
❖ The capitalization rate used to determine the
amount of borrowing costs eligible for
capitalization.
PROBLEM SOLVING
BORROWING COST

Problem Solving
Nitz Company entered into a P10,000,000 fixed contract with Constructors
Company on January 1, 2019 for the construction of a new building. On January
1, 2019, Nitz obtained a loan of P10,000,000 at an interest rate of 12% to
finance specifically the construction. Availment from the loan may be made
quarterly at unequal amounts. Actual interest incurred for 2019 was P900,000.
Prior to their disbursement, the proceeds from the loan were temporarily
invested and earned interest income of P50,000. The building was completed
on December 31, 2019. Additional costs incurred during the construction were
P200,000 for plans, specifications and blueprint, and P350,000 for architectural
design and supervision. What is the cost of the building?
A. 11,450,000
B. 11,400,000
C. 10,550,000
D. 10,000,000
Problem Solving
SOLUTION
Fixed contract price P 10,000,000

Actual interest cost, net of interest income
(900,000 – 50,000) 850,000
Plans, specifications and blueprint 200,000
Architectural design and supervision 350,000
Gain on exchange P 11,400,000

Problem Solving
Niña Company had the following loans outstanding during the years 2018 and 2019:
Specific construction loan P 2,000,000 10%
General loan 15,000,000 12%
The company began self-construction of a building on January 1, 2018 and was
completed on December 31, 2019. The following expenditures were made during 2018
and 2019:
January 1, 2018 P 2,000,000
July 1, 2018 4,000,000
November 1, 2018 3,000,000
July 1, 2019 1,000,000
P 10,000,000
What is the total cost of the building on December 31, 2019?
A. 11,700,000
B. 11,660,000
C. 10,840,000
D. 10,000,000
Problem Solving
SOLUTION
2018
Capitalizable borrowing cost
01/01/2018 (2,000,000 x 12/12) P 2,000,000
07/01/2018 (4,000,000 x 6/12) 2,000,000
11/01/2018 (3,000,000 x 2/12) 500,000
WACE P 4,500,000
Capitalizable
WACE P 4,500,000
WACE – applicable to specific borrowing 2,000,000 200,000
WACE – applicable to general borrowing P 2,500,000 300,000
Capitalizable borrowing cost P 500,000
Running balance
Costs incurred (2,000,000 + 4,000,000 + 3,000,000) P 9,000,000
Capitalizable borrowing cost 500,000
12/31/2018 P 9,500,000
Problem Solving
SOLUTION
2019
01/01/2019 (9,500,000 x 12/12) P 9,500,000
07/01/2019 (1,000,000 x 6/12) 500,000
WACE P 10,000,000
Capitalizable
WACE P 10,000,000
Capitalizable borrowing cost P 1,160,000
Building
Costs incurred (9,500,000 + 1,000,000) P 10,500,000
12/31/2019 P 11,660,000

Problem Solving
Norla Company had the following outstanding loans during 2018 and 2019:
Specific construction loan P 3,000,000 10%
General loan 25,000,000 12%
Norla Company began the self-construction of a new building on January 1, 2018 and
building was completed on September 30, 2019. The following expenditures were made
in 2018 and 2019:
January 1, 2018 P 4,000,000
April 1, 2018 5,000,000
December 1, 2018 3,000,000
July 1, 2019 6,000,000
What is the total cost of the new building on September 30, 2019?
A. 18,700,000
B. 18,900,000
C. 20,196,000
D. 20,260,000
Problem Solving
SOLUTION
2018
01/01/2018 (4,000,000 x 12/12) P 4,000,000
04/01/2018 (5,000,000 x 9/12) 3,750,000
12/01/2018 (3,000,000 x 1/12) 250,000
WACE P 8,000,000
Capitalizable
WACE P 8,000,000
Capitalizable borrowing cost P 900,000
Running balance
Costs incurred (4,000,000 + 5,000,000 + 3,000,000) P 12,000,000
12/31/2018 P 12,900,000
Problem Solving
SOLUTION
2019
01/01/2019 (12,900,000 x 9/9) P 12,900,000
07/01/2019 (6,000,000 x 3/9) 2,000,000
WACE P 14,900,000
Capitalizable
WACE P 14,900,000
WACE – SB (3,000,000 x 10% x 9/12) 3,000,000 225,000
WACE – GB (11,900,000 x 12% 9/12) P 11,900,000 1,071,000
Capitalizable borrowing cost P 1,296,000
Building
Costs incurred (12,900,000 + 6,000,000) P 18,900,000
Capitalizable borrowing cost 1,296,000
12/31/2019 P 20,196,000

Problem Solving
The third year of a construction project began with a P30,000,000
balance in Construction in Progress. Included in that figure is
6,000,000 of interest capitalized in the first two years. Construction
expenditures during the third year were P80,000,000 which were
incurred evenly throughout the entire year. The company has had
over P300,000,000 in interest-bearing debt outstanding the third
year, at a weighted average rate of 9 percent. How much interest
for the third year is capitalized?
A. 3,600,000
B. 6,300,000
C. 9,360,000
D. 9,900,000
Problem Solving
SOLUTION
Capitalizable
WACE
From previous years (30,000,000 x 12/12) P 30,000,000
Additional cost – GB (80,000,000/2) 40,000,000
Total P 70,000,000
Capitalizable borrowing cost (70,000,000 x 9%) P 6,300,000

