CA51016 – Intermediate Accounting 3

Subsequent Costs
Definition of Subsequent Costs
− Cost = Expenditures, Subsequent = After
o Therefore, these are expenditures incurred on an item of PPE after acquisition/Initial
recognition.

Types of Subsequent Costs

− Replacement of Parts – because of passage of time, some parts becomes old and should be
replaced
− (MAJOR) Inspection – for the inspection of the equipment
o If it is a routinary/maintenance inspection, it is treated as an expense outright. But major
inspection, this would be required to be capitalized as part of your PPE.
− (MAJOR) Repairs – kapag nasisira ang ibang parts ng PPE
o Only Major Repairs are capitalizable. Minor repairs are treated as expense outright.

Accounting Challenge
− Whether to Capitalize the Subsequent Costs (most difficult between the two)
o Ex. 01/01/2023
Machine xxx
Cash xxx
− Or Charge this to Profit or Loss
o Ex. 01/01/2023
Expense xxx
Cash xxx
− The question is, between the two; Capitalizing Subsequent Costs or merely Charging them to
P/L, the more difficult between the two is Capitalizing Subsequent Costs.
o When you capitalize something to your PPE, like additional costs, it will change the
computation of the depreciation after the capitalization.
▪ Mayroong recomputation of depreciation dahil nagkaroon tayo ng ADDITIONAL
cost na nilagay sa ating PPE which results for depreciation expense to increase.
▪ For Capitalization (mas preferred ni Ma’am Ireneo)
● If you debit to expense (or charge to P/L) your subsequent costs, after
journalizing it to expense, there is nothing more to worry. Your depreciation
will continue as its used to be computed in the past.
● But if you capitalize your subsequent costs, you still need to worry about
the effect of the capitalization on the computation of depreciation.
o We cannot just debit an asset because we want to, there is an Asset
Recognition Criteria before we can say that an asset is to be
recognized.

When to Capitalize (either repair or inspection or replacement of parts)

− When the subsequent costs meet the asset recognition criteria:
o The subsequent cost of an item of PPE shall be recognized as an asset if, and only if:
a) It is probable (more than 50% chance of being realized) that there is an
additional future economic benefits associated with the subsequent costs
that will flow to the entity; and
o One criterion for the asset recognition criteria to be met is that dahil
nag-incur ka ng subsequent cost, ito ang naging dahilan kung bakit
probable na makakaranas ka ng additional future benefits sa iyong
asset.
 CA51016 – Intermediate Accounting 3

o Therefore, you must have an understanding of what are the future

benefits that you will experience in using an asset. So kung
mayroong subsequent cost na dapat ma-incur, you have a
benchmark as to benefits you are now incurring.
b) The subsequent costs of the item can be measured reliably.

Usual joke raw ito ni Ma’am sa class for this part. Kunwari sa keyboard nagtatype ka ng 100 words per
minute. Pero nung pinaayos mo ito, biglang 1000 words per second. Hindi pa raw dumadampi yung
kamay mo sa keyboard, gumagana na yung mga keys. Therefore the report that you have done to the
keyboard is to be capitalized because as stated in the one criterion, naging efficient yung asset after
ma-repair. But if nung ni-repair ito at same pa rin ng performance sa dati (100 words per minute),
overall ni-repair mo lang para gumana, that should be treated as an expense outright.

Indications that an Additional Future Economic Benefits Is Probable

a) When there are increases in the asset’s
o Useful life
o Capacity to produce more products
o Efficiency (producing an more output with a lesser number of input), or an
o Improvement in the Quality of the products produced
b) When operational costs of the entity is reduced
o Ex. Nung inayos yung machine, though same output, mas naging less na ang
consumption niya sa electricity.

How to Capitalize Replacement of Parts

If tatagalugin daw ni Ma’am Ireneo ang part na ito, ang dapat lang isipin, kapag nagrereplace ng parts;
i-debit sa PPE yung bagong parts na binili mo kasi its capitalizable (assuming it is worth capitalizing).
Pero after you capitalize yung bagong part, habang dinedebit mo sa asset ang new part, kailangan i-
derecognize mo ang old part. “HELLO NEW PART, GOODBYE OLD PART”.
- Ang rule naman dito ay kapag mag-go-goodbye ka sa old part, i-depreciate mo muna siya
hanggang dun sa time na i-de-derecognize mo siya. Kasi dapat kapag pinapatay mo yung cost
& accumulated depreciation, accumulated depreciation should be updated. Para yung
depreciation expense mo ay na-i-record hanggang sa point na siya ay i-de-derecognize.