SPECIFIC COSTS OF PROPERTY,
PLANT, AND EQUIPMENT

LAND
Costs chargeable to land include the following
(DSTOP2 BER2T LCM):
✓Draining cost and filling the land.
✓cost of Survey
✓unpaid Taxes up to the date of acquisition assumed
by the buyer
✓cost of Option to buy the acquired land. if the land is
not acquired, the cost of option is expensed outright
✓Purchase price
LAND
(DSTOP2 BER2T LCM):
✓cost of Permanent improvement (cost of grading,
leveling, filling)
✓Broker’s commission
✓Escrow fees on the land
✓cost of Relocation or reconstruction of property
belonging to others in order to acquire possession
✓fees for Registration and transfer of title
LAND
(DSTOP2 BER2T LCM):
✓payments to Tenants to induce them to vacate the
premises
✓Legal fees and other expenditures for establishing
clean title
✓cost of Clearing unwanted old structures, less
proceeds from salvage
✓Mortgages, encumbrances and interest on such
mortgages assumed by buyer
Treatment of land improvements
Improvements Examples Treatment
Non-depreciable cost of: surveying, ✓ Land
clearing grading and
leveling, subdividing.
Depreciable fences, water ✓ Building if part of
systems, drainage blueprint of the
systems, sidewalks building
and pavements, ✓ Land
landscaping. improvements if
not part

BUILDING
Costs chargeable to building when purchased
(PLIRT2)
✓ Purchase price
✓ Legal fees and other expenses incurred in
connection with the purchase
✓ Interest, liens and other encumbrances on the
building assumed by the buyer

BUILDING
Costs chargeable to building when purchased
(PLIRT2)
✓ any Renovating or remodeling costs incurred to put
a building purchased in a condition suitable for its
intended use such as lighting installations,
partitions and repairs
✓ unpaid Taxes up to the date of acquisition assumed
by the buyer
✓ payments to Tenants to induce them to vacate the
premises
BUILDING
Cost of building when constructed (SPAM PD2ET)
✓ Superintendent fee
✓ building Permit and license
✓ Architect fee
✓ Manufacturing cost (materials, labor employed
and overhead incurred during the construction
✓ expenditures for service equipment and
fixtures made a Permanent part of the
structure
BUILDING
✓ expenditures incurred During the construction
period such as interest on construction loans
and insurance
✓ cost of Demolishing old building old structures,
less proceeds from salvage
✓ cost of Excavation
✓ cost of temporary buildings used as
construction offices and tools or materials shed
BUILDING
• Note: Any savings (gain) or additional costs
(loss) from construction shall not be
recognized.

Treatment of Building fixtures
Fixtures Treatment
Immovable ✓Building
Movable ✓Furniture and fixtures and
depreciated over their useful
life

Cost of a new building constructed on the
site of a previous building
Acquisition of land and building
1. Building is Purchase price is allocated entirely to the land
unusable and (including demolition cost)
likely to be
demolished right
away.
2. Building is Allocate the purchase price to the land and
usable and the building based on the relative fair values.
company will use
it for a while

a. PPE The land and building will be classified as two
separate items under Plant, Property and
Equipment measured at their allocated cost
determined using the relative fair value
method.
b. Inventory The land and building will be classified as one
item under Inventories.

c. Investment Property-subsequently measured at:
Fair value the land and building will be classified as one

model item under Investment Property
Cost Model the land and building will be classified as two
separate items under Investment Property at
their allocated cost determined using the
relative fair value

Treatment of Demolition Costs
The entity acquired the property in the current reporting period, with the
intention of demolishing the old building and replacing it with a new building.
The entity will not use the old building prior to its demolition. New building will
be used as:
Investment
PPE Inventory
Property
Carrying value of Charged to loss Capitalized as Charged to loss
the old building on retirement inventory on retirement
Cost of new Construction cost Allocated carrying Construction cost
building plus demolition value of the old plus demolition
cost building plus cost
Construction cost
and demolition
cost
MACHINERY
Cost of Machinery when purchased (SWAC
PIFIT FUD):
✓ nonrefundable Sales tax
✓ cost of Water device to keep machine cool
✓ cost of Adjustment to machinery for operational
efficiency and to increase capacity
✓ Construction of base (cost of safety rail and
platform surrounding machine)
✓ Purchase price
MACHINERY
PIFIT FUD):
✓ Insurance while in transit
✓ Freight, handling, storage and other cost related to
the acquisition
✓ Installation cost, including site preparation and
assembling
✓ cost of Testing and trial run, and other cost
necessary in preparing the machinery for use
MACHINERY
PIFIT FUD):
✓ Fees paid to consultants for advice on acquisition
of the machinery
✓ Unloading charges
✓ initial estimate of cost of Dismantling and removing
the machinery and restoring the site on which it is
located

Treatment of old installation cost
a) machinery is moved to new location – The
undepreciated old installation cost is expensed.
New installation cost is charged to the NEW
asset.
b) machinery is removed and retired – The
undepreciated old installation cost is expensed.
New Installation cost is charged to the NEW
asset. (in addition, the removal cost is also
charged to expense.)
PROBLEM SOLVING
SPECIFIC COSTS OF PROPERTY, PLANT, AND EQUIPMENT