− Capitalize the subsequent cost (the new part for the replacement of PPE) incurred as additional
cost of an item of PPE
Machine 1,500,000
Cash 1,500,000

− Derecognize the carrying amount of the replaced part

Computation of Accumulated Depreciation of Replaced Part at Date of Derecognition
Annual Depreciation (P1M/15 years) P 66,667
x Age of Replaced Part x 3 yrs
AD of Replaced Part P 200,000

AD – Mach Old 200,000

Loss on Disposal 800,000 (ito yung Carrying Amount ng Asset na idderecognize mo. Cost
of Asset - Accumulated Depreciation)
*Mach (old) 1,000,000

* if hindi given ang cost of the old part, we will credit the cost of the new part.
 CA51016 – Intermediate Accounting 3

If the original cost of the replaced part is not known, then the cost of the new part may be used as a
guide in determining the original cost of the replaced part at the time it was acquired.

Ang ibig sabihin daw ng statement sa taas, yung bagong machine na nilagyan mo ng entry pero dapat nag derecognize ka
rin ng lumang part pero you were not able to monitor how much already is the cost of old part being replaced. Kasi at this
point in time when an accountant would journalize the PPE, as much possible, go get down also (if it can be done and
breakdown also the components of your property, plant, and equipment) because you need the parts later on when the cost
of this different parts of your PPE when you make a replacement, because the requirement of our accounting is that we
have to derecognize the old part. But for whatever reason at hindi mo na alam ang cost nung old part, the assumption is
that you will assume that the old part cost is the same as the cost of the new part. So the cost of the new part is
borrowed as if that is the cost of the old part.

Therefore;
Computation of Accumulated Depreciation of Replaced Part at Date of Derecognition
Annual Depreciation (P1.5M/15 years) P 100,000
x Age of Replaced Part x 3 yrs
AD of Replaced Part P 300,000

AD – Mach Old 300,000

Loss on Disposal 1,200,000
*Mach (old) 1,500,000

Replacement of Parts: Case 1

On January 1, 2020, Nibi Company acquired a machine for a total cost of P10M. This is depreciated
using SL over a period of 15 years. A machine part was replaced on January 1, 2023 with a similar one
for a total cost of P1.5M. This replacement is expected to generate future economic benefits for the
entity. The cost of the replaced part on January 1, 2020 was P1M. Journalize all 2023 transactions.

01/01/2020
Machine 10,000,000
Cash 10,000,000
12/31/20
Depreciation Expense – Machine 666,666.67
Accumulated Depreciation – Machine 666,666.67

12/31/21
Depreciation Expense – Machine 666,666.67
Accumulated Depreciation – Machine 666,666.67

12/31/22
Depreciation Expense – Machine 666,666.67
Accumulated Depreciation – Machine 666,666.67

01/01/2023
Machine 1,500,000
Cash 1,500,000

Computation
AD Derecognized, End of 3rd Year:
P 1,000,000 x 3/15 = 200,000
 CA51016 – Intermediate Accounting 3

AD – Machine Old 200,000

Loss on Disposal 800,000
Machine 1,000,000

Computation (short-cut)
01.01.2020 Cost P10M = 100% = 15/15
01.01.2023 AD (3/15)
01.01.2023 CA P? 12/15

Computation (long version)

01.01.2023 End of 3rd Year CA before recognition and derecognition (10M x 12/15) P8.0M
01.01.2023 Cost of the New Part 1.5M
01.01.2023 Carrying Amount of Old Part (0.8 M)
01.01.2023 Carrying Amount P8.7M
01.01.2023 Remaining Life (Total Life – Age + Extension in Life, if any) (15 – 3) (divide) 12 yrs
Annual Depreciation Beginning 2023 P 725,000

12/31/2023
Depreciation 725,000
AD – Machine 725,000

Replacement of Parts: Case 2

On January 1, 2020, Rocku Company acquired a machine for a total cost of P10M. This is
depreciated using SL over a period of 15 years. A machine part was replaced on January 1, 2023 with
a similar one for a total cost of P1.5M. This replacement extended the life of the machine by 2 years.
The cost of the replaced part on January 1, 2020 was not known. Journalize all 2023 transactions.

01/01/2023
Machine 1,500,000
Cash 1,500,000

Computation
AD Derecognized, End of 3rd Year:
P1,500,000 x 3/15 = 300,000

AD – Machine Old 300,000

Loss on Disposal 1,200,000
Machine 1,500,000

Computation
01.01.2023 End of 3rd Year CA before recognition and derecognition (10M x 12/15) P8.0M
01.01.2023 Cost of the New Part 1.5M
01.01.2023 Carrying Amount of Old Part (1.2 M)
01.01.2023 Carrying Amount P8.3M
01.01.2023 Remaining Life (Total Life – Age + Extension in Life) (15 – 3 + 2) 14 yrs
Annual Depreciation Beginning 2023 P 592,857

12/31/2023
 CA51016 – Intermediate Accounting 3

Depreciation 592,857
AD – Machine 592,857

Replacement of Parts: Case 3

On January 1, 2020, Yoda Company acquired a machine for a total cost of P18M. This is
depreciated using SL over a period of 10 years. A machine part was replaced on April 1, 2023 with a
similar one for a total cost of P2M. This replacement is expected to generate future economic benefits
for the entity. The cost of the replaced part on January 1, 2020 was P1.2M. Journalize all 2023
transactions.

04/01/2023
Machine 2,000,000
Cash 2,000,000

Computation of AD Derecognized,
End of 3rd Years & 3 Months or 3.25 years
P1,200,000 x 3.25/10 = 390,000

AD – Machine Old 390,000

Loss on Disposal 810,000
Machine 1,200,000

Computation of Depreciation for 2023

04.01.2023, CA before recognition and derecognition (18M x 6.75/10) P 12,150,000
04.01.2023 Cost of the New Part 2,000,000
04.01.2023 Carrying Amount of Old Part (810,00)
04.01.2023 Carrying Amount P 13,340,000
04.01.2023 Remaining Life (10 – 3.25 years) ____6.75 yrs
Annual Depreciation beginning 04.01.2023 P 1,976,296
X 9/12
Depreciation for the last 9 months of 2023 P 1,482,222
Add old depreciation for the first 3 months of 2023 (P18M/10 x 3/12) 450,000
2023 Depreciation P 1,932,222

12/31/2023
Depreciation 1,932,222
AD – Machine 1,932,222

Major Inspection
− An entity may be performing regular major inspections as a condition for the entity’s continuing
operations of the PPE.
− The cost of these major inspections is capitalized if the recognition criteria are met.
− Any remaining carrying amount of the cost of the previous inspection (as distinct from physical
parts) is derecognized.
o Same rule as the replacement of parts
▪ Yung binabayaran for inspection is equal to the cost of the new parts if
replacement. For the derecognition of parts, we derecognize the carrying amount
of the old part na dinederecognize.
 CA51016 – Intermediate Accounting 3

▪ Ang dinederecognize for Major Inspection, kunin ang cost nung last major
inspection (if given) then kunin ang accumulated depreciation. “Patayin” ang Acc.
Dep. nung pinakalast inspection cost before the new inspection cost that you are
now incurring. Tatanggalin ito at tatanggalin din ang cost.
● And if hindi given, dahil hindi alam ang cost ng previous inspection before
the new one, you can use the new inspection cost to be guide in determining
the cost of the previous inspection cost.

Similar lang ang major inspection sa replacement of new parts, it is as if the new major inspection is equal to
new part and previous inspection is the old part.

How to Capitalize Inspection Cost

− Capitalize the new inspection cost incurred
01.01.2023
Machine 1,500,000
Cash 1,500,000

− Derecognize the carrying amount of the previous inspection cost

01.01.2023
AD – Machine Old 200,000
Loss on Disposal 800,000
Machine (given) 1,000,000

− And if the cost of the previous inspection is not known, then the current inspection cost may be
used as a guide in determining the previous inspection cost to be derecognized.

01.01.2023
AD – Machine Old 300,000
Loss on Disposal 1,200,000
Machine (given) 1,500,000

[May sinabi si Ma’am Ireneo sa video na may mga questions na hindi binibigay yung cost na i-dederecognize tapos given
yung amount ng machine pero sinasabi niya na yung effective interest rate ay nag-iincrease ng 6% per annum. Kung ang
major inspection ay nangyari 3 years ago, magcocompute ka ng present value ng amount ng PPE (1.5M, hypothetical; ito
yung nasa taas) sa effective interest rate of 6%, assuming the 1.5M is the future value. Ang ginagawa lang daw dito ni
Ma’am ay dinidivide ang 1M by 1.06 then ididivde ang 1.06 ulit ng 1.06 which will be our present value at the time the asset
was acquired 3 years ago.]

Subsequent Cost that are Expensed

− Those that do not meet the asset recognition criteria
− The day-to-day servicing of an asset or the repairs and maintenance cost, which includes labor,
consumables, and small parts.