Problem Solving
The following expenditures were incurred by Pinky Company in 2019:
Purchase of land with existing building 10,500,000
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 110,000
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
What is the cost of the land?
A. 11,860,000 B. 11,750,000 C. 11,690,000 D. 10,760,000
What is the cost of the building?
A. 21,590,000 B. 20,970,000 C. 20,880,000
COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING
D. 20,700,000 9/29/2020
Problem Solving
SOLUTION
LAND BUILDING
Purchase of land with existing building (10,500,000 – 500,000) 10,000,000
Fair value of old building – TREATED AS LOSS (500,000)
Land survey 400,000
Fees for title search for title of land 300,000
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 290,000
up – NET OF DEMOLITION COST (400,000 – 110,000)
Excavating basement 350,000
Special assessment tax for street project 60,000
Damages awarded for injuries sustained in construction - EXPENSE
Costs of construction 20,000,000
Cost of paving parking lot adjoining the building – LI
Cost of shrubs, trees and other landscaping – LI
TOTALS 10,760,000 21,590,000
Problem Solving
Land and an old building were acquired from a seller by Casio Company at 4,000,000 as the new location for
an expansion office south of Metro Manila. The old building had a fair value of P500,000. The old building
was also demolished at the end of the reporting period at a cost of P100,000. Other cost incurred in
connection with the land, applicable taxes and other cost before construction of the expansion office are as
follows:
Title search and insurance 200,000
Documentary stamp tax 70,000
Transfer Tax 25,000
Land registration fees 15,000
Construction materials purchased in advance for construction 2,000,000
Proceeds of scrap from old building 30,000
Perimeter fencing 50,000
Cost of signage and other land improvements 140,000
Cost of drainage works and plumbing before construction 150,000
Filling, leveling and landscaping 300,000
What is the total cost of the land?
A. 4,410,000 B. 4,160,000 C. 4,110,000 D. 3,800,000
What is the total cost of the land improvements?
A. 640,000 B. 560,000 C. 490,000 D. 190,000
Problem Solving
SOLUTION
LAND
LAND IMPROVEMENTS
BUILDING
Purchase price of land and old building 3,500,000
500,000 will be recognized as LOSS
Demolition cost 100,000
Documentary stamp tax 70,000
Transfer Tax 25,000
Land registration fees 15,000
Construction materials purchased in advance for 2,000,000
construction
Proceeds of scrap from old building (30,000)
Perimeter fencing 50,000
Cost of signage and other land improvements 140,000
Cost of drainage works and plumbing before construction 150,000
Filling, leveling and landscaping 300,000
TOTALS 4,110,000 190,000 2,220,000

Problem Solving
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
Special assessment for city improvements water and sewer 150,000
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 P300,000. The old building was never used by Paula.
What is the cost of the land and building as inventory?
A. 9,880,000 B. 10,280,000 C. 10,430,000 D. 10,580,000
Problem Solving
SOLUTION
LAND
Land and building purchase price 2,500,000
Fair value of the old building on the land – already included in the
total purchase price
Special assessment for city improvements water and sewer 150,000
Cost to destroy existing building (P10,000 worth of salvaged material
sold as scrap), net of scrap (60,000 – 10,000) 50,000
TOTAL INVENOTORIABLE COST – Land and Building P10,580,000

Problem Solving
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 40,000
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
A. 2,950,000 B. 3,000,000 C. 3,450,000 D. 4,000,000
What is the cost of the building?
A. 10,000,000 B. 10,950,000 C. 10,990,000 D. 11,500,000
Problem Solving
SOLUTION
LAND BUILDING
Cost of land, which included an old apartment building appraised at P500,000 (3,000,000 – 500,000). 2,500,000
The 500,000 allocated to the old apartment will be recognized as LOSS.
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 – P10,000 not deducted since retained by the
demolition company.
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
The P180,000 is treated as LOSS.
Cost of paving driveway and parking lot P40,000 LI
Fences surrounding the property P20,000 LI
Cost of installing lights in the parking lot P50,000 LI
Premium for insurance on the building during construction 250,000
Cost of open house party to celebrate opening of new building P60,000 EXPENSE
TOTALS 2,950,000 11,500,000
Problem Solving
Paula Company has decided to expand its operations and has purchased land with a dilapidated
building in Quezon City for construction of a new manufacturing plant. The following costs were
incurred in purchasing the property and constructing the building:
Land purchase price 2,500,000
Special assessment for city improvements for water and sewer 150,000
Cost to destroy existing building (P10,000 worth of salvaged material used in new 60,000
building)
Fire insurance on building – 1 year 40,000
The depreciated value of the old building on the books of the company from which the land was
purchased was P300,000. The old building was never used by Paula.
A. 3,050,000 B. 2,850,000 C. 2,800,000 D. 2,700,000
Problem Solving
SOLUTION
LAND BUILDING
Land purchase price – entire amount is allocated to LAND 2,500,000
Special assessment for city improvements for water and sewer 150,000
Cost to destroy existing building (P10,000 worth of salvaged
material used in new building) 60,000
Land improvements – LI
Sidewalks and parking lot – LI
Fire insurance on building – 1 year – EXPENSE
TOTALS P2,800,000 P7,090,000

Problem Solving
During the current year, Nelly Company purchased a second hand 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 second
hand market value of P2,400,000. A new machine would cost P4,000,000. 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. 3,120,000 C. 3,550,000 D. 3,800,000
Problem Solving
SOLUTION
Market price of the second hand machine 2,400,000
Cost of removing old machine that is replaced – P/L EXPENSE
Cash proceeds from the sale of the old machine replaced – P/L
General overhaul and repairs to recondition machine prior to use 150,000
Cost of spare parts to cover breakdowns – Other item of PPE
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 – P/L EXPENSE
Repairs incurred during the first year of operation – P/L EXPENSE
Safety device added to the machine 250,000
Cost of training workers to operate the machine – P/L EXPENSE
TOTAL 3,000,000

Problem Solving
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, 2019.
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 2019 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. 1,231,000 B. 1,160,000 C. 1,150,000 D. 1,135,000
Problem Solving
SOLUTION
Cash paid for machine, net of VAT of P96,000 800,000
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 2019 – P/L EXPENSE
Cost of training for personnel who will use the machine
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
TOTAL 1,135,000

DEPRECIATION

Depreciation
The systematic allocation of the
depreciable amount of an asset over
its useful life.

Factors of Depreciation
The following are factors of

depreciation:
1.Depreciable amount
2.Residual value
3.Useful life
Depreciable amount
Depreciable amount is the cost of an
asset, or other amount substituted for
cost, less its residual value.
The depreciable amount of an asset
shall be allocated on a systematic
basis over its useful life.
Residual value
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
Useful life is either
❖ The period over which an asset is
expected to be available for use by
an entity; or
❖ The number of production or similar
units expected to be obtained from
the asset by an entity.
Factors are considered in determining the
useful life of an asset
❖ Expected usage of the asset. Usage is assessed
by reference to the asset’s expected capacity or
physical output.
❖ Expected physical wear and tear, which depends
on operational factors such as the number of
shifts for which the asset is to be used and the
repair and maintenance program, and the care
and maintenance of the asset while idle.
Factors are considered in determining the
useful life of an asset
❖ Technical or commercial obsolescence
arising from changes or improvements in
production, or from a change in the market
demand for the product or service output of
the asset.
❖ Legal or similar limits on the use of the asset,
such as the expiry dates of related leases.
Carrying amount
The amount at which an asset is recognized
after deducting any accumulated depreciation
and accumulated impairment losses.
Cost XX
Less: Accumulated Depreciation (XX)
Accumulated Impairment Losses (XX)
XX

Depreciation of items of PPE
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.

Depreciation period
COMMENCEMENT
Depreciation shall begin when the asset is available for use
(i.e. when it is in the location and condition necessary for it to
be capable of operating in the manner intended by
management).
END
Depreciation shall cease when the asset is derecognized or
when it is classified as “held for sale” under PFRS 5,
whichever comes earlier.
Accounting Treatment of Depreciation
The depreciation charge for each period shall
be recognized in profit or loss unless it is
included in the carrying amount of another
asset (e.g. depreciation on factory equipment
which shall be included as overhead and cost of
inventories).

Depreciable Amount and Depreciation Period
❖ The depreciable amount of an asset
shall be allocated on a systematic
basis over its useful life.

❖ The residual value and the useful life
of an asset shall be reviewed at least
at each financial year-end and, if
expectations differ from previous
estimates, the change(s) shall be
accounted for as a change in an
accounting estimate.
❖ Depreciation is recognized even if the
fair value of the asset exceeds its
carrying amount; as long as the asset’s
residual value does not exceed its
carrying amount.
❖ Repair and maintenance of an asset do
not negate the need to depreciate it.
❖ The residual value of an asset may increase
to an amount equal to or greater than the
asset’s carrying amount.
If it does, the asset’s depreciation charge is

zero unless and until its residual value
subsequently decreases to an amount below
the asset’s carrying amount.
❖ Depreciation of an asset begins when it is available for
use.
❖ Depreciation of an asset ceases at the earlier of the date
that the asset is classified as held for sale and the date
that the asset is derecognized.
❖ Therefore, depreciation does not cease when the asset
becomes idle or is retired from active use unless the asset
is fully depreciated.
❖ However, under usage methods of depreciation the
depreciation charge can be zero while there is no
production.
Depreciation Method
❖ The depreciation method used shall
reflect the pattern in which the
asset’s future economic benefits are
expected to be consumed by the
entity.

Depreciation Method
❖ The depreciation method applied to an asset
shall be reviewed at least at each financial
year-end and, if there has been a significant
change in the expected pattern of
consumption of the future economic benefits
embodied in the asset, the method shall be
changed to reflect the changed pattern.
❖ Such a change shall be accounted for as a
change in an accounting estimate
Depreciation Method
A variety of depreciation methods can be used
to allocate the depreciable amount of an asset
on a systematic basis over its useful life.
These methods include:
✓ straight-line method
✓ diminishing balance method
✓ units of production method

KEY OBSERVATIONS
❖ SL provides uniform depreciation
❖ SYD and Double-declining provides
accelerated and declining
depreciation
❖ Production provides variable amount
of depreciation
KEY OBSERVATIONS
❖ SL, SYD and Production method uses
depreciable amount from beginning to end.
❖ Double declining ignores the residual value
in the initial year and depreciates the book
value after that, but still adheres to the
depreciation of the depreciable amount only.

KEY OBSERVATIONS
❖ Depreciation for SYD and Double-
Declining for a portion of a year is
computed by multiplying the amount
of depreciation by the number of
month’s outstanding divided by 12.

PROBLEM SOLVING
DEPRECIATION

Problem Solving
During 2016, Beagle Company purchased an equipment with a cost of
P1,500,000. It is expected that this equipment will be used for 5 years
and have a residual value at the end of its useful life of P300,000. It is
also expected that this equipment can produce 200,000 units of Beagle’s
products. Beagle’s policy is to take a full year’s depreciation in the year of
acquisition. In 2016, 2017 and 2018, this equipment produced 50,000,
30,000 and 40,000 units respectively. Beagle sold the equipment on
January 1, 2019 for net proceeds of P900,000.
What is the gain on sale recognized in 2019?
A. 500,000
B. 320,000
C. 240,000
D. 120,000
Problem Solving
SOLUTION
Gain on sale
Net proceeds P 900,000
Less: Carrying amount
Cost P 1,500,000
Less: *Accumulated depreciation 720,000 780,000
Gain on sale P 120,000
*[(1,500,000-300,000)/200,000 x (50,000+30,000+40,000)]

Problem Solving
A schedule of plant assets owned by Oren Company is presented below.
Depreciable Annual
Cost Scrap Life
cost Depreciation
Building 8,800,000 800,000 8,000,000 20 years 400,000
Machinery 3,200,000 320,000 2,880,000 15 years 192,000
Equipment 640,000 640,000 5 years 128,000
Total 12,640,000 11,520,000 720,000
Oren computes depreciation on the straight-line method. The composite life of
the assets should be
A. 19.8
B. 18.0
C. 16.0
D. 13.3
Problem Solving
SOLUTION
Composite life (11,520,000/720,000) 16 years

Composite rate (720,000/12,640,000) 5.70%

Problem Solving
Ollen Company uses the composite method of depreciation and has a composite rate of
25%. During 2019, it sold assets with an original cost of P500,000 and a residual value
of P100,000 for P300,000 and eventually acquired P900,000 of new assets with a
residual value of P150,000. Information regarding the original group of assets as of
January 1, 2019 is presented below:
Total cost 5,000,000
Total residual value 800,000
Accumulated depreciation 1,000,000
What was the depreciation expense recorded by Ollen Company in 2019?
A. 1,000,000
B. 1,100,000
C. 1,312,500
D. 1,350,000

Problem Solving
SOLUTION
Depreciation
(5,000,000 – 500,000 + 900,000) x 25% = P 1,350,000

Problem Solving
On April 1, 2018, Ofelia Company bought machinery under a
contract that required a down payment of P500,000 plus 24 monthly
payments of P300,000 for total payments of P7,700,000. The cash
price of the machinery was P6,500,000. The machinery has an
estimated useful life of four years and estimated residual value of
P500,000. Ofelia uses SYD method of depreciation. In its 2019
income statement, what amount should Ofelia report as
depreciation for this machinery?
A. 1,800,000
B. 1,950,000
C. 2,275,000
D. 2,400,000
Problem Solving
SOLUTION
Year 1 (6,500,000 – 500,000) x 4/10 P 2,400,000P 1,800,000 2018

600,000 2019
Year 2 (6,500,000 – 500,000) x 3/10 P 1,800,000 1,350,000 2019
450,000 2020

Problem Solving
On January 1, 2019, Tiger Company acquired equipment to be
used in its manufacturing operations. The equipment has an
estimated useful life of 5 year and an estimated residual value
of P200,000. The depreciation applicable to this equipment
was P900,000 for 2021 computed under the sum of years’
digits method. What was the acquisition cost of the
equipment?
A. 4,300,000
B. 4,500,000
C. 4,700,000
D. 5,000,000
Problem Solving
SOLUTION
Year 1 (xxx – 200,000) x 5/15

Year 2 (xxx – 200,000) x 4/15
Year 3 (xxx – 200,000) x 3/15 P 900,000
Acquisition (xxx)
[900,000 / (3/15)] + 200,000 P 4,700,000

Problem Solving
Lily Company purchased an equipment for P4,000,000 with a
useful life of 5 years and a residual value of P500,000 on July
1, 2019. Lily opted to depreciate this asset using the double
declining balance method of depreciation and did not foresee
any changes in its estimate to occur. What is the depreciation
expense on this equipment for the calendar year ended
December 31, 2020?
A. 800,000
B. 960,000
C. 1,280,000
D. 1,600,000
Problem Solving
SOLUTION
Year 1 (4,000,000 x 40%) P 1,600,000 P 800,000 2019

800,000 2020
Year 2 (2,400,000 x 40%) P 960,000 480,000 2020
480,000 2021

Problem Solving
On January 1, 2017, Ozzie purchased a large quantity of laptop computers for their
associates. The cost of these computers was P10,000,000. On the date of
purchase, the management estimated that the computers would last approximately
6 years and would have a residual value at that time of P550,000. The company
used the sum-of-years’ digit method of depreciation. During 2019, the management
realized that technological advancements and the volume of files being uploaded
had made the computers virtually obsolete and that they would have to be replaced
sooner. Management decided to depreciate the computers using the double
declining balance method of depreciation with no change in useful life and residual
value. What is the depreciation to be recognized for the year 2019?
A. 1,125,000
B. 1,683,333
C. 2,250,000
D. 2,525,000
Problem Solving
SOLUTION
SYD
2017 (10,000,000 – 550,000) x 6/21 P 2,700,000
2018 (10,000,000 – 550,000) x 5/21 2,250,000
Cost P 10,000,000
Accumulated depreciation 4,950,000
Carrying amount P 5,050,000
Double-declining balance
2019 (5,050,000 x 50%) P 2,525,000

GOVERNMENT GRANTS AND
GOVERNMENT ASSISTANCE

Government assistance
➢ Government assistance is action by government
designed to provide an economic benefit specific
to an entity or range of entities qualifying under
certain criteria.
➢ Government assistance for the purpose of this
Standard does not include benefits provided only
indirectly through action affecting general trading
conditions, such as the provision of infrastructure in
development areas or the imposition of trading
constraints on competitors
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 include subsidies, subventions or premiums.
Significance of government grants in FS
The receipt of government assistance by an entity may
be significant for the presentation of financial statements
for the following reasons:
✓ If resources have been transferred, an appropriate
method of accounting for the transfer must be
identified.
✓ It is desirable to give an indication of the extent to
which the entity has benefited from such assistance
during the reporting period. This facilitates inter-
comparability of the entity’s FS.
RECOGNITION
Government Grants, including non-monetary grants at fair
value, shall not be recognized until there is reasonable
assurance that:
❖ The entity will comply with the conditions attaching to
them; and
❖ The grants will be received.
Receipt of a grant does not itself provide conclusive evidence

that the conditions attaching to the grant have been or will be
fulfilled.
Characteristics of a recognized government grant
The following are the characteristics of recognized
government grant:
✓ An economic benefit received from the government
✓ Direct benefits is specific to the recipient entity
✓ With measurable value
✓ Received or receivable in return for past or future
compliance with attached condition
✓ There is reasonable assurance that the recipient entity will
comply to the attached condition
✓ There is reasonable assurance that grant will be received
CLASSIFICATION OF GOVERNMENT GRANTS
ACCORDING TO ATTACHED CONDITIONS
Government grants may be classified
as either
1. Grant related to assets; or
2. Grant related to income.

Grants related to assets
Government grants whose primary condition is
that an entity qualifying for them should
purchase, construct or otherwise acquire
long-term assets.
Subsidiary conditions may also be attached
restricting the type or location of the assets or
the periods during which they are to be
acquired or held.
Grants related to income
Government grants OTHER than those
related to assets.

RECOGNITION : 4 Types of Gov’t Grants
❖ Grants for the purpose of specific
expenses
This should be deferred and recognized as
income in the same period as the relevant
expense.

❖ Grants related to depreciable assets
are usually recognized as income over the periods
and in the proportions in which depreciation on
those assets is charged. Either by deducting the
grant from the cost of the asset or as deferred
income.

❖ Grants related to non-depreciable assets
may also require the fulfillment of certain
obligations and would then be recognized as
income over the periods which bear the cost of
meeting the obligations.
Example: A grant of land may be conditional upon
the erection of a building on the site and it may be
appropriate to recognize it as income over the life
of the building.
❖ A government grant that becomes receivable
as compensation for expenses or losses
already incurred or for the purpose of giving
immediate financial support to the entity with
no future related costs shall be recognized
as income of the period in which it becomes
receivable.

Presentation of Grants Related to Assets
❖ Government grants related to assets,
including non-monetary grants at fair value,
shall be presented in the statement of
financial position either by
a. setting up the grant as deferred income; or
b. deducting the grant in arriving at the
carrying amount of the asset.

In the statements of financial position and
comprehensive income
▪ Sets up the grant as deferred income which is
recognized as income on a systematic and rational
basis over the useful life of the asset.
▪ Deducts the grant in arriving at the carrying
amount of the asset - The grant is recognized as
income over the life of a depreciable asset by way
of a reduced depreciation charge.
In the statement of cash flow
The purchase of assets and the receipt of related grants
can cause major movements in the cash flow of an
entity.
For this reason and in order to show the gross investment
in assets, such movements are often disclosed as
separate items in the cash flow statement regardless of
whether or not the grant is deducted from the related
asset for the purpose of balance sheet presentation.

Presentation of Grants Related to Income
Grants related to income are sometimes
presented as a credit in the income statement,
either
a. separately or
b. as “Other income”.
Alternatively, they are deducted in reporting the
related expense.
❖ Supporters of the first method claim that it is
inappropriate to net income and expense items and
that separation of the grant from the expense
facilitates comparison with other expenses not
affected by a grant.
❖ For the second method it is argued that the expenses
might well not have been incurred by the entity if the
grant had not been available and presentation of the
expense without offsetting the grant may therefore be
misleading.
❖ Both methods are regarded as acceptable for
the presentation of grants related to income.
❖ Disclosure of the grant may be necessary for a
proper understanding of the financial statements.
❖ Disclosure of the effect of the grants on any item of
income or expense, which is required to be
separately disclosed, is usually appropriate.

Repayment of Government Grant
❖ If a grant becomes repayable, it should be treated
as a change in estimate.
❖ If the grant is recorded as a deferred income, the
repayment should be applied to the following:
a. any related unamortized deferred income (the
balance of the deferred income), and
b. the difference shall be recognized as expense.

Repayment of Government Grant
❖ Where the original grant related to an asset,
the repayment should be treated as
increasing the carrying amount of the asset
or reducing the deferred income balance.
❖ The cumulative depreciation which would
have been charged had the grant not been
received should be charged as depreciation
expense.
PROBLEM SOLVING
GOVERNMENT GRANTS AND GOVERNMENT ASSISTANCE

Problem Solving
On January 1, 2019 Union Company received a grant of
P10,000,000 from the British government in order to defray safety
and environmental costs within the area where the enterprise is
located. The safety and environmental costs are expected to be
incurred over four years, respectively, P1,000,000, P2,000,000,
P2,000,000 and P3,000,000. How much income from the
government grant should be recognized in 2019?
A. 1,000,000
B. 1,250,000
C. 2,000,000
D. 10,000,000

Problem Solving
SOLUTION
Costs Allocation
2019 (10,000,000 x 1/8) P 1,000,000 P 1,250,000
2020 2,000,000
2021 2,000,000
2022 3,000,000
Total P 8,000,000 P 10,000,000

Problem Solving
On January 1, 2019, Carroll Company received a grant of P1,000,000
from the Philippine Government for the construction of a laboratory and
research facility with a total cost of P6 million and a useful life 5 years
and a residual value of P500,000. The facility was completed in early of
2019. Carroll Company recorded the grant as deferred revenue upon the
receipt.
What should Carroll Company include in its 2019 income statement an
income from the government grant?
A. 500,000 B. 240,000 C. 200,000 D. 100,000
If the grant becomes repayable in full in 2021 because Carroll is not able
to comply with the conditions required for the grant, what is the amount of
loss to be recognized in the income statement?
A. 1,000,000 B. 600,000 C. 500,000 D. 400,000
Problem Solving
SOLUTION
2019
Income from GG (1,000,000/5) P 200,000
2021
Loss on repayment
(amount previously recognized as income) P 400,000

Problem Solving
On January 1, 2019, Beetle Company received a grant of
P8,000,000 from the Australian government to compensate for
massive losses incurred because of a recent tsunami. The grant
requires no fulfillment of certain conditions. The grant was for the
purpose of giving immediate financial support to the entity. It will
take Beetle 2 years to reconstruct its facilities destroyed by the
tsunami. How much income from the government grant should be
recognized by Beetle in 2019?
A. 8,000,000
B. 4,000,000
C. 2,500,000
D. 2,000,000
Problem Solving
SOLUTION
Entire amount of the grant is recognized as

income since it was a compensation to losses
already incurred.

Problem Solving
On January 1, 2019, Lenny Company received a grant of P800,000 from a Foreign
Government for the acquisition of an equipment to be used for research activities
with regard to environmental concerns. The equipment was placed into activity
early in 2019. Lenny Company recorded the grant as a deduction toward the capital
cost of the equipment. The equipment cost Lenny at a gross amount of P4,000,000
with a residual value of P200,000 at the end of its 5-year useful life.
Lenny however was not able to comply with the strict requirements of the foreign
government and was required to pay the total amount of the grant in full in 2021.
How much is the depreciation expense in 2019?
A. 760,000 B. 640,000 C. 600,000 D. 500,000
A. 600,000 B. 920,000 C. 1,080,000 D. 1,200,000
A. 600,000 B. 760,000 C. 800,000
COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING
D. 960,000 9/29/2020
Problem Solving
SOLUTION

THEORETICAL CONCEPTS

Which is not an essential characteristic of property,
plant and equipment?
A. The property plant and equipment are tangible assets.
B. The property, plant and equipment are used in
production or supply of goods and services, for rental,
administrative purposes.
C. The property, plant and equipment is expected to be
used over a period of more than one year.
D. The property, plant and equipment are subject to
depreciation.
The cost of an item of property, plant and
equipment includes all of the following, except
A. Trade discount and rebates
B. Purchase price
C. Import duties and nonrefundable purchase
taxes
D. Directly attributable costs of bringing the asset
to working condition for its intended use.

Examples of costs that are expensed rather than
recognized as an element of cost of property, plant and
equipment include all of the following, except
A. Cost of employee benefits arising directly from the
construction or acquisition of an item of property, plant
and equipment.
B. Cost of opening a new facility
C. Cost of introducing a new product or service, including
cost of advertising and promotion.
D. Cost of relocating or reorganizing part or all of an entity’s
operations.
The carrying amount of property, plant and equipment
subsequent to acquisition is the
A. Historical cost less accumulated depreciation
B. Revalued amount less accumulated depreciation and
accumulated impairment losses thereon
C. Fair value less accumulated impairment losses thereon
D. Amount at which an asset is recognized in the
statement of financial position less accumulated
depreciation and accumulated impairment losses
thereon
Entity-specific value is the
A. Amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.
B. Cost of an asset or other amount substituted for cost, less its
residual value.
C. Amount for which an asset could be exchanged between
knowledgeable and willing parties in an arm’s length
transaction.
D. Present value of the cash flows that an entity expects to arise
from the continuing use of an asset and from its disposal at the
end of its useful life or expects to incur when settling a liability.

The cost of the plant asset “building” should
usually include all, except
A. Cost of renovation or remodeling required to
prepare the building for its intended use
B. Expenditures for service equipment and fixtures
made as permanent part of the building
C. Property taxes related to the period prior to
acquisition that are assumed by the buyer
D. Costs incurred to have existing building removed
to make room for the construction of new building
The cost of the land to be used in the
operations of a business should include all of
the following, except
A. Commission related to the land acquisition
B. Property taxes at the date of acquisition
assumed by the purchaser
C. Excavation in preparation for the construction
of a new building on the land.
D. The cost of a survey.
Improvements which result to increased future
economic benefits include all, except
A. Modification of an item of property to extend its useful
life or increase its capacity.
B. Upgrade of machine parts to improve quality of output
C. Adoption of a new production process leading to large
reduction in operating cost
D. Expenditure on repair or maintenance of property,
plant and equipment, such as cost of servicing or
overhauling plant and equipment.
Technical obsolescence arises from
A. Expected usage of the asset
B. Expected physical wear and tear
C. Expiry date of related lease of the asset
D. Change or improvements in production
or change in the market demand for the
product output of the asset.
Which is incorrect concerning the residual value of an item of
property, plant and equipment?
A. The depreciable amount of an asset is determined after deducting
the accumulated depreciation of the asset.
B. In practice, the residual value of an asset is often insignificant and
therefore is immaterial in the calculation of the depreciable amount.
C. The residual value of an asset may increase to an amount equal or
greater than the asset’s carrying amount.
D. The residual value of an asset shall be reviewed at least at each
financial year-end and if expectation differs from previous estimate,
the change shall be accounted for as a change in accounting
estimate.
The composite depreciation method
A. Is applied to a group of homogeneous
assets.
B. Is an accelerated method of depreciation.
C. Does not recognize gain or loss on the
retirement of specific assets in the group.
D. Excludes salvage value from the base of the
depreciation calculation.
Which of the following depreciation
methods applies a uniform depreciation rate
each period to an asset's book value?
A. Straight-line
B. Units-of-production
C. Declining-balance
D. Sum-of-the-years'-digits

An entity bought a private jet. The jet is expected to be
used over a period of 7 years, its engine has a useful life
of 5 years and its tires are replaced every 2 years. The
jet shall be depreciated using straight-line method over
A. 7 years composite useful life
B. 5 years for the engine, 2 years for the tires and 7 years for
the balance of the cost of the private jet
C. 2 years based on conservatism as this is the lowest useful
life of all parts of the jet.
D. 5 years based on a simple average of the useful lives of
the major components of the jet.
In recording the trade of one asset for
another, which of the following accounts is
usually debited?
A. Accumulated Depreciation-Old Asset
B. Cash
C. Gain on Exchange of Asset
D. None of the above

Gain or loss from disposal of an item of property,
plant and equipment is equal to the difference
between
A. Fair value of the asset on balance sheet date and its
carrying amount
B. Net realizable value on balance sheet date and its
carrying amount
C. Net proceeds from disposal and the cost of the asset
D. Net proceeds from disposal and the carrying amount
of the asset
What is the acceptable approach in accounting for
government grants?
A. Government grants should be recognized as income
over the periods necessary to match them with the
related costs.
B. Government grants should be credited directly to
donated capital.
C. Government grants should be credited directly to
retained earnings.
D. Government grants should be deferred and amortized
over a maximum period of 20 years.
Government grant shall be recognized when
there is reasonable assurance that
A. The entity will comply with the conditions of
the grant
B. The grant will be received.
C. The entity will comply with the conditions of
the grant and the grant will be received.
D. The grant must have been received.
In the case of grant related to an asset, which
accounting treatment is prescribed?
A. Record the grant at a nominal value in the first
year and write it off in the subsequent year.
B. Either as deferred income or deduction from the
carrying amount of the asset.
C. Record the grant at fair value in the first year ad
take it to income in the subsequent year.
D. Take it to income immediately.
Grant in recognition of specific costs is
recognized as income
A. Over the same period as the relevant
expense on a systematic and rational basis.
B. Immediately
C. Over 5 years using straight line
D. Over 5 years using sum of digits

Grant related to depreciable asset is usually
recognized as income
A. Immediately
B. Over the useful life of the asset using straight
line
C. Over the useful life of the asset using sum of
year’s digits
D. Over the useful life of the asset and in
proportion to the depreciation of the asset.
A grant that becomes receivable as
compensation for losses already incurred or
for the purpose of giving immediate financial
support should be recognized as income
A. When received
B. Of the period in which it becomes receivable
C. Over 5 years using straight line
D. Over 10 years using straight line

In the case of grant related to income, which
accounting treatment is prescribed?
A. Credit the grant to “general reserve” under
shareholders’ equity.
B. Present the grant as other income, separate
line item or deduction from the related
expense.
C. Credit the grant to retained earnings.
D. Credit the grant to sales.
A government grant that becomes repayable
shall be accounted for as a
A. Change in accounting estimate
B. Change in accounting policy
C. Both change in accounting estimate and
change in accounting policy
D. Neither change in accounting estimate nor
change in accounting policy
Repayment of a grant related to income shall
be
A. Recognized in profit or loss immediately
B. Recognized in other comprehensive income
C. Recognized in retained earnings
D. Applied first against any unamortized
deferred income set up previously, and any
excess is recognized immediately in profit or
loss.
Repayment of grant related to an asset shall be recorded
by
A. Increasing the carrying of the asset if the deduction
approach is used.
B. Recognizing as expense the cumulative additional
depreciation that would have been recorded to date in
the absence of the grant if the deduction approach is
used.
C. Reducing the deferred income balance if the deferred
income approach is used.
D. All of these
When funds are borrowed specifically for the purpose of
obtaining a qualifying asset, the capitalizable borrowing
cost is equal to
A. Actual borrowing cost incurred during the period
B. Actual borrowing cost incurred during the period plus any
investment income on the temporary investments of the
borrowings
C. Actual borrowing cost incurred during the period minus
any investment income on the temporary investments of
the borrowings
D. Estimate borrowing cost during the period
If the qualifying asset is financed by general borrowings,
the capitalizable borrowing cost is equal to
A. Actual borrowing cost incurred.
B. Total expenditures on the asset multiplied by a
capitalization rate.
C. Average expenditures on the asset multiplied by a
capitalization rate or actual borrowing cost incurred,
whichever is lower.
D. Average expenditures on the asset multiplied by a
capitalization rate or actual borrowing cost incurred,
whichever is higher.
The capitalization of borrowing costs as part of the
cost of a qualifying asset should commence when
(choose the incorrect one)
A. Expenditures for the asset are being incurred.
B. Borrowing cost are being incurred.
C. Activities that are necessary to prepare the asset for
its intended use or sale are in progress.
D. Substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are
complete.
Capitalization of borrowing costs
A. Shall be suspended during temporary period of
delay.
B. May be suspended only during extended period of
delay in which active development is delayed.
C. Should never be suspended once capitalization
commences.
D. Shall be suspended only during extended period
of delay in which active development is delayed.
Which of the following is not a disclosure requirement
under PAS 23?
A. Accounting policy adopted for borrowing costs.
B. Amount of borrowing costs capitalized during the
period.
C. Segregation of assets that are “qualifying assets” from
other assets on the balance sheet or as a disclosure in
the footnotes to the financial statements.
D. Capitalization rate used to determine the amount of
borrowing costs eligible for capitalization.
Thank You !!!

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PROPERTY, PLANT AND

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Acquired through long ✓ The cash price shall be

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Invoice price, net of discount (3M x 95%) P 2,850,000

Cost of removing the old machine - EXPENSE P 20,000

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Repair cost during installation - EXPENSE 50,000

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Invoice price of the machinery 3,000,000

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Fair value of old machine P 2,000,000

Gain or loss on exchange

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Fair value of the computer P 430,000

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Fair values of assets received

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Fair value of Land P 2,000,000

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Cash paid (900,000 x 95%) P 855,000

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

PV of P (400,000 x .797) P 318,800

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

This eliminates the benchmark and

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

The amount of borrowing costs eligible for capitalization on

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

The amount of borrowing costs eligible for capitalization

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

The amount of borrowing costs capitalized during a period

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Fixed contract price P 10,000,000

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Capitalizable borrowing cost (70,000,000 x 9%) P 6,300,000

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

COVID-19 PROJECT FOR ACCOUNTANTS |FINANCIAL ACCOUNTING AND REPORTING 9/29/2020

Fair value the land and building will be classified as one